Ladies and gentlemen, good day and welcome to IIFL Finance Limited Q3 FY 2020 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. If you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to management. Thank you. Over to you, sir.
Good afternoon, everyone. On behalf of team IIFL, I thank all of you for joining us on this call. I am Prabodh Agrawal, CFO, accompanied by Nirmal Jain, our Chairman, and Sumit Bali, CEO, IIFL Finance. I will now pass the mic to our Chairman to comment on overview of the group's strategy and plans.
Thank you, Prabodh and welcome to all. Normally as I speak about macro environment and then how our group strategy fit into that. Obviously the economic growth and the macro headline numbers still are challenging. They are not what we all would like them to be, but all hopes are pinned on the budget and the only good news or hope we can have is that government is seized on the problem. They are committed to make sure that the economy is back on growth path and all the sectors, all the segments are basically revived.
Coming back to IIFL Finance and the credit market that we operate in, the positive thing is that the lending capacity has decreased for the system as a whole, and therefore, I would say that in the core segment that we operate in, the competitive intensity has eased or has become more sober. In fact, there are too many me-too players and new players and obviously markets become little more challenging. I mean, to take example of, for instance, loan against property market where the rates have gone down without factoring in the risk premium. All the core segments that we work in, the operating environment seems to be much better and that is reflected in our results as well. Our strategy remains the same as we had articulated earlier. In terms of growth, we want to focus on retail, small ticket, granular loans.
Incrementally we are focusing on that and those loans now are almost about 87% of our portfolio. The remaining 13% primarily a developer portfolio. In fact, there's a lot of apprehension about this portfolio, but I said this earlier and I reiterate that at least our developer portfolio is not in the high price segments of Mumbai where there's a supply overhang and many large-scale projects are not selling or they are stuck for end-user demand. Almost entirely our developer loans are in the suburbs of Mumbai or NCR or in smaller towns and cities. Each and every project is monitored very carefully and we are also working on whether a significant part of this portfolio or entire portfolio or a substantial part of portfolio can be transferred to an alternate investment fund.
IIFL Asset Management, which is part of our wealth, has shown interest and a diligence has started, there's more information on this as we go along. Having said this, in terms of retail business model, we are focused on using technology to leverage growth without increasing operating cost. That's why even in this turbulent time of last 15, 16 months, we've been able to maintain our net interest margin and our return on assets. In the last quarter, we have seen that the volume growth in core segments of our businesses is coming back and we are seeing that the outlook for this quarter is even more optimistic. As we get the business volumes back, I think even the margins will improve.
Particularly businesses like home loans where our fixed cost structure is, we are not able to stretch it fully because of lower disbursements in last nine months. I think as we go along, the environment is improving. Significantly for us, National Housing Bank has reduced the interest rate which will allow us to be more competitive in the home loan segment which is more price sensitive. Now I'll hand it over to Prabodh, our CFO, to take you through our financial numbers in greater detail. Thank you.
Thank you, Nirmal. IIFL Finance net profit was INR 192 crore in third quarter FY 2020, up 11% Q on Q and 78% YoY, excluding the one-time impact of reversal of deferred tax asset in second quarter FY 2020. Loan AUM grew 11% YoY and 3% Q on Q to INR 36,015 crore excluding CV business AUM which we divested in fourth quarter FY 2019. Our Tier I CAR stands at 17.9% and total CAR at 21.4%. Primary drivers of our AUM growth are small ticket home loans which grew by 10% YoY, gold loans which grew by 41% YoY and microfinance loans which grew by 70% YoY. On the other hand, the share of developer and construction finance and capital market loans continues to decline. In home loans, our focus remains primarily on small ticket loans to the salaried and self-employed sections.
The fastest growing segment in home loans is the affordable home segment or Swaraj loans with average ticket size of INR 13 lakhs - INR 14 lakhs. IIFL Home Finance has been a significant player in Pradhan Mantri Awas Yojana, credit-linked subsidy scheme. Till date, it has provided benefits to 34,000 customers and disbursed subsidies of nearly INR 800 crores. Retail loans, including consumer loans and small business finance, constitute 87% of our loan book. Another strong characteristic of our loan book is the large proportion of loans that are compliant with RBI's priority sector lending norms. About 61% of our home loans, 48% of business loans, and 92% of our microfinance loans are PSL compliant. In aggregate, nearly 44% of our loans are PSL compliant. Some details on the profit loss account.
Our interest income comprises of gross interest earned on loan assets and interest spread on assigned assets, loan assets including securitized assets. Net interest income on loan assets has gone up by 5% Q on Q and declined by 13% YoY. Net interest income on assigned book has declined by 5% Q on Q and gone up by 118% YoY. This is broadly in line with Q on Q and YoY growth in loan book and assigned assets. Our NIM for the nine-month period was 8.2%, excluding the 2% spread on assignment, the normalized NIM was 6.2%. Our average cost of borrowing fell by 9 basis points Q on Q and rose by 39 basis points YoY.
The other income of INR 66.9 crore comprises interest strip, that is upfront amortization of interest on assigned assets of INR 21 crore, fee and commission income of INR 26 crore, and other income of INR 19 interest strip in this quarter is lower compared to previous quarters as the volume of new assignment was lower. Operating expenses are flat Q on Q and are up 11% Yo Y due to increase in the number of branches, employees, and related overheads. The number of branches has increased by 27% Yo Y to 2,366 as we added new branches for our microfinance and gold businesses. The number of employees increased by 9% Yo Y to 18,309. The operating expenses were flat Q on Q as our head count and thus the salary costs are slightly down Q on Q.
We were also able to cut down several discretionary expenses like marketing and advertisement and traveling expenses. Loan loss provisions at INR 34.8 crores were down 77% YoY and 42% Q on Q. Effective tax rate for the quarter was 22.6%. For the nine-month period, it was 23.5% versus nine months last year of 33.4%. The other comprehensive income shows a gain of INR 4.3 crores, which is a partial reversal of the previous quarter's mark-to-market loss of INR 12.7 crores on our foreign exchange loans. As the foreign exchange loans are fully hedged, both principal and interest, this is just a notional gain or loss, which will be eventually nullified. We completed securitization assignment transactions amounting to INR 2,381 crores in the third quarter compared to INR 3,721 crores in second quarter and INR 4,595 crores in first quarter.
We sold on both PSL and non-PSL loans in five product categories, including home loans, LAP, SME, gold, and microfinance to government, private, and foreign banks. Access to long-term funding has significantly improved this quarter. We raised long-term loans to the tune of INR 2,721 crores in this quarter, compared with INR 403 crores in first quarter and INR 1,723 crores in second quarter. Our funding mix is well diversified, including 22% from NCDs, 36% from bank term loans, 4% from NHB refinance, and 38% from securitization and assignment. Our asset liability maturity is well matched with surplus in all buckets. Consolidated gross NPA was at 2.27% of loans and net NPA at 0.98%. This was a significant improvement over the previous quarter's GNPA ratio of 2.51% and NNPA ratio of 1.51%. Provision coverage, including on standard assets, stood at 95.4%.
Return on assets for third quarter FY 2020 was at 2.5% and return on equity at 16.8% for the nine-month period. ROA was 2.26% and ROE was 16.3% excluding the impact of one-off items. IIFL Loans app's popularity with customers is increasing. Customers are increasingly using it for payments and top-up. This quarter, we had 122,600 average monthly active users on the app. We have improved customer experience and the rating on Android Play Store has gone up to 3.9 and on App Store it has gone up to 4.4. Thank you. We'll now open the floor for Q&A.
Thank you. Ladies and gentlemen, we will now begin with the question- and- answer session. Anyone wishing to ask a question, may please press star and one on your 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. Participants, if you wish to ask a question, you may please press star and one. The first question is on the line of Anitha Rangan from HSBC Asset Management. Please go ahead.
Yeah, hi. Good afternoon. The first question I had was, you had said that you had raised about INR 2,700 crores sorry, INR 2,300 crores through assignment and securitization. Your overall assigned book is flat. Can you explain how this works?
We raised INR 2,300 crores by long-term debt, which is bank loan in the Non-Convertible Debentures bonds. That basically is borrowings.
No, this is securitized assigned loans of INR 2,381 crore.
Yeah, okay.
Yeah. The thing is that, we had new assignment securitization of INR 2,381 crore in this quarter, there is also a rundown of the existing book. The net impact is that Q on Q, it is almost a flattish kind of off-balance sheet book.
The earlier securitized assets would have got paid off. As the customer pays back the money, it goes back to the bank, so the assets go down.
Okay. This, around INR 2,300 crore is the quantum which we can see maturing every quarter. Is that correct?
What happens, the gold loan which was basically matures faster. Just one second, do you have any estimate of how it next quarter will be?
It will be around INR 2,400 crore.
Around 2,400 crore. I think, yeah. For next quarter also it will be similar number, yeah.
Okay. Also, in your housing segment, can you explain, what kind of customer profile you'll have at a yield of, let's say 11%?
No, 11% is a weighted average yield on the-
Boarding yield is 10%.
Boarding yield is 10%, it is not 11%.
The profile of customers, average ticket size INR 16 lakh-INR 18 lakh. Almost there's a 50/50 split, now it's more increasing towards salaried people. Maybe slightly more than 50%. These are maybe government employees or people in smaller towns, places like Nashik, Nagpur or Bhuj. Most of our or maybe Virar or Panvel or Thane, these kind of places, is where we operate. Most of these can be either self-employed traders, businessmen or salaried people. That's the profile of people that you'll have. I think typically they fall in INR 6 lakh-INR 8 lakh or INR 6 lakh-INR 10 lakh income range.
Okay. Just one more question. On your loan loss provision of this quarter, are there also any write-backs which you have taken this quarter? As compared to Q3 of FY 2019, it's quite small. Just trying to understand that.
Normal course there are write-back and write-offs, so they basically happen on this thing. Some of the cases will have write-back. There are recoveries and therefore there can be some write-backs, you're right.
Okay. There is a substantial write-back in this quarter we can understand from.
One second. I don't think it's substantial, but there'll be some write-backs. You're talking about which corporate loans? Or you're talking about?
No, generally in your consolidated results, loan loss provision. That's what I'm trying to see.
One second. Prabodh, you want to talk about it?
Yeah. See, the thing is that there will be some write-back if an account is upgraded from, for example, say, from Stage 2 to Stage 1 or from SICR to Stage 1. There will be some write-backs. That has happened in some cases like mortgages and corporate loans.
The provision this time is less not because of write-back alone.
New slippages were low.
New slippages are low.
Okay. Just one more thing. When I'm trying to see your result which you have posted in BSE, the financial results, the impairment on financial assets is a positive INR 35 crores. There is also a line item called net loss on de-recognition of financial instruments. I am just trying to reconcile what those items would be within the loan loss provision.
Sorry, just say it again please. Prabodh. We'll take the numbers and revert to you. I mean, the breakup of this.
Okay. All right. Yeah. Thank you. That's it.
You're talking about which numbers?
Yeah. Under expenses category, there's a third item called net loss on de-recognition of financial instruments, which is INR 49.38 crores. There is also another line item called impairment on financial instruments, which is a INR +35.82 crores.
Okay. We'll get back to you on this.
Sure. All right. Yeah. Thank you very much.
Thank you. The next question is on the line of Rajeev Agrawal from DoorDarshi Advisors. Please go ahead.
Yeah, hi. My first question is around your gold loan book. That seems to be having a very good traction. Can you compare your gold loan book to the two leading players of gold loan, and how do you compare with them and what's your expectation there?
This is an interesting question, now I'll take you back a little bit to the history. In 2015, 2016, our gold loan book had come down, we did not shut down many branches, we also expanded our branch network very recently. If you compare with the two leading gold loan players, still our loan, what you call principal outstanding, per branch would be lower than them. I think we may be in the range of INR 4 crore, whereas the leading player may be in the range of INR 7 crore. That just shows that there's a capacity to grow these. We can also be in that similar range. Capacity to grow in terms of our loan assets from this branch network, if we just focus on marketing and sales and being competitive in these areas.
I really don't have the numbers of two players, how they've done in terms of growth. One of them is fairly more aggressive in terms of yield, and the interest yield typically, maybe both of them, their yields typically tend to be higher than ours. Normally, we focus on customer relationship from a longer-term perspective, where we try to cross-sell multiple products, including insurance, mutual fund, and other loan products. Our approach is a little different, and maybe the customer segment may also be a little different, because our focus may be on more, even with the gold loan product, on SME kind of clients where we expect cash flow to basically take care of the loan.
Therefore, if you really look at it, the number, I don't know whether that number will be transparently available all over or not, is what is the auction to our loan book. Where we have something like less than 0.1%. If you take loans as a three to four months, then typically you will not auction more than 0.3% or 0.4% of actual loans that we disperse. That's what, I mean, I won't take the numbers, but whatever I gather in terms of reviews with our people, I think this is what I gather.
Sure. Do you expect your gold loan book to continue to have traction, or this is one-off? Can you just talk about how you see the gold loan for yourself?
I think gold loans will have traction because as I said that our branches are still, in terms of their capacity, they are not fully utilized. Our loan cost per branch is still low and therefore our OpEx is high. We can make sure that these branches go to the optimum level. Not only that, we'll also probably set a few more branches. I think gold loan traction you'll continue to see for maybe next year also.
Got it. Coming to how you are funding yourself. I noticed that your assignment is now almost 31% of the sources of the fund, right? Clearly you are funding yourself significantly through assignment and securitization. Where you are preferring assignment. Can you just talk to the economics of an assignment versus a securitization? Would you continue to be much more preferring assignment over securitization? Just give us some sense of the economics of the two modes of funding.
Yeah. Maybe Sumit, who's asked you, I'll just explain it to you in terms of what our approach and what our strategy is.
Overall, if you see now, assignment has taken over and now our borrowing on commercial paper is virtually nil. Going forward, I think assignment will be in this range and probably slightly lower. The advantage of assignment is it is a true sale, so you transfer the risk also and it goes off your balance sheet. It's a more capital-efficient way of running the business. Having said that, at this level is where we would want it to be, and we would want more assets hereafter on book, and that's our strategy going forward. With easy liquidity, I think we are set for a better Q4.
How much capital do you have to set aside when you are assigning versus securitization?
No, assignment is true sale, so you don't have to put aside any capital.
You will have to either over-collateralize or have some cash.
It basically gets adjusted in the commercial. Typically, you'll have securitization at a slightly lower rate. In assignment, the rate will be slightly higher because the risk of loss is also getting transferred to buyer of the assets. Typically, the way it happens is that CRISIL or some rating agency will make an estimate of the losses on the portfolio, and then we will do it if there's a history of the business as well as portfolio. Say they say that, okay, 0.6% is the expected loss of this portfolio through the entire life cycle of the portfolio. If they are securitization happening at X price, then it can happen at X plus something. Alternatively, securitization will happen at the same rate, but then they will ask you for a cash collateral. Maybe typically, say 5% of cash collateral you keep with them.
On which one happens that there can be bank fixed deposits. You have a negative carry on that. Even if your book is running down, so if your book has run down to almost zero level, the cash collateral remains stuck with the bank. That's how securitization happens. Therefore, from our point of view, assignment is a clean true sale where the risk is assessed upfront. You are not blocking any cash collateral, and basically, it is going off the book completely. In case of securitization, the amount of cash collateral will get knocked down from your capital. Now, practically speaking, what will happen if the banks that are buying the asset, if they are more comfortable with you, they have done business with you for a longer term, they will take assignment.
It will be easier for them to take assignment and the complete loan on their books. If you are a new player, they have not done business with you, then they might insist on securitization. Sometimes also, when you're doing business with foreign banks, they may say, "No, we don't want assignment." They want PTCs, which is securitization then. These are all negotiated transactions. More and more, I think given a choice, we'll prefer assignment. Given longer term, now we have raised a lot of long-term resources, if you see our liquidity at INR 3,300 crore cash and banks in hand and almost similar amount of uncommitted line. Now we are fairly comfortable, we really need to weigh every transaction based on cost of funds, cost of capital, and our strategic requirements. Assignment will now become stabilized at these levels.
They won't increase as a percentage of our total loan assets.
Got it. The cost of fund for you from assignment versus a securitization is similar. The capital investment you are doing?
In the short term, in the immediate this thing. Supposing you are doing a mortgage asset assignment, you do a securitization at 8%, but what you've done is 5% of cash collateral you've given on which you have a negative carry. Instead of 8%, supposing you do at, say, 8.7% complete assignment. What will happen, your yield every year will be less by 70 basis point. Ultimately, through the tenor of the loan, you would make that up because your capital is not getting blocked, the losses are not coming to you and things like that.
Got it. Fantastic. The assignment income, I think we talked about the assignment income was almost 2%, right, of the NIM?
No, not of the NIM.
From the 8.2%, I think 2% was assignment, wasn't it?
Yeah. It's the 8.2% of the total of the interest income.
Right.
[audio distortion] . When you say 2%, our NIM 8.2% is based on total loan assets, right?
Yeah.
Out of that, 2% of the total loan asset is our assignment income. What we will do is that immediately after this call, we'll upload our numbers giving you breakups. I think that will make things clear.
Got it. I think this is pretty good because it is keeping our leverage low, and it seems like it is a very good way of funding. Is it fair to assume that most of the assignment is happening from the home loan book because that is where it is a lot easier to do the assignment?
Actually, a lot of assignment happened from gold loan book. You know what happens? Gold loan is completely collateralized asset. For banks, on their balance sheet, gold loan has 0% risk weighting because you got a full collateral.
Right. Got it.
A lot of it has happened gold loan, SME also, and home loan also, but I think it's not that it's only home loan, it's all three asset classes that we assign. Even microfinance is better.
I will just add to the reply. What has also happened that since assignment and securitization have become very prominent on our funding side in the last 15 months. Now the banks also have a first-hand asset quality experience of the assets on their book. They know that this asset is nil. For example, gold gives them virtually zero losses or home loan, they know the portfolio is good. Today when they are willing to lend money and there's overall liquidity in the system, given the fact that they've experienced our asset, that's how we've been able to have conversations and raise money in Q3 and going forward in Q4 also. I think most of the conversation is that if you want INR 200 crore assignment, you also give us about similar amount of term loan to create more assets to sell down further.
All that has been helpful in raising liability.
No, I absolutely feel that, given the granularity of the book that IIFL has and your ability to assign, I think that makes you one of the few players who can easily raise funding when you need it, right? Compared to the liquidity challenges many others are facing. That's, I think, pretty helpful. Now, coming to your provisions cost. I think the previous participant also asked this, and I also want to ask this, which is that every in your P&L, there is a negative provision that you have been taking in the last few quarters. If you look from Q4 2019 onwards, every quarter you have an impairment of financial instrument which is a negative number, which basically means that you are actually reversing your provision. Is that correct? Can you explain why that is?
I'll just explain that, and this is also in response to the earlier question from Anitha of HSBC. There are two line items in the expenses. One is the net loss on derecognition of financial instruments under amortized cost category. That amount is INR 49.38 crores in the latest quarter. That comprises of two items. One, there is a write-off of INR 70.6 crores, and then there interest strip income of INR 21.2 crores. The net amount is INR 49.38 crores. That is the net loss on derecognition of financial instruments. The second is impairment on financial instrument, which is a negative number which you're saying. That is INR -35 crores in the latest quarter. That is actually release of ECL. The way it is accounted is that when you write off, you release the ECL, so there are two separate items.
The ECL is released, that is a credit item, and the write-off happens, which is a debit item to the P&L. This INR 35.8 crore is the ECL release.
Is it because your net loss due to categorization is always higher and I've not seen the breakdown. Is it always that the write-off is equal to the negative on the impairment of financial instruments, so you're just balancing the two in the last two quarters?
There are certain assets on which we have made 100% provision, in which case the ECL will equal to the write-off.
There will be certain assets that have made a 70% provision. The write-off may be slightly more than the ECL release.
Got it. Okay. Sorry, I'm taking too much time. If you want me to come back in the queue, I'm happy to do that.
We can take one question.
Okay. In the MFI loans, you have this 100% credit-linked insurance coverage. Can you explain what that is and how that works?
Yeah. Essentially, that is the cover for the loan amount given. Every individual is covered to the extent of loan, and in the unfortunate event if the customer were to pass away, the loan is waived and insurance company covers that loan. That's what.
Okay. This is only in the case of somebody passing away. Like life insurance. Sorry. Okay.
Exactly.
Thank you. I have a few more questions. I will come back.
Thank you. The next question is from the line of Savi Jain from 2Point2 Capital. Please go ahead.
Hello.
Yeah.
Yeah. I have a question on your home loan business. One is, you conduct the entire home loan business through your subsidiary, right?
Yeah. It's only our subsidiary, you're right.
Yeah. In that, do you also do developer financing in that subsidiary?
Yeah. There's a construction finance with that subsidiary also. When you see these numbers for the developer group, they are consolidated. They are for NBFC as well as HFC put together.
Okay. The percentage that you are showing for your development construction finance, that includes loan given from the subsidiary as well.
That's right, because out of that INR 4,000 crores-
Eight.
INR 1,180 crore is from HFC and roughly INR 3,600 crore is from NBFC.
Okay. My second question was that, your yield on the home loan segment is continuously increasing, from 9.3% in FY 2018, it has gone up to 11% in a declining interest rate regime. Are we onboarding subprime customers because this is also coinciding with a uptick in your NPA and how exactly can we manage to continue to lend to salaried people at these kind of yields and obviously because our cost of funding is increasing, how do you see all of these dynamics playing out?
No, I won't say subprime, but even in the market in the liquidity squeeze after [IL&FS], everybody has increased the rate. This is the boarding yield, not the portfolio yield. Already we are seeing that from this month onwards, the interest rates are coming down. In last few quarters, our focus was more shifted on a very small town affordable and that PMAY scheme in which government gives subsidy. There are interest rates. If you look at interest rates of various sub-segments, it has not changed much. The relative contribution of the sub-segment, which is the affordable category, has gone up little bit. Even then, we are seeing that interest rates, as I said earlier in this call, that we have seen that NHB has reduced interest rate, and we are passing that on to our customer.
When our cost of funds had gone up, we obviously passed on to the customer and focus on certain segments that we are competitive in. As we speak, I think things are getting normal and back to where they were.
When you have 57% of the loan book going to salaried segment, aren't these people better off taking loans from banks who will also rely on their documentation to give them loans at much lower rates? Why exactly are they coming to you?
No, this 11% is a weighted average. This is not what we are charging to everybody. At the same time, most of these people See, today, if you really look at it, many larger players, in the affordable home loan segment, I don't want to take names, but everybody knows there are two large players. They stopped disbursing new loans and they have gone out of business. Therefore, the competitive intensity in these places has gone down. These are the segments or the geographical areas which are really not reached to by large players or where your relationship with the developer or your nimbleness, all those things matter. This was again, the last two quarters where we have seen that the boarding yield has gone up in line with the market.
Right. Your most of these homes are like standalone units, right? They're not like flats of big buildings or something.
No. Mostly they are flats or apartments in smaller towns.
Okay.
These home loan is around INR 16 lakh-INR 18 lakh, the value of the house will be around INR 22 lakh-INR 25 lakh. There you can't expect any big building or a bungalow for that price.
Right. What is the risk weight for these loans that you carry on your Do you carry like what, 50%?
No, the risk weight will be as per.
35%-37%, mostly it is there.
Mostly it can be up to 75%, 100% also, depending on what kind of loan is it.
Or INR 25 lakhs.
It varies, but it's typically in a small ticket loan can be 75%.
Current status, what is the weighted average risk weight of your home finance book? Do you have an idea about that?
No, I don't have this number, but we'll get back to you. See if [Prabodh] has noted it down and give this number.
Okay. Thank you. That's it from me.
Thank you. The next question is on the line of Chandra Govin from Ashmore. Please go ahead.
Hi, sir. In the opening comments, you mentioned that substantial developer portfolio can be moved to AIF. Is it moving loan portfolio to AIF or is it seeking incremental lending to the same developers from AIF? Why I am asking this question, because if we are moving loan portfolio to AIF, we need to do fair value adjustments again.
Okay. If you look at whatever provisions we have provided for, we are not carrying loan portfolio at price more than fair value. Fair value or maybe even less than fair value the way it's carried on our books net of provisions. Having said that, incremental loans for last two, three years, the new incremental loans we have moved to our AIF almost two or three years back. By now we have got almost six or seven real estate funds. The latest fund, India Housing Fund, where we at Fairfax and DEG also as sort of core investor and sponsor. That is partly invested, it's not yet fully invested. The new loans we are doing there. What we're talking about is a structure that we have done with another large developer also, where we try and move this high risk.
We pool together all these assets which are high risk and high yield. Basically, there are HNI investors or there are institutional investors who are looking at slightly higher risk. One other thing in a fund structure, you can have a senior and a junior unit, so series, series A and series B, where the cash flow timing can vary and therefore, the different risk appetite can be met there. This is still, I'm saying we are considering it, but still nothing concrete at this stage. Hopefully, once our diligence and everything is over, we'll come back. We'll work on this.
Okay, got it. Thank you.
Thank you. The next question is on the line of Shiv Kumar from Unifi Capital. Please go ahead.
Yeah. Thank you for the opportunity. Sir, we see that in the developer finance book, the GNPA has come down sequentially from 4.8% to 3.8%. What led to this improvement, and can we expect the same kind of a trajectory going forward in terms of asset quality improvement?
One minute, I'll just patch in Balaji who heads our real estate. One second. Okay. Yeah, Balaji.
Hi, Shiv Kumar. As you recall, I think when last time around also when we had this conversation, these are all lumpy exposures. Sometimes what happens is that some of these transactions tend to sometimes go over the quarter and some of them then get pulled back. This is one such instance. Otherwise the book is doing fine. Sometimes we do have these aberrations of one or two transactions going up and down. That's about it.
Okay. Can we expect this 3.8% to also trend down going forward in the next quarters? Do you have any visibility of any improvement in the asset quality that way?
Yeah, I think in the next two to three quarters you will see improvement. I think it should be.
Right. Sir, in Q2 you had made a mention that the developer finance book itself would be run down to the extent of 40% over the next 6-12 months. Do you still stand by that commitment?
Shiv Kumar, I think it will take a little over 12 months. I think whatever we said last time around also is that about a year or so down the line, we will see a rundown. That is happening. I think we should see that.
Right. Coming to the microfinance book, we see that there is a slight spike in the GNPA from 1% to 1.3%. Can you explain what is the exposure to these troubled areas, Assam and some districts in Karnataka and how is it looking like currently in terms of asset quality?
The increase, as you rightly observed, is due to the agitation in Assam. Assam only accounts for about 2.4% of our overall portfolio, but the increase in GNPA largely comes out of Assam. We are not doing more business there. I think the MFIN is also engaged with the finance ministry and the local government and we hope to see things settle down there. There's been some also, I think post couple of natural calamities in Odisha especially. We've seen now things settle down and come on course. By and large, we are in reasonable control of the situation.
Okay, and what about the Karnataka exposure?
Karnataka, again, the problem specifically is only in the Bangalore region. That's close to about 3.5% of our AUM. That also as we speak, I think there is a fair bit of engagement with the local bureaucracy who is very keen to ensure that the whole thing settles down. We don't have large exposure in these areas, and we are in control of the situation.
Okay. Sir, for the business loan segment, we see that there is hardly any growth over there GNPA at 4%. What is the strategy going forward? Is this a course correction kind of a thing wherein you want to not grow that particular segment while you look to amend the asset quality issues over there?
This is a segment where I think as broadly as an industry, especially on the secured LAP product, the risk return has gone haywire. It does not make sense from our perspective to be doing large ticket LAP deals wherein the rates are very low. We've course-corrected and brought down our average ticket size now to about INR 20 lakh and we do both secured LAP and unsecured business loan. That combined, I think now there is a degrowth in the portfolio but I think more or less it is settled down now. It'll be steady for some time before it starts growing. We've identified the segments which we want to be in, which is the low ticket LAP and the unsecured business loan. Those will be our growth drivers in this segment.
Currently, what will be the proportion between the LAP and unsecured business loans?
About 57%, or sorry, 65% is secured LAP and 35% is unsecured business loan.
Okay, what are the ticket sizes in each of them?
LAP also incrementally is now down to about INR 23 lakh-INR 24 lakh and business loan is down to about INR 16 lakh-INR 17 lakh.
Right. Sir, one last question on the capital market segment. We were under the impression that incrementally that entire segment has moved to IIFL Wealth and we would hardly see any loans being done here. Is there a rethink in that strategy and we can actually see capital market loans as an emerging segment at IIFL Finance?
No. It still remains one of the synergistic segment which is not the core growth segment for us. Even when you talk of growth, overall still it is less than even 1.5% of AUM and that I think is likely to remain between 1%-2%. These are largely to our retail IIFL Securities customer. That's what we do. As I said, this will remain in this region of up to 2.5% of the AUM.
Right. Thank you. That's it from my side.
Thank you. We'll move on to the next question that is on the line of Aditya Agrawal from Indgrowth Capital. Please go ahead.
Hi, this is Kunal Pawaskar from Indgrowth. One request was there to the team at IIFL Finance that on the subsequent slides where segments are shown, home loans, for example, business loans, right now we see the AUM number quarter-by-quarter, but it would be great if we could also see what the actual number on the balance sheet was because right now in the deck we are unable to see that. By segment, that is. You have another table somewhere else which just captures the segments and how they add up into AUM but not how much they are on the balance sheet. If that would be there, that would be really helpful.
Yeah, we'll give those numbers and as I said earlier, and also the interest income breakup. We'll put it up, yes.
Interest income breakup. Okay. The other question was that the number that is there on slide 15 of 38 of the PDF, which is the 2% assignment gain that is put in the NIM chart on the top right.
Yes.
That number has basically kept on growing over the last three reporting periods, FY 2018, FY 2019 and nine months FY 2020. What might that be due to?
Basically, the total assigned assets have increased, no? See, we make about 5% margin on the assignments which works up to 2% of total loan when we are looking at this number. Actually, when we look at NIM in a traditional way, that is what this explanation is but otherwise you have to look at these numbers separately. There's a 6.2% NIM on the balance sheet asset and then there is about 5% margin on securitized assets. Obviously this income will grow in tandem with the total quantum of securitized or assigned assets that we have.
Okay. To be clear, and please correct me if I'm wrong, but is it fair to look at it this way that for us to pad the two numbers together in one stack chart?
See what happens that you define NIM in a particular way where you say that what is the interest income and interest expenditure difference and that you divide by loan assets on your balance sheet. You get this number 8.2%. If you ask me analytically this number doesn't make much sense because what is happening in this NIM, the interest income, we are getting net credit for assigned assets. Supposing I assigned certain asset as 10% and my yield is 15%, then that 5% is getting into the gross income without any corresponding interest cost for that. We separate these numbers but when we separate these numbers, now we are taking this 5% income on assignment as a percentage of loan assets on balance sheet. A stack diagram actually doesn't make sense.
Only thing is it explains that if you calculate the NIM based on balance sheet numbers, how will it look like? Where is this 2% extra coming from? What I'm saying is that as I said today itself, we'll put up the breakup of these numbers which will make it very clear.
When you look at it, this is the interest income on balance sheet asset. This is interest cost of balance sheet asset. This is net interest income. Add, this is the income on securitized assets, the interest income, you get the total NIM as reported in the profit and loss account. We also have to make adjustment for the CV business because in the loan area, the CV business is not there for the last year and this year. Last year, the interest income and interest cost will have the CV business interest income and interest cost. When you look at these numbers normalized, you'll be able to make sense of the ratios.
Okay. One very last question, and this is a bit more on accounting, that when this income is booked on assignment, say any assignment transaction happens, per the result file with the BSE, strictly does it show an interest income hit?
Yes.
Okay.
The spread on the assignment asset comes as interest income as per Ind AS.
Okay. Is there any amortization or is it taken as a one-shot gain in that? Not one-shot gain, one-shot transaction.
There is amortization over the period of the asset.
Period of the asset. Okay. Originally, whatever that asset was. Okay. Five years, so then it gets amortized over five years. Fine. All right.
The income gets accrued over five years.
Got it. Okay.
Okay.
Thank you.
Thank you. The next question is from the line of Nikhil from Sundaram Mutual Fund. Please go ahead.
Yeah. Thanks for taking my question, sir. In the press release, point number third, you mentioned that during the quarter, IIFL subsidiary has transferred its microfinance portfolio to Samasta Microfinance for a lump sum consideration of around INR 172 crore. Why was this done, sir?
You know what happened when we acquired this company, this company had a very small balance sheet, and still the market standing, they were still getting established. Now it's known as IIFL subsidiary and business is very established. Earlier they were originating assets when they were not fully properly capitalized, and the assets were on NBFC balance sheet. They were acting as agent or a co-origination model where microfinance assets were sitting on NBFC balance sheet because the MFI company did not have adequate capital. Now that it's capitalized and is fully on its own, the microfinance assets we have transferred it back to the MFI.
Okay. Sir, second question is a data point actually. Can you share your Stage 2 assets number?
What number?
Stage 2 assets.
Stage 2 assets?
Yeah.
No, I think, I don't know. We have not disclosed this in a public domain, but we'll just check this. Stage 1, Stage 2, because these numbers keep changing based on estimating every quarter.
I mean, is it above 5% or, I mean, any broad idea?
We have not actually given these numbers, but if we give it, we will give it as a part of our presentation since everybody has access to this.
Okay, no problem. Third thing is, in our NCR, I believe, I think for our real estate book, we would be having around 25% of the exposure in NCR. I just wanted to check with you whether do we have any exposure in these accounts, Radius, Supertech, Ornate, Ireo, Omaxe, which I think one of our other HFC have classified these as stress accounts. Just wanted to check whether do we have any exposure in these finance?
We can't disclose the names of the borrower, wherever if the asset has any problem, then either we have provided for it or we have taken that as NPA. I really can't disclose the names of the borrowers in a granular basis or what is the exposure actually. As I said, that if any of the specific cases are there, they are provided for.
Out of our INR 4,600 crores, INR 4,700 crores of RE book, we don't see any further assets slipping into NPA in the next six, seven months.
See, based on the current state, whatever we can estimate or expect, we have provided for it. At least we don't expect further slippages in this.
Okay. Fine, sir. That's it from my side.
Thank you. The next question is from the line of Nischint Chawathe from Kotak Securities. Please go ahead.
Yeah, hi. Hello.
Hi.
Yeah, hi. Just two, three questions. One was, on the home loan side, your book has been sort of almost flat for last three, four quarters. Is it something where you just kind of slowed down disbursements because the off take is low because the rates are higher or is it something that the repayments have gone up because of balance transfers?
No. Actually, the borrowing yield, as somebody else also pointed out, so we were basically pricing it based on cost of funds. Yes, the offtake was primarily lower because of disbursements were slower, primarily because of the rates being higher, one, and two, many places we were very cautious because even if the builder is getting stuck and wherever at least we are financing the approved project for finance where then you can get that even if you disperse home loan, it might get in difficulty. Having said that, as I said, these things are easing now, so the rate of interest also. The NHB, that is the principal refinancing organization, they have reduced the interest rate, and they also realized this, that if they keep interest rates higher, then many housing finance companies will not be able to be competitive and disburse. That has happened.
We are seeing good positive traction from December. We are seeing that the month of December was significantly better than earlier sort of eight months, and I think that will continue in this quarter also.
Sure. How many cities do you operate from?
I think we operate our gold loan and all other products from six cities, but home loans probably will not be in all the cities, but will be in good number of cities, maybe at least 200 - 250 cities.
No, because if you really look at 200, 250 cities, it's obviously a fairly large footprint that you have.
See, this footprint is recently expanded, significant part of business still. This, we are expanding, we are training people, and they will start contributing meaningfully in one year's time.
Size of the book is not that large that if you're operating in 200 cities, you may not kind of struggle on growth or good quality developers across. I mean, you're already large, right?
No.
Select geography.
I think, if you really look at it, in the affordable segment, we are next only to Gruh Finance in terms of size.
At INR 50,000 crore book, when the average ticket size is around INR 15 lakh, the size is fairly good. As I said that from many of these cities, as we are expanding our footprint and will get to scale in a year's time.
That is what the size growth as we expand our geographical footprint. This is what will drive growth.
No, what I'm trying to say is that growth may not, or quality of projects or stress may not be so much of an issue given the fact that your size is small and you already have a wide footprint. That is what I was trying to say.
Yes, that's right. We have been cautious in last few months, but I think we are seeing that the environment is changing little bit [audio distortion]
Mm-hmm. Sure. Just on MFI.
Also one more thing, Nischint, is that the segment that we are operating in, there are some other housing finance companies, and many of them have shut down. A couple of them at least have stopped disbursing. That also is an advantage in terms of making sure that you keep your credit threshold high and still grow the business.
Mm-hmm. Sure. On the MFI side, when you say that your ticket size is INR 20,000, is it like ticket size per loan or is it average loan per borrower?
Yes, ticket size per loan, but in MFI, you will not have too many multiple loans per borrower. Because most of our loans are joint. It's basically a group lending. The five women as a joint lending.
There are MFIs who have kind of multiple loans per borrower for various needs.
No, I think we have not done that.
Sure.
What happens, there are MFI regulations. Anyone can't have more than two or three loans from all the lenders, not only other loans.
If somebody has already got, say, two, three loans from other NBFCs, other microfinance companies, then they won't qualify as loans from us. Forget about multiple loans from our side.
Sure. On the tax rate side, what really happened this quarter?
This quarter is a normal tax rate. Last quarter was slightly lower because the first quarter we had provided for tax at a higher rate.
Mm-hmm. No, I think.
This quarter is 22%, which is applicable tax rate.
22%? I mean, you're getting any rebate for any specific product because I think the corporate tax rate would be higher, right?
No, I think this is the right tax rate.
It has the effect of exempt income. It's 22% + surcharge. If I remember, it's 25%.
No, what is the benefit that we have? The effective tax is 22%.
22.6%.
On some of the liquid assets, if you're getting dividend, that might be tax-free and kind of things.
Okay. Just one final question. Prabodh was kind of clarifying this particular quantum in write-offs. I think he mentioned that INR 70 crores of write-offs and INR 20 crores interest strip. i was just trying to understand what interest strip was.
I think INR 20 interest strip is what?
Nischint, that INR 21 crore is interest strip on the assigned asset.
Okay. Why will you write that off?
No, that's not a write-off. That's just an offset. There is a INR 70 crore of write-off.
There is INR 21 crore.
INR 21 crores of income that you have earned on the assignment.
Yes. The net amount is INR 49 crore, which has been debited.
This is the ongoing one, right? This is not on sale.
No. Every quarter we book some gain because this quarter we did about INR 2,300 crore assignment. Every quarter, whatever is sort of new volume, we'll interest strip on that. The old also, there will be some amortization. The net amount this quarter was INR 21 crore.
Got it. Sure. Great. Thank you very much. Those were my questions, and all the best.
Thank you.
Thank you. We'll move on to the next question. That is on the line of Rajeev Agrawal from DoorDarshi Advisors. Please go ahead.
Yeah, hi. Thanks for giving me the opportunity again. I just wanted to understand on the DCF portfolio, I think it was asked that your quality is improving. But there has been a lot of concern around the overall real estate, the sales. What are you seeing on your side? Are you seeing that the traction is picking up now? If you can just talk about the broader real estate market that you are seeing.
Well, you're saying that the real estate market is improving or not? That is what the question is?
Yeah. How are you seeing the real estate market?
I think the projects which are where, okay, there's a demand and there's a latent demand. Demand is for affordable houses because now the demand is more from end users. The investors and speculators are out of the market. The demand is that location is good, and people think that project will get executed and they'll get their apartment or house. Actually, again, Pune, Hyderabad, Bangalore, these markets are doing well. Bombay, suburban, good location, they have seen good traction. Not only the projects funded by us, but otherwise also. The problem areas are obviously the very high-priced pocket of central Mumbai or certain areas of Gurgaon and maybe certain areas of Noida is very large. Greater Noida is very large. Certain locations which are little out of the main location.
I think the problems are more concentrated there. If you look at central Mumbai, then it has absorbed large amount of system credit and therefore, people are concerned about the whole system. As I said, the improvement and traction what we are seeing is more in the affordable segment. If you look at Bombay, up to INR 1.5 crore, INR 2 crore is affordable. If you look at Bangalore, it may be INR 50 lakhs. If you look at Delhi, it may be INR 75 lakhs to INR 50 lakhs depending on which area you are in. Other cities may be INR 30 lakhs, INR 40 lakhs. Every city has a different market.
Got it. What percentage of our loans would still be under moratorium?
Moratorium, you are saying basically the developer loan?
Yeah.
I think they are at different stages. Not too many loans will be under moratorium. Balaji.
There are no interest moratorium. Whatever will be there will be only from the principal part, and it will be all evenly spread out.
I think there's no interest moratorium. The principal moratorium is, say, if you look at our entire loan portfolio, I think it's fairly spread out. They're at different stages.
Got it. On the business loan side, I think we had in the previous quarters indicated that the GNPA went up because it was a seasonal issue, right? I think in Q1, Q2, we talked about seasonality possibly causing the GNPA to go up from 2.2% to 3.8% and then 4%. Into Q3, we are still seeing it as 4%. Are we expecting this to go down or what is the expectation around the business book?
We will get out of this one.
Typically, what happens in this is that some of these cases were treated legal during the course of the year, it takes about four to six months to bring the customer to the situation where either we get to sell the property or he makes it online, or he balance transfers the loan. We expect improvement this quarter. Also do understand that given the slowness in the economy overall, there have been headwinds in this sector. That also has meant that we've kind of slowed down our growth there and we've remodeled our business to look at pricing the risk appropriately. You will see an increase in the boarding rate, which is largely to take care of the risk in this segment. Our strategy continues to be that we choose the risk, price it appropriately, and do follow up with strong collection.
That's how.
Got it. Should we expect higher yield and also higher credit costs going forward in this particular business?
No, that's not the idea. We've increased the yield, but I think the GNPA will remain at this level where they are or probably come down in this quarter. It depends a lot on terms of resolution getting the case order from the arbitrator, et cetera.
Got it. This is one segment which was primarily cash flow-based, then you were using secured LAP as you mentioned, which is now at 65% for more than INR 50 lakhs. Clearly you have brought down the ticket size here from what I understand, right? Where you were getting the collateral in terms of the property. Do you expect your secured LAP portion to continue to grow from 65% to even higher number? Are you looking at more than the cash flow as a basis for giving the loan?
Cash flow assessment is necessary for every credit approval because eventually collateral is just a deterrent. Our policy is that anything above INR 50 lakhs must have a collateral, though there are cases below INR 50 lakhs also where we do take collateral. Cash flow assessment is necessary. Collateral, as I said, above INR 50 lakhs must. Below that is also certainly a segment of business which we do. We've priced it appropriately and we've reduced the ticket size. This is the way forward for this business.
Okay. All right. My last question is on the home loan. I think this question came up earlier as well, which is we have a boarding yield of 11%, cost of fund is 9.5%. If you were to just look at our home segment and accounting for NHB finance and everything, what would you say is the cost of fund in this particular business?
In home loan?
Yeah.
Cost of funds, around 9% or so. Incrementally, it's coming down.
Yes.
As I said that, again, you know what happens is when NBFC refinance, there were different refinance rates for different pools of assets. When you are doing a very small ticket home loan, then they give you loan for refinancing that at a lower rate. Home loan business is a little segmented, and you apply different cost of funds for different segments.
Right. What would you be shooting in terms of a return on equity for a business like the Home Finance? Is it similar to the rest of the business, or this will be a lower return on capital business?
I think given our ability to securitize, sell the assets as well as earn cross-sell income on it, if you look at our balance sheet for last year and maybe this year as well, it generates similar return on equity. Our target would be to, as we have said earlier, to take the return on equity to 20% range, which is around 17% today. That applies to both the businesses.
Okay.
Home loan business can hit 18%-20% range of return on equity very comfortably. If you are able to continue the securitization and the assignment over a period of time, then it can improve from there also.
Got it. Okay, great. Thanks a lot.
Thank you. The next question is from the line, Shiv Kumar from Unifi Capital. Please go ahead.
Yeah. Thank you for the follow-up opportunity. Sir, what is the cost of funds, incremental cost of borrowing in Q3, and what is the blended cost of borrowing?
Incremental cost of borrowing and total cost of borrowing. Can you, Prabodh, takes this?
Yeah.
My total cost of borrowing is 9.45%, and my incremental cost of borrowing would be close to 9.25%.
Okay. With such a higher cost of borrowing, do you still think that you would be able to grow the home loan category at these rates?
This is the 9.25%, what we are seeing is the weighted average or aggregate cost of borrowing. In home loan, as I said that we are getting refinancing at a lower rate. Therefore, we will look at it from that perspective, and I think the rates that has brought down the last quarter by some of the refinance organization, and we are very comfortable and confident that we can grow this business from next quarter onward pretty well.
Okay. Sir, Q2, you were expecting a new refinance line from NABARD. Has that come?
Not NABARD, but the [audio distortion]
Okay. Sir, one question with regards to developer finance. Have you seen any of your clients get support from the real estate fund which was launched by the government?
Not yet.
Are there any proposals wherein you are trying to access those funds for some of your stressed accounts?
We have submitted a few proposals to them as to start with to see the process and the mechanism that they are suggesting. We've been interacting with their team also. We will know probably sometime in the course of this quarter as to the outcome of that.
All right. Thank you.
Okay. Shiv Kumar, you had asked about NABARD. We raised INR 150 crore in our MFI from NABARD. That came through this in Q3.
Right. Thank you.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for the closing comments.
Yeah. Thank you so much, everybody, and if you have any more queries or clarification required, please be in touch with our investor relations. Thank you. Have a good day.
Thank you. Ladies and gentlemen, on behalf of IIFL Finance Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.