Ladies and gentlemen, good day and welcome to IIFL Finance Limited Q4 FY 2021 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to the management. Rajesh and over to you.
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. Also on this call are Mr. Monu Ratra, IIFL Home Finance CEO, and Mr. Venkatesh N., Managing Director, Samasta Microfinance. I'll hand over to our Chairman to comment on the macro environment and the group's strategy and plans. Thank you. Handing over to Mr. Jain.
Thank you, Rajesh. Good afternoon, friends. We are really living through hard times with mass social and health crisis. The 2nd wave of COVID has been really cruel for India. All of us have some loved ones affected by it. Going by the pandemic history, the steeper the rise, the steeper the fall of virus spread should be. We hope and pray that with not much damage, this passes us by quickly and we get back to our normal lives. We are doing everything possible for our employees as they have dealt with this challenge valiantly. Our message to our employees is also clear, to have compassion for the customers as well. Be empathetic, understanding, flexible in handling customers that are genuinely impacted.
In our previous call, I exuded confidence about the V-shaped recovery, and I do hope that this wave is a blip and things will get better soon. One has to be cautious in several aspects about the impact of pandemic. At IIFL, fortunately, our product mix is dominated by home loan and gold loan, and both these are fully backed by safe collateral. This has also helped us maintain superior asset quality, and our overall GNPA and NPAs are below 2% and 1% respectively. At the same time, as lockdowns affect livelihood and income in our portfolio, microfinance and unsecured business loans are most affected segments. Considering the headwinds in near future, we have aggressively taken write-offs and provisions, particularly in unsecured portfolio of microfinance and business loans. Our business loans, 2/3 of business loans are secured and about 1/3 is unsecured.
Therefore, during this quarter also, we have loan losses and provisions which are significantly higher than the long-term norms that we had till last year. We started the process of transferring real estate loans to an alternate investment fund so that we can refocus our business model solely on retail loans. The COVID affected the teams working on it during the last two months and caused some delay. But now the process is on track and SSG Singapore Fund has signed the contribution agreement. The 1st tranche, which will be about 1/3 of the proposed portfolio that is to be transferred, will move to the fund in next few days, maybe in a week. The remaining assets will move in a few weeks thereafter.
Coming to financial performance, I'm happy to report that our profit before tax crossed the milestone of INR 1,000 crores, and the quarter post-tax profit was INR 248 crores, which generates an annualized ROE of over 30%. Our cost-income ratio has fallen steeply from 52% last year to 35% this year, with higher volumes as well as higher margins and cost control. Our capital adequacy for listed NBFC is now over 35%, which leaves adequate margin for future growth. Our loan AUM is a little short of INR 45,000 crores, but grew 18% last year against all odds of lockdown and liquidity challenges. Our strategy to partner with banks as well as fintech is on track and yielding expected results. We continue to invest in technology and people, and we launched 1st of its kind app, which is called MyMoney, for paperless instant digital business loans with proprietary technology .
During the last quarter, we expanded our branch network as the things were looking much better in terms of the likely impact of COVID. We added 135 branches and hired or added about 1,800 people to our manpower. We'll wait for some time and once things get normalized, probably we'll expand our branch network further. To sum up, we look at the environment with cautious optimism. Cautious because we don't know when will this pandemic end, and optimistic because we know it will end sometime soon. These times call for extraordinary dynamism. If things get more challenging, we should be adequately cushioned. If pandemic eases and credit demand is strong, we should be prepared to seize the opportunity. Thank you. I hand over to Rajesh to give you business and financial updates.
Thank you, Mr. Jain. I'll just take you all through our business and financial updates in brief. During the quarter, IIFL Finance's total comprehensive income was INR 270 crores, which was up 17% on a quarter-on-quarter basis and up 392% on a year-on-year basis. We recorded our highest ever pre-provision operating profit of INR 650 crores during the quarter, which was up 6% on a quarter basis and 85% up on a year-on-year basis, driven by higher volumes, better margins and cost optimization. Our loan AUM at INR 44,688 crores was 6% higher than the previous quarter and 18% higher than the same period last year. Our core segments in fact grew faster at 21% year-on-year to reach INR 39,790 crores. Our disbursement for all core products except business loans continue to surpass pre-COVID levels. Retail loans, including consumer loans and small business finance, constitute 90% of our loan book.
A strong characteristic of our loan book is a large proportion of loans that are compliant with RBI's priority sector lending norms, PSL. In aggregate, nearly 36% of our loans are PSL compliant. Gold loans are not deemed to be PSL compliant. 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 our capital optimizing strategy, 33% of our AUM is assigned to securitize as of March 2021, up from 31% as of March 2020. Our cost to income at 35% was significantly lower than 52% of FY 2020. In fact, for quarter four, our cost to income was 33%. Annualized return on assets based on quarter four results is 2.8%, and return on equity was 20.7%.
Our Tier 1 capital adequacy stands at 17.5% against the minimum requirement of 10%, and total capital adequacy at 25.4% against the statutory requirement of 15%. Our average cost of borrowings declined 13% on a quarter-on-quarter basis and 56 basis points on a year-on-year basis at 8.8%. Consolidated GNPA and NNPA at slightly below 2% and 0.9% of loans respectively, is much lower compared to 2.9% and 1.5% respectively in quarter three. The collection efficiency for most products continues to be on a rising trend. Our provision coverage, including standard assets provision under India's norms on Stage 3 assets, was 186% as of March 2021. Moving on to liquidity updates. During the quarter, we raised INR 3,889 crores through term loans and refinance from banks, including debentures. In addition, loans of INR 3,189 crores were securitized or assigned during the quarter.
Our public issue of unsecured subordinated debt in March 2021 was highly successful as we raised INR 670 crore, more than 6x the base issue size. Cash and cash equivalents and committed credit lines from banks and institutions at INR 5,275 crore were available as on March 31, 2021. We continue to have nil exposure to commercial paper. We have a positive ALM in all buckets, whereby inflows cover or exceed expected outflows. During March and April 2021, we bought back $9 million nominal value of our MTN issue, which we had done last year, through the open market. This is as per the maximum permissible amount that can be bought back currently under RBI regulations. A brief update on our digital focus. 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 have completely digitized our business loans journey right from customer onboarding to underwriting, disbursements, and collections. We are collaborating with the Fintech ecosystem to further enhance our platform and customer experience. We have recently launched MyMoney app for paperless, instant, unsecured business loans. We have enabled digital top-up for our high-quality secured MSME loan customers, wherein the entire journey is paperless, right from communication for accepting sanction letter and e-agreement is sent to eligible customers via SMS, and the disbursement is automatic with no manual intervention. Our JhatPat home loan app is a pan-India product for instant home loans, helps all the stakeholders in the housing finance industry, be the individual home borrowers, developers, and the company. They get a loan in an instant manner. Our home loan disbursed by JhatPat Loans has gained significant traction.
Out of the total home loan disbursed in the month of March, 99% was sourced through JhatPat Loans. The corresponding percentage in March 2020 was 54%. In addition to digital top-up and renewal of gold loan launched earlier, during the quarter, we have launched the facility for customers to avail gold loans directly from their home office. The loan officer visits the applicant's home or office, and the entire process is tablet-based, from onboarding, sanction to disbursement. IIFL Loans app is being increasingly used for various transactions by customers and has been especially beneficial during COVID lockdown times, giving customers ease and convenience of access. This app has been downloaded more than 6 million times till now, and we have more than 2.5 lakh active users on the app for the month of March 2021. With this, we bring an end to the update.
We can now open the floor for questions, please.
Thank you very much. We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The 1st question is from the line of Prashanth Sridhar from SBI Mutual Fund. Please go ahead.
Yeah. Good afternoon, sir. Hope I'm audible.
Yeah, we can hear you.
Yes, sir. We can hear you.
Hello?
Yes. Go ahead.
Sir, if you could just tell us, as of now, how much of one-time restructuring and the DCCO extension is done?
One-time restructuring, we are done with about INR 500 crores, and DCCO we would have done, we have said about INR 2,400 crores.
Okay. How much of this DCCO would move into the real estate fund once that comes in?
I think because when I say 2,400, is almost half the real estate book and the DCCO has been done only in real estate portfolio. Most of it will move to the fund.
Sure. Thanks. The 2nd question was, sir, when we look at disbursements, especially in the MFI and business loan space, over the last two quarters, how much would have been disbursed to an existing customer or to a customer under some sort of stress, maybe zero plus, if that's a metric?
In business loans, the existing customers would have got under the government scheme. What is the amount there? INR 245 crores. In case of microfinance, we don't have the data, but a good number of customers will get a top-up loan depending on their track record.
Okay. What would be the filters we apply there, sir, before we do a top-up loan?
Yeah. A good question. Basically, we look at the loans to be current. It shouldn't be an NPA, we look at the track record of the customer with us, how long the customer has been and what has been the overall track record. In case of business loans, I mean, we are more than restricted only to who are eligible for this ECLGS scheme of the government and focus on that.
Sure. Thank you so much, sir. I'll come back in the queue.
No, your concern is valid actually, in terms of how the because there's always the fear of evergreening of the book, and we are quite cautious about it.
Yeah. Sure.
Thank you. The next question is from the line of Rajeev Malhotra from Skanda Investments. Please go ahead.
Hi. Good afternoon, everybody. I have a macro kind of question. In a time when a lot of people would be looking from corporates, especially in the finance of acquiring or setting up banking, is there any long-term plan of IIFL for that? Long or short-term plan?
Yes. Banking is something that we are very wary of. At this point in time, there's nothing on anvil. What we plan to do is, just set up a team internally and maybe take help of some consultant and figure out that what is the feasibility of becoming a bank and what is the cost of it also, because initially you'll be hit by CRR, SLR, and priority sector immediately on day one. What does it mean for all the stakeholders? Maybe next couple of months, we do propose to undertake an internal study with the help of some consultants also if required.
Okay. That sounds good. Thank you, sir.
Thank you. The next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead.
Hello.
Yeah.
Yeah. Sir, just wanted to understand, now given the 2nd wave and uncertainty, is there any thought process you can put on the credit cost that we might want to kind of in FY 2022?
See, our unsecured portfolio of microfinance and business loans put together is just about 15% of our total book. Credit cost actually, last year was actually a quite exceptional year when our credit cost in terms of loan losses and provision has been significantly higher than the historical 10 years if you see before that. Current year, if you really look at it may be as bad as last year or better now, because given the fact that COVID is still there and nobody has a clue that what 2nd wave, 3rd wave and how it could pan out ultimately.
The worst-case scenario, in my opinion, will be what was there last year, but most likely probably will be better off and better level the credit cost and provisions as compared to last year.
Yeah. Understood. In terms of growth-
Even if you have organic growth as much as last year, which was exceptionally high in terms of the provisions, if you look at our balance sheet or our profit margin for 10 years. Also I think we are fairly good. I mean, in terms of whatever profitability we have, we can maintain the normal growth there.
Okay. Normal growth, like 20% is what we kind of have been doing, right?
Sorry. Can you repeat?
In terms of growth, like 18%-20% growth is what we have been doing. Is that what we want to target this year as well?
I think that's a good target to have. Last year also we grew 18%, and last five years also our compounded average is in the same range. 18%-20% is a good volume growth target.
Okay. Thank you.
Thank you.
The next question is from the line of Chetan Cholera from Pragya Equities Private Limited. Please go ahead.
Yeah. Hi. Congratulations for good set of numbers. Can you hear me?
Thank you.
Yeah. I just wanted to understand that CRE asset transfer. What will be the impact on the balance sheet as well as P&L? Is there any?
Yeah. It is good that you asked this question. The assets which are transferred will basically release the cash flow and capital to that extent, but it is 1/3 of the book. 1/3 of the portfolio, which is there right now will be classified as investment. At least 1/3 of the portfolio. The way it happens is that we have got all these debentures, which we sell it to a fund buys it, and fund gives you the units in return, and those who are buying units, they give cash. Basically, what we expect is that about 2/3 of money we should get back in our hand, and the remaining 1/3 that remains should basically attract the capital adequacy norms of 100%. At least whatever portfolio we transfer, 2/3 of that will get released in terms of capital and in terms of cash flow also.
It can be a little less than 2/3 also, because 1/3 is the minimum that we need to keep. But at the same time, what it does is that there are a couple of things that happen which are also very interesting to understand how this works. What is happening is when they are on our books, and supposing one quarterly payment is delayed, it becomes NPA. The project may require some last-mile funding because what cash flow they've forecast and the actual bookings are less, but still you think project is good. It really becomes difficult for an NBFC to support something which will become an NPA.
In funds, because you don't have a quarterly payment structure or whatever, and we are providing for liquidity in the fund, the last-mile completion will be fast and none of the projects will get stuck for last-mile cash. Our plan broadly is that INR 3,000 crore portfolio will transfer and INR 600 crore will be kept as cash out of the total INR 3,600 crore. The portfolio that we are transferring should get executed very fast and should generate the cash flow so that it pays the external as well as us. Now, our investment will be valued on the basis of fair value by maybe rating agencies. Depending on the cash flows of the project, we may not be able to accrue much on the portfolio that we are holding.
The cash that we get from the portfolio, basically that will be redistributed in our business. If it remains in our extra liquidity, though then it's generally low liquidity, but if we are able to deploy it in our other businesses like home loan, gold loan, then it reduces our need to borrow and start generating that kind of return. Immediately what NIM you see, which is about 14%, 14.5% in the entire portfolio, that goes away. We'll be able to accrue on our 1/3 portfolio depending on the fair valuation. The remaining 2/3 or whatever cash which we get, we're able to deploy that in the business. That is one.
What it does, that incrementally, we won't require provision on this portfolio because if you see last four quarters, given the stress in the overall sector and trying to be conservative because the portfolio is going to get transferred, we have been making provisions in this portfolio quite aggressively.
How much will it be though?
It will also reduce the provision in our damage that we have.
There won't be a one-time effect. It will be like slowly-slowly effect will be there for the markdown.
Absolutely right. Unlike some others, what we have done is that we have been writing down the portfolio as required, but there won't be any one-time impact because the transfer is more or less at the current value. There may be small impact, but it will be insignificant.
Okay. The 2nd question is, we have various businesses. What is the eventual game plan? There will be a different two, three companies out of this IIFL Finance or you will be going to be bank or something? What is the eventual game plan?
Game plan for IIFL Finance, you are saying?
Sir, we have microfinance business, we have a home loan finance. You can have a different company for each sector. Is it? Each sectors are very large.
Yes, because the size of these businesses now is in a way sometimes closer to some of the companies that I can invest in. At this point in time, there are two alternatives. One, as somebody asked that whether we can become a bank, we want to evaluate that. If you become a bank, there's no point in listing these companies separately. The other alternative is that we decide not to become a bank. At what point in time we should basically get them listed separately? I don't know. I think that nothing in near future. As of now, the most likely scenario is we continue as one entity with two wholly controlled or wholly owned subsidiaries. More or less wholly owned. It may be 99% or so in case of microfinance. That I will continue. We are open. It depends.
If the businesses attain a critical size and we find that they can be a good investment and it makes sense for all the stakeholders to separate them, we can look at that. Historically, if our group, you see then, we separated wealth and these businesses when we had high-quality investors, and they attained a critical mass and they could attract a separate set of investors. In this business, at this point in time, there's no plan.
Thank you. We would request the current participant to please come back in the question queue for any follow-up questions, as we have several participants waiting for their turn. The next question is from the line of Manjesh Verma from Citigroup. Please go ahead.
Thanks. Congratulations on a good set of numbers.
Thank you.
I had two key questions. 1st one was regarding the recent complaint which came out against you and apparently which is being investigated by the Ministry of Corporate Affairs. I know your response has been there in the public domain as well, but I would want to get some clarification about how you are thinking about how this thing proceeds and is there anything that we should be worried about? I know you have mentioned about the background of the person as well, but at the same time, just your thoughts and how it progresses. We'll appreciate that. The 2nd will be with respect to the potential disruptions to your business in light of the impending lockdowns everywhere. I know there is no national lockdown, but regional lockdowns and disruptions to business is likely, which is going to have an impact on your earnings.
How do you think about that, and how should we think about the impact on your financials as a result of this? Thank you.
Perfect. Thanks. The 1st, the complaint now. This gentleman who was a borrower earlier, but now we don't have any exposure to him. He defaulted to suppliers, and there are many customers who had bought from ICICI Bank or company, and some of them have taken him to NCLT also, and there are quite a few criminal complaints. To get out of NCLT, he decided to sell his project to a builder, that is far more reputable builder with a very good track record, which is Saya. The company name is Saya. Their promoters also gave personal guarantee when they were taking over this project. As far as financially we are concerned, we don't have any exposure to this person who has lodged or who has given this input to this new project story in the electronic media.
As we have said in our response which was given to the exchange, he has talked about Ministry of Corporate Affairs complaint, but we have received no communication from them, and there has been no inspection by Ministry of Corporate Affairs till now. We also do not know that on what ground he's seeking inspection by the Ministry of Corporate Affairs. Unless we hear something from MCA, we really can't comment on that. Having said that, as I said, that financially we don't have any exposure, but there are a lot of criminal complaints which are going on against this gentleman. After this story that has come in news, we'll also take legal action against him and try and get an injunction to avoid him spreading or mudslinging without any evidence or without any base. We'll take certain corrective action there.
Does this answer your 1st question?
Yes, broadly. At the same time, in the complaint there are definitive points which have been raised about how the trail has worked, and apparently, that is what he's alleging. From your perspective, are you planning to come up with a point-by-point kind of rebuttal to those, or would you leave it as is and just go for a legal action against him?
We'll go again for legal action. Their completely baseless point because what he has said, round- tripping or evergreening, which again, is completely baseless because it's a new loan and a new collateral. There are a lot of contradictions in what he has given. We have given our response to the media also, which they partially carried, they partially did not carry. Some of the response is there in this article. His entire, whatever complaint he has given is completely baseless, and it's too frivolous to respond to. Our legal action against him is for damages that is causing by mudslinging, giving false information. We have responded, but I don't think it merits point-by-point rebuttal.
Nonetheless, any investor that you want to know more about any of the points that he has raised, we'll be happy to give you the clarification or more details about every case.
Okay, got it.
Yeah. If anybody's more interested, you can take out the point from that and just send it to us, we'll give you the details. Coming to the lockdown impact. As of now, as we speak, lockdown impact is minimal because most of our branches and most of our offices are still live. This lockdown has exempted the financial services, not only capital market, but all the financial services firm, including NBFCs and banks. We are able to operate. Many people are working from home. At least now we have a playbook because we passed through the entire pandemic last year. More or less, business is not impacted much. If it is impacted in terms of collection efficiency and this thing, over a period of this quarter, we'll discover that, and we are prepared for that.
The volume growth may slow down, particularly in the business loan, but that is intentional because we also want the environment to become clear before we are able to do much. There will be some impact because some of the branches are closed. I really don't have precise number, but maybe all over the country, about three, four percent of our branches may be shut down because of lockdown and the tensions in those micro areas. The impact, as of now, appears to be minimal.
From a collection point of view, are you seeing any difference in the past month as compared to the previous month? So far it has been relatively unchanged?
There's a marginal decline in the month of April as compared to March, but many times these things pick up in the last month of the quarter or towards the end of the quarter. In the month of April, when we look at our collection efficiency, there's a marginal decline as compared to the previous month.
Right. Okay. The final thing is with respect to your plan to sell your assets, the loan portfolio for real estate to SSG and a few other investors which have been mentioned in the public media. How should we see this in terms of your overall portfolio getting impacted? I think your real estate exposure, if I'm not wrong, was something like 12%-13%. What is the change going to be after this transaction?
Already real estate portfolio has come down to 9.5% now. When we look at our March numbers of the last year-end. This 9.5% will become insignificant. As I said, that about INR 3,000 crore portfolio we are moving. The portfolio that we are not transferring either are the loans which will get over very soon because of the cash flow or they are very small ticket loans, the INR 5 crore, INR 10 crore, INR 20 crore, where many of these are through our housing finance company for construction only. That is not the portfolio that we want to transfer. I think once we get done, the 9.5% will come much below 5%, I guess, will become relatively insignificant.
Thank you. We would request the current participant to please come back in the question queue for any follow-up questions, as we have several participants waiting for their turn. The next question is from the line of-
Hello.
Abhiram Iyer from Deutsche CIB Centre Private Limited. Please go ahead.
Hello, Mr. Jain. Thank you for coming and congratulations on a good set of numbers. I had a couple of questions. One was more in terms of housekeeping. The gross and net NPA numbers that are mentioned, the 2.1% and 1.0%, these are before taking into account the Supreme Court suspension, right? These are not comparable to the 1.6% which was given for last quarter, when you talk of gross NPAs?
Yes. The pro forma numbers were higher. These are comparable to pro forma numbers.
Got it.
Numbers were higher. Yeah, you're right. The last quarter numbers would be significantly higher when we look at the comparable numbers.
Sir, on the pro forma GNPA as of December was 2.87%. The right way to look at it would be 2.87% has come down to 2%.
Got it. Thank you. Just wanted to confirm that. The other question that I had was You mentioned that you're targeting a growth of, say, 18% like in the previous years for the portfolio. Do you mind letting me know whether you'll be tapping the capital markets to facilitate this growth, either the offshore bond market or even the equity markets?
Not really. We don't need to because our capital deficit is 25%, and internal accruals will also meet part of this growth. At this point in time, for 18%-20% growth, we really don't need to tap the capital market.
Got it.
There are different drivers for tapping capital market, but it's not the need for capital.
Got it, sir. The cash that you will receive on the AIF transaction, the real estate transaction, that will go towards growing the other parts of the business, or would you be using that to grow sort of the AIF itself and grow real estate transactions through the fund?
No. As we said that we want to focus primarily on retail.
Okay.
There's no question of putting that money back in real estate transactions.
Got it, sir. Thank you. I'll get back in the queue, sir. Thank you.
Sure.
Thank you. The next question is from the line of Amit from 2Point2 Capital. Please go ahead.
Yeah. Hi. A couple of questions. One, this quarter, the collections that have been provided including arrears. Can you provide comparable numbers with last quarter, which were excluding arrears for home loans, business loans, and microfinance?
No. We have provided numbers for four quarters. Basically they are like this. You can look at that entire chart.
Yes.
Which gives you quarterly numbers, actually.
Yeah. If you can give us what are the collections, excluding arrears for the home loans, business loans, and microfinance category, which was being provided earlier?
Actually, see what happens because many times they are part payment and the payment, it becomes difficult to track that way. Basically, this is demand versus collection. This is what if you see the quarter numbers are comparable.
Okay. There are INR 1,160 crores of loan losses and provisions last financial year. Just how much of this was from the CRE book?
Out of INR 1,160 crores, how much? This includes write-offs as well as incremental provision.
Yes.
Out of this CRE is close to INR 500 crores.
INR 500 crores. Okay.
Close to that, yeah.
Okay. Just on the gold loan business, even this quarter, you have actually grown fairly well. This despite banks having the advantage of almost 90% LTV. Now from April 1st onwards, banks are again back to 75% LTV on gold loans. How has the competitive intensity now changed versus what it was the last two, three quarters when banks had advantage in terms of being able to give higher loans? Are you seeing improvement in the competitive intensity scenario in the gold loan business?
See, actually, even if you were allowed 90%, probably we still would not go beyond 75. If you look at March quarter, then the gold prices fell by almost 15%-18%, kind of a thing. In a way it's a commodity, and that can basically generally send goosebumps because your LTV will go down too, or you have to mark it even if under two months interest is not paid.
Will hit more than 100% and you need panic to auction or sell, which can be problematic for customer also, because jewelry has emotional value. We would like to be conservative and keep it at 75%. I don't think we are impacted much by that. I don't know whether many banks were also conservative, so their rate per gram, the way they calculate, I don't think they were going aggressively towards 90%. If somebody had, then there's a significant risk to the portfolio because when you have so many customers and if you lend at 90% LTV, and then some of them default, then obviously you won't be able to recover entire money because your collateral will be below your recoverable amount.
I really don't see that as a challenge. The competitive intensity has been increasing because banks have become very aggressive in gold over the last one year. You must see this market a little differently because there's a huge market which is filled with pawn brokers, money lenders. Many of these jewelry shops they lend, and there is an unorganized market which is very large. Basically that has to come to the formal channel which comprises banks and NBFCs. Within that system, market is very local, that your branch has to be close to the customer. Many times customers do repeat business so they build comfort with the people that are there in the branch. They want to have a very quick turnaround time because many times these loans get repaid, they are prepaid.
Say somebody's borrowing for two months, three months or four months, they really don't bother too much about few percentage interest here and there. If you look at the industry, the organized market is now huge. It's something like INR 3,600 billion or something like INR 60,000 crores. That's what I'm seeing the numbers for the industry, which is there on our slide 42. It's also further growing.
The market is very large actually, and there will be a movement from unorganized to organized. If it is organized, I think customers will value all the things. When you are borrowing, say, home loan, then you are very particular about half a percent, 1% or 2% because it can make lot of damage over 15 years. If the short-term thing, then people say fine. It's a small loan, say INR 50,000, then maybe they don't bother much. Service becomes very important. They come to the branch, within five minutes they can take their gold back, within five minutes they can get the money. Somebody from the branch will remind them about interest, or will talk to them. All these things matter a lot in their business.
Okay. Thank you very much, sir.
Now we have started giving home service also.
Okay. That is helpful. Thank you very much.
Thanks.
The next question is from the line of Eugene Chan from HPS Investment Partners. Please go ahead.
Hello. Hi, Nirmal. Thank you for the call, and also congratulations on the good numbers. Most of my questions have been asked, and I just want to get a further clarity on couple of issues. One is on the CRE loan transfer. You mentioned that about INR 3,000 crore will be transferred out. That you are not pursuing or you're not growing this loan book further. Over time, this loan book will be this business, you're exiting the real estate financing business. Is that correct?
Yeah. See, as a group, we do this business through funds, and these funds are right now in our alternate investment fund, which is part of our wealth management subsidiary. We'll be exiting real estate financing business from the NBFC balance sheet . In the AIF structure, we may continue. In the AIF structure, the contribution of NBFC will be either insignificant or very small, which can be like 2% or 3% or 5% in case we do this. You are right that when we look at the NBFC balance sheet our company, broadly, we'll be exiting this business.
Great. Then in terms of the impact on your balance sheet-
Sorry, just one clarification. The existing portfolio that we have will take maybe at least three years to fully exit, therefore we'll have a team to manage this portfolio. Sometimes from the fund they may require last mile funding. We are the sponsor of this fund, therefore, it's the managing the existing portfolio and whatever the requirement will continue. Also in housing finance, the construction finance of the smaller ticket size, that will continue.
Got it. In terms of the, you just mentioned the AIF structure will remain. Your stake or your ownership in the AIF structure, what percentage is that?
In this particular fund, it'll be at least 1/3.
Sorry?
In this particular fund.
Yeah.
In which SSG has come in now as an investor, we'll hold at least 33% and 1/3% , not less than that.
About 1/3 . Okay, 33%. Got it. You mentioned that it takes three years to exit to fully fund. The INR 3,000 crores will take, what, three years to transfer over time?
No. The INR 3,000 crore or whatever portfolio we work on will get transferred now to exit because the fund has a tenure of three years plus. The fund will get the cash flow, and then we'll get the cash flow for our contribution as well as the residual. Our exit will happen in the next few weeks, but the fund probably will be able to exit in three years.
Understood. In terms of just broad numbers, again, you mentioned 2/3 of the amount, 2/3 cash will be released, 1/3 will be in terms of capital release. In terms of understanding, in terms of provisioning, and in terms of your capital adequacy ratios, is there any impact to it? Potentially, is there any reversal of provisioning as a result of this?
As I spoke earlier, in terms of capital adequacy, this will help. Whatever assets we continue to hold on our balance sheet, even if it's investment, they will continue to attract capital adequacy. That's why the capital adequacy is required. It will release at least maybe about up to 2/3 of that portfolio will be transferred. Suppose we transfer INR 3,000 crores and INR 2,000 crores is taken up additionally by outside investors, then the capital adequacy, what we are requiring for INR 3,000, we require only for INR 1,000. Broadly it works in this manner.
Thank you. We would request the current participant to please come back in the question queue for any follow-up questions. The next question is from the line of Prashant Sridhar from SBI Mutual Fund. Please go ahead.
Yeah. I think the call has been very useful. Just if you could explain to us, the fee income growth has been substantial YoY. Actually, even the interest income growth has been pretty good. What would drive both of these this year?
If you see our presentation, slide 6 where we give details. If you see the fee income is INR 153 in this quarter, and it was just about INR 207 last year and INR 177.9 the last quarter. This is actually broken up in two parts. One is the fair value changes. This is fair value changes in investment of property that is estimated. In India, if you keep valuing on a fair-value basis and the gain or loss is accounted for. That is INR 63. The larger component, which is INR 89.3, and the fair value change last year, last quarter was negative. That is why you see a more steep change here.
The fair value is around INR 60, and INR 90 is fee and other income, which is the income that we get by cross-selling and also some incentives that we get on assigned assets and securitized assets. That comprises of those income, and the processing fee for the new loans. That is a component which is there, which was close to INR 90 crore, INR 89.3 in this quarter, which was INR 59.3 in the last year, last quarter, and INR 77.6 in the 3rd quarter, which is the quarter before. That is a steady stream of income. The fair value changes is more accounting and that can be a little more volatile.
Sure. The fair value changes come from what kind of assets?
Both investments and property which are held, not the property that we use, but suppose we acquired something from the customers who have defaulted and the investments that we have. Some of this maybe sometimes we apply in the IPO. Some of the IPOs we apply as an NBFC. Earlier we had a CIBIL share, which we actually liquidated last quarter. This is primarily investment and property.
Okay. Interesting. Okay. Sure. That's helpful. Just if you could give us one more data keeping point. If I have to split this restructuring of INR 500 crores, what asset classes would they come from?
They are mostly SME. Primarily, entirely SME. They are home loans also. I'll just give you the breakup, just one second. Yeah. The INR 575 is the complete restructuring. Out of this, INR 130 is home loan, about INR 273 is business loan, and there's one-time restructuring the capital market also, INR 150. Broadly, these are the restructuring amounts.
Sure. That's helpful, sir. Just a doubt. When you say restructuring in the capital markets, that would be what? A LAS kind of product that you've restructured?
It's a LAS kind of product, particularly during last year moratorium time period. That is when we did that.
Thank you. We'll take the next question from the line of Abhiram Iyer from Deutsche CIB Centre Private Limited. Please go ahead.
Hi, sir. Just one clarification needed. On the AIF fund, you mentioned that SSG has come in with INR 1,200 crores of their investment in the fund, which means that our current contribution would be two-3rds, right? Not 1/3. The 1/3 is the minimum limit, right? We'll be working towards that.
Okay. SSG is taking INR 1,200.
Yep.
They are the anchor investor.
Yep.
We started the process. As per our agreement with SSG, we have to hold 1/3, which is INR 700 crore minimum. The remaining portfolio, we can sell it down. We are talking to some other investors.
Okay.
That basically, we'll sell it down to some other investors.
Got it, sir. That's in the process. The work down towards 1/3 is in the process.
That may take a little more time. I think if SSG transition gets completed in this quarter, we expect that transition to spill over to next quarter also, quite possible.
Got it, sir. Thank you.
Thank you.
Thank you. The next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead.
No more.
Deepak, your line is on talk phone. You can go ahead, please.
Yeah. Am I audible?
Yes.
Yeah. Deepak, go ahead.
I, sir, just wanted to understand this, the transferring of the CRE portfolio that we have been talking about. Already we have some provisioning on it done. Any kind of impact on the provision that we can see because of this transfer or the haircut, or any kind of haircut that we are taking on that?
No. What is happening is the provision will take care of the haircut. Let me put it this way. We won't see much impact on the provisioning.
Not much impact on the provisioning.
Neither new additional provision nor release of provision. We should basically, the provision will take care of what we are transferring. The balance portfolio in our book also, we want to carry some provision, so that is also there.
Okay. The provision that we have taken, the haircut would kind of match each other, and we would have not much impact on the provision on either side.
Yeah, you can say that.
Okay. That's it, sir. Thank you.
Thank you. The next question is from the line of Eugene Chan from HPS Investment Partners. Please go ahead.
Hi, sir. I'm back on my 2nd round. The other question I have is on your business loans. I see that there was INR 244 crore from the disbursements from the ECLGS. Just want to understand this a little bit. The ECLGS scheme, the disbursements for this is for your customers that for new loans, or this is to meet their debt obligations because they're not able to sell, they need to access this scheme?
This is for existing loans. The customers who were good customers and did not have any default as on 29th February 2020, and so they were impacted by COVID. What Government of India has done is, they've given something like 20% additional working capital loan, which is guaranteed by government to make sure that at least the customers that were good and not defaulting, they don't become defaulters.
Understood. This is about 18% of your disbursement in Q1.
Okay. What happens is this scheme, the eligibility criteria are there from the government, that the borrower should not have defaulted, and also, we require borrower's consent. What happens, that even if some borrowers were eligible, so that's why out of INR 6,000 crore portfolio, we have got INR 1,200 crore. Many borrowers may not be willing to take the new loan. It works both ways, that if the borrower consent is there and borrower is eligible, then we can give this loan.
Your customers apply to these schemes through your company, or do they apply directly to the Government to get access to it?
No. Through our company.
Through your company.
We have to upload the data to certain agencies appointed by the government, but the loans are disbursed and monitored through us only.
Understood. In terms of just looking forward then, also given because of the 2nd wave of the COVID, how much visibility or pressure do you see in the business loans? Having said that, this scheme has a finite amount. How much access do you have to this funding liquidity? The 3rd question is, when I look at your slide 15 in terms of collection efficiency, business loan has been lagging the rest of your businesses, gold, home, and microfinance. How is this collection rate trending in Q1 and Q2, given what's going on?
Now actually it's very difficult to figure out how it will go in future. As of now, things are not as bad. In fact, people are fearing much worse than what reality is. Many businesses now, unlike, say, last year when there was a complete lockdown and there was no activity happening and nobody knew how to handle it, I would say most of the businesses today are able to carry out, do some activity. They may be impacted marginally. Now actually, we don't expect it to worsen much. Whatever reports we get from the ground, most of the business are able to manage, and they are also concerned about their own credit score and their ability to borrow in future. They're struggling, but it looks like that it may not be a big damage.
Understood. The LTV of this business?
Like Mumbai, the COVID has already started. The number of cases started falling steeply. Many areas where we have good exposure also, we are seeing that things are getting even better. The COVID too has been very bad in terms of the impact. It has been very nasty, and it has caused a lot of damage. From the economy or business point of view, it has been very quick. It's like the rise was very steep and hopefully fall is also very steep. We think that we'll get over this very soon.
Understood. Thank you. Thank you very much.
Thank you. The next question is from the line of Isabelle from Ares SSG. Please go ahead.
Hi. Thanks for this call. I just have one quick question. I noticed that you mentioned you have bought back about $9 million of the US dollar bond in the open market. Are you able to share, at what price were these bought back at?
Good to have SSG on the call because there are many questions for you. I didn't know whether I could have directed them to you. They were bought back at 6.05% dollar yield, and we saved 4%-5% of forex cover also. Effectively, we get about 11%, 11.5% savings in the cost of borrowing as we buy back this dollar bond. We are able to borrow at around 8.5% locally. I think it's good. Whenever we get an opportunity, we would like to buy it back because the dollar bonds are still quoting at around 6%. 6% in dollar, but as I said that when we buy them back, I can cancel the equivalent amount of my forex cover, which saves me about 4.5% per annum more. Maybe up to 4.5%-5%. Does this answer your question or no?
Yep, it does. Thank you.
Thank you.
Thank you. That was the last question. I would now like to hand the conference over to the management for closing comments.
Thank you so much. Thanks for everybody for being on the call. If you have any more queries or questions, we shall be happy to respond to that. Our Investor Relations, Anup Burgess or our CFO, Rajesh Rajak, you can address them to anybody. Thank you so much and have a good day ahead.
Thank you. On behalf of IIFL Finance Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.