Ladies and gentlemen, good day, and welcome to Fusion Finance Limited Q2 and H1 FY 2026 post-results earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Smit Shah. Thank you, and over to you, sir.
Thank you. Good morning, everyone, and thank you for joining us on the Q2 and H1 FY 2026 earnings conference call of Fusion Finance Limited. We have the company senior management team with us on this call today. 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 Q2 and H1 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, Managing Director and Chief Executive Officer, Fusion Finance Limited, to begin the proceedings of this call. Thank you, and over to you, sir.
Yeah. Good morning, everybody, and thank you for joining us today for Fusion's Q2 and H1 FY 2026 earnings call. I hope you and your families had a wonderful festive month. The sense of optimism and cheer that this season has brought across the country continues to reflect on the ground, bringing some much-needed freshness to an otherwise challenging global environment. Before I begin, I would like to take a moment to acknowledge the leadership transition that took place last quarter. Devesh and I have worked very closely over the past several months, and I want to sincerely thank him for ensuring a smooth, seamless handover and for laying such a strong foundation for Fusion's next chapter. His vision, commitment, and deep belief in responsible growth continue to guide us.
As I take on this responsibility, my focus is to build upon his legacy, continue to steer Fusion into a phase of calibrated growth with sharper execution, stronger credit discipline, and deeper customer focus. The broader macroeconomic environment continue to show steady improvement. Favorable monsoon patterns, healthy agricultural output have supported rural income stability, while inflation has moderated across most consumption categories. The recent rationalization in the GST rates across several essential and consumption-like categories has improved affordability and sentiments in the rural and semi-urban India. Lower taxes on two-wheelers, fertilizers, farm inputs, and household goods are strengthening purchasing power, boosting small business turnover, and improving cash flows for self-employed borrowers. We believe that this recovery in consumption is not a one-off bounce-off. It appears broad-based and sustainable. Tractor sales, two-wheeler registrations, and rural wage growth continue to trend positively, signaling durable demand through the second half of the year.
At the same time, the microfinance sector has strengthened. PAR levels across most leading players have declined to multi-year lows. Collection efficiencies have improved, and the sector's credit curve has now flattened, reflecting improved borrower behavior and discipline. For Fusion, these tailwinds are significant. A more buoyant rural economy, combined with stronger cash flow visibility for small entrepreneurs, directly enhances the quality of the portfolio and repayment discipline of our borrowers. The second quarter of FY 2026 builds upon the encouraging momentum of Q1. Across all key metrics, credit cost, asset quality, disbursements, and collections, we have seen meaningful improvement. This progress validates the effectiveness of our refined operating model, which integrates regional sensitivities, borrower behavior insights, and risk analytics directly into our growth strategy.
Our primary focus continues to remain on the quality of growth, ensuring that whatever customers that we acquire are acquired with a strong credit hygiene, and we continue to have robust collection discipline and meaningful customer engagement. I am also happy to share that IRDAI has approved our corporate agency license in October, enabling us to build more diverse and customized products for our customers. Coming to disbursements. Disbursement stood at INR 1,298 crore in Q2, up about 37% sequentially, INR 950 crore in Q1, taking the total disbursements to INR 2,248 crore in H1 FY 2026. We acquired about 75,000 customers in Q2 versus 55,000 in Q1. September alone contributing over 80,000 customers. About 75% of Q2 disbursements were to existing customers, reflecting deep franchise trust. Our portfolio of clients have relationships with more than three lenders has significantly come down to now 10.8% at a value level.
The same figure on the current book now stands at 6.9%, clearly showing deleveraging due to disciplined new sourcing. In new disbursements, we continue to focus on Fusion and Fusion plus one customers, which now account to over 78% of new acquisitions and have consistently demonstrated superior repayment discipline. Our state level and now district and branch level strategy remains data-led and disciplined. We have gone deeper into the field to categorize risk at the ground, mapping branches and districts by risk profile, leverage indicators, and environmental stress parameters. This sharper segmentation allows us to calibrate approval rates, optimize exposure, and channel efforts to areas demonstrating resilient credit behavior. Approval rates have now improved to 27% in quarter two, which are sequentially moving up from 24% in the last quarter. This validates our enhanced credit filter, stronger on-ground intelligence, and better field productivity.
The average ticket size has now improved to 56,000, largely driven by second-cycle customers who now form 36% of the client base versus 27% a few quarters ago. Credit quality continues to strengthen. Credit costs declined to INR 111 crore in Q2 from INR 178 crore in Q1, making the fourth consecutive quarterly decline. GNPA improved to 4.6% from 5.5% in Q1, and NNPA remained low at 0.38%. Collection efficiency was at 98.5%, with the new book at 99.5% collection efficiency. Book now stands at 65% of the overall book in terms of value. The forward flow from the current book continue to remain controlled between 0.5%-0.6%.
I would also like to reinforce here that collection efficiency, while I have mentioned on number of customers in the current bucket was 98.5%, the same on PAR, because that is what the industry talks about, is at 98.85% in quarter two, which is an improvement of 98.65% over the previous quarter. On the operational front, our paperless customer onboarding system has significantly reduced processing time and manual errors, ensuring faster turnaround. Real-time internal audit and fraud control systems have sharply reduced irregularities month on month, allowing our front-end teams to focus on growth rather than manual checks. Disbursement growth has come despite a reduction in the overall manpower from 15,400 to 13,600, demonstrating productivity gains and process efficiency. Our dedicated collections vertical remains stable, with over 75% of the staff having more than six months tenure.
The analytics-driven segmentation is helping faster rollbacks, while 90+ DPD recoveries and write-backs have gained stronger momentum. Write-off recoveries have nearly doubled to INR 13 crore in Q2. Our 30+ DPD flow forward rates continue to outperform the industry by 10%-12%. Digital collections have grown from 21% to now 35%, supported by greater customer adoption and real-time tracking. We are rolling out digital receipting to further improve transparency and reduce grievances. Our MSME vertical continues to scale as Fusion's second growth engine. As of September, the portfolio stood at INR 708 crore, up from INR 634 crore in Q1, with 91% of the book secured and an average LTV of 42% and an IRR of 23%. Operating across eight states and 91 branches, the business remains at about 56% approval rate and 78% booking.
The focus remains on lending to small entrepreneurs, traders, and service providers within a 50- 60 km radius of each branch, fully PSL compliant, 100% Udyam registered, and over 95% digital collections. We have remained focused on creating a right to win through distribution reach, strong cash flow assessment, and emphasis on property marketability rather than mere technical valuations. These measures are helping us grow the book meaningfully without proportionate OpEx increase. We have also added cost-efficient channels on the ground to enhance per person productivity and scale sustainability. Technology continues to anchor our transformation. We are building our origination and servicing systems in-house by leveraging AI for real-time KYC, geo-fencing and credit scoring, improving compliance, reducing fraud, and enhancing customer experience. We have also started pilots with multiple partners to test alternate models for early and mid-bucket collections.
The AI models under training are already showing encouraging results with over 85% of our workforce in business roles and 75% of the branch managers over three years tenure reflecting depth and stability. Governance has further been strengthened with the induction of Rajeev Sardana as an Independent Director and appointment of a dedicated Chief Compliance Officer and Head of Internal Audit, both reporting directly to the board. Fusion is now operating from a position of strength, discipline, and renewed energy. Our strategic focus for the rest of FY 2026 and beyond rests on three critical pillars. First, customer acquisition. Expanding presence in branches and districts which we have identified as growth, driven by products like Ujala and Sugam, which ensure that we are adding less leveraged customers. Second, stronger underwriting using data analytics to build credit guardrails which are stronger than industry norms and reviewing them quarterly.
We are also developing an advanced bureau plus two credit model for sharper credit separation. Third, people capability through AI enablement, ensuring that every technology investment directly empowers our team on the ground and enhances their ability to serve customers better. In parallel, we are also reinforcing our capital position to support the next leg of growth. The board has approved calling the second tranche of INR 400 crores from the ongoing INR 800 crore rights issue in view of the improving asset quality, collections efficiency, and rising credit demand across our operating states. This call reflects our stronger performance and investor confidence, ensuring that we enter FY 2027 with ample capital headroom to fund both microfinance and MSME expansion sustainably. Having emerged from a prolonged credit cycle, Fusion today stands de-risked, disciplined and digitally enabled.
Our microfinance business is stabilizing and our MSME vertical, now over INR 710 crores in AUM, with 93% secured loans, is ready to scale as our second growth engine. With renewed leadership, strong lender confidence and capital adequacy of over 31%, we are moving to forward building. We have proven that early recognition, proactive provisioning and consistent transparency build trust. Going forward, our focus will shift from protecting the balance sheet to expanding it safely, sustainably and profitably. We are also confident that the strong foundation we have built, supported by prudent governance, robust systems and a customer-centric culture, will help us to deliver sustainable and profitable growth in the quarters ahead. Thank you once again for your time and continued support. I will now hand over to Aman to take you through the financials in detail.
Thanks, Sanjay. Good morning, everyone. I am pleased to walk you through our financial performance for the quarter ending September 30, 2025. The second quarter of FY 2026 reflects continued operational discipline, a strong focus on balance sheet quality and sustained support from our lenders and partners. Starting with our capital and liquidity position, during H1 FY 2026, we raised INR 1,813 crores through fresh funds between April 2025 and September 2025, including INR 258 crores through DAs, INR 327 crores via PTC and INR 173 crores via ECB. We remain comfortably placed with liquidity of INR 892 crore and a capital adequacy ratio of 31.31%, well above the regulatory requirement. The completion of the partly paid up right issue, along with consistent internal accruals, has further strengthened our capital buffers and enhanced financial flexibility. Our relationship with lenders continues to be robust.
Waiver coverage for covenant breaches of quarter one FY 2026 has strengthened to around 89% as of date, up from 72% in the previous quarter. For Q2 FY 2026, we are witnessing a similar trend with most waivers either received or in process. This ongoing confidence is reflected not only in waiver approvals, but also in fresh credit lines extended to us, underscoring the resilience and credibility of our company within the financial ecosystem. Now turning to funding and margin performance. Our average cost of funds remained stable at 10.35%, in line with previous quarter, while marginal cost of funds declined to 12.9%. Despite this, our NIM expanded to 10.9%, driven by a richer yield mix, improved asset quality and lower non-recognition of interest income on stage III assets. Now coming on ECL and asset quality.
We have continued to maintain a strong focus on portfolio hygiene and credit quality.
During the quarter, our disciplined approach led to further improvement in asset quality metrics, with gross NPA declining to 4.61%, while net NPA remained well contained at 0.38%. Our credit cost for the quarter was INR 111 crores, equivalent to 1.7% of average on-book loans. ECL provisions stood at INR 444 crores, down from INR 579 crores in the previous period, with strong stage III coverage of 92.1% and a stage II and III coverage of approximately 85%, reflecting our conservative approach towards recoverability and minimal P&L volatility. During the quarter, we also wrote off INR 246 crores of portfolio and released INR 15 crore of management overlay based on management analysis, including asset quality metrics, the reduction in delinquency and a conservative provisioning approach under ECL, supported by higher provision coverage across stages. Now coming on operational performance. We continue to streamline costs and enhance productivity.
The cost-to-income ratio was 70.2% and overall operating cost stood at 11.38% for the quarter. The modest increase in the operating cost ratio over the previous quarter is driven by a reduction in AUM. This is expected to normalize as AUM expands in the coming quarters. Despite a moderated portfolio size following the recalibration undertaken over recent quarters, our pre-provision operating profit stood at INR 89 crores, reflecting the underlying strength of our core operations and efficiency gains. To summarize, quarter two FY 2026 marks another step forward in our journey towards sustainable profitability, characterized by stable margins, high provision coverage and strong liquidity. With continued lender trust, improved asset quality and disciplined cost management, we are very much confident of delivering further improvements and building durable growth with robust guardrails in the coming quarters. Thanks.
Can we move on with the question and answer session?
Yes.
Thank you very much. We will now begin 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. The first question comes from the line of Renish from ICICI. Please go ahead.
Yeah. Hi, sir. Congrats on a good set of numbers, especially loss for this further reducing to INR 22- odd crore. My first question is on the P&L charge, which stood at more than INR 100 crore. Can you please help us with some reconciliation, like how much is towards incremental PAR provision and how much is towards write-off? Obviously, write-off number is there in PPT, but when I do a reverse math of looking at your incremental PAR zero rate, which is 0.5, 0.6. That number actually doesn't reconcile with your P&L charge.
Actually, P&L charge, whatever provision we have made, INR 15 crore of management overlay, what we have released, that charge you have to add back if you want to calculate that with the respective flow rates. With reference to ECL calculation methodology, the same factors what we have applied in the earlier quarter, that's the same we have followed. So flow rate metrics will calculate the same. One thing more, the flow rate calculation is on AUM based on own bucket and DA bucket, and the calculation of ECL is based on our own bucket. So there must be a difference between that.
Can you just give me one number? What is the incremental provision towards fresh PAR accretion?
Total incremental provision, including that write-off, is around INR 126 crores, including management overlay.
Okay. Maybe I will take it offline. Sir, my second question is on the market exits. In the last six months, we have closed almost 25 branches. Can you please throw some light on which geographies we are exiting the markets?
Renish, there is no specific state that these branches lie in, and most of these branches are distributed between the top three states, which is U.P., Bihar, Odisha, and some of it in M.P.
Okay.
Essentially, these branches were closed down and there are some branches that we have added because these branches were not making headway for us. These are insignificant in terms of the existing POS.
Got it.
We have also shut down some MSME branches and merged with our ROs to reduce our overall OpEx.
Got it. My last question is on this effect tenure. Now, if you look at the repayment rate for last three quarters, it has been hovering around 25%, which used to be 20%, which essentially means that incrementally we are disbursing loans with lower tenure. When we look at the average ticket size is sort of going up, which again means that the share of three-year plus loan will be increasing. Just wanted to know why repayment rates are higher for last three quarters.
Essentially what happens, Renish, is that when you focus on an existing set of customers. There are customers moving out and adding. The process that we follow is that existing customer, the moment is ready for a second cycle, which is after 14 months, which means that about 60% of the loan should have retired for the customer to be eligible for a second cycle. Which means that essentially, if I lend to my existing customers, my overall tenor will reduce because there are loans which will close and there are new loans which will get created.
Got it. So pre-closures are higher is what you are trying to highlight.
Versus let's say, if I would have gone to an open market and acquired new to Fusion customers.
Got it. Okay. Lastly, given in absolute terms our repayment rate is close to INR 2,000 crore on quarterly basis. When do you see our disbursement sort of start matching the repayment number?
I think, Renish, we are seeing a continuous improvement in disbursements and the numbers that we have reported in Q2, we already see a significant upside in Q3 as well. I think somewhere in Q3 end or beginning of Q4 is where we think that the disbursements will take over the book growth or the—
Got it.
—what you are mentioning as repayments.
Got it.
Somewhere I think between December and January is, if let's say you are asking for an exact month, I think between December and January is what we should encounter that.
Got it. Okay. That's it from my side, sir. Thank you, and best of luck.
Yeah. Thanks so much, Renish.
Thanks, Renish.
Thank you. The next question comes from the line of Rajiv Mehta from YES Securities . Please go ahead.
Yes, sir. Hi, good morning. Congrats on better numbers than previous quarter. Sir, my first question is on the flow rate from current to past zero bucket. It has actually increased from 54 basis points to 60 basis points in Q2. I believe the needle moving market has been U.P., which is our largest geography also in terms of operation. When I look at U.P.'s collection efficiency between March and September, I think you gave March, June, and September collection efficiency of U.P. in the presentation. The collection efficiency has actually slightly gone down over the last six months in U.P. Just wanted to understand what is happening in U.P., because when I look at your reported collection efficiency, instead of improving month on month, it has actually come off a bit.
Plus the new portfolio U.P. must be giving you higher collection efficiency, which also implies that the older portfolio collection efficiency seems to be still coming down. If you can just give us more color of why U.P. is dragging our overall flow rates and collection efficiency and what is the underlying issue and when does it get resolved?
Okay, sure, Rajiv. I think first, the question that you have asked is on the net flow rate, which presumably you are referring to 0.54 in the last quarter, going to 0.6 in this quarter.
Yeah. The source seems to be U.P., largely. Yeah.
I will just come to that, Rajiv. I will just explain.
Sure.
A very valid question. There are two important things that we need to look at. One, I will first explain the collection efficiency, the way industry reports it, which is on value. Because most, w hich is on PAR. Now, if you see the new book, which is now 63%-65% of the overall value, that collection efficiency is at about 99.47% and the old book is at about 98%. So from a value perspective, what I said is explained in my notes, our collection efficiency is 98.89% for this quarter. That is how the industry calculates, which is gross roll forward on PAR level. Which has improved from 98.65%, which is a 20- 23 basis points improvement over previous quarter. That is one.
Now, also, the way our demand happens is that the demand stretches through the entire month, which is even the last day of the month. Because of this, there are some customers who will flow forward. In the month or in the quarter, our roll forward rates were much better than the previous quarter. That you can understand from the collection efficiency. The roll forward rates in the previous quarter were 1.35%, while in this quarter was 1.12%.
Okay.
That is why the collection efficiency has improved to 98.8% from the previous of 96.65%, right? Now, the rollback, that is how you get the net roll forward. The rollback has come down by about 15 basis points, okay? Despite the overall improvement on collection efficiency, that is why there is a marginal increase. However, I think the way we look at it is that we are not losing much of sleep on this. The first bucket collection efficiency, if you see, where the roll forward rates continue to be upwards of 60%, we are at least 10%- 20% better than the industry.
I think this is a, if, let's say, we were to like to likely focus on 98.85% as collection efficiency over, let's say, 98.65% in the previous quarter. We are now nearing 99% the way industry reachs it on POS on the entire portfolio. I have also given you the breakup. For the last quarter, the rollback was about 15 basis points lower because of which this issue happened, and that was more to do with the festivals and the floods that happened, and there were not any specific issue. Now let's come to U.P. that you are explaining a sking.
Now, U.P. if you see, continues to be, we have explained that our collection efficiency at a number level is 98.47%, which is 98.85% for the quarter. U.P. continues to be above the country benchmark, which is by about 15 basis points. Certain parts of U.P. which are adjoining Uttarakhand and Eastern U.P. were little impacted, but that doesn't cause any concern going forward. If you see in October, we are back to It is higher than the overall country by about 30 basis points, U.P. specifically.
Okay.
This is despite festivals and Diwali and everything else in October in U.P. So we continue to be strong on U.P. and there are no concerns that we see. U.P. continues to be 20 basis points higher than the industry level. I think what we will do, Rajiv, is from next time onwards, we didn't want to in between change what we are reporting. We will start reporting on PAR from next, the way the industry reports.
Yes.
I think that will give you a much better sense. But I thought we will not change it in between. That's why I mentioned it in my call details. But next time onwards, we will start reporting. Let me reinforce our collection efficiency the way industry measures on PAR is 98.87% to 88% for the quarter, which is a 20 basis point improvement.
Okay. No, clear about that. Broadly, when I look at the disbursement on a month-on-month run rate basis, I mean, September, you did about INR 430, which is in pure microfinance. October, you said the collections were better for U.P., but one can expect this month-on-month pickup in this disbursement number with the approval rates getting better. Hence, overall figure for disbursement will start climbing up for Q3 and then similarly in Q4, which is why you also replied to the previous question that your book will stop de-growing from December, mostly January onwards. It will start coming back to growth.
Absolutely, Rajiv. That is one of the reasons when we presented to the board the details, the confidence that the board got on our credit guardrails, which continue to be at least plus two stronger than the industry. That is why we called that second tranche of INR 400 crores on the rights issue, because we are confident of growth on the credit guardrails now.
Okay. Why did we release management overlay? It was supposed to get released at some point in time, but in a quarter, just coming back to the flows were stable, we had not seen much improvement. You started releasing management overlay. Now that you already started utilizing, can we assume full utilization of the balance in next two to three quarters? Even adjusted for this, even adjusted for when the whole write-offs get finished, maybe another two quarters of write-offs also getting complete. Where do you think that the ECL rates or ECL coverage on stage II and stage III will get eventually settled in the next two to three quarters, which then becomes your recurring rate of provision in the next year?
Great. First thing, let me state. The reason why we are giving the flow rates is for you, for everybody to get a sense of how much that is going forward, we are able to roll back. We are consistently measuring ourselves. However, it is also important to look at collection efficiency. Now, collection efficiency, I have explained, is now closer to 99%, which is a significant improvement. Two, the overall credit cost has come down. This was in Q1 as well, that when we looked at our ECL model and the management overlays, you understand both of them go hand in hand.
What we realized was that there is an over-provisioning that we have done or let's say we have taken a much higher provisioning because of what happened in the previous year. At the same time, keeping the advice from everybody was that between the two, there is no point in creating both. There is a management overlay as well as there is a higher provisioning that we are doing, and that provisioning is 15% higher than, let's say, what others are. The other industry is. Which means that between the two, we should be balancing. Deliberately, the guidance that we are giving here on the call also is that we will constructively over the few quarters, continue to release this management overlay in line with the ECL provisioning and reduced overall better collection efficiency. We will continue to do that.
We have not used all of it, so we have explained there that overall INR 60 crores of management overlay. We have utilized INR 15 crores and the balance we will continue to utilize rather than using a big chunk in one particular quarter. As a percentage of the overall income, this is very insignificant part. While you see the loss reducing, but if you see overall income that we have generated against that using INR 15 crores is a very small amount. I hope that answers the two queries that you have put, Rajiv.
No, I think one part is, of course, utilization of management overlay. That's very clear. Once you utilize the management overlay and this INR 45 crore goes out of the ECL balance, then of course, the pending write-offs will also get finished in the next two quarters. Then where does the ECL coverage of stage II and stage III settles?
Let's move from a percentage to an actual absolute level in stage I and stage II, which we have shown. I'm saying we can't give you an exact guidance, but if you look at the trends, last quarter INR 172 crores stage II coming down to INR 140. Stage III, INR 383 to INR 294, which means that there is significant recovery happening because technically entire stage III should be written off. We wrote off INR 240 crore and now write-off is not a discretionary thing. We write off everything that goes into 180.
I think if you take these two, three things into tandem, you will understand that there is a recovery that is happening pre-write-off also. The third thing is that we have also reported a better write-back number over the previous quarter. INR 13 crore over merely INR 4 crore- INR 6 crore in the previous two quarters. This will continue to improve. I think that the discussions that we internally had with the board and the auditors, the confidence came from these three areas. The efficiencies in 90+ and the write-off rates, the improvement in write-back and the collection efficiency in the X bucket.
Yeah, I get that. Thanks.
Coming back to your first point, you should look at flow forward rates in tandem with all the other matrices and not standalone. That is my suggestion.
No, I think that confusion was happening because volume report and we were looking at then the pause movement and then the pause movement was not reconciling with the volume movement. Now once you start reporting consistently, I think then that question will not come.
Absolutely. That is why I thought that we will not change it in the investor deck because there will be confusion. However, we have mentioned in our analyst call.
No, clear about that. Thank you.
Yeah. Thanks, Rajiv.
Thanks.
Thank you. The next question comes from the line of Kushagra Goel from CLSA. Please go ahead.
Hi, sir. Thank you for taking my question. Firstly, just some data keeping question. Could you tell us the interest reversal this quarter?
Interest reversal is around INR 19 crores excluding write-offs. INR 19 crores- INR 20 crores. Right.
Got it, sir. Also, on your customers disbursement this time, you said around 75% is to existing and 25% is new. In the new, how much is new to credit and what is new to Fusion?
Right. Kushagra, out of that 25%, 13%-14% is new to credit and about 11%-12% is new to Fusion.
Okay, sir. Got it. Now coming to my first question, it is regarding this disbursement only. You have mentioned that you expect disbursements to overtake your repayments by December or January. On that, do you expect this similar existing to new sort of percentages to remain or do you expect new to go up and how do you see that playing out?
Kushagra, there are efforts that we have put in to ensure that new also goes up because we see that new to credit behaves quite well and if let us say the credit matrices continue to be strong, we see confidence in new to credit. But we also understand that let us say we were deciding to scale up, we should spend little more time on scaling up a new to credit or new to Fusion. Not that the customer is over-leveraged, but just from our own confidence perspective, two, there are significant number of customers which are only Fusion and Fusion plus one, which are currently requiring or not been so taken care of and require more attention from our side.
I think the way, hence the strategy that we have laid down that for the next one and a half quarters, you may see this percentage continue to be at about 75%. But the way we are making changes in quarter four onwards, you will see this tempering. Eventually, a go-to number we think should be somewhere between 60%-65% from Fusion customers and the balance 35% should be new to Fusion and within that new to credit.
Okay, sir. Got it. But that you will expect from fourth quarter or from next year potentially?
Yes, because it is not just by design, it is just that from an existing customer perspective, there is an opportunity we have. Why should we neglect our existing customers and go after new customers? That is the only thing. Not that there is anything wrong in the second strategy. It is just from a prioritizing perspective.
Got it, sir. Just one more question. Just wanted to know if the industry or different players have hiked new loan rates because of this increased sort of stress situation or credit cost situation. Just wanted to know about that.
Yeah. Absolutely. I think the key thing is that if you look at the industry, there is a pressure on NIMs, and I think if you look at NIMs is supported by three areas, cost of borrowing, how the book behaves in terms of delinquencies and the yields that you give to new loans. I think yields you give to new loans is the easiest to change. The other two are much tougher to work on. We are cognizant of this fact. There is an internal discussion that we are having. We have made a presentation to our internal audit committee and board and I think post discussions with that we will come back to the market in terms of what our strategy will be on rates or yields to new customers. But yes, you are right.
We see that people in the market have increased those rates from 75 to as much as 350 basis points. We are evaluating that option and there is an internal audit and we have an asset pricing committee which is evaluating all the options. Post discussions with the audit committee and the board, we will come back to the market on what our plans are very soon.
Okay, sir. Got it. You haven't done it till now. You are planning to.
No. We have not increased the rates till now, but we have had a detailed internal discussion on the same.
Got it, sir. Thank you. Those are my questions.
Thank you so much.
Thank you. The next question comes from the line of Abhijit Tibrewal from Motilal Oswal Financial Services Limited. Please go ahead.
Yeah, good morning, everyone, and thank you for taking my question. Just picking up on the yield bit that you said right before I ask my questions. Just trying to understand maybe a year back, right? We were all kind of discussing that the regulator is asking NBFC-MFIs in particular, right, and other MFI players to reduce their lending yields and suddenly one year forward, today, we are looking at everyone like your knowledge, increasing their lending yields by 75 basis points to 300 basis points in a declining interest rate environment. So I mean, fair to say that today, inherently, the risk that we see in MFI lending at an industry level has gone up and which is why maybe the regulator will be okay with NBFC-MFIs and other MFI players kind of taking an increase in their lending yields.
I think, yeah, it's a very tough question, but I think the way we should look at it is that the challenge is less to do with the risk cost and more to do with the borrowing. I think Alok Misra, SRO, MFIN has already in multiple interviews, said that there is a borrowing challenge to a lot of MFI players in the market. They are also representing us and talking with the government and the regulator to see what are the opportunities. I think somewhere that whatever the industry is doing, I think right now everybody should be doing what is right for them rather than overall at an industry level and chasing each other that if someone else is doing, should I increase rates? Very tough to comment on that. But like I said, we are evaluating that.
Amongst all the other three variables, I think the big reason is less to do with the credit cost and more to do with the borrowing cost. So the cost that the MFIs are paying, I think that is and Alok Misra, MFIN CEO, he's clearly identified that as a key metric rather than just the risk cost going up. But like I said, I think we are not taking it like a light decision and that is why we are evaluating all the options that are available. I think how the regulator should look at is very tough for me to say. But I think Fusion as a company would want to focus on what is right for Fusion. There is enough representation that as an industry we have made through Alok Misra.
I think overall at an industry level there should be some solution to that. But I think Fusion is more focused on what is right for Fusion at this point of time.
Got it, sir. I think I understand. I mean, that's very useful. The second question I had was around the credit costs. I mean, like previous participants in the call acknowledged, right? I mean, it's heartening to see credit costs coming down, even after we include that 15 crore of management overlay release in the quarter. But just trying to understand how are we looking at credit costs trending in the second half next year. Why I ask this is, I mean, the largest NBFC-MFI, which already reported earlier in this earning season, kind of increased their guidance on credit costs for the second half as well as the next full-year timely because they're seeing now higher ECL provisioning requirement. I acknowledge, I mean, our cover on both stage II, stage III is actually very good compared to everyone else that we have.
How are we thinking about credit cost trending for us? Do you think there is a reason to believe that earlier what was thought of as maybe 3% kind of normalized steady-state credit cost, will it be higher now going ahead, maybe next year onwards?
Okay, great. I think without reference to any particular company, one, we see credit cost trending hugely down. You are absolutely right, despite the management overlays, the way we should look at credit cost is management overlays utilization versus the provisioning or the ECL model that we have. The management overlay release is not a standalone. It is because of improving performance and the over-provisioning actually that we have done through the ECL model. An ECL model is not something that can be changed every quarter. That's an important thing to acknowledge for us. I think now, from a credit cost perspective, I am reporting collection efficiencies, and you see collection efficiencies significantly improving. We were reporting collection efficiencies on a number, that's why you didn't see the new portfolio kicking in this time.
In my analyst call at least, we have not changed the investor deck numbers so that there is no confusion. However, in the analyst call, I have mentioned that the collection efficiency is now closer to 98.9%, which is an 18-20 basis points improvement over the previous quarter. There are improvement in recoveries. We have reported write-backs almost doubling. Our collection efficiencies in 90+ is improving. Clearly, the credit cost will significantly continue to come down. The way I am looking at it is that, let's say and that's why one of the reasons we published the flow forward rates, net flow forward rates, to give you a sense on the long term. That from a, let's say, a 0.5-0.6 flow forward rate, moves to, let's say, a 6% annualized cost.
About roughly between 50%-55% of that is what gets knocked off in the entire year. On that, we should assume a credit cost of roughly between 3%-3.5%. However, the way we are building our portfolios in our modeling, the credit cost that we are building is sub 2.5%. The guardrails, we are building sub 2.5%. But I think from a more realistic, we should consider ongoing future credit cost at about 3.5%.
Got it. Thank you for that detailed answer, sir.
I hope that takes care of the query that you had.
Yeah. It answers my question. The other question that I had was around OpEx. We see that in other peers, right? Wherever we are continuing to see a rundown in the costs, right? There are some measures being taken on the OpEx side, right? To bring them down, including rationalization of branches, maybe employee attrition, which is there, is not being filled in as proactively as it was done in the past, but there are steps being taken to bring down OpEx. How are we approaching OpEx, given that you shared, Sanjay sir, that maybe for one more quarter, AUM will continue to trend lower. And then a related question to this is that, looking at whatever you said, right, net flow rates now in that 0.5%-0.6% range, write-backs improving, collection efficiency is improving.
Are you now getting higher confidence in scaling up your disbursement momentum in the coming months and coming quarters?
Okay. Right. Yeah. I think first is on the overall OpEx, the first question that you asked. If you see, there are certain roles that we have redeployed, and we have not backfilled certain positions, which we thought were redundant in the current. The net headcount position that you see has come down from 15,600 to about 13,600, so close to about 2,000 people over a period of two to three months. You have not seen that significant improvement in OpEx because most of it happened during the quarter and the salaries and everything, the reduction will kick in from quarter three onwards, which is October onwards. That you will see. The second strategy we said that when we are going to start seeing growth happening, we are again going to require people. There are two things.
One, if you see the disbursement growth has come on the drop of 2,000 people lesser, which means that our productivities have significantly gone up. There are two things that we have done on the disbursement. One, there is a lot of redundancy in terms of the entire onboarding, which we have moved completely digital. That's one big change that has happened and the first time not right, which used to be 65%, 67%, has come down to now sub 30%. That's a big reason of increase in disbursement and it is not just more efforts, better credit. It's not just that. It is a mix of this as well. This will continue to happen. Right now, we have gone live with our digital receipting, which means that no physical receipting in the market.
We feel that these two will reduce the burden on the front end and productivities will continue to improve without adding people, and without any increase in OpEx. This I am saying for both the businesses, MSME as well as MFI. So you will see people OpEx coming down, and there may be certain IT expenses, but most of it will go into CapEx and long-term, and will not be front-ended. But there are a lot of investments that we are doing in IT to ensure that the overdependence or the heavy lifting that the front-end person has to do distinctly comes down. Hence the confidence on disbursement or growth without having to significantly increase OpEx. That is extremely high in the current environment.
That is why when we presented to the board in detail, that is where the board got the confidence that we feel that we should be on acceleration. We will not let down the guardrails. But even with the current guardrails, you see that our approval rates have improved from 15%-16% two quarters back now to about 27%, 28%. While we are talking, we are closer to 30%. These are more aligned with the industry, and this is happening when our guardrails are tougher than the industry. The demand definitely is there, and these two to three things give us the confidence that the disbursement will continue to sequentially grow without putting any pressure on OpEx.
Got you. This is useful. Yes, sir. Thank you so much. I just wanted to squeeze in one last because you already made a presentation to the board. At least from next year onwards, how are we thinking about the MFI growth and the MSME growth and put together at an overall level? How is it that we are looking to grow from next year onwards?
Yeah. So we presented a plan for the next one year and it is a positive plan. There is a significant book building that we will be doing both in MFI and MSME. That is one of the reasons why, so you will see the disbursement trend continuing. We can safely assume that, let's say right now we are at about what? INR 450 crore per month figure. I have given you the number that we should be somewhere around December and January, where the book turnaround will start happening. We continue to see this sequentially improving in the next year as well. So the overall book size and that is one of the key reasons why we thought that there is an extra capital that would be required from next calendar year onwards. That is why the second tranche of money was called in.
Got it. This is very useful, sir. Thank you and I wish you and your team the very best.
Thank you so much.
Thank you. The next question comes from the line of Pranav Gupta from Aionios Alpha Investment Management. Please go ahead.
Yeah. Hi, good morning. Good morning, Sanjay and the team. Congratulations on a good set of numbers. Some of my questions you have already been answered, but to get more sense on the liability side, two things here. One is that you mentioned that the industry is obviously facing some challenges on raising incremental funds, given that the entire industry has gone through stress. Our marginal cost of funds also have gone up. Obviously this quarter you have seen a decline quarter-on-quarter, but on an overall basis have gone up. Just to give a sense on how we are seeing the incremental demand being fulfilled by banks and whether we can see an increased pace of DA securitization, going forward. That is the first question.
As you have seen as per the market trends now, it is a little bit difficult for getting the funds, but Fusion is getting the funds. In this quarter also, we have raised around INR 309.4 crores, in respect of term loans, ECB, PTC, DA. So we are getting the funds. For boosting our disbursement, we are getting that INR 400 crores of right issue money. So that is the first thing, that funding problem is not there. Currently, we are having a sanction in hand of around INR 2,730 crores, which includes DA, PTC, term loans. So sanctions we are having, liquidity we are having, so it will not be difficult for us. But for marginal cost of borrowing next quarter, it will a little bit get down, maybe 20- 30 basis points down. So trend is like that only.
Our cost of fund, that may get increased in the next quarter, might be 20-30 basis points due to that we have raised the fund in the last month or you can say in the last part of the quarter. So that impact of interest cost will come in the next quarter. But we will try to maintain the NIM or maybe plus minus 10 basis points. We will try to figure it out that how the things will go on and whether we have to increase our rate of interest in terms of yield and all. That discussion is already is going with the board. Let's see. Next quarter, marginal cost of borrowing will come down and that is the guidance.
Great. On the employee cost, Sanjay sir, you mentioned that a large part of the benefit of the number of employees going down will start coming in from third quarter. But just on a more long-term basis, how do you see overall productivity on a per employee or per branch basis? Because obviously the numbers have come off as the AUM has come off significantly. But on a more long-term basis, where do you see overall productivity settling in? What is the implication on cost ratios over a longer term period?
Right. I think, one is there's a medium term and a long term. Or a short term and let's say a medium and long term. In the short term, there are two things where the OpEx is being focused right now. One in disbursement, the second is collections. There were two strategies that we had. One, let people go or retrench like a lot of people would do in a similar situation. I think what we realized was that there is about INR 1,800 crore -INR 2,000 crore of book that we wrote off over the last 18 - 20 months. Multiple cuts that we do on that gives us the confidence that there is recovery that can happen on this book, and there is recovery that can happen on the INR 250, INR 300 odd crores of stage III.
Hence, there is a significant number of people we have redeployed in collections, and our business structure, we have integrated in a way to make recoveries, which is 90+, a significant part of it. So you will see write-backs, you've already seen it about doubling over the previous quarter. You will see recoveries improving in 90+ and write-off in the next two to three quarters. We feel that we should be able to clean up this book in the next three quarters. Post that, once I think we come to INR 700 crore, INR 800 crore of monthly disbursement, I think then the current team should be able to manage that disbursement and the OpEx will seem more in line what it used to be previously, rather than the jarring figures that are obviously there right now.
The OpEx will be partially or significantly, let's say about INR 15 crores-INR 18 crores per quarter through other measures of other income which will come in. Then the way we will look at that OpEx is that is not a non-productive OpEx. While it is not giving me disbursement, it is giving me a better recovery percentage or a better write-back percentage. That is how we are looking at that OpEx. So the non-productive OpEx will be almost zero. By the time the question that you asked, I think in three quarters' time, we have fair confidence that the book cleanup would have happened on the write-off and the 90+. Forward flows you are seeing are almost negligible. The team would then be redeployed.
Just to give you an overall sense, if the question is, let's say we have to go to about INR 700 crore-INR 750 crore a month, which will lead to what? 30% growth next year. We do not envisage adding too many people. Actually, the people headcount will hardly go up from the current level.
Fair. I have some more questions. I will take them offline. Just one clarification. Where does the recovery from write-off classification happen in the P&L? Which line item? If you can clarify that will be great.
Earlier we were showing it as in other income. Now we have moved recovery from write-off recovery to other operating revenues.
Okay, it has moved from other income to other operating income.
Right, in this quarter.
Okay.
Retrospective effect also has been regrouped.
Okay, great. Thank you so much and good luck for the future quarters.
Thank you so much.
Thank you.
Thank you. The next question comes from the line of Hardi Jain from Investec. Please go ahead.
Hello. Yeah. Thank you for giving me the opportunity. Hello?
Yeah. Sure, Hardi, we can hear you.
Yeah. Okay. I have a few questions. One question is there is one note related to covenant breach. I want to understand something about covenant breach and what could be its details in future. If you could explain me.
Covenant breaches are those when we take the loans, there are some conditions. That is mentioned in the agreement about that if your gross NPA is like this, then there must be a breach and you have to take that covenant breach waiver from the bank if that part increases. Like this, we are having—
Okay.
—the covenant breaches from last few quarters. So that way, waivers we are taking from the bank regarding that covenant breaches so that the bank will not ask for repayment of loans. Based on the historical trend and current trend and icons, nobody has asked from Fusion for recalling of amount. We have a cordial and good relations with the lenders, and they are providing us the covenant breach waivers on time.
We have this—
Okay, thank you.
Hardi, this flows from the previous year and we have continuously been reporting quarter on quarter that over 90% of the breach, the waivers have been provided by the lending partners.
We are remaining with 10% only. For that we are also expecting some waivers also in future.
There are certain—
Or else—
Hardi, there are certain banks which do not have a specific policy of giving waivers, but there are no concerns—
Okay.
—that have been identified by any of these banks.
Okay.
They don't have a specific approval. But other than that, all the banks and all the partners we have received approvals from.
Okay. So just we are pending the 10% of that loans only, right?
Correct. And the way to look at it is that some of these are annual, so they are not reviewed—
Okay.
—during the quarter. They will be reviewed at the end of the year.
Okay, understood. Thank you. My another question is, I want to know that from your total borrowings, what is the portion for variable rate borrowings?
Mostly. One second.
Yeah.
Some of the borrowings that we are having of variable rates regarding term loans—
Yeah.
—as well as variable rate contains ECB that we have raised for INR 173 crores. For that proper hedging we have done. We have converted that variable rate into fixed rate for the particular ECB. During the quarter, out of INR 3,094 crores, we have taken variable rate loans as well and fixed rate loans as well. The major quantum pertains to fixed rate loans.
About 15%-20% of the new borrowings would be about 15%-20% other than the ECB that Aman spoke about.
Okay, understood.
ECB we should not consider as variable because it is completely hedged.
Okay, understood.
I will talk about INR 445 crores around that we have taken on a variable basis.
Out of the INR 1,400 odd crores.
Including ECB.
Out of the 1,400 odd crores. That's not much.
Okay, understood. My last question is, I just want to know, as for credit cost, you have given the guidance, but wanted to know guidance related to write-off as looking at your side quality trend. If you could highlight few points, that will be better.
The write-off is as per our policy. There is no discretion we do in it. We have put 180 DPD. Anything that goes beyond 180 DPD as a write-off. From a trend perspective, you can make out that there is a significant reduction.
Okay.
The way you should look at it is look at stage III and assume that from a trending last two quarters, whatever is being written off. Because stage III, technically, if we don't do anything, we'll completely move into write-off 180 DPD at the end of the quarter. From the last two quarter analyst report, you can make out how much we are retaining, and you will get a sense of what will be the write-off for the next quarter.
Okay, understood. Thank you so much.
Thank you so much.
That answers my question. Okay, thank you.
Thank you. Ladies and gentlemen, we will take that as the last question for today's call. If anybody missed to ask questions, you may connect with the management offline. I would now like to hand the conference over to the management for closing comments.
Yeah. Thank you so much. My closing remarks would be, I think there is a lot of positivity that we are seeing. However, we continue to be calibrated and I think all the learnings that we have had, that makes us much stronger going forward from here. We have a very strong second line in terms of the entire CXO team that we have and growing from here for the next six months to three years. We are very confident that the execution will be flawless. Thank you so much and have a wonderful year ahead.
On behalf of Fusion Finance Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines. Thank you.