Ladies and gentlemen, good day and welcome to the IIFL Finance Limited earnings conference call. We have with us on the call today 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, CFO, IIFL Finance Limited. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing star then zero on your touchtone phone. Please note that the 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, everybody. I hope you and your family is safe. Thanks for joining us on this call, for our earnings call, for fiscal 2022. I am Kapish. I'm the Group CFO for IIFL Finance. On the call, I am accompanied by Mr. Nirmal Jain, our Managing Director, Mr. Monu Ratra, CEO for IIFL Home Finance, Mr. N. Venkatesh, CEO for IIFL Samasta Finance. I now hand over the mic to Nirmal to comment on the economy and the group's overall strategy and plans. Over to you.
Thank you, Kapish, and welcome on the analyst call for the full year of FY 2023. To start with my views on the macroeconomy.
Today there are divergent views about India's macroeconomy and prospects, probably because there are concerns about high inflation in the U.S. and Europe and the impending or kind of looming recession fear there, and also the regional slowdown back home. My personal view is that things are good in terms of macro stability. We are far better than ever before because on one hand, inflation seems to have peaked out, and therefore even interest rates seems to have peaked out. We saw that the last policy, last MPC basically paused the interest rate hike. I mean, this is backed by current account deficits coming off after peaking in September. Obviously, the oil imports at a lower price are helping us.
Foreign exchange reserves are in good shape, and the currency is also stable, relatively. If monsoon is good, then I think the rural demand also will come back. GDP growth may be six or seven. I mean, the potential of India is much more. But in the world that is today, India is really in a sweet spot. On the whole, given the stable external environment, stable politics and the economy doing generally well and with inflation and interest peaking out, outlook for the economy, financial services as well as credit market is positive and optimistic. In terms of, there are many concerns and fear of many times people talk and ask questions about the bank credit growing too fast.
What is the potential of co-lending or bigger becoming available to everybody? How will NBFC sector grow? I just wanted to put some numbers in perspective. Banking sector credit is around INR 140 lakh crores today. Out of this, if you see the mortgage, in the mortgage by itself is around something like INR 24 lakh crores-INR 25 lakh crores. If you really look at our share in the overall mortgage is about 1%. Given our vast network of branches, obviously, there's a huge potential to tap for us to grow also. The mortgage by itself in India, the mortgage to GDP ratio is 11%, which is among the lowest. Obviously mortgage is grossly under-penetrated.
In the last quarter, we have seen some slowdown in the affordable housing demand, probably because of interest rate increase as well as the property price increase, where the cost and the prices have not come down to make up for the interest rate increase. This is temporary phenomenon. As we see the interest rates fall, things should come back. The demand probably can accelerate again. Overall, mortgage industry did well, and the luxury segment actually grew much faster. The affordable sector has tremendous long-term potential, as I said. If the penetration is just 11% of GDP, range is 60%-70% in many developing countries and was, has been above 100% in some developed countries like U.S. There's a long, long way to go.
If you look at MSME sector, where the industry, the MSME credit by banking sector is about INR 35 lakh crores-INR 40 lakh crores to manufacturing another INR 35 lakh crores-INR 40 lakh crores for services. Together it's INR 70 lakh crores-INR 80 lakh crores. Still, everybody agrees from the government to banks to Reserve Bank that the credit in this sector is grossly under-penetrated. Again, there's a long, long way for this industry to grow. The size of business that we have at this point in time is very, very insignificant compared to the potential. Even our Gold Loan and Microfinance businesses primarily cater to MSME customers because they're all small businesses and for income generating activity. Now, the question is whether the entire potential can be kept by banks or are there's an opportunity or there's a niche in which we operate.
In my view, again, and what our experience has been for the last few years, that we have a network of branches and people that cater to very small ticket loans. If you look at our ticket size in all loans, be it business loan, MSME, a digital loan is INR 3 lakh-INR 4 lakh or INR 13 lakh-INR 14 lakh for affordable homes and INR 50,000-INR 60,000 for Gold Loans. There's a much bigger market which banks have, banks still have to tap. These are the customers which are difficult for banks because many times they require access to the customer near them. The loan branches that we set up are lean branches with just, you know, can give you loans. The cost structure is very compared to bank.
If they were to have a similar kind of loan modernization sort of system, it would be far more expensive for them. Also in data, while the data is available for everybody, but people still need to learn how to use data and, there are very large number of parameters which people use and it's continuously evolving, learning and emerging algorithm that works for this. And obviously, we have invested in technology, and we believe that we are early movers in using the root technology infrastructure of Account Aggregators that transition data by way of alliances with large technology players as well as our own organic marketing and getting customers.
The digital infrastructure, the digital investment that we have, the branches that we have and people that we have, that basically gives us a moat to continue to grow our business. We expanded our network of branches and people in last two years very aggressively. We can now slow down this expansion and still we have enough capacity to sustain growth of our targeted growth of 35% in our loan area as well as, our in terms of bottom line. Last year as under this we have grown our profits and loan area in line with our target.
One change that we have seen in last, you know, probably, the most of analysts and investors who are watching us would see in last couple of quarters that co-lending is increasing and obviously the relative share of direct assignment or securitization will come down to that extent. In terms of accounting, which we follow in there, in case of assignment, we have to upfront the estimated value of what is already off the book. In case of co-lending, the excess interest accrues quarter after quarter. What we will see probably over the next few quarters is that the co-lending income, the excess interest or the difference of interest that we get will keep growing.
The upfronting will keep reducing and basically that will convert and that impact on the whole will be probably lesser and lesser as we go along. In last quarter as we had, you know, we have been seeing for last three quarters, the COVID impact now is over. Our asset quality is back to the normal level, which is this with even applying our having implemented RBI's new circular and more stringent norms for income and asset quality. We are still at 1.8% in GNPA, which is well below our target of 2% and NNPA is little above 1% and there again our target is to keep it below 1%. Asset quality further can further improve next few quarters.
In terms of cost of funds and our margin, our margins have improved because there has been a systemic interest rate rise and obviously that allows us to increase the pricing of our product as well. Most of our products are small loans which are relatively where it's not very difficult to pass on the interest rate hike. Our cost of fund has not gone up in proportion, primarily because our rating and credibility with the banks have improved. Our international credit rating also has been upgraded.
We have fully repaid now the dollar loan which has the MGM bonds we had issued in 2020, in aggregate about $400 million out of which $170 million was prepaid before March and remaining $270 million has now been paid on, I think April 23rd, which hedging and everything all included the cost was very high at around 11%. That should also help us in containing the increase in cost of funds, which is the impact of a rate increase across the system. We tried to provide as much information as possible in our presentation as well as in calls.
Many times if people have some doubts or some questions or queries about the data on the changes in number, I would really appreciate if they can raise this on this call because I've seen some comments on social media which is about digital loan. Digital loan is just about 3%-4% of our portfolio and the numbers for Q3 and Q4 has changed and the reason is as follows. It is not because of discontinued business, there are some small portion of LAP which was digitally done. We thought that if there's a conflict in classification, we'll take LAP as a primary classification. Therefore you'll see that the Q3 numbers of LAP, the LAP has relatively lesser GNPA as compared to unsecured digital loan.
The Q3 number of LAP which was earlier 3.9% has gone down to 3.48% as part of digital loan which was LAP has moved to this. Correspondingly, the digital loan GNPA which are reported 3.34% for the last quarter has gone up to 4.18%. It's small INR 600 crore-INR 700 crore portfolio of LAP which was digitally done. Now we have classified as LAP as well as digital loan, and there's nothing to get excited about the 3%-4% of loan in terms of how we present the data. We'll answer all your queries either, you know, by mail or you can talk to our investor relations department or ask us question on this call. With this, I hand it over to Kapish to take you through the details of the financial numbers and then we'll take Q&A. Thank you.
Thank you very much, Nirmal. First I'll take you through the quarterly performance numbers, followed by annual. As mentioned by Nirmal, for the quarter the consolidated loan area for the group moved up by around 26%. On a quarterly basis, we moved up around 12%, closing at around INR 64,638 crore. As I further dissect the AUM growth in core products, Gold Loan and AUM and Home Loan AUM grew by 28% and 22% respectively.
Microfinance, which is more like a weighted segment, has grown by around 59% in this year with improvements in the entire regulatory framework which came into the segment. Digital loan and loan against property grew by around 33% and 18% respectively. Overall, the core loan book value grew by 29% after INR 61,502, and the non-core, in line with our strategy, has further shrunk by around 11% YOY and 4% QOQ. This is something which we think is going to be reduced. The non-core segment now comprises 95% of the overall AUM, a mix up. They have gone up by around 2.1% and correspondingly the non-loan core AUM is comprising of 4.9% has come down.
In accordance with our capital optimizing strategy, 38% of our AUM is either assigned or under co-lending. The assigned loan outstanding stands at around INR 16,979, up 19% YOY and 7% QOQ. Impressively, the co-lending book has increased to around INR 7.57 crores in fiscal 2023 up from INR 2,845, a 160% jump. This is something which we have in arrangement with multiple banks and across our products, primarily gold and the Home Loan businesses. During this quarter, we also added two new relationships in co-lending, IDBI Bank and Indian Overseas Bank, for co-lending of gold and micro LAP respectively.
For the quarter, our reported profit before minorities stands at around INR 457 crore, up 43% YOY and 8% on a quarter-on-quarter basis. In this quarter, we also added across our businesses 300 branches and around 1,200 employees, across which has led to a higher cost-to-income ratio of 43%. Going forward, our strategy is to monetize our branches, make them more operational and more efficient, along with other cost drive initiatives that we are working across the franchise, which should enable us to report a far lower cost-to-income, as we got towards the business entire fiscal, right.
Our cost of borrowing increased by 38 basis points YOY compared to a 350 basis point decline that we saw and almost more than half of that is often passed on through the MCLR hike by the bank. And 14 basis points sequentially to around 8.93 is the cost of borrowing. Gross NPA, as Nirmal mentioned, stands at around 1.84, down from nine by around 1.3 YOY and 0.24 QOQ and net NPA is around 1.1%. The diluted earnings per share for the quarter stands at around INR 10.8 rupees, up 28% on YOY and 9% quarter-on-quarter. Just to briefly highlight this enablement on the cost of borrowing was possible only by maintaining healthy liquidity.
We continue to maintain healthy liquidity and the liquidity numbers stands at around INR 9,356 crore. In the quarter, through various sources, we raised an aggregate INR 5,880 crore, be it through term loans, bonds and through refinance. We also did around INR 39,800 crore of debt refinance by selling retail loans to banks. Our Gold Loan at Home initiative, which is really progressing fine, saw significant traction during the year with disbursements more than INR 1,000 crore. And with the improved ease as well in that business. We now have a monthly run rate of over INR 100 crore, which constitutes around 3.5% of our total Gold Loan AUM. With this, I will now discuss the annual performance.
or the year fiscal 2023, our consolidated PAT before minority was INR 1,607 crore, up 35%. Our pre-operating profit was INR 2,831, which has again shown improvement around 24% YOY. Yeah. As I mentioned, 95% of our loan is retail. Of this, 67% of the loans are PSL compliant and the rest are largely Gold Loan, which is again zero risk weight asset for the bank. More importantly, the retail and the PSL loans are of significant value in different environment where we can sell down with the kind of asset performance that we have demonstrated to our partners. We have built a very good relationship on those clients, from a strong business delivery and performance perspective as well.
Overall on the electric, the collection recovery is something we entirely own from driving the whole element for the for the for the bank, while the risk on the trade is completely passed on as we sell the business to banks. Our consolidated ROE for the year stands at around 19.9% and a lower gearing because of the earlier infusion of INR 2,000 crore of primary capital that came in our in our subsidiary company, IIFL Home Finance. And then we reported ROE of around 3.3%. Our capital adequacy stands at around 20.4% in the NBFC, and a very healthy 47.3% in the housing finance facility as of 31st of March. And you can see our CRAR is well above the minimum threshold which is needed.
With our off-balance sheet strategy and the internal accruals, we believe that we should only be able to improve with that as we progress. For the year, our average cost of borrowing increased by 30 basis points to 8.8 on an average basis. Our GNPA, as I mentioned, stood at around 1.8%, which is shade below the guidance that we gave of 1% earlier. With the implementation of the expected credit loss or indirect provision coverage on INTA stands at around 1.67 with specific provision. Our earnings per share for the whole year was around INR 31, went up by around INR 31.5 per share, up 25% and the book value is around INR 331, which again moved up by around 20%.
We have a very positive ALM whereby, in course cover or achieve most of the expected outflows across all our assets and the net gearing, stands at around 3.5 which is down by 4.2 from a fiscal year back in FY 2022. The loans classified as digital loans are part of unsecured loan business with an active customer count around 3.94 fiscal 2023. That's all I have and be happy to take more questions. With this, I open the floor for Q&A, and be happy to answer what questions that you have or we'll come back to you, in case we miss something today.
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 is from the line of Anusha from Dalal & Broacha. Please go ahead.
Yeah, thanks for taking my question. Congrats on good set of numbers. On going forward on FY 2024, you know, couple of, you know, outlook on the credit, you know, growth side, how do you see, you know, panning out and what will drive the growth? I mean, current fiscal we have seen MFI, you know, witnessing very strong growth and digital loans as well. Broader, you know, what will be the growth drivers in each of the segments? Also if you can, you know, elaborate more on the margin side. I think, you know, so far, you know, well managed on the margin side. How do we see, you know, scenario panning out in FY 2024? Because I think many of the NBFCs are facing the heat on the funding cost side. What will be, you know, your outlook on that?
Thanks Anusha. One is on the credit growth side, as I said, that we expanded our network, quite significantly and also invested in technology. Our target or our, you know, the goal is basically 25% credit growth. In terms of margin, we are prepared for some result upward pressure on the cost of funds. Hopefully we should be able to mitigate by, savings in cost to income as we slow down our expansion. To put things in perspective, we would have set up almost 900,000 branches last year. This number may be about 150 or 200, not more than that.
Now why 100, 150 or up to 200 is what we do in Microfinance business in particular is that the larger branches, we split them into two from better risk and operational control. There may be certain strategic locations which are very good. I think the number of branches will be just about, you know, maybe around 15% of what it was say last year. Therefore, cost to income ratio should mitigate the upward pressure on cost of funds. Still relatively last year, we should be better off because we have paid off our high cost dollar bonds and with our rating and credibility being better, we should be able to negotiate better with the lenders.
Okay. Still on, I mean, on the spread side, I mean, how do we see that you'll be able to maintain FY 2023 levels or, you know?
I think we should, we'll be able to maintain the spread at FY 2023 level. For everybody, you know, what we've done now instead of net interest margin, we've given the net interest spread, which is difference in percentage cost of borrowing and percentage portfolio yield. When you say net interest margin might include investment income and the numerical denominator they don't match. I think the spread that we've given in our presentation now is more relevant and more indicative of what is our actual margin. We should be able to maintain that next year also.
Okay. How much was the benefit of this high cost bond that you redeemed?
These are almost the total costs where maybe Kapish should give you some small, some detail on that.
As Nirmal mentioned, this was around $400 million of high cost bond borrowing that we had. Some bit of it we paid last December, and the remaining we paid in February of this year. It has a relevant number close to 11%. Then we also recently as we discussed with you, we also borrowed another $100 million, what with the landed cost around 9.2%. I think we save about 180 basis points on this what we have repaid.
Okay. On the branch expansion side, you said 150-200. That is for the total branches or only for the MFI?
No, total branches.
Total branches will be-
Yeah.
150 to 200.
Maybe Gold, Home Loan and MF all put together.
All put together. Okay. that will be the runway for next two years.
Together we have about 900 branches.
Yeah.
Yeah. Sorry?
Yeah. 150, 200, you know, that should be the runway that we might expect over the next one or two years.
Yeah. This year for sure. Let's see how the opportunity and outlook is for next year. Our annual plans for this year we want to slow down. Next year also, I don't think we need to accelerate because we need to make the existing branches productive. You know, once we get the cost to income ratio to a more comfortable level and then we can, you know, embark upon the next phase. That will also depend on the economic and the business environment at that point in time.
Okay, lastly, on the asset quality side, I guess, you know, what is the credit cost, you know, internal risk that you're working on? I guess you had mentioned that it would be closer to around 200 basis points or, any change in that number are you looking at it?
We should be maybe this quarter probably we are at around maybe 220 basis point. Going ahead I think we should be, you know, the target rate of 200 or lower.
Okay. Okay. Done, sir. Thanks a lot.
Thank you so much.
Mm-hmm.
Thank you. The next question is from the line of Renish from ICICI Bank. Please go ahead.
Sorry about the correction. This is Renish from ICICI Securities. Yes, sir. Two questions. One is on the impact, I mean, likely impact on the Gold Loan rates. If there's any anticipation from government that is something to effect. Any assessment on how, you know, our Gold Loan rates should impact because of that, because currently it's 9.5%?
I think we already changed all our products and, I mean, there'll be negligible impact. There'll be no impact because we are not really charging similar interest now.
Okay. We have already tweaked our product.
That's right.
Got it. Secondly, you know, in your opening remarks.
Sorry. Actually, we never had significant component of this. We have further tweaked the product so we are not dependent on this anymore.
Got it, sir. Just secondly, in your opening remarks you did mention about, you know, sort of, unloading the securitization and building more of a co-lending book. Accounting-wise, of course, you know, this up-fronting of income will go away. Net-net, how do you see, let's say, the sustainable ROE, sort of, looking like in 2024 and beyond? Just considering the sort of, maturing limits.
Yeah. I think we'll sustain our ROA and ROE. As I said that, this is a, you know, as it tapers off over a period of time, the co-lending, the surplus of co-lending also will keep growing. Whatever working we have done internally, I don't think there'll be any negative impact. We should be able to, you know, have or maintain the profitability as well as ROE growth.
Basically ROE around 20% on a sustainable basis.
35% growth in bottom, I mean, the profit, 25% growth in the top line as well as bottom line. That is what I think we had indicated. We at this point in time, we don't see any threat to that.
Got it. Got it. Sir, on a, let's say, ongoing basis, what should be the split between on-balance sheet and off-balance sheet as a whole?
Yeah, that's a good question. Normally it should be 60/40. Now in Home Loans because we have raised equity and we are sitting on a much, on a significant liquidity there. Probably this year in Home Loan, the off-book may go down little bit, but, you know, over medium term you can say 60/40 and probably they can go to 55/45 also. 45 off-book. In the increase, the Home Loan piece because we have much higher capitalization liquidity, this year probably there may be a drop in the off-book there.
Okay. At console level, this year should be 65/35.
This year also probably it will be in the range of 60/40 given the economic situation is there.
Got it. Got it. Then going ahead, it could be 55/45.
Yeah.
Got it, sir. This is very helpful, sir. Thank you.
Thank you. Thank you, Renish.
Thank you. The next question is from the line of Nishant Shah from MLP. Please go ahead.
Hi. Hi, Nirmal. Thanks for the opportunity. This is Nishant from Millennium Capital. I had a question on just Gold Loan business. like, the larger kind of like peers allude to like the competitive pressure now kind of easing off, a lot of the old teaser loans which were given out at like lower yields also are running off. We are seeing much better growth at ISL, but like the yields seem to be quite stable, like sequentially, like with the minor dip as well. Could you talk about that, about your business, like what is kind of driving the growth? What is driving the kind of like relatively somber margins? Just like a broader industry comment on where do you see the competitive intensity in the Gold Loan business?
Some of the other banks which have reported, very kind of like good, kind of like Gold Loan growth. Any comments on like the competitive pressure deltas? Yeah. Those are two questions.
Good question, Nishant. Thanks. The competitive pressure is easing. That's a fact. I think, you know, that should also, in effect, relieve the pressure on pricing. I'll come to that in a minute. The banks basically, you know, the banks' Gold Loan portfolio is around INR 9 lakh crore, which is direct Gold Loan portfolio. Some banks actually when they have every loan with a collateral of gold, still they classify as every loan. I would think that the banks' Gold Loan portfolio is even more than, bigger than that. Obviously they have a much larger, you know, maybe NBFCs. The total NBFCs portfolio will be close to about INR 1 lakh crore. In terms of our pricing and yields, what happened to our portfolio? Our portfolio has grown quite well, quite aggressively.
There has been significantly larger disbursement of the new loans, which has been at a competitive rate, one. Two, as I just said that the signal thing we have removed, you know, in terms of, you know, anticipation of the changing policy that are going to take place now. That has impacted our yield slightly. Also, you know, in terms of products, if you have mostly in-term in a product which are not bullet loans, then your yield is slightly lower. The impact of the price increase or the easing of competitive pressure also happens only for the incremental business and not for the portfolio as much. We should see slight gradual improvement but you know 17.5%-18% is what probably long term also will be maintained.
While competition may ease from new players, but banks are still competitive and they're still aggressive. If you know, I think on a medium to long term basis might be 250 basis points here and there, but this is yield band where we'll be.
Understood. Fair enough. Yeah. That's it from me. I'll come back in the queue for Microfinance .
Thank you. We have the next question from the line of Mona Khetan from Dolat Capital.
Yeah. Hi, sir. Good evening. I had a couple of questions on the gold book. We had this AUM of about INR 20,000 crore-INR 21,000 crore. How much of this would be off the books? [audio distortion]
Out of the current book of INR 20,000 crores, maybe half of it will be off book but I'll give you the numbers as I said that. Just one second.
Yeah.
It is INR 8,330 crores and the which is on slide number 13. That is on book and the balance is off book.
Okay. If I have to look at the break up of this AUM.
If I have to look at the break up of this gold AUM by ticket size, you know, what will be the share below INR 1 lakh, between INR 1-2 lakhs and say above INR 2 lakhs?
Yeah.
If you could help us.
Up to INR 1 lakh we are 33%. INR 1-2 lakh is 26%. INR 2 lakh we are 59%. INR 2-5 lakh is 23% and greater than INR 5 lakh is 17%.
Okay. Greater than INR 5 lakh is 17%.
One-seven, 17% is above INR 5 lakh. 83% is below INR 5 lakh.
Got it. just finally,
60% is below INR 2 lakh.
Got it. Finally, you know, again, what share of AUM would have probably yield below or equal to 12%?
I think maybe will be around, maybe 40%. INR 4,000 crores below it so about 20%. 20% is below, 12 or below 12.
Okay, sir. Thank you so much. That was useful.
Thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question you may please press star and one on your touchtone phones. The next question is from the line of Sanket Chheda from DAM Capital. Please go ahead.
Yeah. Hi, sir. Congrats on a good set of numbers. My query was again to the point that you alluded that since the focus is now more on co-lending, maybe the upfronting related income would be less and that's visible in the revenue from operation line that we report on net gain on the recognition. This quarter there has been a sharp uptick on say fees and commission income and other income. Is that because of the co-lending thing wherein?
There are two, three things there. One is that the disbursements were higher, so there's amount of processing fee that is on disbursement. Two, co-lending. Three, cluster like insurance also peaked in this quarter. It's, you know, historically also our Q4 fee and commission will always be higher.
Okay. Okay.
The credit insurance also comes here. I think last quarter we did, the insurance that is done is like maybe more than what we do in the previous three quarters. That's co-lending, as well as, you know, disbursements in the case, all these three combined.
Okay. On the say net gain on amortized category, since the GNPAs are coming down, do we expect the loss on the de-recognition also to moderate or come down as we move ahead and reduce the focus there?
Loss of?
In the expense we also report net loss on de-recognition, right? On the financial instrument.
Normally there will not be a net loss of de-recognition because, okay, that can happen when supposing that you have assumed certain longer tenure of the loan and the loans get repaid without any prepayment or whatever, much shorter. Normally we are conservative on the whole, so it's unlikely that, you know, we'll have, you know, any significant loss there. There can be a few here and there on a quarter-to-quarter basis. Sometimes it'll be gain, sometimes it'll be, this thing, but this will not be a significant number.
Sure, sir. Lastly, since we are talking about, say some.
What has happened in this thing, okay. Sorry, just to explain one thing that Q4 we were impacted more by the NCR increase by the bank which was higher than the rate increase that we passed on, particularly in our Home Loan book. What happens is that when we do co-lending or when we do assignment, the interest rate which is committed to the bank or which goes to bank many times is linked to NCR. If you look at our, even our Home Loan book, we have passed on around 50 basis points and so we actually when we pass on the cost increase we are, we try to take into account two, three things.
One, particularly the Home Loan we don't want the assets to be, the cost to increase. Two, we also have long-term customers where the goodwill as well as repeat business. Three, how we can afford and what is the capacity to, you know, sort of adjust within our margin as well as and what we need to pass on. We look at environment and do that. I think that impact also has come last quarter. Hopefully this quarter onward as we have seen that the bank MCLR has not increased or, you know, might be corrected, I think, so that negative impact will also not be there.
Sure. Very clear. Lastly, wanted to ask that since we are guiding that maybe operating efficiency should start to kick in when we are guiding for a lower cost to income. Also, this year, despite, say, the cost of funds moving up, we have managed to clock about little more than 3.5% ROA. So as we move ahead, in FY 2024 or say FY 2025, do you see a possibility of hitting 4% in terms of ROA with operating efficiency kicking in? Maybe at some point, rate costs also maybe normalizing a bit. So do we see that for-
We have consistently improved our ROA and the trend will continue. Whether, I mean maybe four or closer to four is what we should target this year.
Okay. Okay. Got it, sir. Wish you luck. I wish you all the best.
Thank you.
Thank you. Participants who wish to ask questions may please press star and one at this time. The next question is from the line of Nischint Chawathe from Kotak. Please go ahead.
Thanks for taking my question.
Sure.
Till date or probably in the fourth quarter, you know, how much rate hikes would you have done for your customers?
Sorry.
In the fourth quarter, that is last quarter, how much of rate hikes would you have done for your customers?
We have done 150 basis. Home Loan, correct me if I'm wrong. Home Loan we have taken 150 basis points.
Yes, sir, but he's asking only on Q4.
In Q4 I don't think we have done any rate hike. Have we done?
Yeah. There was just a 25 basis points rate hike, that's it.
25 bps rate hike in Q4. That is relevant only for our Home Loan because in other products we don't do any rate changes.
No, even in the other products you would have increased rates for incremental customers, right?
In Microfinance business we increased 100 to 200 basis point. It depends on state to state. In Home Loan we have taken a 25% rate hike. In Microfinance also. Microfinance has happened over last three, four quarters. In digital loans, I think we would have taken a rate hike of about 100 basis point. That's a small business. Yeah.
Broadly across products you are around 100-125 over the entire loan.
On a weighted average basis because Home Loan is almost half of it, will be about maybe 50, 60 basis points.
Yeah, for the fourth quarter you mean?
That's it. Yeah.
Okay. The 100 basis points you said, 100-200 in Microfinance is only in the fourth quarter.
No, I think this has happened over three, four quarters. If you see the, one second, portfolio yield of the product, Sudhir, that will basically tell us. You can just give me one second.
Right. Got it. Yeah.
Yeah. Our portfolio yield in the Q, Microfinance has gone up from 23.2% to 23.8%. 60 basis point increase there.
This will be but I mean, these are fixed rate loans, right? So,
Uh,
it will be a lot more for customers and-
Yeah, there is lot. The cherry also high in these loans, but these are fixed rate loans. You're right.
Sure. Over a fourth quarter basis, very broadly, INR 100-INR 125 in gross profit is basically what you are saying.
On the incremental loan, yes.
Yeah. In the fourth quarter broadly.
Only 40 basis point. You are right because this is on the new loans, so the new loans will be eligible in 25 basis point.
The second question is really on leverage. You know, based on your conversations with bankers or rating agencies, what kind of a leverage, you know, are they comfortable with? Do they see this as AUM upon net worth or do they see this as loans and balance sheet upon net worth? How do they really see this? Thank you.
I think they're comfortable till up to 4.5 times or maybe in NBFC about 4.5 and in HFC can be six, up to six, seven times also they're comfortable with. And this is basically done based on on balance sheet. The off balance sheet assets are not part of this. This is also again, so net worth to your debt and balance sheet, you know, that is the relevant number. Many times this question arises whether in gearing or in this thing the BA or the assigned pool should be taken.
You know, if you really look at it, when we assign it becomes part of the bank's risk management because they have to provide for risk weightage and they have to take that as they have to actually allocate risk capital and take that as a part of their gearing. It can't be double counting. Many a times in many countries where these bundle assets are sold 10 times, obviously if there's a true sale along with the risk, then the seller basically gets off the balance sheet completely without any gearing or without any risk capital.
From a regulatory point of view, there is no cap or no restriction.
I think from the regulatory point of view, unless you take along with the risk, you won't get the priority sector advantage also.
Got it. There is no cap in terms of how much for a, from an NBFC, how much should be on book, off book? Per se, there is no cap right now.
No. There, there's no cap.
Got it. That answers my questions. Thank you very much.
Thank you, Nischint.
Participants who wish to ask questions, please press star and one. The next question is from the line of Pruthul Shah from Anubhuti Advisors. Please go ahead.
Yeah. Thank you for the opportunity. Given that you have provided for the guidance of 25% in top line and bottom line, and also guiding about 20% ROE. My question is with respect to the net NPA. We are above like 1%, we have around 1.08% of net NPAs. Going forward next year and beyond, what is the level that we can expect in case of net NPAs? Would it be going down to say 0.7%, 0.8%, or it would remain higher given that we are lending to say NFI segment, which has a higher yield. What's the understanding of this net NPA part? What is the guidance about it?
We would like to bring it under 1%. We really can't guide you to 70%, 80% or 90%, but it'll be under 1%.
Okay. Okay. Got it, sir. Thank you.
In basis point it will be two digits and not three digits.
Okay. Got it. Thank you, sir.
Our provision coverage is significantly more, 160%. What is happening in net NPA is we are really aggressive in stage one and stage two. The net NPA may not come down, but in terms of our total provision, it's significantly more than our GNPA. Suppose if I wanted to provide the management overlay and I say that all is provision against stage three, NNPA can become zero. That is more like a, you know, technical optics. Practically speaking, Our provision coverage is almost 160%. 67. 167%. What it means is that the total provision that we carry on the books is 1.6 times our GNPA.
Yes. Yes.
Yeah.
Okay. Got it, sir. Thank you.
Thanks.
Thank you. Ladies and gentlemen, if you wish to ask a question, you may please press star and one. Participants who wish to ask a question, you may please press star one at this time.
I think, it's over now, so maybe we can conclude.
Yes, sir.
If there are no more questions, I think we might maybe...
Yes, sir. We do not have any further questions. I would now like to hand the conference over to the management for closing comments. Over to you, sir.
Yeah. Thank you very much. I think it was a very meaningful conversation that we had. In case you have any further queries, feel free to write to us at our investor relations email ID or... and we'd be happy to answer your questions and keep the engagement going. Thank you. Thank you so much. Have a good day.
Thank you so much. Thank you.
Thank you. On behalf of IIFL Finance Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.