Ladies and gentlemen, good day and welcome to Fusion Finance Limited Q4 and FY 2026 earning conference call. As a reminder, all participant line will be in the listen only mode, and there will be opportunity for you to ask question after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Smit Shah from Adfactors PR . Thank you and over to you, sir.
Thank you. Good morning, everyone, and thank you for joining us on the Q4 FY 2026 earnings conference call of Fusion Finance Limited. We have the company's senior management team with us on this call. Before we begin, I would like to remind you that certain statements made in today's discussion may be forward-looking in nature and may involve certain risks and uncertainties. A detailed statement in this regard is available in the Q4 FY 2026 investor presentation that has been uploaded on the stock exchanges and the company website. I now hand over the call to Mr. Sanjay Garyali, MD and CEO, Fusion Finance Limited, to begin the proceedings. Thank you, and over to you, sir.
Yeah, thank you. Good morning, everyone. Thank you for joining us today for Fusion Finance's Q4 and full year FY 2026 earnings call. FY 2026 was an important year of learning, testing, and institutional building for us at Fusion. During the year, we prioritized portfolio quality, materially strengthened our credit guardrails, invested in collections infrastructure and technology, and sharpened customer selection across both MFI and MSME businesses.
At the same time, we gained far greater clarity on the operating segments and the customer profiles where we believe the business can scale with stronger portfolio quality and better productivity. This gives us the confidence that the growth we are now seeing is sustainable, operationally stronger, and backed by better execution discipline, while also positioning Fusion significantly better to navigate external and operating headwinds going forward.
At the same time, we remain mindful of the evolving external environment, developments in West Asia, volatility in energy prices, and possibility of inflationary pressures are risks the broader financial system will continue to monitor closely. However, let me reconfirm that we see no impact of the crisis on either the book growth or the portfolio performance. Before I move to the business update, I would like to acknowledge a few important leadership developments during the quarter.
We are pleased to have Priyanka Wadhera join us as the Chief Strategy Officer. Priyanka brings deep industry experience across financial services and will play an important role in Fusion's next phase of technology process and transformational-led growth. We also welcome Remika Agarwal, who has joined the Board as Nominee Director representing Creation Investments, one of our key promoter group shareholders.
At the same time, I would like to place on record our sincere appreciation for Mr. Kenneth Van der Weele for his valuable guidance and contribution during his tenure as a Nominee Director with Fusion. We wish him all the very best going forward. Let me now come to the business update. Q4 FY 2026 disbursements stood at INR 2,140 crore, up from INR 1,594 crore in Q3, reflecting strong sequential growth during the quarter. This momentum was driven by deeper identification of right customer segments and continued investments in automation across onboarding and collections, enabling field teams to operate with significantly lower process friction.
Productivity improved materially across both MFI and MSME businesses during the quarter, helping the AUM trajectory turn positive during Q4. Another important operating change implemented during FY 2026 was the move towards a far more granular branch-level operating framework. Since November 2025, we have classified branches across category A to D based on credit metrics, operating quality, and growth behavior. This framework is now helping drive both growth allocation and risk calibration at the branch level.
We are beginning to see meaningful benefits from this approach. Currently, nearly 90% of our disbursements are coming from category A and B branches. Importantly, we believe the business today has sufficient headroom to continue growing in a calibrated manner without meaningfully increasing portfolio risk. This confidence comes from improved customer selection, stronger operating guardrails, and significant penetration opportunity that continues to exist within our existing branch network. Our AUM increased from INR 6,800 crore- INR 7,400 crore during the quarter. Also, the average AUM for the quarter increased by nearly INR 200 crore sequentially.
This is an important shift because the benefit of the higher average book will start reflecting positively in NII and PPOP from Q1 onwards, with operating leverage expected to accelerate from Q2. Coming to portfolio quality, the forward flow rates in current bucket continue to remain at sub 0.1% level on a net basis, and we continue to see similar trends through April and May so far this year. On collections, we are now beginning to see the benefit of people, processes, and technology investments made over the last few quarters.
A large part of our monitoring and reminder systems are now becoming AI and trigger-driven, allowing early intervention, better execution consistency, and tighter portfolio monitoring. During Q4 alone, we executed over 5 million AI-led customer interactions, mostly in collection and customer onboarding. This is helping improve customer engagement consistency, early delinquency monitoring, and field productivity. Importantly, we continue to see very strong collection efficiency trends across most of our core operating states, including U.P., Bihar, and Odisha, where collection efficiencies continue to remain at approximately 99.75%.
This gives us the confidence that the portfolio stability we are now seeing is broad-based and supported by improving customer behavior as well as stronger field execution discipline. Our 90+ DPD cash recoveries, including the rate of recovery, crossed INR 35 crore for the quarter. Importantly, the write-back component within this stood at approximately INR 21 crore compared to nearly INR 15 crore in the previous quarter, reflecting improving recovery efficiencies and portfolio behavior despite a far reducing rate of growth.
As communicated earlier, our collection model in these buckets continue to remain tightly managed through combination of in-house field teams and AI-enabled calling infrastructure. On customer quality, we continue to focus on lower leveraged and more stable borrower segments, while the new to Fusion customer mix in MFI increased steadily from 24% in Q1 to 35% in Q3 and now stands at 37% at the end of Q4.
Within MSME as well, we continue to strengthen our positioning in the loan against property segment, particularly within the 8 lakh-15 lakh ticket size category. Collection efficiency trends remain robust across both the businesses, with MFI collections improving to 99.7% and MSME at over 99.3%. While our stated credit cost guidance remains in the range of 3.25%-3.75% in MFI over the long term, this is more so adjusted for any cyclical issues. Internally, however, the portfolio trends are modeled towards a credit cost of 2.5%.
We also feel that with MSME as a portfolio kicking in, the overall weighted credit cost guidance will be closer to 2.5%. As a result of the operating and portfolio improvements undertaken over the last few quarters, quarterly credit costs have reduced significantly, down to INR 56 crore from INR 80 crore in the previous quarter. Alongside this, we are also in the process of migrating to a significantly more advanced LMS.
The UAT process has already commenced last week, and the migration is expected to be completed by the end of August 2026. The new platform should materially improve branch productivity, onboarding quality, monitoring capability, and customer servicing while reducing further process friction across both underwriting and collections. As we move into FY 2027, we will additionally focus on two key operating priorities. One, stronger execution around branch consolidation and overall operating efficiency at a branch level.
Two, further strengthening client onboarding, retention, and calibrated book growth across existing and new centers. Coming to profitability, reported PAT for Q4 stood at INR 114 crore. However, excluding the one-time DTA impact, core profitability for the quarter stood at INR 37.5 crore, translating into an annualized ROA of nearly 2.1% for Q4. The first 45 days of FY 2027 give us further confidence in our direction. Growth trends remain healthy. Collections continue to stay strong and portfolio quality is stable across core markets.
With the branch-led execution model now settling well on the ground, we remain confident of progressing towards our INR 10,000 crore portfolio aspiration by March 2027 while maintaining disciplined portfolio metrics. With that, I would like to now hand over the call to Mr. Krishan Gopal to take you through the financials in greater detail.
Thank you, Sanjay, and good morning, everyone. I am pleased to present our Q4 and FY 2026 financial performance with greater context and at our last interaction. This has been a year that reflects meaningful financial strengthening across capital, liquidity, margins, asset quality and provisioning. Let me take you through each of them in turn. Before I get into the financials, a brief but important word on where we have come from.
During the earlier few quarters, the company was navigating financial covenants under stress, caveats on growing concern, and cautious lender sentiment. I am pleased to report that all these challenges are now firmly behind us. The improvement in our book is clearly evident in strong asset quality metrics like gross NPA of 3.21% and net NPA of 0.51%. Our capital and liquidity position remains robust and well capitalized. Liquidity stood at INR 1,913 crore as on March 31, 2026.
This liquidity is higher by about INR 500 crore, which we have deliberately kept keeping in the geopolitical situation in mind. Of course, this additional liquidity comes at a cost, so this has additional finance cost of about INR 7 crore to INR 8 crore for the quarter. In addition to on-balance sheet liquidity, company holds sanctions in hand amounting to INR 1,245 crore, which are drawable at any time, further reinforcing our funding flexibility. Further, in addition to this, company has a strong pipeline of about INR 2,500 crore. Capital adequacy stood at 36.46%, comfortably above regulatory requirement.
This level of capitalization provides meaningful headroom to support the target of around INR 10,000 crore AUM in FY 2027, without requiring any further equity infusion during this year. During quarter four of this year, we raised INR 2,040 crore in new borrowings, comprising of term loans, direct assignments, and pass-through certificates. For the full year FY 2026, total debt of about INR 6,000 crore across our lender base was raised. During the fiscal, we onboarded 11 new lenders, underscoring the resilience and credibility of our franchise within the financial ecosystem.
The lender engagement story has continued to evolve positively through quarter four. Several credit partners that were previously in wait and watch mode have actively re-engaged with fresh credit lines extended by both new and existing lenders. The composition of our borrowing base has shifted favorably. Private sector banks now account for 42% of our borrowings, up from 36%, while public sector banks exposure has declined from 27% in FY 2025 to 16%, reflecting our broadening and diversification of our institutional lender relationship.
Foreign banks contribute about 18%, NBFCs over 14%, and development financial institutions constitute about 4%. Cost of borrowing funds. Our average cost of borrowing for quarter four stood at 10.30%, broadly similar to last quarter, demonstrating the stability of our borrowing franchise even as we actively expanded the lender base. The margin cost of borrowing moderated further to 10.8% in XIRR terms in Q4 FY 2026 from 11.4%, again XIRR, in Q3 FY 2026. This is 100 basis points quarter-on-quarter improvement, reflecting the improving quality of our borrowing mix and the re-engagement of a broader lender base at a more competitive rates.
Going forward, we anticipate our margin cost of borrowing should continue to improve from current levels as the diversity of our sanctions and depth of our lender relationship grows. Of course, this is subject to the current macro environment and geopolitical environment. Our credit ratings remain stable across instruments. Long-term debt and NCDs are rated CRISIL A- stable and ICRA A- stable, and CARE by CARE at A with a stable outlook, with CARE upgrading outlook from rating watch with negative implications to stable in quarter four.
The CARE outlook upgrade is an external validation of the improvement in our financial and operational profile and gives us confidence in further rating momentum as our profitability and asset quality continue to improve. We continue to engage with our other two rating agencies on the upgrade discussions. Net interest margin for the Q4 FY 2026 stood at 11.44%, up 12 basis points from 11.32% in Q3. Net interest income for Q3 FY 2026 was INR 220 crore compared to INR 237 crore, a 6% sequential decline, primarily reflecting higher finance costs due to the additional liquidity which we have kept, as we have discussed in the beginning of the section.
As the AUM grows in FY 2027, NII shall expand correspondingly. Total operating expenses have stayed stable in Q4, at INR 205 crore, nearly flat sequentially from INR 207 crore in Q3, and flat year-on-year from INR 206 crore in Q4 of FY 2025. For the full year FY 2026, OpEx was at around INR 832 crore. As a result, pre-provision operating profits for Q4 FY 2026 stood at INR 93 crore, broadly flat quarter-on-quarter at INR 94 crore in Q3 FY 2026, and up 3% year-on-year from INR 90 crore in Q4 of FY 2025. This flat PPOP is after absorbing additional finance cost of about INR 7 crore- INR 8 crore due to additional liquidity maintained during the quarter.
The full year FY 2026 PPOP was INR 362 crore. This demonstrates the franchise underlying earnings strength and the tangible benefits of the operating efficiency systematically built throughout the year. Profit before tax for Q4 FY 2026 was INR 37 crore, up 166% from INR 14 crore in Q3 FY 2026. A tax asset of INR 76.8 crore was recognized during Q4 FY 2026, arising from temporary taxable differences, primarily from the ECL provisions to the extent considered recoverable based on our forward profitability assessment.
This DTA recognition reflects our confidence in the trajectory of future taxable profits. Thus, with the impact of recognition of DTA, the PAT for the quarter was INR 114.19 crore. Excluding the impact of DTA, the normalized ROA for Q4 FY 2026 stood at 2.08%. For the full year FY 2026, PAT was INR 13.9 crore, making a decisive return to the annual profitability after a loss of about INR 1,200 crore in FY 2025. For ECL, we had provisions as per ECL model of INR 53 crore during the quarter, write-offs were INR 136 crore. Closing ECL was INR 270 crore.
This works to a provision coverage of 84% on Stage II assets and 71.5% on Stage II assets. Collectively, constituting about 81% coverage in Stage II and Stage III. Our rate of recovery during the quarter stood at INR 21 crore, up from INR 14 crore in Q3, demonstrating improving effectiveness in our in-house collection teams. Thus, the net P&L impact of credit costs for Q4 was INR 32 crore, equivalent to INR 0.5 crore of average on-book loans for the quarter. This compares to the INR 65 crore in Q3 FY 2026. The trajectory of credit cost normalization has remained clear and consistent.
I would like to mention that during this quarter, we have released management overlay to the extent of INR 5 crore lesser as compared to the Q3. Based on the monthly net forward flow rates from the current bucket, which is 0.03% in Q4 FY 2026, and continued improvement in delinquency buckets, and the quality of the new book performing at 99.77% collection efficiency, we remain positive to maintain our stable state credit cost of 2.5%- 3%. The company has maintained a strong emphasis on portfolio hygiene and conservative provisioning through Q4.
Asset quality metrics improved further during the quarter. Gross NPA declined to 3.21% in Q4 from 4.38% in Q3 FY 2026. A fourth consecutive quarter of gross NPA improvement. Net NPA improved to 0.51% from 0.63% in Q3 and 0.60% for the internal calibration. These are among the most important validation metrics for our recovery. Total equity as on March 31st, 2026 stood at INR 2,456 crore. To conclude, Q4 and FY 2026 marked the completion of a meaningful phase of financial stabilization and the return to profitability.
The year has been characterized by the stable and improving margins, strengthening provisioning coverage, healthy liquidity, and a materially improved lender landscape. As we enter FY 2027, our financial priorities are clear. Sustaining financial discipline and cost efficiency with cost-to-income ratio improvement as the primary lever of the operating leverage. Deepening and diversifying our lender relationships to support AUM of our INR 10,000 crore target and continuing the bank to benefit from the marginal cost of borrowing improvements as lender confidence builds on.
With improving asset quality, robust capital adequacy, a strengthening funding profile across 11 new onboarded lenders in FY 2026, and a clear path to credit cost normalization, we are well-positioned to deliver steady and sustainable progress in the year ahead. Thank you. With that, I open the floor for the Q&A session. Sanjay and I, along with the rest of the management team, are available to answer your questions. Thank you.
Thank you, sir, for your presentation. Ladies and gentlemen, we will now begin with the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Our first question comes from the line of Abhijit Tibrewal from Motilal Oswal Financial Services Limited. Please go ahead.
Yeah. Good morning, sir. Thank you for taking my question. Sir, two-three things. One is, this DTA that we have created in this quarter, is this the only quarter where this DTA will be created or going forward also there can be more DTA creation?
Thanks, Abhijit. As you are aware, we were not recognizing DTA as there was a caveat on the coin concern. Now we have started the deferred tax asset for the first time after about four, five quarters. Going forward, it is going to be a BAU as far as the deferred tax asset is concerned and to the extent recoverable and availability, we are going to recognize the DTA every quarter for a year based on the availability.
Got it. For the next few quarters, we can see a DTA creation and to that extent, there could be tax write backs in the coming quarters as well.
Yeah, that's the normal situation and we'll follow that.
Abhijit, the total DTA, as we are aware, is close to around INR 390 crore. You're aware we released about INR 77 crore. The balance is left, which in the due course on a pro rata basis, there is no hurry to consume that. But on a pro rata basis in the next 12- 18 or 24 months, we will consume as and what the auditor is also comfortable with. But that's the amount that is left to be, let's say, consumed or whatever. INR 390 crore minus INR 77 crore is what is still left on the table.
Got it. The other question I had was on the liability side. Of course, last year in FY 2025, we had reported a big loss, so obviously PSU banks don't really give out lending lines. Now that we have at least reported a profit this year, FY 2026, do you expect that going forward, lending lines from PSUs can also start opening up? The related question in the opening remarks, Mr. Krishan said that we are in discussions with the credit rating agencies, the other two, for an upgrade. I mean, what is it that they're looking for? Is it improvement in profits, improvement in asset quality that they will be monitoring, or do they also have some size, the balance sheet size?
I will go one by one on your questions, Abhijit . One is, during this year also, we have had decent support from PSU banks. One of the large PSU banks has supported us to the tune of INR 800 crore on direct assignment front in this year. We continue to get the support from PSU banks. Going forward, we have had discussions with all the PSU banks, and they were looking for these annual results and the final balance sheet.
Everyone is broadly open to consider and we are hopeful, we are confident that we will get the support. While we speak, our proposals are already with about five, six banks, including three, four PSU banks for the credit sanction under the Credit Guarantee Scheme . There is a positive trajectory on that side.
I think, Abhijit, the PSU banks may want to start with the Credit Guarantee Scheme with everybody. So you are aware that we have close to about INR 300 crore that we can take up. My sense is that our applications are under process. Most of the INR 300 crore that we take up will come from the PSU banks. That will trigger the normal lending from them.
On the rating front, we continue to engage with all the rating agencies. As per our discussions, the other two rating agencies were looking forward to our annual results and the balance sheet. Then they wanted to take a call. However, in between, you know this geopolitical situation has happened. Now it's less of the internal because we are already profitable, asset quality is robust and they should be comfortable. I think the whole geopolitical situation and the performance of the industry would be a monitorable for them. However, as we have mentioned, we are confident and we continually engage with them.
Perfect. Thank you. The last question I had was on how should we look at FY 2027 now? A few things that came out during your opening remarks was that despite this West Asia war, we are not seeing any impact on growth and asset quality, collections holding up very. Then we also said that on credit costs maybe 3.25%-3.5% is through cycling credit costs.
But this year, given that MSME is also going to ramp up, we are thinking of something in the ballpark of 2.5% credit cost. If I were to put this all together, how should we think about maybe AUM growth in FY 2027 and how the borrowing costs could shape up and the fact that going forward, the interest income reversals could be lower, so margins could expand. What could that kind of translate into the ROAs for this year?
Abhijit, I will answer your first part, and I will let Krishan take the second one. In terms of FY 2027 outlook, we continue to hold firm to the guidance of INR 10,000 crore. Like I explained, the first 45 days, which have been completely part of the West Asia crisis, we do not see any impact. We also feel that you are absolutely right. There could be some challenges in the economy and there could be inflationary pressures. Our view is that in the last one and a half year, the book that we have built is very, very strong in terms of the credit matrices that we have used.
I think this is, these kind of measures help manage whenever the, let us say, macro headwinds come because nobody knows when the macro headwinds are going to come. But I think the prudence or the over-prudence that we used in customer selection, that is going to ensure that the portfolio is able to manage multiple headwinds on the macro side. However, I think, like I think the government has also talked about it. Austerity measures have to be there, and we are already started working on austerity measures in the last 30- 45 days.
There will be certain costs which we think we need to cut down, whether it is some additional branch costs or travel costs. But there will be. There are already significant austerity measures that we have put in place. However, from an AUM growth perspective and portfolio perspective, we will continue to hold that INR 10,000 crore and, let's say, portfolio flow rate of between 0.1%- 0.15% net in the current bucket. Rest, I will leave to Krishan to answer.
Abhijit, can you please elaborate what was the other question?
So Krishan, what I was trying to understand is, if I look at fourth quarter also, I mean, we are yet to see an improvement in the PPOP, in active PPOP level.
The margin-
Going forward now.
Yeah.
Right. So now going forward, given that, maybe interest income reversals which are happening become lower, hopefully the marginal cost of borrowings reduces. How should we think about margins or pacing for the ROA for this year?
Yeah. So the baseline for this is, yes, the AUM has grown during this quarter. However, the average AUM is broadly flat. On top of it, the PPOP is broadly flat because of the two key things. One is, as we have mentioned, we have kept the additional liquidity of about INR 500 crore, which has an impact on the interest cost to a tune of about INR 8 crore. And deliberately, the DA income has been accrued lesser by about INR 7 crore during the quarter. So this has been broadly the impact. So if we nullify this impact, the PPOP would have been higher by that amount.
As far as OpEx is concerned, at a broad level, the total OpEx for this year has been INR 832 crore. What we envisaged for the next year is broadly a 5%-6% increment into that at an annual level. Having said so, as a team, the whole of Fusion Finance team is running an OpEx rationalization project, and we are going to look for the avenues wherever possible, including, as we mentioned in the past, branch rationalization and any cost to processes, and we have engaged some, taking help of some experts also on that front.
That should result into an OpEx reduction, OpEx rationalization, and definitely should not go beyond 4%-5% of increment over INR 832 crore. In summary, going forward, there should be an increase in AUM and that will reflect into PPOP. We do not see any increase in the OpEx, that will again come into the PPOP. Credit cost guidance, as Sanjay has mentioned, is a stable state. There would definitely be an increase in PPOP.
Net-net PPOP, you will start seeing growth in Q1, and the acceleration in PPOP that we all expect as a part of the AOP will start coming in from Q2. The real acceleration will happen in Q2, but you will see growth in Q1 on PPOP.
We got it. This answers all my question. Thank you so much, and wish you well.
Thank you. Our next question comes from the line of Nidhesh from Investec. Please go ahead.
Thanks for the opportunity, sir. First question is on interest income. On a Q-on-Q basis, the interest income is flat despite we seeing a decent AUM growth on a Q-on-Q basis and sharp improvement in asset quality. What is the reason for flat interest income on a Q-on-Q basis?
Nidhesh, any other question? We will answer them together.
Second question is on active borrowers growth. How do you see active borrowers growth in FY 2027, and let's say any target of new customer acquisition for FY 2027? Third question is on, what are the plans to add branches in FY 2027? These are the three questions, sir.
Okay. On the flat NII, Krishan has already explained flat or slightly reduced NII is essentially because the average book growth impact will start coming in. Right now, you see the average book growing or the average AUM growing by already between INR 150 crore- INR 200 crore. That is about INR 6 crore-INR 7 crore upside. However, the dent comes from the additional liquidity, that's about INR 8 crore-INR 9 crore P&L impact. Lesser DA that we've done, that's another about INR 6 crore-INR 7 crore. That's why you see the NII flatter.
However, like I explained Q1 onwards, you will see this NII growing, and then the acceleration will start in Q2 because that's where the real acceleration on the average book will start. Right now you see the AUM growing, but the average book has grown much lesser. You understand how the average and the AOP concept operates. That is one. Hope that answers your flat NII. On the active borrower, there is a call that we have taken that we will go slow on entry-level borrowers.
That is less than INR 40,000. That is why you see that coming down. There is a slide that we have explained in less than INR 40,000. And between INR 40,000 to INR 1 lakh is where the sweet spot is. From a new client acquisition, most of the upside in Q4 has come from the new loans rather than the ticket size increase. The ticket size has only gone up between these two quarters by 2%-3%. The real upside has come from the number of borrowers, which has gone up by about 30%-31%.
We were acquiring, in terms of numbers, about 34% volume was coming or disbursement was coming from new borrowers. This time it is 37%. Now you see that focus we have been telling you that between 35%-40% of the new volume will come from, of the new disbursement will come from new borrowers. Now you see that inching towards 37%. The good thing is that in that 37%, and we have explained, majority of it is coming from less leveraged borrowers and less new-to-credit borrowers, and 80% of that is coming from just one borrower, other than Fusion Finance.
That is on the active borrower. And we continue to. So 37% of this, between 35%- 40%. Right now we are 37%. I think we will be closer to 40% on new client acquisition on the new disbursement. On the branch consolidation or on the branch growth. See, what we had done was that when our book was at about INR 12,000 crore, we had 1,400 microfinance branches. There were some 250 branches which we had split because the existing AUM of the branches had crossed INR 12 crore- INR 14 crore.
Now, we all are aware that the AUM has dropped since then. So there are close to about 200 branches which we had split to form another set of branches. Now the parent branch itself, the AUM has collapsed and that market can be managed by the parent branch rather than the offshoot branch that we created. The plan hence is that of these 200 branches, a lot of branches we will consolidate, and there are about 70- 100 branches that we will add.
The net addition will be negative by about 100, but that is more like a technical because these 200- 40 branches are more like a drag on OpEx and not technically now required considering that the parent branch can manage. And these 70- 80 branches, essentially, we are looking at in three states, between Tamil Nadu, West Bengal, and Assam. In all these three markets, our collection efficiency is around 99.8% and the portfolios are roughly sub 5%.
Sure. One more question on MSME-
Thank you. I am sorry to interrupt, but you may please rejoin queue for more questions. Thank you.
Sure. Thank you.
Our next question comes from the line of Viral Shah from IIFL Capital. Please go ahead.
Yeah. Hi, Sanjay and Krishan. Good morning, and congrats on a good set of numbers. I had two questions then probably two follow-ups, if that's okay. First is with regards to, I understand Krishan has given fairly detailed explanation with regards to yields and why NII did not see growth in this quarter. What I wanted to understand is, have we taken any rate hikes from April?
More importantly, is there actually a scope for us to now take a rate hike given that the asset quality trends are now on an improving trajectory and the reported numbers now already start factoring in a better credit cost outcome? While the cost of funds in general for the markets is likely to increase or has already started increasing, for especially us, it's unlikely to increase, at least in the near term. Is there a case for us to, say, increase the rates on an incremental basis?
Any other question, Viral? We will collectively answer.
Sure. The second question I had was with regards to if you can give some numbers around the disbursement growth and also the collection efficiencies in the month of April and maybe May first half. I understand you gave the qualitative flavor, but if you can help us with numbers that will be quite helpful. The two clarifications or follow-up that I had was, you mentioned about CGSMFI helping us. The INR 300 crore cap now, is that very clear that it is at a borrower level and not at a lender level? The second was the DTA recognition that you mentioned of, say, the residual INR 330 odd crore. Will that be over the next four quarters or six quarters or eight quarters? Just some clarity over that.
Okay. The first three questions I will answer. DTA, I will let Krishan take. Rate hike. We have been saying that for the last nine months there was no rate increase that we had done. Despite the borrowing cost going up by 150 basis points- 200 basis points. From April 1st, we have increased the rates by a small 0.75%, which is in line despite the borrowing cost having gone up by 200 basis points, and this is in line with the industry, but 1st April onwards, rate is increased by 0.75%. We cannot talk about how this will pan out in future and what rate hikes will happen in the future. We will wait and watch.
On the disbursement growth, normally quarter one is about 25%- 30% down as compared to quarter four because quarter four is supposed to be elevated and quarter one is little lazy because of multiple things. For us, quarter one has been very similar to quarter four. Quarter four, we were at about INR 700 crore. Quarter one so far, we are at about between INR 625 crore-INR 650 crore. That is just 4% or 5% lower than quarter three, quarter four. This is budgeted. As per the AOP, the INR 10,000 crore AUM and the INR 9,000 crore disbursement plan, this is as per the part of the AOP. We had actually budgeted Q1 to be at 10%- 15% lower, but we are pleasantly surprised that we are better than that or there.
On the collection efficiency, we continue and reconfirming, we continue to be 0.1% flow rate net in MFI, which translates to a net collection efficiency of 99.9% and a gross collection efficiency of 99.75%. This is for the entire month of April and for the first 15 days of May that have passed. On the credit guarantee scheme, I think there is a lot of clarity. While we have given applications, our understanding is INR 300 crore at our level, but there are a lot of other questions to be asked and answered. We have given our applications and now we are waiting. On credit guarantee, I think we should wait and watch for further steps and then see how it unfolds. On the DTA recognition, I will leave it to Krishan.
Viral, on the DTA recognition, we will recognize the DTA as and when the profit comes and whatever the tax liability is equivalent to that, we will recognize DTA. That is the plan as of now. We will assess the situation at the year-end again, and this is a dynamic situation. As of now, it is going to be equivalent to the tax liability. It will not be four to six quarters, it may be more than that.
It will be between 18-24 months.
18-24 months.
Got it. Just to clarify, Mr. Krishan Gopal.
You can assume we are eight quarters.
Got it. Just to clarify, Krishan, what you mentioned on the DTA pieces, which would imply that there would be a zero tax rate or no tax for the next eight quarters, right? You will not be recognizing it like this in the one you did in this quarter.
That is correct, Viral. As I said, we will revisit these situations every year-end. We will do that. As of now, it looks like-
As of now, what you are saying, yes.
Yes. That is correct.
Thank you. Mr. Shah, you may please rejoin the queue if you have one more question. Our next question comes from the line of Rajiv Mehta from YES Securities. Please go ahead.
Yeah. Hi, good morning. Congrats on a very good number. Most of my questions are answered, but just quick two, three things. One is with regards to this bad debt recovery. If you can just quantify the pool from which we are recovering and whether this accelerated INR 15, INR 20 odd crore per quarter income, can that continue? What is your estimate there for the whole year for bad debt recovery? Would it internally be incremental OpEx or will it be the same OpEx when the recoveries will come? Second is on the MSME strategy. It is 10% of the book roughly at this point in time.
But if you can just take us through granularly what is the strategy for growing the MSME book, because right now it's being done from selected branches, the ticket size is INR 4 lakhs, INR 5 lakhs, but I think initially you spoke about targeting INR 8 lakhs- 15 lakhs for ticket size. What is the scale-up plan? If you could just elaborate on that. Second is, we also spoke about migrating to advanced LMS by August for better productivity and quality. But would it kind of hamper, in fact, the business in the near term? Yeah, these are the three questions. Thanks.
Okay. Thanks, Rajiv. So Rajiv, to your first question, if you see the total write back or the income that we received this year is about INR 110 crore. We are targeting between INR 150 crore- INR 160 crore, which means additional about INR 40 crore. We have explained the cost of collection in this hard bucket is between 25%- 30%. So you can assume that INR 40 crore incrementally net of cost will actually be INR 30 crore. INR 40 crore at 25%, so now cost INR 10 crore, so INR 30 crore incremental. For all hard bucket collections, we can assume 25%- 30% as our cost of collections.
Okay.
So net, whatever we recover, 75% straightaway goes into, 75%- 70% goes straightaway into bottom line. Considering that we have over INR 2,000 crore, while the recent books, there is almost literally zero write-off that we will be doing going forward. But I think the technology and the strategy that we are using to collect, that will lead to this higher, and not because of more availability of pool. So that is the way we are looking at it. Just to give you a number, today we are able to reach out to over 1 lakh 90+ borrowers through the bot calling that we have started. You understand bot calling is not something that gets by design upfront.
It takes time to set in and all. But this is not coming at a very high OpEx. And the OpEx is actually compressed by about 1/10th or 1/15th. Second on the MSME strategy. The MSME strategy that we are working on, you understand our product is income assessment. We are in tier three and tier four towns. There are two additional things that we are doing. That we are creating more right to win in the ticket size between INR 8 lakhs- INR 15 lakhs. And we are saying, okay, we don't want to play in cash flows. So we don't want to deviate on cash flows.
We will not deviate on FOIR. But we want to see how a better cash flow customer we can do with, let's say, a different collateral. So if you have to ask me, the risk we are taking is on the collateral and not on the cash flow of the customer. And that confidence is coming from six to nine months of experimentation that we have done, where the current bucket collection efficiency is 99.5%, 99.4%. There are two channels that we are adopting. We have also introduced the connector channel few months back, and we are seeing good upside from there.
So that is about 25% - 30% volume in a steady state will come from the connector channel. On the advanced LMS. The way the advanced LMS will be institutionalized or set up is that there are 10 branches that we will first be piloting. Then we will be going to about 200 branches once we are confident and there is a back testing. And this model already operates in two to three MFIs, so it is not something that is completely foreign to the MFI sector. It is just little bit of customization, Rajiv.
We are quite confident that after this pilot of 10 and 200 branches, the rest of the 1,200, 1,300 branches will be simple to execute. So we don't expect and that is why we did not keep it in the end of the financial year. We kept it somewhere, the UAT started about a week back. So May, June are typically not very accelerated times, and hence we have kept it at a time where we will have plenty of time to check if there are any issues or transition challenges.
Yeah. Thank you so much, and best of luck.
Thank you. Our next question comes from the line of Kaushik Agarwal from Haitong Securities . Please go ahead.
Yeah. Hi, sir. Thank you for the opportunity. Sir, couple of questions. Firstly, on the other income line item, I can see there has been a sharp jump on Q-on-Q and YoY basis. Can you give some reason, like what really explains this? Number two is on the ECL coverage. I have been noticing that your coverage across the buckets have been coming down on a sequential basis. Should one expect that we have broadly touched the trough or there is some more scope for ECL coverage to come down?
Lastly, if you can give some color around, we are already almost 50 odd days into this quarter. How is the broader demand trend you are seeing in any sort of any particular customer category or geographical segment where you are noticing some kind of a stress or where you have tightened your underwriting filters?
I take the third question and let Mr. Krishan answer the question on other income and ECL coverage. In the first 45 days, while there is no stress on the portfolio and there is no impact that we see in terms of demand. Although, and this is two months back, we made two changes. On the MSME side, there are certain sectors or for generally we went a little slow on, so about 10%-15% we reduced specifically on the fringe customers or on the customers which were on the borderline. Second, we said that about 5%-6% of our business was coming from Fusion plus two lenders when we were acquiring new customers.
This we have stopped. We are not doing in microfinance, Fusion plus two lenders for the last two months now, where we are acquiring new customers. These are the two changes that we have done on, let's say, ensuring that. This is not just the West Asia crisis or the global issues. Every quarter, the intention is that how do we keep cutting the bottom two deciles or the bottom one decile, and this is also a part of that. We are on target for, let's say INR 10,000 crore. We don't see any major headwinds. Austerity measures will continue to happen. For the other two, other income increase and ECL coverage, I'll let Krishan answer.
On the other income front, the increase is mainly due to the increase in the rate of recovery. Coming to the ECL, the ECL coverage for the Stage II and Stage III is, for Stage II it has increased. For Stage III it is broadly similar. Stage I, yes, it has come down from 1.1%- 0.9%, which is basically reflecting the better flows over last two, three quarters. This is purely coming from that ECL model, and we are confident on that front. This is the reason. I mean, when asset flows are improving, it can't be constant. I think it should remain around these levels now on.
Okay. Thank you so much, sir. Best of luck.
Thank you. Our next question comes from the line of Bunty Chawla from ASK Investment Managers Limited . Please go ahead.
Thank you, sir. Thank you for giving me the opportunity and congrats on good set of numbers. Just few queries on the Bihar portfolio. We are growing strongly, but there has been announcement from the Bihar, on the act, which is similar to Karnataka act they have done. Are we seeing any impact on our portfolio or in terms of customer behavior on that? Is it just a start they have announced there is no official, so that's where there is no impact as such. How one should see this portfolio going ahead?
Any other questions other than this?
Secondly, on that, as you said, in terms of Stage I and Stage II and Stage III ECL provisioning, just one clarification. Are we increasing or any coverage percentage due to the geopolitical provisioning, which we have seen in one of the MFI NBFC have done higher provisioning due to this geopolitical. Any changes in terms of that on ECL?
Your first question is on Bihar. We were actually the first ones to come out in the market. This is about one and a half months back where we said that Bihar for regulated entities is actually welcome and it is a time that we need to inform the customers, and be able to disseminate information. Bihar continues to be performed extremely well, and this is not just for us, for everybody, for our peers as well. While I'm talking, the collection efficiency of Bihar continues to be 99.83%, this is March, and April and May it is 99.85%. Bihar continues to be very strong in terms of collection efficiency. I think we should equate Bihar to Tamil Nadu because a similar legislation came in Tamil Nadu.
The way the microfinance industry handled it with the administration, especially the MFIN or the SRO, I think that was commendable. I think same effort has gone in Bihar. If you see Tamil Nadu again, close to everybody is at a collection efficiency of 99.5%. Our collection efficiency in Tamil Nadu in March was 99.82%. Right now it is 99.85%. So I think Bihar is similar to what T.N. is, and I think we welcome anything that encourages the regulated entities or tightens around, let's say, the unregulated entities. There is nothing negative that we see in Bihar. On the stage provisioning, I leave it to Krishan too. Stage I, II, III.
Stage I, as we have discussed, I mean, II, it has gone up from 66%- 71%. Stage III, it is probably similar and as I explained on the stage one, this has come down, but this is purely a reflection of the better collection efficiencies we are clocking month on month, quarter on quarter.
He's saying the provisions that-
Oh, yes.
He's saying one of the large lenders has taken additional provisions.
Sure.
Are there any additional provisions that we have taken on the ECL model?
On that front, what we have done is, although as I mentioned, we had in the queue for the best collection efficiencies and lowest flows, there's no impact on the ground. However, last quarter, we have drawn about INR 15 crore from the management overall. Due to this, to be conservative, we have drawn lesser at INR 10 crore. INR 5 crore lesser we have drawn down. That's the measure we have taken.
I think overall, you should look at it from a overall perspective. I think our coverage anyway is what, in the higher stages between 75%-76%, which the market is at about 65%. We are anyway provision 10% more than the market or the industry. We don't see a need to do that, neither in April and May figures nor in the quarter four figures. We are already at a provision level of 10% more than the market.
Thank you. Thank you. That was very helpful, sir.
Thank you. Ladies and gentlemen, due to the time constraint, that was the last question for today. Also, if you have more questions, you can call our company directly after this call. I now hand the conference over to the management for the closing remarks. Thank you and over to you, team.
Yeah. Thank you so much for being patient. I think supporting us during the tough times. My assurance and the entire Fusion team's assurance, along with the senior management is that you're seeing performance on facts coming in. Most of this performance is come because of credit cost reducing. Some of it is happening because of the AUM growth, because you're now seeing the average AUM so far.
However, Q1 onwards, you will see the AUM coming in, which will lead to a higher income growth for your PPOP. Then Q2 onwards is where the real kicker or the acceleration will happen. That we are fairly confident and we are supremely committed to that as an overall objective. At the same time, whatever crisis that we see in terms of global headwinds, we are fairly confident that the portfolio has the ability to manage those headwinds. Thank you so much. Thanks for patiently backing us for the entire years.
Thank you, sir. Ladies and gentlemen, on behalf of Fusion Finance Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.