Good day, ladies and gentlemen, and welcome to the Q2 FY 2023 earnings conference call of 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 the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Rajesh Rajak, Chief Financial Officer. Thank you, and over to you, sir.
Good day, everyone. I'm Rajesh Rajak, Chief Financial Officer. Thank you all for joining us on this call. On behalf of the entire team at IIFL Finance, I would like to extend best wishes for Diwali and a very prosperous new year ahead to all of you. On this call I'm accompanied by Mr. Nirmal Jain, our Managing Director, Mr. Monu Ratra, CEO of IIFL Home Finance, Mr. Venkatesh N., CEO at IIFL Samasta Finance, and Mr. Kapish Jain, Deputy CFO and Head at Investor Relations. I'll hand over to our Managing Director, Mr. Nirmal Jain, to comment on the economy and the group's overall strategy and plans. Over to you, sir.
Thank you, Rajesh. I think all of you had a good Diwali, and I wish you and your family and loved ones a very happy Samvat New Year. To begin with, I think India's macroeconomic fundamentals are very strong. India stands out as the bright spot in a gloomy world. I mean, this is where investors can expect visibility of earnings growth, political and economic stability, favorable demographics. Something that is not talked about much is the fact that India has leapfrogged the rest of the world to build the best-in-class digital infra for a billion people to ride on. The sector that is most impacted and is crucial for economic growth is financial services. India has come a long way on the agenda of financial inclusion, but still finance and credit have not reached several millions.
All the bank branches network still is not able to reach out to all the needy borrowers. There's a growing realization among the policymakers that banks and NBFCs have to work together to achieve the goals of financial inclusion quicker, and fintechs have a role to play as well. There are thousands of fintechs that have mushroomed all over, so it's a no-brainer that there'll be a high mortality there. RBI has introduced guidelines to prevent systemic issues by unbridled credit products from non-regulated entities. In fact, RBI's timely intervention is the biggest shot in the arm for fintech industry. The orderly growth of fintech will facilitate breakthrough innovations and solutions for credit to the masses. Our PM stated very rightly a few days ago that fintech will lead to financial revolution.
Coming to IIFL Finance, I think we are in the sweet spot to seize the opportunity and participate meaningfully in India's financial inclusion drive. Besides in-house team driving digital innovation and innovative solutions, we have brand, balance sheet and branches. I believe that we are at the cusp of unprecedented growth opportunity, and we augment our organic effort to acquire new customers through partnerships such as Open Money and very recently ZestMoney, to reach out to the underserved customers and exchange their data with consent for instant loans. We continue to look for alliances and innovative partners. For balance sheet, we continue to partner with banks through co-lending and direct assignment. Last quarter, our co-lending book grew 22% quarter-over-quarter.
This quarter I think is the watershed quarter in my opinion because our differentiated strategy of retail on one hand and the partnership on the other hand is getting vindicated by the performance and perceptible potential. Our vision is to be the most respected non-bank in India for innovation, quality growth, customer centricity, and not only meeting but exceeding all the stakeholders' expectations. Last quarter we achieved healthy profit growth, but more importantly, we also improved our asset quality and we reduced our gearing further. This quarter we are taking the standards even higher. We have added a section with business and financial details of all group entities, namely the holding company, the NBFC IIFL, the housing finance company and the microfinance company as well separately, and reconciliation to show how they are consolidated in the reported numbers. Thank you.
With this I hand over to our Head of Investor Relations, Kapish Jain. Thank you.
Okay, a brief highlight.
Sorry. Rajesh will continue. Rajesh Rajak is continuing. Okay, thanks.
Our IIFL Finance's profit after tax, pre non-controlling interest for the quarter was the highest ever at INR 397 crore, which is up 36% on a year-on-year basis and 20% quarter-on-quarter. This was driven largely by volume growth and lower credit cost. We recorded pre-provision operating profit of INR 685 crore during the quarter, which is again up 23% on a year-on-year basis and 2% quarter-on-quarter. Loan AUM grew by 25% year-on-year and 5% quarter-on-quarter to INR 55,302 crore. Our core products grew faster at 28% year-on-year and 5% quarter-on-quarter to INR 52,221 crore, driven mainly by home loan, gold loan and microfinance loans.
Our non-core loan AUM, primarily, construction and real estate financing, shrank by 9% year-on-year in line with our strategy. 95% of our loans are retail in nature, and 69% of our retail loans are PSL compliant, which is excluding gold loans which are not classified as PSL loans under extant, RBI regulations. The large share of retail and PSL compliant loans are of significant value in the current environment where we can sell down these loans to raise long-term resources. In line with the capital optimizing strategy, 39% of our AUM is either assigned, securitized, or under co-lending as of September 2022, which is up from 35% during the same period last year. During the quarter, IIFL Finance tied up with South Indian Bank and Karur Vysya Bank for co-lending of gold loans and Indian Bank for business loans.
During the half year, we added over 450 branches and over 4,000 employees. As a result, cost to income ratio has increased to 43% from 40% last year, but this paves the way for accelerated growth in the future. Annualized return on equity for the quarter just ended as is at 20.4%, and the annualized ROA is at 3.4%. Our capital adequacy ratio is at 21.7%, which is well above the statutory requirement of 15%. As a result of the improved credit profile of the company, our quarterly average cost of borrowing declined 3 basis points quarter-on-quarter and 29 basis points year-on-year to 8.4%.
Gross NPAs stood at 2.4% and net at 1.2% as at September, which is down from 2.6% and 1.6% respectively from the previous quarter. Our provision coverage on NPAs is now 147%, which is up from 137% in the previous quarter. Earnings per share for the quarter, not annualized, stood at INR 10 per share, which is up 30% on a year-on-year basis in line with the increase in profits. Our book value per share is at INR 215.2, which is up 41% year-on-year. A brief update on liquidity. We raised approximately INR 3,800 crore in debt, and in addition, we assigned loans worth INR 3,500 crore during the quarter.
Our cash and cash equivalents and committed credit lines from banks and institutions of INR 8,191 crores were available as at the quarter end, adequate to meet not only the near-term liabilities but also to fund the growth momentum. We have a positive ALM whereby inflows cover or exceed expected outflows across all buckets. Our net debt to equity ratio is at 3.1x, which is down from 5x as on September 2021. IIFL Home Finance, a subsidiary, received INR 2,200 crores from ADIA in August 2022, thereby boosting the net worth of IIFL Home Finance by more than 80%. This will help the company consolidate its competitive position in the affordable housing finance market in India, which has tremendous long-term growth potential.
This also gives us the gunpowder to tap the growth opportunity in the housing segment. With affordability index at a decade high, we believe that the decline in the rate will be well absorbed by the customer with marginal hiccups. The total equity of the group now stands at INR 9,480 crores. IIFL Finance has entered into a partnership with ZestMoney, which is India's leading and fastest growing digital EMI checkout financing platform, to offer credit to potentially millions of new to credit customers. Through this industry-first partnership, IIFL Finance as a dedicated partner will get access to a new customer base on the Zest platform and play a crucial role in driving financial inclusion for a large section of people in the country. A little bit of digital updates.
We continue to focus on digitization and analytics to improve customer experience and enable a convenient one-stop-shop for credit and investment needs. During the previous quarters, we had mentioned about DIY digital initiatives for disbursement through WhatsApp and MyMoney. More than 60,000 customers have been onboarded till date under these initiatives. During the quarter, the DIY disbursements were INR 352, up 36% quarter-on-quarter. Our Gold Loan at Home initiative, which started approximately a year ago, also saw significant traction with disbursements increasing 118% year-on-year to INR 227 crore during the quarter. IIFL Loans app and MyMoney app is being increasingly used by customers for various transactions, and thereby giving customers ease and convenience. We have more than 3,000 average monthly active users across both these apps.
With this, I come to an end of update, and we can now open the floor to questions. Thank you.
Thank you very much. Sir, before we could go ahead. Sir, there is a slight disturbance which is coming along with your voice.
Okay. Is it better now?
Yes, sir. Much better.
I think this is the same instrument we've been using for several quarters. I don't know.
Yes, sir.
Let's start Q&A. We'll try and be a little louder in specifics.
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 phone. 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 Harsh Shah from L&T Mutual Fund. Please go ahead.
Yeah. Good afternoon, gentlemen, and congratulations for such a strong quarter. I guess first question is on the opening remarks that Rajesh just said. You had mentioned that overall cost of funds has gone down. Can you just explain how?
Hi, Harsh. There's two, three things which are responsible for this. Number one is, you know, we have bought back approximately $100 million worth of our overseas bonds and replaced them with low-cost rupee financing under ECB. Basically, we have had a gain on that. If you remember our second round of buybacks were done at a lower than par also. Increasingly what we are seeing is our off-balance sheet funding, which is loan assignments, which was 35% last September, has now become 39%.
That also gives us significant advantage because of direct assignment because of the stronger asset comes in at a lower cost of funds. It's really a combination of all this. Also IIFL Samasta Finance approximately a year ago got upgraded. The credit rating got upgraded from A+ to AA-, which is I think probably just one or two MFIs in the whole country to have that rating. It's really a combination of all this, all these factors that have contributed to the stable cost of funds till now in a rising rate environment.
If I just remove the co-lending and off-book funding that you get, like I'm just referring to a PPT in which you have given.
The primary thing is that dollar bonds were very expensive because the fully hedged cost was about 10% actually. Maybe closer to 11%?
11%.
The dollar bond that we raised in February 2019, in the wake of liquidity crisis. What happens with the hedging also, as we repay the dollar bond, we can remove the hedging also. The total cost comes down significantly. I mean, as I said, it's like a kind of cost that we can replace with even if we raise a half million, we save money.
Harsh, the entire bond is anyways due for maturity in April 2023. We have adequate liquidity to repay that. With that, slightly higher cost borrowing going off the books, we should see more stability in the, I mean, forward-looking.
If given the opportunity, we'll probably try and buy back the entire thing, but, you know, in tranches so.
Understood, sir. Second question is, you have done some small accounting change this time. You had mentioned it in your P&L, the spreads on co-lending has been now classified under non-fund-based. Can you just help us understand how that works?
In case of co-lending, suppose we are lending percent and banks basically have their share is 9%. Then what happens that in a quarter, supposing the total interest is 15%, the difference basically goes as a non-fund income because assets are on the 20% component, we'll account for 15% interest as interest income. On the remaining 80% account of component what banks have, the 6% for the quarter will go as non-fund-based income. You know, when we just started, the entire thing was being taken as interest income, but now we are trying to adjust it. If you understand the underlying assumption that the because 80% assets are not on our books.
Correct.
The risk is also not on our books.
80% will go into interest income and the rest 80% will go into non-fund-based.
All right. Now the co-lending is becoming significant, so it might become visible. The remaining 80%, the difference of the excess interest on our share will go as non-fund income.
Understood, sir. Just last question from my side. I mean, AUM growth, you have been quite vocal of maintaining at current rate plus minus few basis points. Considering how strong your ROA was in this quarter, do you think for the balance of at least H2, you will maintain it or, you know, is there also further scope of increase in this ROA?
I think we should target to maintain it given the fact that there'll be upward pressure on interest cost also, and liquidity has tightened significantly in the system now.
Understood. Has there been any changes in your OpEx strategy? Because even OpEx as a percentage of total AUM has been inching upwards.
OpEx as a percentage of total AUM has gone up because of the branch expansion that we have done very aggressively, and that has continued through the.
I'm sorry.
It now is going to plateau because.
Sorry to interrupt. Sir, we couldn't hear you. Can you please repeat your last line?
No, I'm saying that the OpEx had gone up significantly, because we had large number of new branches, almost 450 new branches, going, you know, commissioning in last quarter. The full impact of cost comes in this quarter. Going forward, it should plateau and should start coming down as we slow down the pace of branch expansion.
Understood. That's it from my side. Thank you very much and all the very best.
Thanks.
Thank you.
Thank you.
The next question is from the line of Sukriti Jiwarajka from Laburnum Capital. Please go ahead.
Jiwarajka, welcome.
Hello.
Go ahead.
Hi. Hi. Congratulations on a strong quarter. Congratulations, Kapish, on joining the team.
Thank you.
My first question is on gold loans. This is one of the, you know, the core segments that you highlight for growth. While the sort of price competition that we saw last year between NBFCs has abated a little bit, you do see banks, especially HDFC Bank, saying that now we want to expand gold across our branches, let's say in Maharashtra. We want to take gold from 1,500 branches to 3,000 branches in the next two years. This will impact, and we've discussed it in the past where you say that, you know, banks can't do gold loans like NBFCs can.
When a large bank comes and says that, "No, we want to expand consumer gold loans to so many more branches and have the gold valuer every day in the branch," it'll impact you in one of two ways, either growth or the sort of 15%-20% yields that you earn in gold today. Because they probably do it at 13%, 12%. What do you think about that? Am I seeing this wrong? If yes, then how would you counter that?
I think your point is valid, and that is what is seen in the gold loan business results of ours and gold loan companies as well. If you see our growth is very modest given the fact that we expanded our branch network 40% in last 18 months. Quarter-over-quarter we have been able to manage just 4% growth. Either you compromise significantly on yield or your loan growth will be muted because of intense competition from banks. If you look at last 10 or 12 years histories and what happens that many times we have seen this, that NBFCs and FinTech basically they jump in because they optically it looks like that the NIM is very high and very attractive for a relatively zero risk kind of a business.
Typically gold loan operating cost is maybe around 10% for a relatively mature, kind of a business, of the loan area. It's not that, you know, the margin of, you know, of any interest rates of 16%-18% are exorbitant. Either, you know, from a bank's balance sheet, I don't know how they do the accounting, but if they do it, then probably people discover. Also it's very vulnerable to frauds and robberies and many other things. Now, you know, if you go back six months or 12 months, then most of the banks were scrambling for retail assets and loan growth. That is the time probably most of the banks also jumped onto this. This is small ticket loan item where the growth is not so rapid.
Already what we have seen is that many new FinTechs and NBFCs that were doing the loss-leading kind of price offer, like up to INR 4 , which means around 6% or 7% per annum, they already withdrawn. I think that the sense is already started to prevail, in terms of the competition. In terms of banks also, you know, we can target the regions and geographies which are not easily accessible to banks even now. At least the new branch's focus will be on that. It's a neighborhood business, you know, like supposing nobody goes from Andheri to Virar to give, take gold loan. We have to work out our strategy and we are also working on a strategy to make sure that the cross-sell of fee income and all those things, increase through this customer base significantly.
Your point is valid, that the competition has intensified and, banks, you know, becoming very aggressive impact on the yield and, the growth.
Got it. The second question is on the assignment income. Now, this INR 418 crores of assignment and co-lending, have you divided this anywhere between how much is from assignment and how much is from co-lending?
Maybe it's a good point. Maybe from next quarter we start or maybe we'll try and figure out how do we disclose that separately. At this point in time, what happens is that even in co-lending or even in assignment.
Yeah.
Maybe we have to divide it into the upfronted portion, the NIM portion, and then the amortization and the fee portion. We'll work on these numbers, but at this point, I mean, right now I don't have it with me.
Yeah. Yeah. The declining trend is probably because a lot of the upfront is turning into amortized. I think that would be it. Correct?
Yeah. Can you repeat please?
No, I'm saying, there was a slight declining trend in overall income from assignments.
Yeah. I think the declining trend is understandable because in co-lending we are not upfronting anything, doing interest as it is received every quarter. In case of assignment, based on Ind AS, we make some conservative estimate and because the risk is off our balance sheet, so you try and upfront. I mean, basically we end up upfronting the discounted value of the income. As we move from to co-lending more and more, the upfronted portion will keep reducing and the flow of interest income on our total business will increase.
Got it. Makes sense. Also the write-offs this quarter, we didn't see anywhere in the PPT. Maybe I missed it.
Write-offs and provision for losses, the loan losses provisions and write-offs are all together in that amount of INR 196 crores.
No, no. What is the write-off?
We don't have any write-offs as such, or not anything significant.
INR 58 crore.
INR 58 crore is the write-off in total.
Okay.
No, sorry.
Um-
Just one second. Let me confirm.
Sorry. 59.
Hello?
Yeah.
Hello?
I can hear you.
Hello? Yeah. No, I think the amount is all included in the sheet.
Okay.
Hello? Yeah.
Yeah. Okay. Also just, you just mentioned to the last person who came before me that the dollar offshore bonds have been replaced, which is a reason for the costs remaining where it is or actually going down little bit. How much of today's borrowings now are these dollar offshore bonds, and how much are you looking to replace over the next few quarters, years? And what sort of cost of funds advantage can we get from that?
Dollar, there are two types of dollar exposure that we have, and therefore both help. One is a dollar bond issue that we did, which is kind of a public offering kind of issue where, you know, you open, get the bid and do that. That was about $400 million that we did in February 9, 2019. Out of which about $100 or maybe a little lower than.
$130
$130 we already bought back.
Right.
The outstanding will be 270, anywhere between 250-270, maybe around 270, is the outstanding out of that issue. Then there are ECLGS loans which you know really can't repay because you can buy back. See, these are the listed bonds, these $400 million that we did in February 2019. The listed bonds you can, you know, try and whenever the market. See, today if you see the yield on all the emerging market bonds has gone up. Even good quality banks also are available at a very attractive dollar yield. This $400, $130 we have bought. 270 is still outside, which, I mean, we can buy back. If we don't, then we have to repay in April 2023.
Okay.
Does this help? Okay, thanks.
I have one more question, if I can.
Yeah, please go ahead.
Actually business loans had a particularly good quarter. The growth run rate went up, NPS came down. You also provided more for this book. You know, there was that arrangement with Open last quarter. Is this something now that you would say this is in your sort of core growth segment? Because traditionally you used to always talk about home loan, gold loans, and MFI as your core segments. Where is business loans? How do you think about it in terms of growth? What are these? These are really term loans or are these working capital loans? Or are these LAP loans?
This is a core segment for growth for sure. I think we'll have four core businesses, which is home loan, gold loan, microfinance and business loans. And within business loans, the larger loans we target property against the collateral of property, and the smaller loans will be unsecured. Now, typically, all the loans basically they're called term loans, and we really don't do OD or overdraft like banks do. But these term loans are also taken by these businesses for working capital requirement. Primarily for unsecured loans will be primarily for working capital requirement. If you look at the average ticket size of our loan, incrementally is around, you know, the unsecured loan will be around INR 4 lakh-INR 5 lakh. All put together, the ticket size has been coming down.
It's INR 61 lakh the last quarter, but incrementally it's around INR 10 lakh-INR 20 lakh . What has happened is historically we had a larger LAP. That business we discontinued. Quarter- after- quarter you see that this is coming down. These are all small businesses like shopkeepers, traders, you know, these freight operators or sometimes some of these self-employed professionals or people who are, you know, self-employed non-professional. All the people who are running any kind of business, and these are all typically small businesses. That is what we'll be targeting, you know, as a core growth thrust and Open partnership and all the many other partnership that we look for is this kind of business.
You are actively doing unsecured in the business loan segment today?
Yeah. But yeah, we are doing unsecured also. If you see the quarter's split is 75%-25%. 75% is secured and 25% is unsecured in our book currently.
In the disbursement?
It's still. Okay. You know what happened? Disbursement, unsecured maybe slightly more but the tenor is shorter, so probably no. In terms of portfolio, it's 75%, 25%. Disbursement may be, sort of, you know, 2/3, 1/3 .
Okay. Thank you so much.
Thank you. The next question is from the line of Anusha Raheja from Dalal & Broacha. Please go ahead.
Yes. Thanks for taking the question. Just wanted to understand, you know, how do you see the growth panning out, you know, for the balance part of the year?
Sorry, your voice is not clear, Anusha. Just, can you speak again?
Mr. Shah, can you please use your headphones?
Yeah. Just a second. Yeah. Am I audible now?
Yes.
Yeah.
Proceed.
Yeah. I'm saying how do you see growth panning out for balance part of the year?
Balanced part of the year, growth.
Like so far we have seen a very good.
Yeah. I think the balance part of the year is should be equally good or better, but there's no reason for you know I think we should be able to sustain the growth and margins both. Right now the environment is looking very positive in terms of demand for credit and the banks willingness to partner. The economy is doing well, so actually most of the businesses are coming back on track and they take you know business loan as well as gold loan. Even in real estate sector, the interesting thing is, while the interest rates might have gone up, but that has not slowed down because builders, they have kept their nominal prices down or they have not increased the prices.
Because they are also, they have the demand to basically, you know, sell and liquidate. We are seeing good demand for all businesses. Microfinance also has picked up very well and, the entire industry has picked up very well in last quarter. I think it looks like, the outlook for the next two quarters as well.
Okay. What were your margins, you know, in Q2?
Margins?
Yes. What were the margins for the Q2?
You're saying net interest margin?
Yeah, net interest margins or the spreads.
Is around 8%.
It's around 8%. You know, what are the incremental, you know, yields and the cost of funds, if you have that, those numbers with you?
The cost of funds, as Rajesh mentioned, that we've been able to bring it down in last quarter by a repayment of the high-cost dollar bonds. They are flattish. It is not that there's not many basis points decline. The yield on an overall level has gone up because the interest rates have gone up also. The portfolio yield 15.5% for the quarter as compared to 15.3%. It's 20 basis points increase in the yield. In the cost of funds, is there a, what is the decline?
Decline is about 10 basis point.
Can be around 10 basis point decline there. Margins have improved by 30 basis point that way.
Okay. Just one last question. You know, on the OpEx side, in the last three or four quarters, we have seen, you know, sizable amount of branch expansion. Going forward, any outlook on the OpEx side? You know, what are your plans to, you know, roll out branches in terms of employee expenses? You know, any guidance there on the OpEx side?
The operating costs should be another because our network has become much bigger. You know, last quarter-over-quarter, the OpEx increase was around 7%. Now, I think that, you know, 4%-5% is something that can continue for couple of quarters and then I'd say 2023, 2024, we will have to take a call on the strategy that we have to continue with our branch expansion or slow it down. Now, that again depends on the business environment because if you feel more confident and more positive, then we can continue to expand the network and still maintain the return on assets. You know, continue to expand the network. But at this point in time, it might plateau.
It's not going to come down significantly, but it won't increase in any rapid manner also.
Okay. Got it, sir. Thank you so much.
Thank you.
Thank you. The next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead.
Hello.
Please proceed.
Yeah. Yes, Deepak.
Yeah. Thank you very much, sir, for the opportunity and many congratulations for the great set of numbers. I just wanted to understand more on the credit cost front and now excess provisioning that we had been doing for last couple of quarters, driven by the RBI policy, so we are through with that, the excess provisioning?
Actually we are pretty close to our guidance and whatever we have spoken that in terms of trade cost is coming down. We should continue the trend on a relative basis, relative to the portfolio or relative to the loan book. I think we are on the right track there. If you see more than INR 35,000 crore-INR 36,000 crore loan on our book, INR 35,000 crore+ , and for a quarter, if you take 50 basis points, it's INR 135 crore. But I think our credit cost this quarter is INR 196 crore. I mean, we're pretty close. Guidance is, you know, it has to actually be around anywhere between 150 to 200 basis points in a year. I think over next two, three quarters, we should move towards that.
Uh-
I mean, we are moving towards that, but we should be there.
150-200 basis points credit cost. That this number is based on your on books AUM, right? Not on total AUM.
Yes. This number is on-book AUM, not on total AUM. What happens is that we have to worry about on-book AUM only and not on the total AUM.
Fair enough. Yeah. That's it from my side, sir, and all the very best. Thank you.
Thank you.
Thank you. The next question is from the line of Kashyap Javeri from Emkay Investment Managers. Please go ahead.
Yeah. Thank you very much, sir, for the opportunity and, sorry to harp on this, but to the earlier question on, you know, co-lending, when this 80% of the book gets transferred to banks, A, I understand that the whole risk also transfers from our book to their book, if that's correct. B, is that-
Yes, 80%.
In which case.
Go ahead.
In which case, the accounting of income will then be similar to what we do for assignments?
No, there's a difference because see.
We book it on, or we sort of amortize the income over the life of the asset which has been transferred.
Exactly. Here it gets amortized over the life of the loan, and whatever we do is based on the Indian accounting and auditing guidelines. I believe that all the companies will do similarly. What is happening in case of assignment, supposing you have a seven-year loan, and let's say you are going to make a margin of 10%. What you'll do, you'll basically say 10 p.a. for seven years, you'll discount it at present value.
Right.
You reduce the operating cost and they say 7 years, you'll say that the really you think that seven year might get repaid here, so then you take only four years.
Yes.
You discount and you reduce the cost and then you upfront it.
Mm.
In case of co-lending, it doesn't work like this. Basically, it is that you'll accrue 10% every quarter, every year as it comes.
The 8 that you pay out, you will account as an expense over there. In the other income you will do the
Interest, no you don't have to accrue expense because interest directly goes to them from the customer.
Okay. Okay.
Money from the SQ is just straightaway goes to the respective partner. We collect on behalf of the bank as an agent and give to them.
Okay. Just last clarification. In which case you, in the other income, you will account for only that spread, the differential?
That is right. On the 80% component or 90% or 70%. Now, in co-lending also this percentage varies.
Okay. Yeah, got it, sir. Thank you so much.
Thank you. The next question is from the line of Darshan Pandya from Fintrust Capital. Please go ahead.
Hello.
Please proceed.
Can you hear me, sir?
Yes, yes.
Congratulations, sir, on this good number. Sir, my question is on the microfinance segment. You know, it is contributing around 12% to the AUM. You know, we have seen a year-on-year growth of 49%. You know, we have come in from probably INR 840 crore in FY 2018 to INR 6,000 crore of AUM, you know, in FY 2022. Do you see this number more getting up, you know, contributing more to the revenues? Because, you know, the market opportunity is very big, as we have mentioned in the investor presentation, and, you know, we are putting up well. Where do you see this number going up, sir? This year's growth is basically because of the lower base of last year. Because last year has not grown. In fact, last two years have been little.
We, in a way, it's catching up. We also expanded the branch network. I think that we would like to be a meaningful player in the industry. We are among top 10, but we'd like to be among top five or top three for sure. Business will grow and the 49% or 25%-30%, that is all matter of depending on how the new business is. It'll grow. Our objective will be to grow a little faster than the industry, not too much faster and not too slower also.
Right. Sir, you know, also something on this, gross GNPA and NNPA. You know, it's
About the microfinance or overall business?
Yes, about the micro, yeah.
Incrementally, we are seeing good quality assets, and GNPA, NNPA will come down in this business, unless something which are unforeseen or a black swan event happens again.
Okay. Any specific sector that, you know, we are giving out loans to microfinance segment?
No, not really. Because we have branches in the suburbs of semi-urban as well as rural areas.
Mm-hmm.
Primarily they go to, you know, these women for cottage industries.
Oh, okay. That's it, sir. I just wanted to ask about this microfinance. Thank you so much, sir. We'll see you in the next quarter. Thank you.
Thank you. The next question is from the line of Nikhil Agarwal from Tusk Investments. Please go ahead.
Hi. Can you hear me?
Yeah, yes, Nikhil. We can hear you.
Congratulations on a good quarter, sir. I have one question only. Investments book. Our investments book has added another INR 1,400 crores in this quarter. Can you explain, sir, what is the details of this increment in the investment book? I mean, in terms of-
Sir, sorry, can you repeat the question please?
My question is on the investments book, sir.
Yes.
You have added around INR 1,400 crore of investments in this quarter.
Yeah.
Can you explain the terms of this investment and what is the collections, like, the repayment status and recovery that we can get this investment book?
You're talking about INR 1,400 crore books?
The INR 1,200 crore has become INR 2,700 crore right now. We have added another INR 1,400 crore.
Yeah. Actually, we've got an Andhra bond of INR 500 crores, which is part of our liquidity. Andhra state bonds. There are SRs, some assets that have been transferred to ARC, and there's the AIF. All these assets are valued every quarter based on the recoverability only and mark-to-market wherever required is provided for. We get them valued and rated every quarter by the auditors who get it. I think rating agencies also do. ICRA, CRISIL also does the assessment. Based on that, we provide for mark-to-market. Value that you see is all recoverable.
Okay. What is the interest rate and the return we can expect in this book? Because a lot of this book is also containing the AIF and the CRE book which we used to have.
Yes, that's right.
I know we agreed to increase that to INR 3,700 crores. I think that was the guidance which was given by you.
Broadly, I think you can say that around, for various instruments 7%-9%.
7%-9%. Okay. Is there any further details that you have on the book in terms of asset qualities in the AIF?
I think you know the real estate assets that we have transferred to AIF, they're doing better now because the environment has improved and quality of the real estate part of it has improved. Even in the ARC assets, we had a reasonably good recovery in last quarter. In a way, I think as the economy improves and the real estate sector improves, the asset quality is improving.
Got it, sir. I have one last question on the microfinance book. Sir, this quarter again, we have seen some very high provisions similar to last quarter. I think last quarter we had mentioned that a huge part of the restructured book had come out of restructuring. How do you see this panning out going forward? Because the ROE in the business is now quite low, the half-year ROE.
I think, as I said last quarter also, that microfinance we have a pain. The call that we took last year of giving moratorium and restructuring, as the book comes out of that, we are seeing that there are a lot of delinquencies there. We are forced to take write-off in microfinance because above 90 is considered as you have to fully provide for that. I think this and therefore, the microfinance ROE is abnormally low to what historical trend has been. I think this will continue for another two quarters, and we'll start tapering off, and probably, you know, I think we should be able to see a bang next year.
On ROE.
Our target is to have 20% ROE, and this is as of now depressing it, but we are working on it. You know, give us two more quarters for this.
Sure. Thanks a lot.
Thank you.
Thank you. The next question is from the line of Jigar Jani from Edelweiss Wealth. Please go ahead.
Yeah. Thanks for taking my question. Congratulations on a great set of numbers and a happy New Year to everybody. My question is on the stage two assets, that especially in the gold loan side. Starting from Q4 onwards, if you see Stage Two assets on the gold loan side, they have gone from 4.9% of the gold loan book to almost crossing 11% now. Any particular reason why we are seeing this such a sharp rise, especially in gold loans on the stage two side? Even on an overall basis, that has pushed up our Stage Two assets from 5.5% in Q4 to almost 7%. Any color on that, why there is such a increase?
Also same is seen partly in home loans, to some extent, not as sharp as gold loans, but quarter-on-quarter we are seeing the increase in stage two assets.
The stage two in the gold loan has gone up from 662 to 843, you know, quarter- on- quarter, partly because of the book growth and partly, you know, in the festival time and, in this time, sometimes the collection gets a little bit delayed. I mean, there's some psychology in customers and the industry, the way they operate, that they try to collect it, you know, they know that 90 days is allowed kind of a thing. You see the stage two. But normally, typically, you know, because there's a gold collateral and the risk to the customer also, so they don't go beyond 90. But it's just question of collection efficiency and putting a little bit more pressure on the system to, you know, track it carefully.
You know, it's gone up a little bit with the book also and with maybe some bit of collection delays. Typically, you know, people know that, okay, the customer don't default on gold with us. There are some technical, some cash flow, this thing, so we give him some. Normally people don't force, you know, till the 90 days to regularize the account. Customers can be sometimes lax on the EMI but yeah, point is noted that I mean it's something which is. Thanks for bringing it to our attention. That's the reason.
Right. For home loans also is the same case? I mean, we have
Home loan has a slight increase with the book growth also. I don't think there is any from 0.15% to 5.4%, that's what you're talking about, right?
Uh, level may-
There's been a flow, but that's not very significant.
Yeah. Yeah. Yeah.
The book is, yeah, much larger.
Thanks. Is it possible to share the 1 DPD plus for the home loan book?
Maybe for all businesses. Right now we don't have it, but yeah. I think I'll note the point that whether we should have 1 DPD plus as a separate, this thing.
Okay. Sure.
In home loan it is broadly around 1,300, 1 DPD plus.
300. Okay. Understood. Thanks. Just last, if this early indicators of stage two go up, say this is only for our own book, which is on-book, but I believe similar performance will be replicated on your assigned book or your co-lending book. Does it impact your ability or are there any repercussions on the asset quality or credit cost side for us? I know it's fully risk-off, but on the co-lending side, are there any clauses wherein if the asset quality deteriorates, especially for books that we have originated, we need to provide more or share more of the risk or something of that sort?
Now the quality and these are all within the acceptors. At this point in time, I don't see any stress or any challenge there, because, you know, this is something which is not worse than the rest of the industry or our banks, their own portfolio typically. That is how we look at it.
Understood. Thank you so much for patiently answering my questions. Thank you.
Thank you.
Best of luck.
Before we take the next question, a reminder to all the participants, anyone who wishes to ask a question may press star and one now. There is a follow-up question from the line of Anusha Raheja from Dalal & Broacha. Please go ahead.
Yeah. Thanks for taking my question. Sir, what are the returns that you'd be expecting from your AIF book? I mean, CRE book which was sold to AIF, given the fact that, you know, the real estate sector has been improving. What are basically, you know, terms of, you know, profit sharing, you know, there on that side?
I think until we fully redeem the book, which may be another two to three years, it'll be very difficult to take any guess on that. At this point in time, that's a very difficult question. See what happens if there are 10 investors there. Some will do very well, some will not do so well. We'll discover the entire thing when the full book is liquidated completely. Another two, maybe 2.5 years.
Okay. You said that you have still $270 million of bonds, you know, on your books currently, which are high cost. Those bonds might come up for refinancing in this quarter? In that case, you know-
They are fixed rate.
I'm sorry?
No, no. These bonds are fixed-rate bonds.
Fixed rate bonds. Okay. I mean, you know, whenever you redeem that, probably that might get also replaced by lower cost, so you might have a benefit of, you know, margin expansion from that as well.
Absolutely right. This INR 270 million still, we are borrowing in terms of cost. I think when we do that, there'll be some cost of funds advantage there also.
That might come for in next fiscal, FY 2024?
Yep. May, yep. Mostly in fiscal 2024.
Okay. If you want to.
Probably we may end up doing a small buyback, but otherwise they'll come primarily in fiscal 2024 only.
Okay.
See, because what is happening now, the bondholders also are not selling because they know that within six months they're getting their full money, so why sell it at a discount? We don't get liquidity in the market. They know our track record, that we have bought back most of them. Whenever there's liquidity, we buy it back. I think it'll come, you know, it will come one shot on ECB somewhere in April 2023.
Okay. You know, I referred to your accounting treatment on co-lending book. If you can just elaborate more on that.
Anusha, I want to clarify to everybody that this is not a change in accounting treatment. The accounting has always been the same. For the presentation purposes, we have only reclassified it from net interest income to non-fund-based income. Don't need any funds on this. The accounting has been consistent. As we also explained on this call, is that we take the margin on that 80%, which is the bank share, and that was the interest income. Now it is included in non-fund-based income. It's only a reclassification, not a change in accounting. Yeah. It's reclassification only in the analyst presentation, but there's no change in accounting.
Okay, sir.
I hope I answered your question, Anusha?
Yeah, yeah.
Yeah. All right.
Thank you.
Thank you.
The next question is from the line of Tushar Sarda from Athena Investments. Please go ahead.
Yeah, thank you for the opportunity. I wanted to understand the valuation basis for selling 20% stake to ADIA. When I compare it with other listed housing finance companies, it looks very cheap. If you have, if you can share your thoughts about this.
I think it's a very difficult question to answer, but what had happened is that the listed companies when you compare, there are ones that are outliers and valued significantly higher, but must be a long tail in the housing finance will be valued much lower. If you really look at the valuations for what we got and based on. Suppose you take historical book value, I think it was at maybe 3.5x-4x kind of thing. If you consider historical or no as same as the current.
Current.
I think, but if you really look at the entire housing finance universe, there are one or two companies where the valuations are higher. That is one. Secondly, what happened that to be very candid, there was also overhang of the parent company's valuation. Thirdly, if you look at our track record, then all the investors have basically made a significant multiple on their investment. We generally, you know, in these deals we want to leave something on the table so that the investors have a good exit. If you look at CDC, ADIA, Fairfax, you know, Carlyle, all of them have made lot of money on our investments.
Oh, okay. Thank you. I just wanted to understand, you know, your thought process. Thanks so much.
Thank you.
Thank you.
The next question is from the line of Sharaj Singh from Laburnum Capital. Please go ahead.
Hello.
Yeah.
Hello. Hi there.
Yes, go ahead.
Just a clarification on the earlier question on default protection that we might have to provide on the co-lending book that we originate. Did you say that the banks have not asked for any such default protection, so in future they might, or there is no such thing?
There's no such thing possible actually, as per the RBI policies and guidelines. See, what happens if the banks take any default protection, then they can't claim as a priority sector asset. RBI is very clear that when you are doing priority sector, the loans and the risks should be with the bank. Secondly, the risk is priced in, so I won't give a price also and risk cover also. The way all these transactions happen, they are without any recourse in terms of risk. Structurally, there's no other way to do this based on the RBI policy also. See, why is RBI encouraging co-lending? Banks have a balance sheet and ability to take risk. If the risk has to be taken by NBFCs, then why would you then, you know, the whole purpose is defeated.
Right. Okay. That was the question. Thank you so much.
Thanks.
Thank you. As there are no further questions, I would now like to hand the conference over to Mr. Kapish Jain for closing comments.
Thank you very much. Thank you very much, ladies and gentlemen, for joining us for our quarterly results call. It was a very interesting discussion with all of you. For any further query that you wish to have, please reach out to us separately with our investor relations team, and we'll be happy to connect and answer all your queries. Thank you, have a great day, and happy Diwali to all of you.
Thank you. On behalf of IIFL Finance Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.