Break out by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to the management. Thank you, and over to you, sir.
Good afternoon, everyone. On behalf of Team IIFL Finance, I thank all of you for joining us on this call. I am Rajesh Rajak, Chief Financial Officer, accompanied by Mr. Nirmal Jain, our Chairman, Mr. Monu Ratra, IIFL Home Finance CEO, and Mr. Venkatesh N, Managing Director, IIFL Samasta Finance Limited. I'll hand over to our Chairman to briefly comment on the economy and the group's strategy and plans. Over to you, Mr. Jain.
Thank you, Rajesh, and good afternoon to everybody and welcome to this call. After a long time, one feels very excited and very happy about talking about the economy. Economy seems to be firing on all cylinders. As you know, consumption is picking up. I mean, anecdotally, you'll find that restaurants and planes are full, but also jewelry stores and retail malls are seeing very high footfall. All the numbers and leading indicators show a very strong recovery. What is more important and heartening is that we are seeing a very strong recovery in the CapEx cycle, and primarily because the commodity companies have got such strong cash flows that many of them are able to deleverage and even announce expansion plans with internal accrual.
As we know that the CapEx, the large ticket CapEx comes from commodity companies and not from the other companies. This has happened after a long time gap. If you had heard the commentary of many capital goods companies, they are showing that the order inflow is significantly higher than what it was even a quarter or a year ago. We are seeing that exports have picked up. Technology software exports and also others are doing much better. All this has been helped by the policy framework which government has been working on. As we know that the large, the bigger problems or the issues of telecom are resolved. PLI scheme has taken off. Tax rate for new manufacturing is 15%. GST has stabilized.
All these factors put together with the infusion of money that happens during any crisis is showing strong recovery. We believe that such recovery has a cascading impact because when you see CapEx in one large sector, it goes on over years creating demand and jobs, and that income basically is spent on other sectors. We see that cycle at least for next 3-5 years should remain strong. Now coming to NBFC sector. From IL&FS crisis to COVID, the sector has seen many upheavals and trial by fire. As with the universal law that survivor emerges stronger and the survivors in the sector seem to be emerging stronger.
There are a few more interesting developments that have taken place in the sector, primarily caused by COVID and the crisis that we have seen in last few years. One is that credit market has always been under-penetrated, but now the demand is becoming visible and addressable. It's becoming addressable with technology because the digital technology, the widespread expansion and use of UPI and digital payment, availability of data, and lot of alliances that are taking place is making this market access easier. Many technology companies or many finance companies are doing lot of innovation which will open up the market and, maybe reduce the cost of doing the small ticket retail loan in a way that was not possible or not thinkable even some time back.
Also, the bank partnership, in terms of direct assignment, securitization as well as co-lending is now becoming much stronger. In fact, when we are talking to banks what we are hearing is much stronger and much more positive than even what we would have expected or thought about. Even the Finance Minister, RBI, everybody is aligned and everybody seems to be in consensus that the best way to penetrate credit to the underserved segments of the society as well as under-penetrated geographies seem to be a partnership model of banks and NBFCs. Because what NBFCs can deliver in a small credit niche segment, the small ticket loan or even microfinance loan, is far more efficient than what banks can do.
These are the areas or the customers where banks are not able to reach and therefore everybody is now. Banks are flush with liquidity. I mean, they're getting deposits, but they're not able to lend significantly. The large ticket private sector CapEx that I talked about, large corporates are able to tap the market directly, either the foreign market or local market, and therefore going forward, banks probably will see a larger and larger part of their balancing credit being shown by the retail borrowers, and that is where the partnership will make a lot more sense. As the economy is doing well, the NBFC sector is very well placed and liquidity has also eased. We are seeing that liquidity easing for the sector, for the survivors, for the well-established companies very well.
Now even our liquidity is higher by almost INR 2,000 crores than what it was a quarter ago. This is a great time to bet on growth, and that is what we are doing. Branches are core to our growth strategy because our gold loan and microfinance businesses, for them the fulcrum is branch from where in case of gold loan, we can store the gold. And for all other products, it becomes the face to the customer, and it becomes a very efficient mechanism for collection. Of course, we use technology as much as possible, but branches cannot be whisked away. In case of gold loan in particular, customer wants to borrow in five minutes and also take back her jewelry in five minutes in case they want to when they're paying the money back.
Technology and innovation is the key. I'll just take one example of WhatsApp that we launched. There are many players who are generating leads from WhatsApp, but what we are doing is different. We are not generating leads, but we are doing the entire credit underwriting process as well as disbursement on WhatsApp. The first 10 days, without any advertisement or promotion, we got more than 60,000 leads. What is interesting is that there are quite a few fraud cases also that we have been able to catch.
Basically, this technology is very different from what many other people or other fintech are trying, because when they put an app in your mobile phone, the app is able to access a lot of confidential data, including where the customer is moving around physically, all the apps, all the contact lists. That basically is intrusion in privacy a lot more than what is required. Many customers sooner or later will reject and understand the issues with that. The WhatsApp model, we ask directly to the customer what are the documents that we need. The models that we have been working on seem to be now stabilized and working well. That is what customers appreciate, and that is why the strong word of mouth referral and organic lead flow stronger than what we would have expected.
When we plan growth strategy for next 2 to 3 years based on our assumptions about the economy sector and liquidity, other than technology and branches, we are also investing in people. Since last year, we have added almost 6,000 people, and in last quarter alone, we added 2,700 people. That's net addition. This basically, number of hiring would be this plus whatever people have left us. This is something which is again unprecedented and a very strong. These are in times when people are talking about job losses and problems inflicted by COVID, but we are seeing a great opportunity and we have been able to hire good quality people as well.
We invest in branding also along with that, and campaigns are there on national media as well as regional channels. When we look at our last quarter results, there are two things that I would like to bring to your notice. One is that our operating cost obviously has gone up significantly. On a year-on-year comparison, it's gone up by almost INR 94 crore. Significant part of it is the new people that we hired, like 6,000 people added since last year, and also salary increases that have taken place during this time period. Over and above that, also the branch setup costs and the new branch initial costs. Other than that, we also invested very aggressively in technology.
Liquidity, as you have seen that we almost increased our cash on the balance sheet by INR 1,800 crores. Liquidity is up by almost INR 2,000 crores. That obviously has a negative carry and a cost. There is a slight diluting impact on our NII or the net interest income. This is a small cost to pay to make sure that liquidity is comfortable and we are prepared for growth. Broadly, we've been able to maintain our margins and ROE. With this, I hand over to Rajesh and I'll come back for the Q&A session later. Thank you.
Thank you, Mr. Jain. I'll just take all of you through brief financial highlights for the quarter. IIFL Finance's profit after tax was INR 292 crore in Q2 FY 2022, up 37% year-on-year and 10% quarter-on-quarter, driven by volume growth and lower credit costs. We recorded pre-provision operating profit at INR 582 crore during the quarter. We have significantly expanded our distribution network by adding approximately 350 branches and 4,000 employees during the current financial year. Our loan AUM grew by 8% year-on-year and 3% quarter-on-quarter to INR 44,249 crore. Our core segments grew at 15% year-on-year to INR 40,851 crore. The CRE portfolio has reduced in line with our retail strategy.
94% of our loans are now retail compared to 89% as of September 2020. 69% of our retail loans are PSL compliant, excluding gold loans which are not classified as PSL loans as per RBI. The large share of retail and PSL compliant loans are of significant value where we can sell down these loans to raise long-term resources. In line with our capital optimizing strategy, 35% of our AUM is assigned to securitize as of September 2021. Accordingly, our non-fund-based income comprised 37% of the total income for the quarter, up from 32% during the corresponding quarter in the previous year. During the quarter, we also tied up with Central Bank of India, Punjab National Bank, DCB Bank and Shivalik Small Finance Bank for co-lending of gold loans, home loans and secured business loans.
Our cost-to-income ratio rose marginally to 40% due to expansion in our physical and digital footprint. Annualized return on equity for the quarter stood at 20.5%, driven by an annualized return on asset of 2.8%. Capital adequacy ratio was 25.9% and Tier I stood at 18.3%. We are well above the statutory requirement of 10% and 15% respectively. Total capital adequacy ratio of home finance was at 30.7%, and for micro finance stood at 21.9% respectively. Our average cost of borrowing declined 33 basis points year-on-year to 8.7%. Our GNPA stands at 2.3% and NNPA at 1.1% as of the quarter end. Collection efficiency has improved significantly.
In fact, the second wave has been much milder as compared to the same in the first wave. As per Ind AS accounting provision, coverage of NPAs stood at 175%. During the quarter, IIFL Finance and IIFL Home Finance's long-term credit rating from both ICRA and CARE were upgraded from AA (Negative) to AA (Stable). The credit rating from CRISIL was already at AA (Stable). IIFL Samasta Finance Limited's long-term credit rating also got upgraded from CRISIL A+ (Stable) to AA- (Stable), and from ICRA from A to A+ (Stable). During the quarter we raised INR 3,717 crore through term loans and refinance. In addition, loans of INR 3,655 crore were securitized or assigned during the quarter.
Our cash and cash equivalents and committed credit lines from bank and institutions, that is total liquidity at, was INR 6,379 crores as of September 30, 2021. We have a positive ALM whereby inflows cover or exceed expected outflows across all buckets. Additionally, we raised INR 843 crores by way of public issue of long-term secured bonds in the month of October 2021. IIFL Home Finance had a subordinated debt of public issue, and it raised INR 656 crores in the month of July. Now for some digital updates. We continue to focus on digitization and analytics to improve customer experience and enable a convenient one-stop shop for customers' credit and investment needs. We are the first NBFC in the country to launch end-to-end instant unsecured business loans only on WhatsApp, right from customer onboarding to disbursement.
Within 10 days of launch, we have disbursed over INR 4.5 crores under this initiative. Our investment in digital innovation has started giving results. Till date, we have also disbursed INR 43 crores of unsecured business loans via MyMoney app. We also went live on the account aggregator model to help customers and better underwrite small enterprises securely. For home loans, we integrated with WhatsApp for better customer engagement on post disbursement customer queries. Under gold loans, we launched our co-branded prepaid card with ICICI Bank. We also tied up with Google Pay for lead generation during the quarter. IIFL Loans app continues to be increasingly used for various transactions by customers. We have almost 2 lakh average monthly active users on the app for the month of June. And that brings an end to the update.
We can now open the floor for any questions, please. Thank you.
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 touchtone 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 Yash Agarwal from JM Financial Services. Please go ahead.
Good afternoon, sir. Congrats on a good set of numbers. A few questions from my side. In your assigned book and securitized book, what percentage credit risk is basically left on our balance sheet, or the whole credit risk lies on the bank's balance sheet?
In case of assigned book, the whole credit risk lies on the bank's balance sheet. In case of securitized book, there is typically 5%-7% of credit enhancement given by way of bank fixed deposit, so that way the credit risk lies on our books because a bank is open to that if your losses are more than what were agreed upon.
Got it. The assigned book completely, it's on the bank's balance sheet, right?
That's right.
Yeah. Okay.
Securitized, our liability is limited to the bank, every debt we've given it to them for guarantee. It is typically about 5% or 10% of the portfolio.
Sure, sir. Also, I was just looking at the standalone and consolidated numbers. I believe we did a standalone profit before tax of INR 244 crore. IIFL Home, I think as per the published disclosures, did INR 197 crore. If I add that's about INR 440 crore profit before tax. Where did we lose the INR 70 crore? Did we lose it in Samasta Microfinance completely?
What happens here is, that there's a securitization is done through a trust.
Okay.
That's actually when the trust closes, that money gets transferred as a assignment income, and that is where it is. Actually there was one trust of securitization that we closed in the last quarter, and I think that is adjustment that has come.
Got it. The whole INR 70 crore is not part of net income.
No. What happened is that we had done this actually one-off transaction where the bond issued on a trust, which is a complicated transaction which was done about 2-3 years back. We have wound it up now, and we have closed the trust.
Got it. Got it. Okay.
That's only contra entry because that income gets recorded here.
Sure. I understood. Got it. My last question is in terms of incremental disbursements, what is the run rate, you know, currently and what sort of loan growth incrementally are we looking at for the rest of the financial year?
If you look at disbursement, then last quarter, gold loan we did about INR 5,000 crore disbursement, but there were quite a few prepayments also. The loan growth book was just about 2%-3%. I think this quarter will accelerate. In case of home loan, we did disbursement of about INR 1,500-1,600 crore.
Which I think will grow significantly in this quarter again. The peak in the last year was about close to INR 1,800 crores. I think we should be near peak across that. Business loan now is completely mostly digital now, and there also disbursements were INR 500-odd crores in last quarter. That should also grow well. Microfinance also disbursements in the Q1 had you know sort of hit a trough and but now they recovered from almost around you know INR 236 crores to INR 1,070, so four times growth in disbursement in microfinance the last quarter, and that momentum seems to be continuing.
Can we see like a 10%-12% growth for the residual part of the year?
Yeah, easily.
I think the loan growth or the loan books will grow by that much, yeah, in next six months for sure.
Okay. Thank you, sir. Best of luck.
Thank you. The next question is from the line of Saptarshee Chatterjee from Centrum Portfolio Management. Please go ahead.
Yeah, sir. Thank you for the opportunity. Sir, my question is on the business loans. If I see the stage two assets, it has come around INR 1,000 crore. Last quarter it was around INR 1,500 crore, and provision coverage is close to around 9%. Just wanted to understand how comfortable we are on this business loans part. Secondly, on overall asset quality, is it like the peaks have been there and now going forward, slippages are going to come down? Just wanted to know your views.
In business loans, stage two has gone up marginally. It's INR 1,152 crore now compared to INR 1,059 crore last quarter. Hello?
Yes. Yeah, and the PCR on that book, how comfortable we are?
The provision coverage is quite comfortable. I think we have been providing aggressively for the likely losses or whatever. If you see our restructuring ECL movement, then we have taken a significant provision this quarter also. Actually, you see business loans are impacted by the economic activity. What had happened is, the first quarter, if you know, I mean, you remember that April, May was almost complete shutdown. Then those people, after two months, they get into stage two, stage three, but things are now recovering. As we speak, I think we should see a very strong recovery next six months in the business loan segment.
Okay, great. In the gold loan segment, we see that the ticket size I think has increased around INR 50 thousand-INR 55 thousand to close to around INR 70 thousand.
50, 55 thousand are last year, but last quarter was around 65 thousand. With the gold prices going up, ticket size has increased across the industry. Also yield has fallen a little bit because we are also now focusing on a little larger values of, you know, customer from a higher income bracket.
Understood.
When you say 59,000, that is last year's average. If you see last quarter, it was close to 65. It's gone up about 65, 67, so it's gone up marginally from there.
Incrementally, generally also we are focusing even on a larger ticket size client for gold loans, right?
See, as the gold prices in the last two years have gone up, so for the same gold probably get little more money also. Incrementally you're right that as we become the new branches, and the customer segment is also improving little bit.
Sure. Any guidance you want to put for next 2-3 years on the credit cost side, sir?
No, it's difficult to put any guidance on that because we under the circumstances, if you see the economy improves, then your credit cost and loan loss provisions should go down. You know, the similar thing what we spoke about, say, in the first quarter, but nobody in Jan, Feb, but nobody knew at that point in time that in April, May, wave two will be so brutal and so quick. So that again impacted our first quarter performance and, you know, the GNPA trending and that. Unless there's something unforeseen, like, you know, COVID or anything else, things should improve significantly.
Sure. Thank you so much, and congratulations on good set of numbers. Thank you.
Thank you.
Thank you. Participant, you may press star and one to ask a question. The next question is from the line of Chirag Sureka from DSP Mutual Fund. Please go ahead.
Hi, good afternoon, sir. This is Vivek Ramakrishnan. Congratulations on a solid performance. I was looking at the collection efficiency numbers, and I noticed that microfinance has in fact actually done really well, despite the fact that across the industry it doesn't seem to have done well. I just wanted to know, is there any segment which has performed very well for you which is contrary to the industry? Just completing the question, in terms of SME business loans, even there you've shown a strong pickup in collection efficiency and you were optimistic.
I just wanted to know, given the, you know, state where things have, there are some businesses that have completely shut down, are your customers in good shape and do you expect this 94% to go up in the next quarter?
No, they're good questions. Collection efficiency basically includes the billing for the month and the overdue amount as well. Supposing at last quarter end, we had a 30-day overdue, 60-day overdue will also become part of the money to be collected. The money collected will be accounted as that, and therefore you see collection efficiency being higher. Even then, you know, the GNPA are trending up a little bit. In microfinance, I just want to clarify one thing which is very important. We restructured significant amount of our portfolio. Almost 7%-8% of our microfinance portfolio is restructured, and the customers have been given more time.
Now, this is a call that one has to take that it is not to say GNPA primarily, but more to make sure that, these are small customers. Imagine microfinance customers are taking 25,000 INR loans and they are depending on small activities for, you know, for on their livelihood. When in April, May things are completely shut down, obviously, they will be impacted. Now, you can declare them GNPA, their credit score goes down, they'll find it difficult to borrow again and you'll also have problem. We took a conscious call and, you know, if you notice last quarter we restructured INR 200 crore of microfinance portfolio and this quarter we again restructured INR 176 crore of portfolio.
Unlike say large ticket or other restructuring, here the customers are given 3-6 months moratorium and then we expect them to restart paying from next quarter. Microfinance industry across has been impacted, but the only thing is that whether you give restructuring and more time to customers or not is a conscious call that every company can take differently.
Okay, sir. One follow-up question. Three to six months you don't even collect interest, is it? Or do you collect any interest or anything? 'Cause people will be going to the collection centers and so on, right? To keep in touch with the customer.
Interest is collected. Interest is capitalized. Interest was not collected. That is collected after the moratorium.
Okay, fine.
You know, if the customer's income generating activity is completely disrupted, what happened in April, May, then we don't expect them to have any cash flow to pay their existing. We have restructured and given them more time.
Absolutely. You're just saying with the opening up they'll bounce back. That's pretty much what you're saying, right?
What happens is that the installments remain the same. They're given more time. What we think is that, and this has been our experience last year also. See, last year after the COVID wave one in August, September when things became normal, most of these people, you know, they basically came back and, you know, they started becoming good customers. There's no point. What we thought is that, rather than declaring them GNPA, we'll do a restructuring. Our restructuring microfinance is relatively significant.
Okay, fair enough, sir. Thank you very much and good luck.
Thank you.
Thank you. The next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead.
Yeah. Thank you very much, sir, for the opportunity.
Deepak, may I request you to speak a little louder, please?
Yes. No. It's better now?
Thank you. Yeah.
Yeah. Okay. Thank you very much, sir, for the opportunity. I was just reading about Aavas Financiers now, on their co-lending pact to more than double its loan book in next 3 years to about INR 1 lakh crore. Can you throw some more light on it and what sort of metrics we are looking at maybe in 3 years in terms of ROA and credit cost? That would be quite helpful.
I think three years time doubling is about, you know, 25% compounded growth broadly. That is what we are looking at. In terms of ROA, I think we'll maintain our current levels and our ROE can improve slightly. You know, as the competition becomes intense, there can be slight pressure on the yield. There can be upward pressure on cost of fund also. We should be able to make it up by better cost to income ratio as we stabilize our expansion plan and those new branches become productive. There are so many divergent factors which will be at play, but broadly speaking, I think we should be able to maintain and slightly improve our return ratios.
Okay. You said maintain or maybe 2.5%-3% is the range we are looking at in terms of ROA?
I think return on assets should be around 2.5%. I mean it's been 2.7% in the first half, but broadly say around 2.5 or 2 to 2.7 is a good number to look at. Now we-
Even at a scale of maybe.
Sorry?
No. Sorry, sir. Please continue, sir.
Return on equity of above 20%. That is what our targets are internally.
Even at a scale of maybe INR 90,000 crore kind of AUM, we are still looking at ROA maybe 2.5%-2.7% range, right?
Yeah. Because our product mix will remain similar, and so our ROA should remain at those level or may improve a little bit. As I said that it's very difficult to make any forward-looking statement because there are so many divergent forces at play.
Absolutely. That's quite fair. Sir, secondly, you did mention that in the second half 10%-12% loan book growth is one can envisage. That effectively will mean that this year our AUM will grow by only 10%-11%, right?
Our AUM will grow by 10%-12% this year. Yeah, you're right. Broadly maybe in the next six months because the first half
Yeah.
There hasn't been any growth as we have. You know, maybe we should look at our core segment. If you really look at last five years, our total loan AUM has grown at a CAGR of 16%. But the core segment or the products that we really want to grow and we are focused on for the future, that CAGR has been 22%. Next six months I think will be 10%-12% AUM growth is a good number to look at.
Understood. Sir, just the last query on the credit cost. You did mention in the last quarter conference call that the last quarter credit cost would be a good benchmark like 2.1% for the rest of the year. Do we still maintain that?
You know, actually this quarter again we are a little bit hit by the rollover of the lockdown in the first quarter. Hopefully, we should be able to maintain that and our endeavor will be to improve it and, you know, reduce the credit cost. Right now, if you see our provisions to loan book is around, you know, 2.5% in second quarter.
Mm-hmm.
which was, you know, around 2.2% in the
First.
No, sorry. 2.2% half full, if you really look at it.
Yeah.
I think we should be able to maintain in that range or, you know, we should be able to improve actually. Our internal target to bring it down further. Historically, before COVID, the credit cost for 10 years would have averaged around 1% or maybe little less than that.
Mm-hmm.
I think in a steady state scenario, once, you know, out of everything, the impact of moratorium restructuring, dies off, then we should be back to those levels. It might take another 2, 3 quarters at least.
Steady state, 1%, right? In 2-3 quarters.
Yeah. To reach steady state, it will still be, you know, some time away.
Yeah. Understood. That's it from my side. All the very best, sir. Thank you very much.
Thank you.
Thank you. Participant, you may press star and one to ask a question. The next question is from the line of Navneet Bhaiya, an individual investor. Please go ahead.
Hi, sir. Congratulations for your results. I have two, three questions. First one is on slide 22, there's a provision release of INR 173 crore. I just wanted to understand how is this accounted for. Is it included in your operating profits?
Included in, sorry?
In your operating profits, sir.
No. Basically, it gets adjusted. If there's a provision and there's a write-off or the recovery will get into the, not the profit, but you know, whatever you call it, but it can be a write-off and, so write-off obviously will not get into the profit. That basically includes write-off as well as recovery.
Sorry.
To the profit. This is a cycle actually. You keep providing and some part of that is recovered, more than what you provided for.
Sir, just to understand it correctly, in your P&L, you've provided for INR 210 crores.
That's right.
In slide 22, you've written, INR 210 crores is the provision and release is INR 173 crores. The net increase is INR 37 crores. I just wanted to understand that.
Many, many assets which, you know, reach a very high level of provision, then it's better to, you know, we write them off, but our right to recovery continues. That is how the book is cleaned up.
I absolutely understand that. When you recover it's good, but how is it treated in your PNL? Is your profit-
There it gets a INR 210 crore hit. The 173 adjustment gets into balance sheet actually. The provision carried forward is INR 1,347 crore.
Okay. The INR 173 crore is not included in your PBT, if I understood correctly.
No, it's not included in PBT.
Perfect. That's my question. Second, sir, on your cost to income ratio, with your increased focus on digitization and, you know, your investments over there, how do you see your cost to income ratio, which is at 39% right now trending over, say, 20%? What's your aim to take it into?
You know, we have set up 350 branches in the last six months and maybe 230 branches in last quarter alone, and added almost, you know, 4,000 people in six months. Now we have further branch expansion plan. It's a slowdown in terms of quarter-over-quarter, but and the earlier branches become productive. If you see then, you know, the longer term we should be able to be around 33%-35% as cost income ratio in a steady state basis.
With increased digitization, let's say over the next 3-4 years, the lower end of thirties is what you would aim to get to.
Absolutely. You know, once we stop the branch expansion and the branches start becoming productive, then also cost-income ratio goes down.
Okay. As long as you keep seeing growth, you'll always want to keep expanding your branches, right? That would be a continuous cycle.
Yeah. The pace of growth has been particularly faster in last quarter, you know, because there are a lot of things in pipeline, so we just completed everything. Yes, but some bit of expansion will continue, but it's just relative pace vis-à-vis organic growth.
understand, sir. Sir, my last question is on your GNPA ratios. While you know, your collections and everything has improved across your various verticals quite drastically, but your GNPA ratios have moved up over last quarter, overall as well as within the various provisions. Just wanted to understand why would that happen?
As I said that, okay, the collection efficiency basically amount collected will also include the 30-day, 60-day and all the overdues.
Right.
It has inched up a little bit, maybe a more increase in microfinance where it's gone up from 1.8%-2.4%. As we discussed that microfinance has been one industry which has been more seriously impacted by this, followed by business loans. They're also the unsecured portion.
Mm-hmm.
Slight inching up has happened for two, three reasons. One is that last year's restructured cases or moratorium cases would go out of moratorium last quarter. Of course, the collection will happen there also, but there can be slight few basis points decrease because of that. The second wave impact which hits you after 90 days because if you know people who got disrupted in April, May, they're shut down.
Right.
They start missing their installment and three months later that becomes GNPA. These are the factors.
Understood. If nothing happens over the next three, four, five months, this should again stabilize or maybe even reduce over the next couple of quarters, right? If I understood correctly.
Exactly. That's how it should happen. There's nothing, no surprises in terms of COVID or anything else or disruption in the economy, then obviously this should come down.
Understand, sir. Thank you so much and all the best.
A reminder to all the participants, you may press star and one to ask questions. The next question is from the line of Mudita from Kotak Asset Management. Please go ahead.
Hi, sir. Thanks for this opportunity. Just one question. What would be the quantum of business that would we expect from these branches, and what would be the break-even time for this branch?
Typically we break even branches. You know, I think a good break-even will be 6-9 months or maybe up to 12 months. The gold loan branches scale up over a period of time. You know, a mature branch may have INR 7 crore, INR 8 crore, INR 10 crore of principal outstanding. Even if they reach about, say, around INR 2 crore or so, which is in less than a year, then at least on the unit level they start breaking even. I mean, at the unit level without allocating the HO costs. You know, our endeavor is to make them break even in less than a year's time, but 9-12 months is what we can take as a good benchmark for their break-even.
Okay, sir. Thank you. That's it from my side, sir.
Thank you.
Thank you.
Next.
Next question is from the line of Amit from 2Point2 Capital Advisors. Please go ahead.
Yeah. On the new branches, you've added almost 300+ branches in the first half. Going forward, what's the plan on branch expansion?
You know, we, as we said about couple of quarters ago in March, we got approval from RBI. Our plan is to set up totally 700 new branches, and I think almost half of it we have done, 350, 360 we have done. Maybe next 2, 3 quarters we'll set up another 300-400 branches, 350 branches or whatever.
Of these 350 branches that you have set up already, how many of them are also gold loan branches and how many are microfinance-focused branches?
Around 250 would be gold loan and 100 branches for microfinance.
If you look at your gold loan growth, at least in the last few quarters, while the branch expansion has been fairly strong, the gold loan growth has not been that strong. In fact, the per branch gold loan AUM has been coming down. What's the thought on where this number should stabilize?
First quarter was disrupted. In the last quarter we saw that, you know, many people were waiting for that, so there are prepayments and also the pickup has been. The new branches will start delivering over a period of time. Last quarter, I think there were some auctions of the old cases as well as some of the prepayment of some of the loans. I think the new branch contribution we have not seen yet, but as we go along, that will happen over a period of time. I mean, it's a slow process. It'll happen over a period of time, quarter to quarter.
Okay.
Last quarter I think we grew gold loan by 3%. That also despite auctions and prepayment, which are all pending for a long time. You know, customers were waiting, and they got it done. Hopefully, you know, that growth that we talked about, which is about 10%-12% over 6 months, is what we should look at.
What are the quantum of auctions that have happened in Q2?
They happen at local level, actually at district level. I won't have the number right now, but we can just find it out for you what it is. Around INR 500 crores or so.
INR 500 crores. Okay. Thank you very much.
Thank you. The next question is from the line of Tejas Mehta from Kotak Capital. Please go ahead.
Hello?
Yeah, go ahead.
Yeah, hi. Hi, Nirmal. Thanks so much. Thanks for taking my question. A few questions. Number one, you raised a lot of liquidity in the second quarter, which is lying on the balance sheet. What will be, you know, what's the reason for raising so much liquidity? Is it to make sure that the balance sheet remains pretty liquid and solvent, or are you seeing a lot of growth coming in the second half?
Actually last quarter, see, what has happened is that in last two, three years everybody was liquidity starved and people were getting. Last quarter actually many applications were pending with banks. They started clearing it and you don't want to say no. One. Secondly, we thought that we set up so many new branches and, we, you know, even if there's a little bit of negative carry and a cost you have to pay, you should feel comfortable even if slight accident in the economy or system, you shouldn't worry about it. That is how we have boosted our liquidity reserve.
Got it. What's the cost at which the liquidity has come? What is the cost of liquidity?
8.5, 9% depending on the tenure.
Okay. It's more or less similar to the cost.
Again, what we get is about 2.5-3% on bank fixed deposit or liquid fund. It's almost about 5-6% negative carry on annual basis on the excess liquidity that we have.
Got it.
What it does is that it gives you peace of mind in the sense that you want to expand. You don't want to hold back branches that, "No, no, there's a liquidity tight, so go slow," kind of a thing. You want to make sure that, you know, for next 6 months you shouldn't worry about growth, you know. That is what the thought was.
Right. Sir, on gold loans, what's the kind of tonnage that we hold against the loans that we have on the books?
Sorry, what is the kind of?
The tonnage of the gold.
Tonnage of gold, I'll give you the tonnage of gold actually. One second. 42 tons of gold is there in our vault.
Got it. The other question, you know, it's quite intriguing that, you know, your gold loan book is very well spread between south, north and west versus the traditional gold loan players, which are largely, you know, south-focused, more or less. What sort of pockets are you identifying in these new geographies that is helping us to spread our wings so fast in these new geographies, as in the behavior of the customer or anything that you would like to highlight here?
Relatively we are under-penetrated in some. Secondly, we do a lot of research and, you know, there's a data analytics team and a fintech that also works with us on identifying the areas which bottom-up from the district to small towns to villages, based on. We do a lot of modeling on that based on our historical experience, the current loan book of various products, whatever data we get and the pattern of growth over next two to three years. I think it's a process. The team works on identifying locations for growth.
Okay. All right. One more question-
That's why we can target to break even quicker. If you break even 6-12 months, that's really, to my mind, a very good achievement, you know?
No. Yeah, because see operationally, gold is a very tough business generally to do. You need a vault in almost every branch that you're operating. Then ability of separating the true gold from fake jewelry, or many times we have heard of robberies, stuff like that. There are a lot of challenges in this business and, you know, spreading into new geographies which may not be as tried and tested can have business challenges later down the line. You know, just trying to understand what sort of risk management in place do we have so that we don't have a very major accident.
No. We have a lot of internal systems for security. Many a times most of the branches that we are newly setting up are also in the vicinity of branches that we have. Because we already are spread all over the country, so we have some understanding of geographical areas. We are growing based on that knowledge and understanding. We are not lending into any geography which is completely alien to us.
Right. Okay. Got it. Just a last question on your strategy to reach INR 1 lakh crores, right? Is it going to be, like a bank relationship driven co-lending? What kind of sell downs are you looking to do? How will you manage capital to grow so fast over the next three years? If you can just throw some light on that.
I think what you are saying is right, that the bank co-lending model will be one of the key drivers for our growth.
Right.
We have, you know, as we said, the branches are core to our strategy because the businesses that we do, they require physical presence and particularly the storage of gold. Banks are also looking for retail assets, particularly those that are backed by high quality collateral like home loan or gold loans or those are also priority sector and meet the social objectives. We are working on that strategy and I think our growth will be driven by that.
Got it. Any banks I have said you would like to highlight, for this strategy?
No. I think we've tied up with many banks and Central Bank of India, ICICI Bank, Standard Chartered, even DCB and, you know, all these new banks that are starting, Punjab National Bank, you know, they're looking very exciting.
Basically you originate and then just transfer the loan to the banks and you basically get a cut over the period of the loan. Is exactly the strategy?
Yeah, this is the strategy, but the way it works is that you sit down with the bank, go through their credit policies, and then originate the loans that are in line with their credit policies because they're going to have 80% on their books. Then you set up the workflows, then you set up the processes, you check them, then you integrate the system, then you test it, pilot testing, and then you scale up over a period of time.
Right. Today we have about 35% of our loans as securitized and assignment. When you hit a number of INR 90,000 crore-INR 1,00,000 crore, what sort of number are we looking at, given that co-lending will be a key for you?
Maybe 50% of total book.
Okay.
More or less.
Got it. Thanks so much. I'm done. Thank you.
Next question is from the line of Tejas Mehta from Omkara Capital. Please go ahead.
Yeah. Hi, Nirmal. Just a couple of more questions. One is on the residual book of commercial real estate that we have. What's the strategy over there now? Are we looking to grow that book again or we will continue to run it down?
No, we do want to grow the book. What happens with CRE book? No, there are very clear two types of loans that happen. One is loans that banks do, which is construction finance, where the money is given only for the purpose of construction and not any other purpose, like, say, land purchase or against the collateral of land for takeout for other projects or whatever. There are not many NBFCs including us that are doing it. At some point in time we have stopped completely. But having said that, when you see the portfolio, there are some projects which are synergistic or strategically good for our home loan business. Monu, you are live?
I am there.
Yeah. Maybe you talk about that strategy, that how do we look at CRE portfolio growing or, from here, what kind of loans you would like to take.
Yeah, here on, we would, as you know, in home loans we are in the affordable category. We would like to do construction, pure-play construction finance, where all the approvals are in place, they are registered, which will complement our retail strategy.
Right.
These would be typical, where you can expect 70%-80% inventory would have, inventory of below, say, INR 75 lakh. This has a great potential to grow, and that will supplement our retail home loan growth as well. Those are the kind of loans we would like to do going forward.
Essentially the book will remain small because large ticket loans will not be done, and obviously this book will become relatively much less riskier because when you are financing construction affordable, you really don't run too much of a project-related risk. As a percentage, I think our endeavor will be to bring it down to less than 5%.
Got it. Sir, some more light on the home-
Absolutely.
Yeah. Some more light on the home loan book, as in, can you just throw some light on the profile of the customers or the salaried versus self-employed. You have given that breakup of self-employed of 36%-39%, salaried of 61%. Can we look at your book as in more closer to some competitors, like, say, Can Fin Homes?
Maybe, I think his question is that.
Yeah.
Out of salaried, how many are informal salaried and formal salaried or what kind of organization? Maybe you want to talk about it.
Yeah, sure. As you can see, our average ticket size is about INR 17-18 lakhs. Yes, it is. You're very right when you say it's a bit akin to something like a Can Fin Homes kind of a portfolio. It's very similar to that. These would be the segment of people where people are buying properties typically ranging from, say, INR 15 lakhs to anything about INR 35-40 lakhs. The people from the salaried side would be people who would be working in the blue collar jobs or the ones who are working in the retail setups, which are there and where the fair amount of our portfolio has a documented income coming because that's how the whole economy has grown.
Yes, this is very much akin to a Canara kind of a profile. We also stress a lot on the CLSS subsidy. So far, we've been able to give subsidy to nearly 50,000 people worth INR 1,200 crores. These are people who are buying first time homes, and they are also fairly eligible for the subsidy as well. That's the kind of a segment we operate in home loans. You would typically be operating on the outskirts of large cities. Is it
Absolutely.
That's the-
Yes.
Okay.
Very true.
And, and-
Very true.
Got it. If you can take me through the ROA break-up for home loan book, if that is possible.
It may be off the cuff about there, but yes, as a home loan is concerned, the ROA typically we are able to garner somewhere around 1.5%, around kind of a 1.5%-1.7% kind of an ROA for a standalone home loan book.
The leverage on the book would be about 12 times or 11, 12 times? The assets to equity leverage will be about 11-12 times.
No.
Is it like-
We are at about 6.5 or 6.
We also assign. You know,
We have fair-
ROE multiplication will be not only from leverage but also from the securitization assigned assets. Oh, yes. Correct.
30%-32% is assigned book.
30%-32% is assigned book. Okay.
Yeah.
The ROE would be what range then in that scenario?
ROE is about 20% in home loan also separately.
Oh, okay.
Yeah.
You maintain a ROE profile similar in most of the segments, potentially.
Yeah. Yeah.
Got it.
Microfinance in last two quarters is very badly impacted, but other than that, we maintain that our target is to have ROE of 20%+.
On one more question on the asset quality side, you mentioned that, you know, as in the presentation mentions, INR 770 crore is gross NPA, and then another about INR 1,290 crore is your restructured book. If you add the two, it's about close to 7% of the loans which are basically stressed. While you have mentioned that you have made almost a full provision on the entire book. What sort of recovery do you see in this book, or do you see more slippage, chances of more slippage in the next second half?
I think all indications are that recovery should be better than the slippages. And as against INR 768 crore of GNPA, provision is INR 1,347 crore. The restructured book is in less than 4%. I think we are fairly covered and the recovery is now. Till now we've been passing through a long period when things have been bad or things have been uncertain and volatile. Hopefully, next few quarters will be more stable and recovery led. I think our recovery should be very strong compared to the slippages.
Yeah, I know. My concern is more to do with, you know, something like a gold loan book or a microfinance book where usually the recovery is delayed by a couple of quarters, then it's more or less a write-off situation for these loans generally. As in even if you give a moratorium and everything, it still becomes very tedious and tough.
If you go by last year's experience when things recovered, these are not the case. Maybe there are exceptional cases. Under normal circumstances, people have not paid for a quarter, obviously, then they'll be difficult to recover. When people have not paid because of disruption caused by COVID, which is very clear and, you know, visible, then obviously things are a little different. In case of gold loans, what happens is that you have a gold, so you know as you can auction and recover the money. Your loss given default is almost negligible or zero.
How much gold would you have sold in the last quarter and the first half?
We said it's about INR 500 crore.
You sold about INR 500 crore. Okay.
Because they were pent-up and pending for a long time. I think last quarter was about INR 500 crore.
Got it. Great. I am done then. Thank you a lot for this.
Thank you very much. A reminder to all the participants, you may press star and one to ask a question. As there are no further questions, I will now hand the conference over to the management for closing comments.
Thank you all the participants. I also take this opportunity to wish all of you, your families and loved ones a very, very happy Diwali. A safe Diwali and a very prosperous new year ahead. Thank you so much. If there are any more questions or queries, you can always be in touch with our investor relations or our finance, our CFO's department. Thank you so much, and have a good day.
Thank you very much. On behalf of IIFL Finance Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.