Ladies and gentlemen, good day, and welcome to IIFL Finance Limited Q2 FY 2024 earnings conference call. From the management team, we have with us Mr. Nirmal Jain, Managing Director, IIFL Finance Limited, Mr. Monu Ratra, CEO, IIFL Home Finance Limited, Mr. Venkatesh N., CEO, IIFL Samasta Finance Limited, and Mr. Kapish Jain, Chief Financial Officer, IIFL Finance Limited. 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 this 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. Kapish Jain. Thank you, and over to you, sir.
Thank you very much. Good afternoon, ladies and gentlemen. Thank you very much for joining us for the second quarter earnings call, for the company. I would request Nirmal to just set the ball rolling and give a perspective on the current macro environment, more particularly for our businesses, and his outlook on how things look like from a business performance in quarter two, and strategy going forward. Yeah, Nirmal, if you can start.
Thank you, Kapish, and good afternoon, everybody. So as we know, globally, growth is slowing down, and more steeply outside U.S. and maybe a few countries like India. Interest rates are expected to remain higher for longer. In this environment, India stands out in very good state and a sweet spot. So all macro parameters in India show healthy trends. Inflation is in control, growth is holding up, demand for credit is strong, interest rates upward movement seems to have paused, financial system is robust, tax collection is buoyant, infra and CapEx cycle is seeing tremendous growth, and services in general are also doing very well, too. So coming to IIFL, there's no change as such in our strategy, so we remain focused on retail lending, and that through targeting customers underbanked and geographies under-penetrated by banks.
That's why we make some good partners with banks for co-lending and sale of our priority sector and small ticket retail assets. Only one bit of change or move in our strategic direction, and that is our maybe the need and therefore our resolve to accelerate investment in digital technology and artificial intelligence or AI. We are poised to make some rapid strides in leveraging technological capabilities and digital capabilities, riding on one hand, unmatched digital infrastructure that has been created by the Government of India, and exponential growth in artificial intelligence and machine learning. Our AUM crossed INR 73,000 crore mark in this quarter, and we are on track towards our guided AUM of INR 100,000 crore by end of next financial year. ROA is close to 4%, and ROE has been above 30%.
Gold loan, home loan, LAP and all these core loan assets grew by about 5%-7% in the quarter-over-quarter. Digital loans grew at a faster pace on a small base, and similarly, microfinance also witnessed a very strong growth in line with the sector trends. Interest yield has improved, it has improved across asset categories, again, in line with the market trend. But contrary to market trends, we've been able to contain and keep our cost of funds stable, in fact, bring down by 10 basis points, benefiting from low-cost funding from multilateral agencies and National Housing Bank for refinance for affordable and housing for economically weaker sections.
Also, the full impact of repayment of high-cost dollar bond that we did last quarter, we saw in this quarter, and our improved credibility with banks, and other institutional lenders will give us, leverage to negotiate our rates. With our time-tested strong underwriting standards and collection process, asset quality has improved across the board again, with the exception of gold loan, where despite reported numbers, I said, reported numbers we just said higher, the actual losses or actual risk of loss is very minimal. We are taking shareholders' approval of course, for capital raise anytime during next one year, and enabling resolution to tap the capital market at appropriate time. With this, I hand over to Kapish to, take you through the financial numbers in greater detail. Thank you.
Thanks a lot, Nirmal. So before we go ahead to the, for the Q&A, I'll just give a highlight and a snapshot of how our performance has been for the quarter. So for the quarter, IIFL Finance at a consolidated level before non-controlling minority adjustment, was INR 525 crore, which is up 32% YoY, and up 11% on a quarter-on-quarter basis. We recorded a pre-provision operating profit of around INR 922 crore for the quarter, up by 41% YoY and 15% on a QoQ basis. For the quarter, our consolidated loan AUM grew by 32%, to INR 73,000 crore. On a YoY basis, this reports a growth of 32% and 7% on a QoQ. Further dissecting the AUM, our core products of the loan AUM is driven by gold, housing finance, and microfinance.
And then the growth here has been around 34% YoY and 7% QoQ from 69,744, which largely comprises of all our retail portfolio and currently now comprises of 95% of our total AUM. As highlighted by Nirmal, our gross NPA stood at around 1.8% and which is still marginally lower than our guidance to the market of around 2%, and our net NPA is around 1%, which is significantly lower and down by 58 basis points and 20 basis points respectively when compared to the same period last year. With the implementation of the expected credit loss in the IIFL, the provision coverage ratio on NPA stands at around 159%.
In continuation of our capital optimization strategy, 40% of our AUM is either assigned or under co-lending arrangements with financial institutions as of 30th of September 2023. Going forward, we will see a larger share of co-lending emerging in December, like what we have highlighted in the previous quarters. The assigned loan book therefore stands at around INR 18,429 crore, which is up by 19% YoY, and 4% QoQ. More particularly, the co-lending asset book crosses a critical milestone of INR 10,000 crore and stands at around INR 10,576 crore, which is 125% up YoY and 18% on a QoQ basis.
In spite of the rising interest rate scenarios in the last one year, where we saw costs in MCLR in the bank repo rising from around 150 basis points -250 basis points, with a more dynamic operations, we could reduce, we could get our cost of borrowing, but a muted growth of around 40 basis points YoY. And sequentially, it went down by around 6 basis points, led by some of the multilateral borrowing that we did. And we also got a very lumpy chunk of borrowing that we could get from the National Housing Bank, in our Housing Finance company. Not to mention the high-cost MTN borrowing that we paid off last quarter, which had a full impact this quarter as well. From a liquidity perspective, we are fairly healthy.
We stand a liquidity of around INR 9,000 crore, INR 9,078 crore, to be precise. And during this quarter, we raised around INR 5,552 crores, through a mix of term loans, bonds and refinance, and INR 428 crore was run through a direct assignments of loans, to various banks. As I mentioned, some of the key highlights of our borrowing this quarter has been a $50 million of borrowing that we did from U.S. International Development Finance Corporation, for financing affordable housing loans, and $100 million from IFC World Bank, with 50% earmarked, to promote women borrowers and 50% towards green housing under the underserved category. And around INR 1,500 crore that we have already drawn from National Housing Bank.
We have a positive ALM, whereby inflows coverage exceeds and the expected outflows across all our buckets, and with the net gearing at a healthy position around 3.3x. Our annualized ROE for this quarter is around 3.1%, supported by a healthy ROA of around 3.9%, which moves up our earnings per share to around INR 12.5 for the quarter, up 25% YoY and 11% on a quarter-on-quarter basis. Our capital adequacy stands firm at around 20.5% for the Housing Finance company HFC, supported by the capital infusion that we got, it stands at around 47.6%, and Samasta is 21%.
Our CRAR is, of course, well above the minimum threshold requirement of 15%, clearly suggesting that we are able to grow ourselves without impacting hugely on the capital position through the on-book, off-book strategy, which has been holding for us well. And not to mention, the healthy internal accrual, which is coming from the NIM, which we have been able to maintain over the last few quarters. With this, I open the floor for question and answers, ladies and gentlemen, and thank you very much.
Thank you very much. We'll 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. Participants, you may press star and one to ask a question. The first question is from the line of Shweta Daptardar from Elara Capital. Please go ahead.
Thank you, sir, for the opportunity, and congratulations for a great set of numbers. I have couple of questions. One is: so most of the NBFC managements have been calling out concerns on small ticket lending or personal loan segments. You being, Mr. Jain, you being a veteran, what are your inputs, especially in light of IIFL Finance portfolio on the digital loan side? That's, that's question number one.
Yeah. So I think personal loan, maybe, the fears are not completely unfounded because, there has been very aggressive, personal loan portfolio built up by some of the new fintechs and new NBFCs, and banks have also become aggressive. But banks probably will have more established credit underwriting practices. As far as we are concerned, this is not a thrust product for growth.
Our personal loan is more limited to our known customers as a cross-sell, but our digital loans are more focused on MSME and business loans. But in personal loans, while I won't have the details, but, I mean, many of the fintechs, the new account, new practices for underwriting that they follow, can have risk, and those risks manifest more in the down cycle and when the economic activity slows down. I'll be cautious.
Noted. My second question pertaining specifically to gold loan portfolio. So how are the LTV, ticket size and customer segmentation working for us on the gold loan side? Have there been any shifts given the current market scenario? Thank you.
Not really. I think our gold loan portfolio and the customer profile, because there are millions of customers, they remain broadly the same. In terms of our average ticket size, there is a there's a little increase, but that is, so it used to be, say, around INR 70,000 last year, is around INR 73,800 in the last quarter. So I mean, that is basically inflation and the increase in gold prices. But broadly, the customer, the target customer segment remains the same.
Noted. That's all from my side. Thank you.
Thank you.
Thank you. Next question is from the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.
Yeah. Am I audible?
Yes.
Yeah. Sir, the first question again, I mean, I have two questions, one on gold loans, the other one on home loans. Both pertains to strong growth that we're seeing in both the segments. Just wanted to understand first on gold loans, what would you attribute this strong momentum in gold loan growth? Is it predominantly the distribution that we have built? Or would you kind of attribute it to the fact that you're also doing fair amount of co-lending in gold loans, which perhaps allows you to offer very attractively priced co-loans to customers despite being an NBFC?
So if you could just help us understand that while, I mean, checks seem to suggest that g old loan, growth in the g old loan assets, loan assets, is primarily driven by, one, the distribution that we have built over the last two, three years, and two, our very customer-centric, and friendly practices that we have. I don't think that co-lending in any way helps, because in fact, if you really notice, co-lending cost is higher than the cost of borrowing, so that doesn't allow us to price the product cheaper. And in fact, it's primarily because of, the distribution strength that we have built.
So if you see the number of branches, then the way we have grown over the last two, three years has been, very significant. In fact, more than 50%-60% growth in number of branches alone. Still, if you look at our branch, our productivity per branch is around INR 8.5 crore compared to, say, INR 12 crore of the leading player in the industry. So, it's more, I mean, I will say that the primary reason is the distribution that we have built over the years, and then the customer goodwill that we are building and getting repeat business also from them.
Got it, sir. A similar question on home loans as well. Different industry experts kind of seem to suggest that there is some slowdown that we are seeing in urban affordable housing, in ticket sizes between INR 15-INR 25 lakhs, INR 15-INR 30 lakhs, thereabout, some slowdown being seen. Different reasons being attributed. Some of them say that there is a supply constraint, which is there when the CLSS was withdrawn for the developer community.
But if I kind of look at our home loan franchise continues to do very well, continues to grow from strength to strength, do you think it is predominantly because our business model, as I understand it, also leverages this developer APF extensively, which most other at least listed HFCs don't. Do you think that is a moat that we have kind of built in our home loan franchise today, which is helping us, when, when there is a more of a narrative of a slowdown that we are seeing in smaller ticket mortgages?
Yeah, this is in fact, we have Monu, who is the-
Yeah.
CEO of our Housing Finance company. He's there on the call, and he'll probably take this.
Yeah. Thank you. Thank you, Nirmal. Hi, Abhijit. So Abhijit, you rightly said that we have been seeing the reports that in the urban, the metros and the hubs, there has been a constraint in the supply in the affordable housing. But if you look at our expansion of our distribution, which we have done in the last about two years' time, this is playing out to offset us any slowdown in the Tier 1 and the metros. The constitution of our, which we call as expansion branches, as a percentage of the overall disbursement, has monthly disbursement has increased. So whatever marginal slowdown we are seeing, which is absolutely correct, we have been able to offset by the distribution.
If you will see the kind of manpower we have added and the distribution we have added, currently we are in position about 370+ locations. So Abhijit, that is offsetting it. Secondly, as far as the APF thing is concerned, yes, we have decent relationships which continue to thrive. But majorly this growth continues because of our expansion branches, which we have worked on for the last two years, and we hope to see carry that momentum forward.
Got it. This is useful. And just in the interest of time, one last question. Nirmal sir, I mean, when I look at Samasta, obviously growing at a very, very strong clip, I mean, do you think going forward, you will kind of look to slow down here or we're still looking at close to 50% kind of YoY growth for the next few years?
I think, maybe for a year or two it may continue at that pace. In fact, in the COVID, you know, the things have slowed down, so there was a bit of catching up with the natural trend line. But as the base becomes larger, the growth will slow down in percentage terms.
Got it. This is actually very, very useful. Congratulations and, and all the very best.
Thank you. Thanks, Abhijit.
Thank you. Participants, you may press star and one to ask the question. Next question is from the line of Anusha Raheja from Dalal & Broacha. Please go ahead.
Yeah, thanks for taking my question, and congrats on good set of numbers. Firstly, you said that, you know, you might require a capital over the next one year's time. So that is for the subsidiary or for the parent company?
So the approval that we have taken is for the parent company, and in the subsidiary we can, like, you know, in Housing Finance, we have raised private equity. So we have both the options available. We can actually raise capital either in parent or microfinance and, or both or, b ut that way, in terms of our gearing, in terms of our capital efficiency, we are fairly comfortable. So we'll have to wait for the opportune time, otherwise we can wait. We don't have any pressure to raise capital in terms of, requirement of capital for growth. We can grow, with the current capital as well.
Okay. So the requirement is more specifically from the, means, you know, for the parent and for MFI? Because I think Home Finance has just raised it.
Yeah, we raised capital from IFC, and still our capital efficiency is very high, around 40%-45% or so, so that's more than adequate for next few years. Yeah.
Mm-hmm. Yeah. And secondly, on the gold loan [GNPA], you know, if I see there is a sequential rise there to 1.2% odd levels. So what explains that?
So Gold Loan, in fact, you know, gold jewelry and ornaments, they are emotional assets of the customer, and we generally are very careful before, you know, we just put them into auction or, s o even in the NPA, and the customers are regular, sometimes, you know, if the gold prices have fallen, customers may take some time, so we, we just put up with that. But historically, if you see, the loss given default in this asset class has been minimal or negligible. And I think it's a festive season in this quarter, and many people release the jewelry. So I mean, it's a small temporary updrift, but I don't see any risk in terms of the product class.
Okay. And, what was the NHB borrowing during the quarter? I missed on to that number.
Borrowing?
NHB borrowings.
No. So, okay, what we are saying is that if you look at our cost of funding on an average, has come down by 10 basis points in the quarter.
Yeah.
Primarily because we get a low-cost funding for our affordable housing and the economically weaker section Housing Finance that we do. So there's a refinance from National Housing Bank, NHB, where the interest rate depends on what kind of customers we are lending to. So that has been at a lower rate. And, similarly, we got some funding, which is at a consistent rate from, multinational, multilateral agencies.
Okay.
And also, y eah, so that has basically helped us control the cost of funds.
Okay. So, you know, so far, I think this quarter we have managed the margins quite well. I mean, contrary to other industries where, you know, they are facing the margin contraction. What is the outlook on, you know, say, over the next two quarters? How do we see, you know, margins, panning out?
So, you know, actually, we are focused only on four, primarily four, which is mortgages, MSME lending and, gold loans and microfinance. So in all these, and affordable housing, affordable home loans are a significant part of mortgages. We have the power. I mean, we have the pricing power in the sense that market is not so sensitive to interest rate, and we are typically able to pass on the increase in interest rate that happens systematically. And on the other hand, in last few years, we have been able to improve our financial position, our credibility through the cycle, and, also the high-cost dollar bond that we had, which we raised during the height of COVID, we have repaid. So, you know, going forward, I think we should be able to maintain our margins. Our NIM will remain at around 7.5% or thereabout, yeah.
Yeah. And just lastly, on the growth side, you know, so far we have seen a quite, you know, strong growth across segments like home loans, gold loans, and on the MFI side. Say, over the next one to two years, you know, do you, are you seeing on the ground level any slowdown in any of the segments or where the growth is a concern, or you would prefer to grow at a slower rate? Or you feel that, you know, the current momentum, you know, can continue?
As of now, the demand for credit is very strong, and India is still a grossly under-penetrated market in terms of credit to small businesses as well as you know, the retail customers. So at this point in time, I think the momentum for credit demand is strong, and the growth trajectory will continue. Having said this, I'll caution on a couple of things. If the economic activity slows down or if you see some significant pressure on the interest rate, which can happen for multiple reasons, then you know, one has to be cautious for that. But other than that, if the economy remains strong the way it is today, then I don't see any slowdown in the demand.
Okay. Okay. Got it. Thanks.
Thank you. Thank you, Anusha.
Thank you. Next question is from the line of Renish from ICICI Bank. Please go ahead.
Yeah, hi. Sir, just two questions. One is on the, your IIFL standalone profitability. So if you look at the first half 2024 ROE, ROA, or in fact the absolute PAT number, that is being far lower than what we have reported in 2022 and 2023. So what explains that profitability hit in first half, sir?
So in standalone, okay, one is that, we have actually, you would have noticed that we have moved significantly from direct assignment where the excess income or excess interest used to be capitalized to co-lending. And if you see our co-lending book has crossed INR 10,000 crore milestone or this is very significant. So I think this adjusts the, if you, when you compare the last year, there's a significant component of, upfronted assignment income. And on the other hand, co-lending book, as it keeps building up, you'll see the co-lending interest income also keeps growing.
Right. Right.
So I-
So that's basically-
Sorry?
Okay, it is fair to assume that, let's say, a shift from a direct assignment to co-lending is actually hitting the profitability at standalone entity level?
Yeah, yeah. And see, another thing that happens in a co-lending direct assignment, many a times, if you know, the assets get repaid faster, then obviously you have to take the upfronted income as a reversal also. So but what you're saying is right, the primary reason is that the co-lending is basically taking over, so it's a transition phase. And secondly, you know, because of digital finance and one account in our CR has been restructured, the provisions are higher.
Okay, okay. Got it. Got it. And sir, secondly, at the entity level, as well, if we look at the first, the non-fund based income this quarter, it has actually gone up by 23% sequentially. But when we look at the incremental assigned plus co-lending pool, that remains static at around INR 2,000 crore. So what explains that? I mean, it is fair to assume that because of the higher interest income of the assigned portfolio, the spread on the assigned pool might have gone up this quarter?
One second. See, what is assigned income growth? The assigned book, okay, assigned book also is, I mean, has grown slowly, but there's still a growth.
Yeah, yeah. So, so that's what actually, sir... Mm-hmm.
You're seeing QoQ or YoY you are saying?
Quarter, sir.
Yeah. The banks basically have a reset based on their MCLR. Just give me one minute.
Yeah, yeah. Sure, sir. Sure, sir.
Okay, sorry. And then, this quarter, we had an assignment in Samasta for the, you know, I mean, Samasta normally we are not assigned earlier, but I, t here was a loan assignment of Samasta this quarter.
Okay, okay, okay, okay.
Basically, still, you know, the co-lending is, I mean, most likely are willing to, but we are able to assign that, Renish .
Got it. Got it, got it. So basically, this quarter, we might have assigned higher under Samasta, which is the higher yielding book. That's why there is a high non-fund based income. Is that right?
That's right. So in the Samasta, I think assignment will continue.
Got it. Got it. Okay. And sir, just last thing, at the consolidated level, what should be the AUM growth over next couple of years we are factoring in?
25% is what we should, you know, we have guided, and I think we should achieve that.
Okay. Okay. Thank you, Nirmal. Best of for the coming quarter.
Thanks. Thanks, sir. Thanks.
Thank you. Next question is from the line of Abhishek from HSBC. Please go ahead.
Yeah, thank you. Hi, Nirmal, thanks for taking my question. So just a few questions. First, on MFI,
Yeah.
When I look at the gross stage three assets, they have not gone up, but the credit costs have gone up, you know, sequentially. So have there been any write-offs because of which the credit cost is higher?
Yes, there will be some write-offs in Samasta.
Can you quantify, how much it was this quarter versus last quarter?
No, the provision has gone up because of as the book grows, stage one, stage two also has gone up. The write-offs are INR 98 crore this quarter, we have INR 88 crore last quarter in Samasta. The provision that we are seeing, because when the book grows, your stage one, stage two provisions also grow significantly.
Right, of course.
Yeah.
Yeah.
Yeah. So I think that's why provisions are higher.
Huh. Got it.
But there's a write-off increase of INR 10 crore also.
Exactly. That's the, that's the driver. Okay, got it.
Absolutely.
When I look at the yields, right, the data that you've given on the yields, in gold loan, the portfolio yield has gone up, I think, by about 1% in the quarter.
That's right.
I mean, can it be so sharp in just one quarter, or is, does this have any kind of one-off?
No, actually, the Gold Loan portfolio churns very fast. You know, the average life is 90 days, 120 days, also. And the gold loan yields has started improving from quarter before last, so maybe we are seeing impact in this quarter. But I mean, as I don't see, another thing that happens in this is that the average book is little different from the quarter-end book.
Okay.
Now, I don't have those numbers with me, but when we reconcile with average book, then probably, that will explain the story better.
This yield is based on the average book?
So what happens, the yield that we give in the financial results, it deals with the quarter end. No, I think, so the yield difference, how much the yield difference in the quarter- to- quarter?
10%. 1 basis points. -10 basis points.
1 basis points. -100 basis points.
Probably 10 basis points , yes.
Yeah, yield has gone up as the market, the competition is yield, my yield has gone up. In gold loans, the impact can be quicker compared to the other asset classes, where the assets have much longer term, like home loans. But in the gold loan, yield can move very fast.
So the yield hike was taken when in gold loans? The last rate hike.
Actually, we started taking from April, because in the last year, the last two quarters, there was very intense competition from banks and from NBFC. So this year, this financial year, from April, we started taking. I mean, we got back to the normal rates of interest, and we had quite a few teaser schemes and a low interest scheme that we drew in most of the places.
Got it. And can you share the tonnage in for gold loans for this quarter and last quarter, maybe?
Just one minute. What is the tonnage?
Tonnage is 60% growth, quarter 6% growth.
There's a 6% tonnage growth, and what is the tonnage actually?
Sixty.
Is there, in the data book, this data?
Yes, it is.
Is there in data book, Abhishek, 60% or no?
I'll pick it up.
Yeah.
Thank you.
Yeah, it's there.
Sure, sure. One last question on cost of borrowing. So actually, two things. One-
Mm.
When do we see this cost of borrowing start showing the upward trend? You know, because the market rates are stiffer, you would have some back book repricing. So when does it start moving up?
I think we should be able to maintain it at just 9%. I don't think, unless the, n ow, okay, my personal view is that the interest rates in India at least have paused, and they peaked out. I mean, they may not fall, but they might remain at these levels. In that situation, I think we should be able to maintain at the current level. 10 basis points here and there, it can move around, but not beyond that.
Got it. Got it, got it. Thank you so much, Nirmal, and congratulations for the work.
Thank you.
All the best. Thank you.
Thank you.
Thank you. Next question is from the line of Nischint Chawathe from Kotak Institutional Equities. Please go ahead.
And, congrats for a great set of results,
Thanks. Thank you, Nischint.
Yeah. The first question is, you know, on the operating expenses, 9%. Now, if I really look at your loan growth, you have been growing fastest in microfinance and, probably, you know, followed by gold loans.
Yes.
Now, both these businesses have lower tickets, and in that sense, in that sense, tend to be sort of slightly more OpEx intensive. You know-
Yes.
And probably, you know, home loans and the wholesale businesses have the lowest OpEx. But I think despite that, your OpEx growth is lower than the loan growth, so you seem to be kind of, you know, getting some benefit somewhere. So just trying to understand what's happening here.
So, Nischint, you know, we have slowed down the growth in our branches, so significant part of OpEx comes when you're setting up new branches. So if you really look at, we are driving our growth by making our existing branches more productive and taking the productivity of a branch up as much as possible. And also, with our digital loan business is primarily, you know, end-to-end digital, and there the manpower requirement is lower.
So, you know, in fact, OpEx is still at a much higher level, and we have, you know, maybe room for savings over the next few quarters. In terms of OpEx or our cost-income ratio, because, as I said, that if you look at our gold loan branch productivity, INR 8.5 crore, there is a leading player at INR 22 crore. Now, there's a very significant difference. So you know, if we keep the branches as last, you know, whatever we have, so the same set of people, same set of branches, if they can originate more assets and build up, then obviously our OpEx should come down.
But microfinance, I mean, practically, I guess, the geographies would be different, right? So you can't share branches. Gold loan, again, sort of-
No, they are...
Slightly.
Even in microfinance, we have 1,100, 1,200 branches, so that's also network, which we expanded, in the recent times. So if you look at our manpower cost on a quarter-to-quarter basis, what is the manpower cost there? That has gone up, actually. And there will be some savings in our other costs, which is, what is the total OpEx? Just give me one second.
INR 427 crore for the quarter. Sorry, manpower, INR 384 last quarter.
Manpower cost has gone up from INR 384 - INR 427. Operating cost also has gone up by 7% in the quarter, which is very significant. That is primarily because of the expanding the microfinance network.
The other expenses, you know, which is X of employees and depreciation, it's up around 15%, which is, like, less than half the overall loan growth. So, you know, that's I think where my question was.
No, that is basically because the new branches are not being set up, but the existing branches, we add people and, s o the new branch addition has been very minimal.
On the digital loans side, I know this is a small business, but, growing very rapidly. So what is the tenure of these loans?
Now, tenure of the loan varies from six months to two years, typically.
You know, NPLs in this book, and I think the ratios may not be very accurate representation because, you know, you've been growing very fast. But over the last six months, you know, the NPL in this book has grown by almost, like, 25%. So, I would believe that, you know, six months lag ratio is a fair ratio to look at, you know, given the fact that probably somebody may not default in three months and, you know, we have a three-month NPL, you know, recognition.
So, you know, so, so are you kind of, you know, worried? Are you seeing, a nd you have been growing very fast, so, you know, are you, are you kind of seeing any concerning signs because of which you would slow down? It's a small proportion of the book, so it matters less, but, nevertheless, it's an, you know, it's a very fast-growing-
No, Nischint, you're right. So if you see our stage three provision in this is 73%. So, what we are trying to understand, I mean, okay, our strategy here is that the risk is priced in because these, you know, the interest rate also is higher on these kind of loans. And we are prepared that through the cycles, you know, and as books mature, there can be higher losses. So we want to keep, aggressively providing for it, but even this adjusted return is quite attractive.
How it appear? I mean, your, your sense is that you'll continue to grow this rapidly.
We'll continue to grow. At this base, it'll grow faster. When the base becomes larger, the growth may slow down. GNPA, NNPA, and this book will be higher than the rest of our other loan books, and that we priced, you know, as we go to the customer.
It's made in-house, right? There are no partnerships in this.
No, we have partnerships to source. We don't, a nd we have a few partnerships, but, significant part of business is organic. So we do have partnerships, including Airtel and GPay, and others also. But, by and large, businesses, you know, but,s o, okay, many partnerships are for lead. There are very few partnerships where the loan is sourced as such. So our primary partnerships or our focus for growth is, to have digital partnerships where we can get lead and we pay a fee, but we do underwriting and we take the risk.
Fully originated, let's say, by, you know, a partner, and that is kind of picked up by you. It's something that they just pass on the lead and-
What happens is partnership model is that, okay, there are one or two small partnerships that we have, which is an FLDG. But there, you know, normally your interest rate and your income is also capped. So many of the players that have done partnership, they might give you 15%, 16%, and then a bit of a first loss. But our primary, our strategy is that we want to have full access to data. So we do underwriting, we keep learning, and we have full control of the credit quality as well as who we are lending to.
On the yield side, you know, your home loan yield is marginally down on a sequential basis. So, you know, so, is there anything that we should be reading?
Monu, you want to respond to this?
Hello?
Yeah. Monu, Nischint is asking-
Yeah, yeah. Yeah. Yeah, yeah, I saw that. So it's a very, Nischint, a very, very marginal change. It's, I think if you just look at it, it's a pretty marginal change, and it's primarily to do with how the areas are panning out. So there is nothing very significant with yield change if you see. Rather, the portfolio yield has a shade gone up only.
It's 11.2%-11% in the quarter-over-quarter.
Yeah.
But this 11.2% was also a bit on the higher side because, historically it has been 10%, 10.5%, Nischint, so I think we've been off this quarter.
Yeah.
Cut rates in any cohorts, or is it just competition that just driving this?
There's nothing in their cohorts, but it's just the competition which has played out a bit. Yeah.
This is a competitive segment of the business.
Segment to be in. Otherwise, also, overall, still overall, I think, 11% is pretty, pretty much okay, in line with our strategy.
It collaborates with, I think, the general industry view. Just, you know, on the LAP side, interestingly, you know, the trend is very different. Your pricing, your pricing power seems to be pretty strong. Although, you know, so is it something that is a very different segment? I guess the ticket size is, I mean, how should one really think of it? Because I think-
Yes, yes.
That was also a reasonably competitive segment.
Yes, yes, yes. So, for the last about two years, like primarily earlier, we were being focusing on LAP only in our hub places, but as we had had experience of expansion in branches. So we, for the last two years, we are doing a bit of LAP business in our expansion branches, where the expected yields are better than the hub locations, which is a very competitive market if you try to give LAP loans in the Tier 1 and the metros. So the one which is we are able to source through the smaller towns, we have better yields.
But this LAP yield is, so this is in line with the industry, so even the competition will charge similar yields. And the primary reason is that this business has significant, operating costs as well, and is a la... you know, it's not in terms of the physical collection of the installment as well as processing and in smaller locations for a small ticket LAP of INR 5 lakh, INR 7-INR 8 lakh, the cost of title, valuation, everything is, significant. So, you know, when the industry rates are also higher because that's the cost structure of this, segment of business, as well.
Final question, if I can, and that's on the microfinance side.
Yes, go ahead.
You know, on the microfinance side, you know, there have been some concerns in the industry that delinquent customers tend to get refinanced by finance companies, or they move from one company to the other. So I think in this regard, you know, what is the policy that you follow at Samasta?
Actually, relevant customers, credit score and the, you know, they will be basic. So all the customers in the, in microfinance are reported to bureau, so there's nobody likely to rank it. Are you there on call?
Yeah. Yeah, Nirmal, I'm there on call. Yeah, with aspect of the policy in terms of our lending, we don't lend to any customer who's more than 30 DPD, and who's got an outstanding of more than INR 4,000. See, we, couple of companies don't report, the credit bureau on a very, daily basis, so we give them a leeway of INR 4,000 maximum, which could be one EMI in, some ticket sizes. So ours is very restricted into that. We don't give to any customer more than 30 DPD.
Period, which means that, you know, if the customer has been an NPA, comes out of NPA, you would lend him after a particular period of time, that's all?
No, no. I'm talking about, No, no. Customer is not in an NPA. I'm talking about-
I'm saying that-
-particular customer.
That, that's right, but I'm saying that customers who sort of, you know, come out of an NPA, is there a cool-off period for, you know, re-disbursement?
Yeah, that naturally applies. No, we also have a track record of once we look at the credit bureau, we have a track record of the customer, and if she's coming out of the NPA, we definitely will not lend.
Questions. All the best.
Thank you. Participants, you may press star and one to ask the question. Next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead.
Hello, am I audible, sir?
Yes.
Yeah. So my question revolves around your ROA. I mean, now this quarter also, we have seen a very good growth, and accordingly, ROA is 3.9%. But what sort of sustainable or steady state or aspirational ROA as a business we are looking at going forward? Now, considering also because you told that your co-lending share will increase, right? So that that's what I presume, yeah. So some color on it would be helpful, sir.
You know, as what Nirmal mentioned, this is Kapish here, so if I can just pitch in. As Nirmal mentioned, in spite of the rising interest rate scenario, we have been able to pass on our rate hikes to our borrowers. Our spread across quarters have actually moved up. We have done our investments regard to branch expansions, which means that there wouldn't be any more incremental investments coming in to meet the growth targets from our operating expenses perspective. All these attributes should help us in maintaining our overall, our NIMs, and with better optimization on our costs, we believe that we should be able to maintain our ROA in the range, which could be between 3.7%-3.9%, touching toward 4%. We believe that we should be able to maintain our ROA at the levels they are today.
Great. Great,
There will be some more shoulder spots as well there. Yeah.
I understood. And my second question is on your credit cost. I think ideally that could also help your ROA, because ideally, your credit cost in the range of 2.25%-2.5% is little on the higher side, right? I mean, considering the kind of the-
Yeah, it should be, on the more longer term, steady state basis, within 2%, yeah.
I mean, why not below 1.5%-1% by 1%?
That's right.
No, no, so I was trying to understand why it can't be below 1%. I mean, w-
Okay.
Is it because of the MFI business that you expect-
No. So, no. Okay, I'll tell you what. Over a period of time, so microfinance business historically prior to COVID used to have much lower NPA, but now most of the industry people expect longer-term credit cost in microfinance business to be around 2% or so.
Mm-hmm.
Similarly, in digital loan, it can be little higher than 2% also. And, what you're saying is right, that at least if you look at home loans and gold loans, it should be much lesser.
Absolutely.
But I think as things stabilize over a period of time, then again, it depends on the relative share of the unsecured loans in microfinance and digital loan. But it can be lower. It should be lower than what, you know, if not 1, at least maybe closer to 1.5%, 1.5%.
Yeah, because that straightaway adds 0.75% to your ROA, right?
Yes, it should.
So, so a trajectory which is at 3.5%-4% can inch towards 4.5% if our credit cost comes below or closer to that 1% mark, that, that is the-
Yeah, that's there.
-kind of-
But at the same time, Deepak, you know, there will be little competitive pressure on the margins also over a period of time. So, I mean, what you're saying, in one scenario, it can happen, and at least the credit cost should go down, and that should straightaway add to the ROA, but there will be many other variables, and there are many other moving parts.
Fair enough. I got the sense, I got the sense.
Yeah, yeah. Great.
That's it from my side.
Thank you, sir.
All the very best to you.
Thank you.
Thank you.
Thank you. A reminder to all the participants, you may press star and one to ask the question. Next question is from the line of Akriti Banka, from HSBC Mutual Fund. Please go ahead.
Yeah, hi. Can you hear me?
Yes.
Yeah, hi. I just have one question. I don't know if you already addressed it, but, how did your yields, how did you manage to increase yields in the gold book in this quarter? Giving-
Y ou know, across industry, I think it would have improved because last quarter last year, quarter three and quarter four-
Mm.
There was sort of, you know, intense price war kind of a thing, where some people started teaser and some larger players started pouring up. Many banks also got into this with a lower rate of interest. But I think many banks also now discover that if they do the separate profit and loss accounting of gold loan, then the operating cost is much higher. So it's not something which is, because when you're doing a INR 50,000, INR 60,000 rupees loan for a shorter tenure, then the cost is higher. So I think it is actually the yield is going back to the earlier level, where the normal is getting normalized. In between, there was an aberration, then the yield came down.
Okay. So you think there is still some scope for this to go up further or, this is pretty much-
No, I think they will remain at these levels.
These levels. Because even I thought by Q1 itself, things had sort of normalized, which is when you were at 17.5%, and this quarter is showing even higher than that.
Yeah, impact comes actually with a lag of one or two quarters, actually, because as the earlier loans get repaid, because they are at a contracted rate, which can be lower. So it always spreads out over a couple of quarters.
Got it. Okay, thanks. That's okay.
Thank you.
Thank you. Next question is from the line of Jigar Jani, from B&K Securities. Please go ahead.
I just wanted to quiz on the fundraising, although it's an enabling provision. Now, considering we are moving largely off book, which is co-lending and DA, 40% is what we are at, I think, for that book, and we are guiding for 25% growth. I think then 60% of that 25% only needs to be funded through internal accruals or equity, because even if I consider the co-lending part of 20%, probably it will push it to 17%-18%.
And we are already making kind of 20% ROEs overall, and we are expecting ROEs to remain stable. Won't this additional equity of INR 3,000 crore be a drag on your ROEs, whereas you can easily find your estimated growth of 25% through internal accruals itself, considering we are moving more and more off book?
So, well, it's a good question, and, but, you know, as, o kay, so whether if you don't do this, then probably the ROE can move up further as our profit keeps adding to the pool. But as the, you know, we are in a finance business where from a rating agency point of view, from, you know, the banks that are partnering with you, they also want to see your balance sheet becoming stronger as your total assets grow. I mean, it's not necessary that we will raise INR 3,000 crore, I mean, say up to INR 3,000 crore. But whatever equity addition happens, which can be about 20%-30% to our net worth, which may be in the next 12-18 months, we can catch up in terms of ROE. That will also help us grow a little faster than what we've been growing till now.
Right. So there might be a chance that your growth trajectory might move higher post the equity fundraise. And any plans to go inorganic in terms of growth post this fundraise?
We are open to opportunities, but it's not something which anything is in, n othing is on the anvil or nothing is in the pipeline. But yeah, if there are good opportunities, we can always look at them.
Sure. Understood. Thank you so much for answering my question.
Thank you.
Thank you.
Thank you. A reminder to all the participants, you may press star and one to ask a question. Next question is from the line of Aarush, from [Enam] Holdings. Please go ahead.
Hello. Yeah, thank you for taking my question. So broadly, if you can break up the assignment assets in the categories and same for the co-origination. Can you explain the economics of both these routes, both for you and for your partner?
So, assigned assets, we had INR 18,429 crore as on Q2 of 2024. And, and co-lending is INR 10,576 crore.
Okay.
Most of these will be home loan and gold loan, but if you want a breakup, just give me a minute.
Yeah.
In, around INR 2,300 MFI. Okay. INR 7,500 in housing, including LAP and INR 8,900 in gold. Okay. So roughly INR 7,500 is mortgage assets, INR 8,500 or so is gold, and the remaining is the microfinance in the assigned book. And the co-lending book, again, primarily is gold and gold, LAP, and houses. Gold, LAP, and houses.
Got it. Just from the co-lending book, can you just explain the economics, like how it works for you and for the partner?
For every product like LAP, home loan, and gold loan, the interest the bank will retain is negotiated separately. Also based on the credit policies, the region and geographies that we do. So supposing I'm doing a gold loan at, say, 16%, and I agree with bank, as they select, say, 9.5%, then what happens that every quarter, whatever interest is accrued, that comes into the escrow account, 9.5% goes to them, and the remaining comes to us. So that is about co-lending. In case of assignments, we take the total income, make an NPV, based on the probability of that income accruing, reduce the cost of servicing from that, and that is our front end. Got it.
This is helpful. Thanks.
Thank you, Aarush.
Thank you. A reminder to all the participants, you may press star and one to ask a question. Next question is from the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.
Thanks for allowing me follow. So, going back to the personal loans again, you yourself said that-
Sorry to interrupt you, your audio is not clear. Can you switch to the handset, please?
Is it better now?
Yes, sir. Thank you.
Yeah, thanks. So again, going back to the personal loans again, you also said, that, you will kind of remain cautious, in personal loans, while given this, the small base, it will kind of continue to grow strongly even, even from current levels. Just, just kind of trying to understand why the risk-adjusted returns are good, at least at an industry level. There have been discussions happening, around small ticket personal loans, where the ticket sizes are less than INR 50,000. Have you had a chance to see, what proportion of your customers or what proportion of your digital loans have ticket sizes below INR 50,000?
Yeah. So below INR 50, n ow, no. Okay. Personal loan is happening in all sizes, like the [BMP] is INR 5,000, INR 10,000, INR 3,000, INR 20,000, all kind of things. So we'll have a reasonably good number of our loans less than INR 50,000. But primarily our loans are to self-employed professionals or the small shopkeepers or businessmen and the micro-enterprises. I think they're different. Another thing is that even personal loan as a category, as a asset class, you know, we can't paint it with one brush. There are many banks that do it very smartly and very cautiously. So when I said my worry is more about the new players where, you know, they are still moving up on the learning curve in terms of credit underwriting, and they are trying to achieve aggressive growth.
So, you know, that is a, that's a class of lenders or the segment of customers that they're targeting is more risky. And, but, you know, the market is very big, and the type of loans that, you know, get categorized as personal loan, again, is very wide variety. But in our case, mostly now our focus, there can be a small part of it as a personal loan. Sometimes, you know, people like sole proprietors, they run the entire thing through their personal account, so it becomes the blurred line between personal and, business loan. But our focus for growth is more on MSME and business loans.
Got it, sir.
I think the credit risk is different when people are borrowing for consumption and people are borrowing for business or income-generating activity.
Understood. So just one follow-up here. I mean, have you seen any divergence in terms of delinquencies, collections, asset quality when it comes to MSME business loans originated organically versus ones originated through partnerships? Any divergence in collection asset quality between organic sourcing and ones originated through partnerships?
So we have had multiple partners and our experience has been different. So I can't reveal the names, but some of the partners, their experience is not good. Then we realized that the profile that they target is different, so we slow down or discontinue that partnership. But it varies across, you know, because the whole segment is so heterogeneous and so wide. It's very difficult to bracket, but you are right that our experience with different partners has been different, and we keep taking corrective actions where our experience is not good.
Got it, sir. This is useful. And just one last question. Why you've taken an enabling resolution for equity increase in your subsidiary, Samasta, as well? Are you kind of looking to bring a strategic investor on board, or is it more like the parent infusing capital into the microfinance subsidiary?
No, maybe it's not a strategy, where we can get a priority investor or parent can infuse. So either way, we are to see, you know, what kind of opportunities and what kind of investors we have, and we take a call on that. So, it's like, you know, it's open. There's nothing which has been done till now.
Got it, sir. This is, I think, very useful. Thank you and all the best.
Thank you. Next question is from the line of [Vidhi], an analyst. Please go ahead.
Good afternoon, sir. Thank you for the opportunity. So I just wanted to ask, today our branch count is 4,596 versus 3,700 last year. So when do these branches start contributing at the operating level and any, how much time does it take to break even? Thank you.
So branches, okay, in microfinance, when the branches grow above particular size, we split it. So the cost structure in microfinance is much lower compared to, say, gold loan, where we need to put a vault, IT, camera, and security and everything. So typically, branches break even. I would say 80%-90% of our branches break even between 18-24 months.
Okay.
There will always be some exceptions which take longer, and some exceptions which can be much quicker.
Thank you, sir. Got it. Sure. Thank you so much.
Thank you, Vidi.
Thank you very much. Sir, we don't have anyone in the question queue.
Thank you so much then. We can,
Would you like to give any closing comments?
Yeah. Thanks, Kapish?
Yeah, yeah. Thank you very much, ladies and gentlemen. It was quite an intriguing session, and we really welcome in case you have any further question, you can drop an email at ir@iiflfinance.com, and we'll be happy to connect and give you any further detail that you might be looking for, and let's stay connected. Thank you very much.
Thank you.
Thanks, everybody, and season's greetings. This is a festive season to everybody. Thank you.
Thank you so much, sir. Thank you, everyone. On behalf of IIFL Finance Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.