Ladies and gentlemen, good day and welcome to IIFL Finance Limited Q3 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 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, CFO, accompanied by Mr. Nirmal Jain, our Chairman, Mr. Monu Ratra, CEO, IIFL Home Finance, and Mr. Venkatesh N., Managing Director at Samasta Microfinance. I'll hand over to our Chairman, Mr. Jain, to comment on the economy and the group's overall strategy and plans. Over to you, sir.
Thank you, Rajesh. Good afternoon and welcome everybody on this call. Macro environment and prospects for V-shaped recovery now look much brighter with the no bad news budget that we had yesterday. Also the CapEx and investment outlays that are provided in the budget, that makes 11% GDP a very achievable target. Also, I would say that the execution track record of this Finance Minister and government inspires confidence about performance on the budget proposals next year and also later. As the economy recovers from a negative to a very strong positive growth, we should see a robust demand for credit, especially for MSME and affordable housing. The underlying trends of digitization and formalization of the economy will further boost the demand for credit.
We are fairly optimistic about our business prospects as almost our entire business is driven by these two sectors, which is MSME and affordable housing. When you look at microfinance, this is the first letter M of MSMEs, the micro businesses income generating activities that we fund. Also in gold loan, I guess almost 75%-80% of our loans are for short-term working capital requirements of the small businesses. In this context, we are also very pleased to note that now liquidity has eased, credit demand is robust, interest rates are falling, collection efficiency is getting better. Construction real estate, which had become an Achilles heel, is likely to see a substantial exit very soon, and so on.
Still from a longer-term perspective, what we have seen in last two and a half years is that the liquidity situations can be volatile for NBFCs as they depend on wholesale sources of funding. Banks, as we know, have access to stable liability sources like deposits and besides access to lender of last resort, RBI. Historically, banks have built an asset mix which is of large corporate loans and retail with focus on priority sector. In the last few years, we have seen that they are looking at a shift in their balance sheet mix towards retail assets. This is where partnership between NBFCs that have established branch network, specialized underwriting skills in the niche segments and a trained workforce becomes a win-win.
While banks will grow their own network to meet requirements of the growing economy, more often than not, NBFCs will be more efficient in terms of cost and also more effective in collection and servicing when it comes to small ticket loans. It is not surprising that in the recent past, Finance Minister, RBI, State Bank of India's Chairman, everybody has emphasized co-lending as a way ahead for banks and NBFCs partnership. I think they all recognize this is the most optimum and viable way to channelize bank liquidity into productive and credit-starved segments of the society over long-term. Our experience over last few months is encouraging. While it takes enormous time to get agreements past legal, compliance, risk, and business departments of a bank and also workflow and technology integrated.
Also bank starts slow, will start with 10 branches, then they will scale it up to 50 and so on. But the good news is that most banks, almost all the banks that we have spoken to are very keen on the partnership and co-lending. Two, the market size and opportunity is very large. When we look at our market share in, say, affordable housing or MSME, it's just about 1%-2%. Or even in gold loan, if you look at the formal lending by banks and NBFCs, we may be about 3%-4% market share. Similar in microfinance. We had expanded our branch network in 2019 and paused it in 2020. We are seeing positive impact of operating leverage in the results now.
Despite being at the forefront of digital technology, we see the need and opportunity to expand branch network, particularly for microfinance and also a few locations for gold loan. Typically, our branch sales break even in 12-18 months, so the expansion will be gradual through 2021. In terms of provisions and write-offs, we take a prudent and conservative approach, while write-offs wherever feasible as per tax laws can give a tax break. Collection efficiency is interpreted differently by different companies. We report based on the dues collected for the month. Therefore we don't include in the numerator the dues for the previous month collected this month.
Whereas there are many other companies have a different approach, and they take the total amount of total cash received from the borrowers. Coming to technology, we have made substantial progress in technology, and we have plans to accelerate investment in digital technology in all the product categories in all our businesses. We are already listed on CredAll as a certified vendor, we plan to be on OCEN Network very soon. Before I sign off, I wish to highlight social impact our business is creating, and in this presentation, you'll find a separate section on that, and efforts we are making towards environment and sustainability as well. It's covered in our presentation, so I'm not spending much time on it. With this, I hand over for question and answer. Thank you.
Thank you very much.
Okay. Thank you, Mr. Jain. I'll just begin with giving a brief update on the business numbers.
Yeah, sorry, my apologies. Actually, I asked CFO to speak about the financial numbers. Yeah.
And then-
Yeah, of course.
We'll open it for questions. IIFL Finance net profit was INR 268.3 crores in third quarter FY 2021, which was up 26% quarter-on-quarter and 47% year-on-year. We recorded our highest ever pre-provision operating profit of INR 615 crores during the quarter, which was up 9% quarter-on-quarter and 127% year-on-year. This was driven by volume growth, reduction in cost of funds, and higher efficiency in management of operating costs. Our loan AUM grew 3% quarter-on-quarter and 17% year-on-year to INR 42,264 crores. Our core segments grew faster at 21% year-on-year to INR 37,365 crores. Our disbursements across core segments for the quarter are significantly higher than last year's same period, that is quarter three.
Home loans have grown disbursements at 90% year-on-year, gold loans at 25%, business loans at 43%, and microfinance loans at 61% growth in disbursements year-on-year. Retail loans, including consumer loans and small business finance, constitutes 90% of our loan book. A strong characteristic of our loan book is the large proportion of loans that are compliant with RBI's priority sector lending norms. About 68% of our home loans, 47% of business loans, and 90% of our microfinance loans are PSL compliant. In aggregate, nearly 43% of our loans are PSL compliant. A 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. Annualized return on assets for the quarter was 2.6% and return on equity was 18.4%.
Our Tier 1 capital adequacy stands at 18%, and total capital adequacy stands at 21.4%. Our average cost of borrowings declined 10 basis points quarter-on-quarter to 9% for the quarter. Consolidated GNPA and NNPA stood at 1.61% and 0.77% of loans respectively, as against 1.81% and 0.77% respectively in the September quarter. Without considering effect of the Supreme Court interim order, pro forma GNPA and NNPA would have been 2.87% and 1.46% respectively. Provision coverage, excluding standard asset provision under Ind AS norms on Stage 3 assets was 170% for the quarter. A brief update on liquidity. During the quarter, we raised INR 3,987 crore through term loans and refinance from banks. Cash and cash equivalents and committed credit lines from banks and institutions were INR 5,149 crore as of 31st December 2020. We continue to have nil exposure to commercial paper.
We have a positive ALM across all buckets, whereby inflows cover or exceed expected outflows. A brief update on co-lending and co-origination strategy. In line with our strategy of growing through partnership model during the quarter, we entered into co-lending arrangement with Standard Chartered Bank and ICICI Bank for extending home loans and secured MSME loans. We have already commenced business in partnership with CSB Bank for disbursing gold loans as announced last quarter. A brief update on digitization analytics. 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, disbursement, and collections. We are collaborating with the fintech ecosystem to further enhance our platform and customer experience.
With these strong partnerships, we intend to co-create solutions for enhanced experience in SME lending. We have enabled digital top-up to retain quality customers in home loan and secured MSME loans, wherein the entire journey is paperless. Communication for accepting sanction letter and e-agreement is sent to eligible customers via SMS. The disbursement is automatic with no manual intervention. Jhatpat Home Loans, our pan-India product for instant home loans, helps all the stakeholders in the housing finance industry, individual home borrowers, developers, and company get a loan in an instant manner. Our home loan disbursed via Jhatpat Loans has gained significant traction. Out of the total home loan disbursed in the month of December 2020, 89% was sourced through Jhatpat Loans. The corresponding percentage in January 2020 was 61%.
In addition to digital top-up and renewal of gold loan launched earlier, during the quarter, we have launched home pickup of gold loan, wherein the loan officer would visit the applicant's home or office and the entire process is tablet-based: onboarding, sanction, and 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. We have about 175,000 average active users on the app for the month of December. That brings an end to the update. We will now open the floor for questions. Thank you.
Thank you very much. We will now begin the question- and- answer session. Anyone who wishes to ask a question you may press star and one on your 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.
T he first question is from the line of Abhiram Iyer from Deutsche Bank. Please go ahead.
Yes. Thank you for the opportunity. First of all, congratulations for the results. I have two questions. One is with regards to the collection efficiency that's given in slide number 15. For the business loans, it's mentioned that quarter three collection efficiency is 75%, microfinance is 77%. First of all, are these average numbers or ending numbers? That's one. If these are average numbers, then it seems to me that they haven't increased from September 2020. If you look at your last set of results, it was 75% for business loan and 78% for microfinance in September itself. Was there no improvement in the quarter?
Yeah. I think this quarter, things came out of COVID, and what we have seen is that the true picture emerges only after COVID. Just one second. Slide number 16. Next slide. There is an improvement in business loans from 60% - 75%, and in home loans from 81% - 90%, and microfinance from 69 %- 77%. These are the monthly averages, but there's a significant improvement in this quarter vis-à-vis the previous quarter.
Yes, sir. No, I'm just trying to figure it out from the end of last quarter. Last time you had given it on a monthly basis. In September it was 75% and 78% for business loan and microfinance. Microfinance has actually come down over the quarter. Business loans have stayed flat over October, November and December?
No. What happens is that most of the time, the collection happens mostly towards the end of the quarter.
Okay.
Therefore, when you see monthly averages, then they will give you the correct picture of how things are moving. Also, as I explained in my this thing, that collection efficiency is measured differently by different players. What we do is that something is due for the month of December, obviously you'll collect November month also in December. That happens to some extent in all our businesses, that doesn't get counted in collection efficiency. If you look at towards the end of the quarter, obviously collection picks up, and therefore, you can't really compare September with October. We can compare September with December.
What were the numbers for December, sir?
One second. December month, I'll give it to you. December actually is 93%.
This is for business loans?
October was down. Actually October, November, December it picked up. 68%, 72% and 93%.
Actually, sir, this is for business loans, is it?
No, microfinance.
Oh, this is for microfinance. Business loans?
Business loan is one segment which has remained a little sluggish because of a.
Okay.
It has hovered around 75% throughout the quarter.
Got it, sir. Got it. Is there any programs in place to correct this?
Okay, I'll tell you. Collection is happening with some delay because these are small borrowers. You might see the 30 DPD, but when we look at 60 and 90 days, we are seeing that the collection is improving.
Got it. Got it. Got it, sir. Basically these are being pushed back by a month, but not exactly going into NPA status because-
This is a typical characteristic of the smaller borrowers and smaller loans because they're all passing through time. Things are recovering. We see that the collection is also improving. It's happening with a lag.
Got it. I'll join back with you, sir. Thank you.
Sure.
Thank you. The next question is from the line of Thomas from Aberdeen Standard Investments. Please go ahead.
Yes. Hi. Thank you. I have one question with regards to liquidity. You've got a slide on this topic, which is slide 20. It shows that your reliance on term loans, on bank lending basically keeps going up. Equally, bond refinancing is trending down quite significantly. If you could share a little bit of color what the drivers are. Is it that risk appetite in the onshore bond market is still fairly muted? Is it purely a reflection of pricing? Yeah, a bit of color on that would be helpful.
Right. A significant of our financing is now happening through securitization assignment, which is not debt. What we are doing, we are selling down our assets. Last quarter, we would have sold down something like INR 4,400 crore, and also the earlier sold-down assets of INR 2,000 crore would have got repaid. That has become a significant contributor. Coming to refinancing. If you really look at the refinancing, from 152 in Q2, it has gone up to 500 in Q3. The debentures of bonds that you're seeing has come down. In Q2, we had bond issuances to the bank under the TLTRO scheme. When banks are funding, actually their appraisal and whether they're funding it through bonds or term loan is similar.
The Q4 last year bond issue, which you see 2,856, is the dollar bond issue that we did, which is a foreign currency dollar-denominated bond that we issued in international market, $400 million. This obviously will do once in a while, maybe once in two years. Therefore, I don't think there's a significant change in mix. The nature of business is such that sometimes you'll see some of the pieces of pie moving in different ways.
Okay, thank you. Just on a forward-looking basis, would you say that the dollar bond market remains important for the company for refinancing purpose?
Not really. To be very honest, dollar bond market is more opportunistic and more a diversification. In fact, when the dollar bonds have been quoting at a discount, we applied to RBI to allow us to buy back, but RBI refused us permission for that. This is a market which is there, and when the opportunity is right and the market is favorable, we can always tap it. We aren't really dependent on this. Over a longer time period, this can be a good source of money on a periodic basis. This is a market you can tap, say, once in two years or thereabout.
Okay, thank you.
Thank you. The next question is from the line of Ashwin Kumar from HSBC. Please go ahead.
Yes. Hi. My question is on the collection efficiency part. Just wanted to understand, I think some of segments like business loans and so on, it is only at 75%. If I look at your NPAs as such, and even if you exclude the Supreme Court dispensation, that has not gone up very significantly. How do we look at this? Is it like a lot of customers are missing one or two installments? If it is on average 75%, it would mean one customer is paying in October, another customer is paying in November, and so on, right?
No. 75% means three out of four customers are paying in the same month. Out of remaining 25% customers, maybe some of them, 20%, 22%, 23% are paying in the next, say, second month or third month. They don't pay for three months, then only they get reported as NPA. In business loan, our loan book GNPA is 2.46%. If you look at our pro forma, this is 6.5%. We also take aggressive write-offs and write-downs in this segment. Because wherever we see that from a tax point of view and from the age of the loan point of view, it's prudent to write it off, we do that. That doesn't affect our collection effort. Because our collection people, they get the buckets of all the loans, so regardless of how we've done the accounting.
Also 2/3 of our loan book in business loans or more than 2/3 is loan against property or secured. There also we are seeing slightly lesser stress. Business loans, there is a stress, and that is why our pro forma GNPA is 6.5%. In a way, two things have basically helped us to contain the damage, which is, one is significant part of our loan book is secured, and two, we have taken aggressive write-offs as required.
Okay. Similarly, if you can give some color on the microfinance. Again, that also, I think it's only 77%. What kind of credit losses are you seeing there, and which states are you seeing stress? Do you have any exposure to Assam as such?
Microfinance, fortunately, we are all over. We have very well spread out networks, and 88% of our business is from rural segments. If you really see microfinance industry, the performance has been very varied across the companies. In the COVID time period, the companies that have been more dependent on urban areas got impacted more compared to companies that have been predominantly servicing the rural areas. If you look at industry-wide, I think 46% is urban, 54% is rural. In our case, 88% of our customers are from rural areas. Secondly, microfinance, we have provided additional INR 40 crore in this quarter, and GNPA have gone up to 2.24%. Secondly, our Assam exposure is minuscule, and all over we are very well distributed. We are almost there in 25 states now. We aren't really dependent on any one state as such.
Okay. How much would be your exposure to Assam, which has been on the news?
Our Assam exposure, I can tell you. One second.
It's 2%. 2% it was.
2%, yeah. 1.79%, to be precise, is Assam exposure.
Okay.
Maharashtra also has been very badly hit for some of the microfinance companies. Our exposure to Maharashtra is only 2.79%.
Okay. Thank you. Just one question on the microfinance again. The ticket size this quarter suddenly dropped significantly. Is there any change in strategy or something?
The last quarter probably we did a little bit of more individual loans, which had a higher ticket size. One second. Venkatesh. Microfinance. Venkatesh, you're on call? Okay. I can get back to you on that, but I think.
Mr. Venkatesh.
Yeah. The individual ticket sizes are low, are slightly higher as compared to the group ticket size.
Yeah. Sorry, I was on mute actually. I can answer.
Yeah.
In terms of the ticket size going up, it was for various size. As Nirmal said, we have also added individual loans to our portfolio. Plus, in certain markets where we see traction of things, every state has got a segregated higher ticket size because we have gone in many of the markets, we are getting into the second and third cycle. We gradually increase the ticket size of loans as we get into the different cycles. That's another factor which the loans ticket sizes have gone up.
Okay. Thank you.
Thank you. I request all the participants, please restrict to two questions per participant. If time permit, please come back in the question queue for a follow-up question. The next question is from the line of Prashanth Sridhar from SBI Mutual Fund. Please go ahead.
Yeah. Good afternoon, sir. Any guidance on restructuring or the DCCO extension?
No. DCCO extension for what? Sorry.
Sir, I believe you have a construction finance book as well, which you're going to put under AIF.
Yeah. Construction finance book, actually almost significant part of or substantial part of our book will probably move it to AIF. All these things will become irrelevant because the book will be held by an Alternative Investment Fund. That is what we're planning to do.
Okay. What about restructuring on the remaining book? What kind of expectations do you have?
Remaining book will continue, and there we have adequate provisions. As at December end, we are carrying INR 458 crore of provision and also we have written down and written off quite aggressively. Some of that money will have potential to get collected. I think we'll have a significant provision. The remaining book will have two parts. One is the smaller loans, which are, say, less than INR 20 crore-INR 25 crore loans, and they have been generally doing well. Very small ticket loans, we are not planning to move it to AIF. There'll be a few residual projects. For that, we'll have adequate cover. This will become insignificant part of our book. As we had guided earlier that, going forward, as a group, we are doing our real estate funding through Alternative Investment Fund, which is part of our wealth management subsidiary company, AMC.
In the NBFC, HFC, we might continue to do the residual funding of the project that we already financed or the green and environmentally sustainable building that we are focusing on. Also the typically small ticket construction loans in Tier 2 and Tier 3, where we can dovetail that or we can have a forward linkages to our home loans. Then, after the transfer to this AIF, this book will become insignificant.
Okay. Understood. You would receive consideration for the other investors' portion in upfront cash or that would also be in some sort of securities?
What will happen is that INR 3,600 crore is the target size of the fund, out of which, say, INR 600 crore is the sponsor's contribution. The INR 2,400 upfront cash you get. From our income and the point of view, our INR 3,600 or our real estate book has been generating return of around 14.5% if you see last quarter. What we can accrue on the remaining part of the book will depend on the valuation because this AIF will not be managed by NBFC, it will be completely independent. Our target is that most of the exit will happen say over three-year time period. Till then, the income accrual can be conservative, but at the same time, this will also save us the provisioning, because in last few quarters, we have been really hit very hard by this segment of our business in terms of provisioning requirement.
Sure. Did I hear that right? You said the total consideration for the RE book is INR 6,600 crores?
No. The total consideration for RE book is not INR 3,600 crores. We will transfer, say, something like INR 3,000 crore of RE book to the fund. INR 600 crore will be the cash or liquidity in the fund, INR 500 crore-INR 600 crores. Whatever we are transferring, we'll be transferring at book value. Wherever required, write down or write off, we've already taken that. The remaining part of book will remain in our book as construction finance or whatever it is. Out of this INR 3,600, INR 1,200 crore will be the contribution, which probably will be the AIF unit, which will remain as an investment in our book. Maybe INR 1,800 crore cash and INR 600 crore will remain in the fund, will come to us.
Understood. Sure. Sir.
Sir, sorry to interrupt you. I request you to come back in the question queue for a follow-up question. Thank you. I request to all the participants, please restrict to two questions per participant. The next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund. Please go ahead. Vivek, may I request you to unmute your line from your side and go ahead with your question?
Hello. Hi. Is it clear now?
Sir, may I request you to speak little louder.
Yeah. Hi. See, on the business loan portfolio, your average ticket size has been coming down, but your onboarding yield has also been coming down. Typically, you would think that the smaller size you'd get better yields. Also if you see the collection efficiency has also been only gradually improving, which is par for the course for these kind of smaller customers. How do you see the risk?
No, it's a good question. What has happened in business loans, that incrementally we are doing business loans only digitally. There are very small ticket loans done, which are like maybe INR 1 lakh, INR 50,000, INR 2 lakh, and that is bringing down the ticket size. Now if you see incremental business loans, there are two components of it. One is loan against property, which may be typically INR 1 crore or INR 2 crore. Again, there also we focus on a smaller ticket size. In loan against property, your average yield will be lower, but that is a major component of it. The smaller loans that we have started on digitally and then will continue. Today, we don't any longer have any sales force for unsecured business loans, so that entire thing we have phased down.
Now we have been pilot testing our digital model and will aggressively expand this as we get confidence. There are a couple of things more we have done. Also, we have tightened our credit threshold. Even if it's a lower yield, but we are focusing only on good quality customers. Obviously, business loans for the entire industry has been very badly impacted because of COVID. Going forward, when we do digitally, our objective will be that have a lower yield, but lower credit losses and almost negligible operating costs as far as unsecured business loan is concerned. In secured business loan also, you may get lower yields, typically about 14%, 14.5% or maybe even lower sometimes. Then your collateral is there and the risk of ultimate loss is very limited.
Okay, great, sir. Even, I guess, cost income, everything improves, so that's a good thing.
Absolutely.
Secondly, congratulations on the various tie-ups you have. Incrementally, what proportion of your loans do you think will be on book and what will be through the co-origination tie-ups? Thank you.
Today what is happening is that we are assigning and securitizing our books. We are selling it down. The co-origination tie-ups we started with three banks, and probably we are looking at more. They will take, I think, three to six months before they become significant. Till then, we'll continue to sell down our books. Even there's a huge market for that. Securitization and assignment also is a very big market. We'll continue to do that till this gathers momentum. Both these put together, the ratio I think is already 35%. Over a period of next two, three years, the incremental growth is coming from here. If you really look at loan book using our risk capital has declined in this quarter also.
It may remain around these levels, and incrementally this 35% over next two to three years may become 50%-60% also.
Excellent, sir. Thank you and good luck.
Thank you.
Thank you. The next question is from the line of Kush Sonigara from Mahindra Manulife. Please go ahead.
Hi. I have two questions. One is on your gold loan LTV. On a sequential basis, I've noticed that gold loan LTV has moved up from 68% -7 2%. Now, even if I look at the standalone 72% number, I mean, that looks too aggressive. I wanted to understand, what exactly is our strategy, how we are doing over there?
No, actually 75% is allowed and during moratorium, some of the interest would have got capitalized, which is getting collected now. Also gold prices in the last quarter. Quarter before gold prices had gone up, and that's why you saw that LTV was a little lower. 72% is very comfortable. Today, banks are giving loan at 90% LTV. NBFCs are allowed up to 75%, so you have to be competitive. This includes also the interest due, is also counted as in LTV. When we look at the loan, we include the interest accrued and due but not paid.
Understood. I understand 75% is the regulatory threshold. One can expect the number to remain.
In the gold business, important thing is that how do you value and what do you tell customers? When there's a gold, say you value it as a 20 karat or 22 karat, that can make a lot of difference in what you communicate to customers and how do you account your internally. We are very conservative when it comes to valuing the customer's gold. Every jeweler will have certain deductions for impurity or certain other things in that, and that is where you build your cushion. It'll remain around these levels, 68% - 72%.
Okay. Yeah. The second one is on our Stage 2 numbers. On a sequential basis, if I look at absolute numbers, so Stage 2 has moved up from around INR 1,700 crores -INR 3,100 crores. I presume most of it would be the COVID-stressed book. Internally, how do we.
If you see, the Stage 2, a significant component is gold loan. What happens in, say, home loans or business loans, money is collected automatically through banking channel on 30th day for 30 days, 60 days or whenever it becomes due. In gold loans, still a significant part of collection happens in cash where customer either comes to the branch or you follow up with the customer. Typically, branch people will start following up with the customer after 30 days. You'll always see that 30 DPD is high, but most of it gets collected before 90 days. 90 DPD will be very low. Loss given default in this case is almost negligible. Gold is a peculiar business where you'll see Stage 2 as a higher component, but that doesn't get into Stage 3.
Okay. No, because I was just looking at the earlier.
Our branches start reminding customers or following up with customers only after 30 days. They've already moved into Stage 2.
Okay. Fine. Yeah. Thank you.
Thank you. The next question is from the line of Savi Jain from 2Point2 Capital. Please go ahead.
Hello.
Go ahead, sir. You're audible.
Hello. Hello, can you hear me?
Yeah.
Hello.
Savi Jain, you're audible. May I request you to go ahead with your question?
I have a couple of questions. One is on the dividend. You've announced quite a large amount of dividend. I just wanted to understand, given that our leverage is already on the higher side, and we could also do with a better credit rating going forward. Given the growth ahead, isn't this a little too high? Just wanted to understand your thoughts there.
I think our dividend is INR 3, and we have a dividend policy, which is board approved and declared, that anywhere from 15%-25% will be our dividend payout ratio. It's around 18%. If you look at our quarterly EPS is INR 7.1. Out of that INR 3 dividend is not so significant. Net debt to equity ratio has fallen in last quarter, as we have securitized and assigned more assets. Dividend we have to maintain. We have a consistent track record of dividends since listing and we continue to do that.
Okay. Now, given that our stock price, at least until last week, it was not at a stage where you would probably want to raise more money.
No, every year we have given dividend and we have been very consistent in that.
Okay. Appreciate it. Second question is on the wholesale book transfer that you talked about. You mentioned is it still at a diligence stage, or is it at a very advanced stage, or where exactly is the process right now?
Yeah. There's a final diligence happening on that. It's advanced stage, but the diligence is underway.
You mentioned we would not need to take provisioning once we transfer those assets there. So how exactly will it work? It will show as investments on our book and we would need to write?
If we achieve entire target and do INR 3,600 crores of funds, INR 1,200 crores will appear as investment in our books, as investment in Alternative Investment Fund. The units will be held by us, and that will appear as investment in our books. Yes.
What part of the money we will get back?
What happens in a sponsor's contribution, normally the other investors get paid off first and then the residual comes to you. The provisions or not will depend on the fair value. As we do, we'll understand the process, but I think those units are valued, and a fair value is taken in the book in Ind AS accounting, which can be higher or lower than the cost, and that depends on how the valuation comes out.
Okay. Last question is on the gold loan front. There's obviously been a lot of competition by banks in the last few quarters. Just wanted to understand, are you incrementally seeing a large degree of market share loss and growth tapering off in the gold loan business? That's one. Second, is this growth by banks a result of LTV increase which will probably reverse after 31st March? You think they'll continue to grow at this pace that they're growing over the last few quarters?
I think gold, we are increasing the customers and the gold tonnage also in our custody. Secondly, yes, you're right that competition has increased significantly. There's a huge unorganized market. Those pawnbrokers, money lenders, and that is moving to the formal market, which is NBFCs and banks, which is a good trend. In last four, five years, we are seeing that there's a underlying trend of formalization of economy where many things that were happening in informal sector are getting back to formal sector. While we don't have precise numbers, I think a lot of market share is coming from there as well.
Okay. You are continuing to see the same kind of growth that you were seeing in the last few quarters in the gold business?
Okay. When the gold prices go up, obviously the LTV goes up and all the gold loan companies will see a much robust growth. It might taper off. It may not be as strong. In fact, in Q3, it's already a little lower than what Q2 growth was, but there'll be a healthy growth. I think 15%-20% growth is what one should consider as a healthy growth in a year.
Right. Branches you mentioned you're planning to open, how many branches are you planning to open in this year probably ?
We can't put a number on that. In both our businesses, like microfinance business in particular and also gold loan business, we need some more branches because there's some good locations that we have left out because this entire expansion plan was paused in 2020 throughout the year, all of a sudden in the early part of the year. There are some opportunities. It will not be very aggressive expansion. Probably in 2019, relative to number of branches we had, we expanded very rapidly. It again depends. There's a location study which is done by every area, every state, and depending on that, they decide on the branch network. I can't give a number at this point in time, but as I said that throughout this calendar year, we'll continue to grow the network.
Thank you. Sorry to interrupt you, Mr. Jain. I'll request you to come back in the question queue for a follow-up question.
Yeah, please.
A request to all the participants. Please restrict to two questions per participant. If time permit, please come back in the question queue for a follow-up question. The next question is from the line of Amit from RoboCapital. Please go ahead.
Hello.
Amit Mehendale, may I request you to go ahead with the question, please? Amit, may I request to unmute your line from your side and go ahead with the question? Due to no response, we move on to the next participant. The next question is from the line of Abhiram Iyer from Deutsche CIB. Please go ahead.
Hello. Thank you for taking some more of my questions. My first question was on the rating actions on the USD loan, USD bond rather. Fitch has placed a USD bond on a negative rating outlook for close to 11 months now. Is there any update from the company on, other than discussions for this to be removed? It's quite a long time that it's been on a rating watch.
I think rating agencies basically had a negative on the entire sector or most of even the banks, very well-known banks in India. We'll engage with them again. Our liquidity has improved, even our debt equity has improved, our profitability has improved significantly. We'll make a representation to them. I think, as I was listening to in the budget speech, that India being fifth largest economy still is not investment grade. Somehow, I think rating agencies have been a little, in my opinion, biased against or maybe not done a fair rating for the Indian financial sectors. I'm not talking about IIFL, but all the banks and NBFCs. As far as we are concerned, we'll engage with them because what you said is absolutely right, that our numbers have improved significantly and it's a good time to go back to rating agencies.
Got it, sir. The second question that I had was on cash flows. Forgive me if I'm being a bit technical or repetitive with numbers right now. If I look at your balance sheet and your income statement for the quarter, you've raised debt by about close to around INR 16 billion.
Your operating income is somewhere around INR 5 billion. That's close to INR 21 billion which you've received in cash and money. Whereas if I look at the other side of your balance sheet, the cash and equity investments have increased by only around INR 4 billion, and the loans have increased around INR 10 billion, INR 10.5 billion. There seems to be a discrepancy of around INR 6 billion or INR 600 crores if I look at it. My question was, is some of the income not coming in as cash? Because that's the only thing that seems to explain this.
Sorry. No. I mean, I am not able to Rajesh, can you understand what is his question and what are the numbers he's referring to?
What I've understood Abhiram saying is that you have your cash raised, right? What you have to take into consideration, Abhiram, is also our AUM. Our book is growing. We've had about INR 1,400 crores of increase in AUM as well.
Yes. Out of which INR 10.5 billion .
No, one second. No. I think the discrepancy is the securitized assets as per Ind AS have to be taken in the book.
Okay.
That is what could be causing some of the difference. During the quarter, if you see from INR 1,000 crore, incremental securitization was done.
Yeah.
What happens in a securitized asset is that actually the risk is off the book, but Ind AS accounting, as per auditors, you can't de-recognize, so you add the asset and loan both.
That's not in terms of cash, which is why that is a discrepancy.
Yeah. In IGAAP accounting, we were not required to take securitized asset, then our loan book would have been INR 27,692 instead of INR 30,000 odd crores that we have.
Okay. Got it. Okay. Sir, let me connect back again, maybe offline.
What we can do is maybe, if you put a mail, then we can put the numbers in a reconcile them properly and put it, you know, so that everything is clear.
Yeah. That would really help, sir. Thank you very much.
Yeah. Thank you.
Thank you.
Yeah, go ahead with the second. You had another question?
Yes, sir. The next question is from the line of Sivakumar from Unifi Capital. Please go ahead.
Yeah. Thanks for the opportunity. Just to clarify on the CRE AIF. You said that once the AIF takes over INR 3,000 crore of the CRE book, you'll be left with INR 1,300 crore of residual CRE loans, right?
Right.
They have now already seen a provision of INR 458 crores. That's what you said.
That's right.
Okay. Sir, coming to your own cash infusion for the AIF. From our side, it will be about INR 1,200 crores of sponsor cash infusion.
INR 1,200 crore include. The way we are planning is that we are trying to estimate that what is the last-mile cash flow requirement for all these projects, so that the money kept can be opened and the projects can get executed very fast. What we are seeing is that there's a demand for affordable housing, and in fact, housing has picked up all over. In some of the projects, we are seeing amazing spurt of sales that in last few months has come. The idea is that provide enough liquidity for last mile, so the projects get completed very rapidly. What will we do is that when we transfer certain things, so the total size is INR 3,600 crore, which include the cash required for last mile. We'll estimate it properly, and we'll provide for that in the fund itself.
Okay.
Supposing out of INR 3,600, whatever cash requirement reduce and the remaining amount we'll transfer it to the fund.
I see. Will there be any first loss stipulation on the cash infusion being done as a sponsor?
Come again? No.
Will there be any stipulation?
No. Okay. First, the entire 33% that way. Okay, the way the AIF is structured and as has happened in the industry. The senior holders, they get basically fixed return, but they get a priority cash flow. Whatever cash flow is generated from the project will get paid out to non-sponsor investors, which is the two-thirds of the fund. The residual is what comes to sponsor.
Okay. As a sponsor, we'll be holding the junior tranche, right?
Yes, that's right.
Okay.
There's a fixed rate. We'll be holding the junior tranche. That's right. The sponsor is a junior tranche.
Okay. Sir, roughly what will be the final cash infusion after? You must have done some calculations on the cash requirements of each of those projects, right?
It will be about maybe 15% of the total thing will be the cash, broadly required.
15%. Okay.
If we provide for 15% and we are safe, we'll make sure the projects get executed very fast. You know what happens in a project, it also depends on what is the success on launch. When you're constructing, if the launch you get very good response, the cash flow from the buyers only pay for the progress of the project. If you are conservative and you say, "Okay, let me plan for even if the response is poor, but my project should not get affected." We'll provide for little more.
Okay.
We don't expect it to be more than 15%-17% kind of a thing.
Okay. 15%-17% of the total size of the.
Yeah. These are ballpark numbers. I really don't know the precise numbers because this is what is the work is which underway, and maybe next few weeks we'll have clarity on that.
Any timelines, sir, when this AIF will be tied up?
As we had indicated, the binding terms sheet has been signed, and probably we'll consummate this transaction in this next two months.
Next two months. Okay. To that extent, the capital will be freed up for you, right?
That's right. The biggest advantage of this is that the capital frees up for us. Also we become focused on retail, as we always said that then our core DNA and the sweet spot for growth is retail and digital. It becomes a very focused business model for us. We have a four product segment which are core, as we have always highlighted. This non-core segment which is already around 10%, we'll probably try to reduce it to as little as possible.
Okay. In the microfinance, would you continue to see the growth traction that we got to see in Q3?
Yes. I think microfinance should see very strong growth.
Okay.
Microfinance business keeps getting local issues. What our experience is that if you're a pan-India company with your presence which is fairly balanced, then the damage doesn't become very significant for the entire book. We see great opportunity in microfinance business going forward.
Thank you very much. A request to all the participants, please restrict it to a question per participant. The next question is from the line of Jehan Bhadha from Nirmal Bang. Please go ahead.
Sir, if you can sum up the asset quality, how much is the stressed book and what kind of credit costs do we foresee? This quarter, our provisioning was really low. On the other hand, the collection efficiencies seem to be a bit low. If you can just sum up the entire thing.
No, our provisioning is not low. At INR 267 crores, provisioning is very high. Historically, our credit losses provisioning have been around 80 basis points- 100 basis points, which will be roughly something around INR 100 crores. We have provided fairly aggressively in this quarter. This significant amount of this provisioning is for CRE and MSME book. Hopefully in all, I think going forward, our provisioning requirements should reduce from here.
Right. The amount of stressed book, according to you, would be how much?
Amount of stressed book is what we have provided for, and that is where we are carrying our provisions. Our provision, basically, if you look at without considering Supreme Court order, then 2.87% is our GNPA.
Right.
Actually, if you look at our provisions, then they fairly cover that. You can look at that as a book which is stress-free.
Right. We don't foresee this 2.87% figure to increase too much?
No, this should reduce now actually, as we go forward.
Okay. Great. Thanks.
Thank you. The next question is from the line of Prashanth Sridhar from SBI Mutual Fund. Please go ahead.
Sir, thanks. Just two questions from my side. One is, how would we look at the growth in disbursements? Would these have been more to existing or new customers? Number two, just looking at the Stage 2 and Stage 3, excluding gold and real estate, that has almost sort of doubled. How do we look at restructuring expectations over there?
Disbursement trend is very strong. You see Q3 disbursement basically has been already higher than the pre-COVID level in most of the businesses. Maybe gold loan Q4 was INR 5,000, which is now INR 4,900. Other than that, disbursement is very good. Obviously, we add new customers every month, about maybe a lakh odd customers we add every month, and that has been the trend even before COVID, and that is now continuing and probably will accelerate. As the economy recovers, you see that there are new borrowers. Existing borrowers also need more money. There are some cases of balance transfer. That is about disbursement trend. In terms of our GNPA, n o, I don't know what you're saying about the stress book or whatever. I mean, I've not understood your question. I think if you look at our GNPA, they've fallen from last quarter to this quarter.
Yeah. My question was the Stage 2 plus Stage 3 has increased excluding gold and real estate.
Stage 2 and Stage 3. Stage 3 is what is the GNPA, which is 440 now. I don't know, where are you referring these numbers from? Because these numbers have not increased, they have actually fallen.
I'm just adding up the Stage 2 plus GNPA. That's what I meant.
What happened with Stage 2 is, last quarter was moratorium in gold loan in particular. Gold loan is something which will always tilt the Stage 2 numbers, so you have to look at it little differently. As I explained in the earlier question's response, that a gold loan collection effort typically starts after 30 days. This is where you'll see a significant bulging of amount in the Stage 2, 30-90 days. Most of these get collected by 90 days, and you'll see the Stage 3 is very minimal there.
Sure.
Last quarter we're still coming out of moratorium. This was not accurately reflecting the Stage 2. What we are seeing is a normal trend in the business now.
Understood. Sure. Thank you so much.
Thank you. The next question is from the line of Thomas from Aberdeen Standard. Please go ahead.
It's been addressed, my question. No further questions. Thank you.
Thank you very much. As there are no further questions, I will now hand the conference over to the management for closing comments.
Thank you so much, everybody, for being on the call. As always, if you have any more questions or queries, you can always get in touch with our investor relations, Anup Varghese . Thank you. 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.