Thank you for joining and welcome to Paytm's earnings call to discuss our financial results for the quarter ending on September 30, 2024. We will start our call with Q&A. After introduction to the management, I request participant to utilize Raise Hand feature in your Zoom Dashboard if you seek to ask a question from Paytm's management. We have with us Mr. Vijay Shekhar Sharma, Founder and CEO, Mr. Madhur Deora, President and Group CFO, and Mr. Anuj Mittal, SVP, Investor Relations. A few standard announcement before we begin. The information to be presented and discussed here should not be recorded, reproduced or distributed in any manner. Some statements made today may be forward looking in nature. Actual events may differ materially from those anticipated in such forward looking statements. Finally, this earnings call is scheduled for 60 minutes.
A replay of this earnings call and transcript will be made available on the company's website. Subsequently we will start our Q and A now. Kindly utilize Raise Hand feature on your Zoom Dashboard. If you seek to ask a question, please ensure that your name is visible as your name, last name followed by your company name for us to be able to identify you. We will unmute your line and take question in the respective sequence of the raised hands. First question is from Alok Srivastava from UBS. Alok, you may please go ahead.
Yeah, yeah, yeah.
Yeah. Hi everyone. I think first question is if Madhur or Vijay if you could explain this DLG model with an example in terms of how revenue will accrue, how cost will be there? I think it will be helpful for everyone. Yeah.
Hi, thank you Alok, I can begin to answer that. So as you know, in our previous model we without DLG, which is a model that we continue with certain partners, we have a sourcing fee which we have described earlier as 3.5%-4%. So that continues as is. We upfront give a DLG to our partners, which obviously is well within the regulatory guidelines. So we give that DLG. We have, as mentioned in the earnings release, we expense that entirely currently in the quarter in which it was given. So in the last quarter we have expensed all the DLG that we have given and as a result of this we get higher collection revenue during the life of the loan. The overall take rate net of DLG still works out and here we're talking about merchant loans because we have given DLGs only for merchant loans.
The overall take rate during the life of the loan net of DLG cost still works out to be north of 5%, which is, and as you know, earlier we did not have a concept of net of DLG costs. So we had an overall take rate. We think that the overall take rate will still be north of 5% net of DLG cost. So we do expect a significant amount of collection revenue over the life of the loan under the DLG model.
Also, I would go ahead and tell that this is Vijay. Thank you for joining. Also, I'll go ahead and tell that we were reviewing all our regulated businesses and we were seeing what is the market practice and regulatory sort of guidance on those businesses, and as you are aware, the more or less industry had matured or materially had reached towards a DLG based structure. While our commercial model never had any challenge from any audits, etc., but our lenders did look at it, but we were more about that how can we make it very much aligned to like what everybody else does the business, so there the commercial model and viability. We waited till the month where we were able to see that we have enough income.
So we have reported in the quarterly earnings that we have actually taken all the DLG amount that we paid as a cost in the provision, the cost in the quarter. And I'm very happy to say this, that it does not change our profit guideline. We are going to make larger money and this is going to be helping us net the DLG cost if at all, any quarter we are assigning in that and expectedly every quarter there will be DLG cost. And I also want to extend next further that DLG costs as you are aware are going to be paid back to us. So higher revenue. So in a way the business does not require additional equity capital or investment because this is in a rotation. Money is in a rotation here.
Okay, sure. Just to follow up on this, Madhur. This 5% net that you'll be making. Is it over and above the upfront fees that you will make on the loan?
It's a total money that we make. So we make sourcing fee up front. We have DLG cost up front and then we have collection revenue over time. The total of all of that net of the upfront DLG cost that we talked about will be north of 5% or is expected.
Sure. Typically are we talking about a tenor of 12 months or so?
Average tenure is about 12 months. I mean most of our loans are 12 to 18 months. There can be some which are slightly longer, some which are slightly shorter. But yes, that is in the ballpark o f what we do.
Sure, sure, Madhu, that is helpful. Secondly, on net payment margin, I think my calculation is suggesting some three and a half basis point npm. That's roughly a basis point improvement over last quarter. So how has this happened? Has there been some change in mix or something which has driven this improvement?
I won't comment on exactly what the improvement was, but yes, it has gone up, as we have indicated in our earnings release, has been due to largely better monetization of merchants as well as control over our payment gateway costs, so it has been on both sides.
Okay. Should this be the run rate t hat we should be looking at in coming quarters?
Yeah, we do think that we should be able to manage. We should be able to maintain these sorts of levels going forward. We do have some quarterly volatility maybe because of festive being slightly better, slightly worse numbers and so on. And obviously I'd just like to point out here that all of these numbers are excluding UPI incentive. So including UPI incentive for the year, we expect our payment processing margin to be significantly higher.
Sure. Thanks a lot, Madhur and Vijay. Thanks. All the best.
Thank you.
Thank you.
Thank you.
Thank you. Alok. Next question is from Aditya Bagdia of Buoyant Capital. Aditya, you may please unmute your line.
Yeah, hi. Thanks for the opportunity, and congratulations on good set of numbers. So just one question like you have mentioned in the presentation about increased monetization of the devices which were not in use. So if you could just highlight your strategy on that and what would be the rough take rate on those devices right now?
Rough take rate on devices.
So just to be clear, yes, we are focusing on increased monetization of from our devices. The core piece of that of course remains subscription revenues and the subscription revenues has been inching slightly upwards as we get greater active rates and so on. We have talked in the release about reactivations but also pickup, refurbishment and redeployments. So we're quite focused on that. So the core of it is subscription revenue. I think we've given a couple of examples of other places where active devices can also give us increased revenue. And there have been a couple of examples of that. But just to be clear, that relates to active devices, not to inactive devices.
Okay, thanks. What would be the subscription revenues for the quarter? Like, is there a change if you r edeploy an inactive device?
Aditya, interesting thing is that once we pick up a device, that merchant does not remain a merchant anymore with us because we picked up the device. So one number gets reduced there. But if we refab and redeploy the device, we did not incur a CapEx of the size of typical CapEx. We did incur some ref cost which in turn signed up a new merchant. So what we've done and we've written in the detail there is that we will continue to pick up or recoup the devices from the market if the merchant is no more using them, refurbish them and redeploy. So that is how we are trying to say we will more monetize the device. I hope I'm detailing it and you can ask which part I should detail further.
Thanks a lot. That's all.
Thank you.
Thank you. Next question will be from Siddharth Gupta followed by Pranav Gundlapalle of Bernstein. Siddharth Gupta, Voyager Capital. Can you please unmute your line and ask your question?
Hey. Hi. I hope I'm audible. Good evening gentlemen. Great set of numbers. I have a couple of questions. Firstly, on the DLG model, if you could elaborate between the difference between the take rate we'd have on non DLG loans and on the DLG loans. Secondly, do we plan on extending this DLG model to other, t o our other l ending partners as well? And if we have an internal gap that we wish to have on these k ind of models that we have set a round 225 for this particular lender. And third, I wanted to understand if we have any plans on moving back towards a wallet business with a tie up with a potential bank in the future?
Maybe I'll take the first two questions and Vijay can address the wallet question.
So, o ur net take rate for the DLG business, like I mentioned, should be a little bit north of 5% over the life of the loan. So when I'm saying net, that is net of DLG cost, that is not dissimilar to loans which are without DLG. I think the key thing that matters in a loan really is, as you can imagine, you know, interest rates and so on. But also, what is the credit loss? And that is where, as we have mentioned, we are seeing improving asset quality ever since we restarted doing the merchant loan business in March and April. So we're seeing improving asset quality. That's very encouraging. Our collection performance is also improving. So that is what affects the net take rate. But compared to the two models, which is where your question was, they are quite similar.
Of course in the case of the DLG model, the DLG cost comes up front. So as this is, once this is ramped up then it becomes business as usual. But in the first couple of quarters you'll see a bit of a drag. Right? Obviously we have had the numbers that we have had despite the meaningful amount of DLG that we have given last quarter. On your second question, we are open to doing DLGs with more partners. I don't think we have a strong preference one way or the other. Like we should mention, this is the emerging market practice and we are perfectly happy to be in line with what the market practices. For various reasons, some lenders may not want a DLG and that is okay as well.
Yeah. So it's really interesting to know that not every lender has asked for it, but we also wanted to be particularly looking at the particular type of portfolios, etc., etc. So it is not a wider practice that we are going to go with and that is why we have not set a limit or a number here either. Meaning in other words, we are not saying that it will be on every loan nor it is going to be with the capital. So that's what we are trying to say.
But then it leaves me open to t he question that, apart from, say, signaling t o the lending partner that we w e're sort of backing up on the quality of the asset that we are bringing to them. What is our skin, our incentive to kind of go ahead, push forward with this model?
I told you a little bit a while back, this has become an industry practice and regulatory best practice. So our interest was that let's remain in that within the border.
Yeah. The indication that we also had from partners is that they are. Their appetite for doing for amount of business they do under DLG model is somewhat higher. So to your point that that signal is not just a sort of qualitative thing, it does actually have an impact on how much business we do from their standpoint. And it's also possible that some new lending partners may have a preference for DLG model versus maybe, you know, less of a preference of non DLG model. So our focus is we're seeing enormous amount of demand at very good asset qualities and this is a very profitable business for us. So we do want to try to get into win win partnerships with that.
So if they, if existing partners can scale more and new partners, some potential new partners are finding it easier to start with this model and continue with this model, then we're open to it.
Okay, got it. And maybe on the wallet bit.
Yeah. Can you ask the question again please?
Yeah.
Can you ask the question again that you want to bring the wallet back Again?
Yes. Are we envisaging bringing the wallet back with another banking partner or is it a product that we've put on the for now for the near foreseeable future?
Because if you know the Paytm Wallet was operated by Paytm Payments Bank, which is under regulatory supervision right now, we would wait for clear direction on that side first.
Okay. Thank you.
Thank you.
Thank you. Next question will be from Pranav of Bernstein followed by Rahul Jain of Dolat Capital. Pranav, you may ask your question now.
Hey, good evening. I'm just going to go back to the question on DLG. While the average take rate would be the same versus the earlier arrangement, would the sensitivity of the revenue to asset quality change with this model versus the prior model?
I think it's apparent. Over the last four or five years since we have started doing merchant cash advances in the merchant loan business, we have seen asset quality in a relatively tight range. Obviously we have disclosed that every quarter as you're aware. I think within those ranges, and I would say even give or take a couple of percentage points, as much as a couple of percentage points on expected credit loss, we don't expect the net take rate to be different or to be different than what I just mentioned earlier. Right?
So the answer is that in all reasonable scenarios we don't expect that to be different. In theory it can be different because it is a little bit more dependent on collection revenue. But as long as our expected credit losses are in that range or even somewhat higher, we don't expect. The way this models out is that you will get the collection revenue so enough and more collection revenue so that the net take rate will be like I mentioned, north of 5%.
Understood, so yes, I think you know, in the normal circumstances it probably would remain the same. Just trying to understand, let's say there's zero credit losses for a portfolio would end up with much higher revenue? Similarly if there is doubling would end up with much lower revenue.
So, if you had zero credit losses, we would expect we would have much higher revenues, much higher net take rates. If you had even meaningfully higher ECLs, we would still end up with through the life of the loan roughly the same net take rate. Of course in a theoretical scenario where we breach, you know, like you mentioned 2x then yes, our collection revenue would be lower. But like I mentioned and it's mentioned in the earnings release as well, the reason why we are doing this is to release more capital. Our lenders are very confident of the business, we are very confident of the business we're seeing improving asset quality, lenders are committing more capital on the back of it.
The timing, in addition to the regulatory and the market practice, the timing has been when we feel comfortable that we are not going to have such scenarios understood.
Now I'm just trying to understand the benefit for the partners. So that was the basis of the question. The second question is on your cost base. You've seen again a material reduction this quarter versus last. Would it be fair to say this is a new base or is there room for further adoption in the near term?
At the moment we're guiding to this being the new base. Although we continue to look at our cost base particularly on people's software and other indirect expenses, which is the largest chunk, about 85% of our other indirect expenses to continue to find optimization opportunities. I'm optimistic that we will find such opportunities. Like you may remember last quarter we had guided to 5%-7% for the reduction on the back of full quarter impact and so on. We exceeded that on employee cost. So we continue to remain very disciplined on trying to find as many areas as possible. Yeah, so I think that is an ongoing exercise and to find more and more opportunities, including AI driven opportunities to find efficiencies.
This is Vijay. I'd like to add a couple of points on both line items. Important to note that if you notice our contribution margins, they've gone back to near 55% without any UPI incentive which is the guidance that we had done with the UPI incentive and in my belief this is going to be the new norm. We're very hopeful and sure that it should not cross or go much below than these numbers and UPI incentives sort of what comes out will become on top of it, number one. Number two, there is one large cost.
But now, because I love the way you write those notes and I love to read them, so I want to tell you that there is a cloud cost, pretty much large amount of cloud cost, and we've seen one of our industry peer to make a cloud in a CapEx model instead of an OpEx model. And that's another way to look at the cost structure that, so I personally would operate that as AI comes further, further, further. It'll become that we are far more profitable on a point to point basis. But we are far more capital efficient also in using the capital the way that is meant to be.
So, I personally remain committed that technology-wise for a per transaction and for perf revenue we should be lower cost of people, lower cost of machines, and, as you are aware, we are talking AI which is a little bit of cost but we would remain even further cost efficient on that. The models that we are deploying and the cost that we are incurring them are phenomenally low. I'm very happy to tell you, we in literally 10 months reduced 60% of our manpower cost on support. And that was so good. And this all triggered by Klarna's blog post that you would have seen out there. And we internally have created AI IVR. You can talk to a machine like a machine talking and a human so interactive IVR response that used to be front ending the merchants.
Now there is a single model that is answering them on a text. And if you want to continue the call on a call, it will continue there and the agent will also know this. So these are even opportunities to fork out to be a full blown independent technology and software businesses. I'm very hopeful like Madhur is saying that this is a new norm that we will be further finding it out ways of our cost but not necessarily in people but on operating costs which are beyond people costs. The point is that and I also believe that our business with this new DLG model that we've done will bring us more capital towards credit disbursement to the merchants. And this is more of a future forward underwriting help that our lenders have learned over the period.
The quality that they have seen, remember the quality that they saw in last quarters gave us more revenue is the reason that we earn more credit revenue and more financial services revenue that we've written in the earnings call. You're talking about higher margin business getting more excess of growth, opportunity of growth while the machine-based leverage is growing this. I'm personally hopeful. Let's see what goes up.
Understood, that's super helpful. Thanks a lot. All the very best.
Thank you, Pranav. Next question will be from Rahul Jain of Dolat Capital followed by Jayant Kharote of Jefferies. Rahul, you may ask your question now.
Yeah, hi. First, on the personal loan distribution business, when you see things turning better and the way we would like to grow in this space and on the revenue recognition point of view, do you see the take rate to ideally go up by 50%-100%?
Sorry, can you just repeat the second question? Rahul, explain that before I answer both questions.
Yeah, I'm saying in general for the total business, do we see the take rate going up by 50%-100% in the lending business?
In the lending business. Okay, so on your first question on personal loan distribution. We have done a fairly good job of disbursing about 1,700 crores last quarter. But we do recognize, as we mentioned in the release, that we have more work to do, and I think we have done a decent job this quarter of adding some new lending partners, and we do hope to add more lending partners in the next quarter as well. I think that is critical for us that scaling the lending partners that we have added last quarter, all those lending partners are relatively small on the platform right now. As well as, you know, adding and scaling new partners, that really is the way we want to grow this business.
I think we've been talking about that for the last two quarters and I think once we are able to do that and hopefully in the next, when we're talking a quarter from now, we will have more proof points to show to you. We'll be very confident of scaling this business because the market opportunity is massive. It's just that, you know, you have to bring in as much supply as you can and as quickly as you can. So that is the key in terms of how does this business scale. There are other factors, there are other tailwinds that could also exist. We are seeing in some sense enough demand drive. So the number of financial products that we did last quarter was about six lakhs. Personal loan is obviously a subset of that. So there is enough and more demand.
I think we are, it is fair to say that in the early days, us and some of our partners are being quite cautious as well. So there is an increasing penetration opportunity. And finally, I would say, and it is important and it is what it is, that we are going through a very cautious phase of the cycle as it should be both for us and our lending partners. So maybe six months or 12 months or 18 months from now, that sort of overall market backdrop is more supportive. With respect to your second question, we do expect our lending or sorry, financial services revenues to continue to scale up on a Q on Q basis. We did have a very good quarter despite on the revenue side, despite the fact that the volume disbursed and number of FS products did not go up very fast.
But we did get better revenues and this does create a base for us to continue to scale it. I think as we get more volume through our platform on both ML and PL, we should be able to achieve that over the next couple years of quarters.
Just last bit, if I could ask one more on the AI initiative on the Soundbox, do we see this could be a meaningful contributor in the near term basis and what should be the ideal?
I don't think it will be a meaningful contributor. The intention was to say that we really continue to innovate on the technology and the various aspects of merchant businesses. This is something that FMCG companies asked us and then Meesho asked us. So we thought that we will talk about it. Meaningful is a big number. So I'm going to say that these are one of those 20% experiment that our team continues to do it.
I would add that this channel of advertising is a bit of a differentiator. We would hope that this does scale, but these things specifically this particular channel, any new channel does take a little bit of time to scale, and we also hope that we see knock on impact of this on our overall advertising business that we are able to offer a differentiated, effectively publishing property to our advertisers, and as a result they advertise, they do this but they also advertise more on our platform.
We are trying to defend our product actually by creating more ways to earn revenue per product.
Sure. Thank you. That's all.
Thank you, Rahul. Next question will be from Jayant Kharote of Jefferies followed by Anand Dama of Emkay. You may ask your question.
Thanks Pranav. This one's for Madhur Deora. I just wanted to understand the accounting for this DLG model. I get it that the net take rate should remain on MLS north of 5%. But the structure through the P and L, should it be like a gross take rate of 10% minus the FLDG cost and the net take rate. And if that is the case, how many quarters do we take to reach that steady state sort of accounting gross and net numbers.
Yeah, so the sourcing fee is taken up front. The DLG cost is basis the ECL model. Given this is a new product we have taken on basis the ECL model. The entire cost of DLG has been taken up front. It is in other direct expenses above contribution margin. The collection revenues will come in financial services revenue over time. The time period of that, like we mentioned that the average tenor of these loans about 12-18 months. The vast majority of that revenue will come in less than 18 months. Actually the largest chunk comes in 12 months. Let's say vast majority comes in about 18 months.
And then there is some tail revenue because you have loans which may have gone ECL but you continue to recover those loans even past the full tenor of the loan or even past the last repayment date. So that's sort of the profile. These are not very long dated but at least for the next couple of quarters they create a bit of a drag compared to if we had to do these loans without DLG.
Just to clarify, 12 months from now our gross take rate if the ECL is holding up goes to 8%-10% and net of FLDG we'll be at 5%. Of course it can be better if the recoveries are stronger. Is that a correct understanding 12 months from now?
That's probably correct.
Great. Lastly on the costs again, phenomenal job, guys. I think in two quarters to come down to these levels. How do we go from here? Is this now? Should we expect quarter-on-quarter growth on this, especially the non-sales employee cost base, or is there more headroom?
I think, Jayant, primarily you should think of if you were to expand marketing costs. I mean that too when UPI, new customer onboarding and market share cap, etc., show up, which I believe that for concentration risk will be done. In my opinion once that is taken care of we would spend money on marketing and that is the time that you should see this growing as far as people is concerned. Not really. I do believe that UPI consumer growth offers an incredible large opportunity for us.
As you are aware, this business was earlier not being done by OCL but by our associate PPBL, and thanks to RBI and NPCI, they allowed us to become a TPAP license as OCL, and now we are awaiting new customers addition, and once that is allowed, we would spend on marketing but a little bit only large when we will take care of market share cap also. So you're expecting the increase only at a materially changing market condition, not otherwise.
Great. And if I could just squeeze one last one, is the active sales employees. I see that base stabilizing around 30,000-10,000 number. Given that you are doing a lot of redeployment of devices, should we expect this number to grow moderately rather than going back to that 35-40,000 number?
You should expect to. Basically we are also enhancing the productivity per employee actually behind the scene. Let me also say the AI that we keep singing a song of is also going to help us on per employee productivity in sales field. So while the number would increase slowly but there will be further productivity in aspect.
Great and congrats guys for the great set of numbers.
Thank you so much.
Thank you.
Next question from Anand Dama of Emkay followed by Suresh Ganapathy. Anand, you may ask your question.
Hey, thank you and congratulations for great set of numbers. Is it possible for you to quantify w hat's the collection revenue that's included in the non-financial services?
We don't really break that out historically, and I would be reluctant to sort of put out another data point, but we have mentioned earlier that 3.54% historically was the sourcing revenue and roughly 1% and maybe in some quarters slightly more. Let's say we have said in the past 1% is the collection revenue, so that's broadly the split on obviously the non FLDG model and non distribution model, so not the pure distribution only which obviously doesn't have the collection revenue. In last quarter it was slightly higher in terms of that split because we did a really good job of repayments and collections and like we have mentioned just merchants are just using mobile payments more so that helps the overall performance of the merchant lending business, so it was slightly higher, so that's about as much direction as I could give you.
Sure. This is primarily on the merchant l oan and PL business both, right? Put together.
Largely, it's merchant loan because merchant loan, just to remind you, we are doing on the same model we've been doing over the last four or five years. Obviously, now in part with FLDG also on the personal loan business. Vast majority of our business over the last two three quarters has been distribution only model. So there is really no collection arrangement. Our lending partners do their own collection.
Any update on the new loan products that we were talking about earlier on, like home loans, mortgages?
I think there are a few experiments and integrations going on with a few secured products. I don't think that at this point in the financial services business that is our number one priority because we see a big penetration opportunity in both merchant lending and personal loan. Like we mentioned earlier in merchant loan there's a huge amount of demand and we just want to unlock more capital including through these DLG arrangements. And on personal loan the focus is on adding more and more partners. So that is really the core focus of financial services while we have work going on. But I think you should really look at that as maybe having some meaningful contribution after the next two or three quarters as opposed to anytime very soon.
And lastly, is there anything pending from o ur side to be done for the NPCI to approve the new user or a customer onboarding?
Hi, this is Vijay. So as of now, nothing. Seems like we are just in a wait state. I wish we can start sooner.
Thanks. Thanks.
Thank you Anand. Next question will be from Suresh Ganapathy of Macquarie followed by Nitin Aggarwal from Motilal Oswal. Suresh, you may please ask your question.
Yeah, thanks. Just a little bit more on this FLDG thing. So if you have about 1,600 crores of portfolio which is under the FLDG and let's assume you are giving 5%. So you are telling that 80% is given in the form of bank guarantee. And there is a cost associated with that bank guarantee. And apart from that a certain ECL cost which has been expensed through the PNL is my understanding. Right?
No, sorry. Let me just clarify, Suresh. So we have given 1650 is the AUM as of September 30th. The disbursed amount is slightly higher than that as you would expect because some installments have already started, have been repaid. So the disbursed amount is slightly higher than that. On that amount. The arrangement is that we give a DLG. The DLG is not 5%. It is meaningfully lower than 5%. 5% is the cap as you obviously know from the regulator. So our DLG is significantly lower than that. The arrangement is that, that DLG, there's no bank guarantee here although there's flexibility to give it as a bank guarantee under regulatory valuation. Our arrangement is that in this case we would most likely give this as a FD which would be lien marked and all of that cost 100% of the DLG that we give.
The arrangement is that we most likely give that in the form of an FD and that FD would be lien marked. And that entire amount of DLG that we are giving in the form of lien marked FD has been expensed in the last quarter. So in other words, there is no DLG given which is not expensed in the PNL this quarter.
So just to understand the numbers, let's assume it is 1500 crore. The disbursement is higher 2%. Suppose this is what you have given. That means you're saying 30% has been expensed. 30 crores has been expensed through the PNL. I'm just telling ballpark, just rough calculation.
Yeah.
Okay. INR 30 crores have been fully expensed through the P&L and it is coming in the other direct expenses. Right?
Exactly.
Okay. Let's hypothetically assume that the number is 5%. The actual experience of that client is 5%. So effectively we are saying that instead of 30 crores it's closer to say 60 crores -70 crores. What happens with the remaining 30 crores? Who backs the hit? The company passed the hit. Or what happens to Paytm? Is there a clawback arrangement because you are only expensed till 30 crores? Right? Just throwing numbers off the app just to understand the mechanism.
Yeah, so let me just simplify the numbers because they're all illustrative. Anyway. Let's say we do INR 100 crores of disbursal and let's say we have 3% DLG. Okay.
Okay. Yeah.
That 3 crores.
Yeah.
Will be given in the form of FD.
Yeah.
That entire INR 300 million will be expensed. Right?
Okay.
Now let's say the ECL is higher than 3% or higher than INR 3 crores on that book of INR 100 crores.
Okay.
All of that hit is credit loss for the partner. Right? So in this case, because we are publicly disclosed, I can say in this case where we have given DLG, we're talking about SMFG where we have given a separate disclosure. Right? And that is a part of their. PL, because obviously they're making interest income as well. And on the remaining 95% or 97% of loans which are good. So they're making interest income on that. Even net of that additional 2% or 3%, whatever we are talking about here, they have very good. Right? So the banker is. So it is a DLG. In this case, the first 3% as we were using in our illustration, the first 3% gets offset against the FD. After that all the hit is.
Yes.
And then on top of that, depending on the performance of the book, we also make what we expect to be significant amount of collection revenue. But that is.
But moreover, if it crosses 3% out and they give you a collection incentive because you have already crossed the FLDG limit. Right? The company is not happy with the number being crossed 3%. You will still get a collection incentive if the GCLs are higher than 3%.
Yes. So, l et's extend that same example, so we have 100 crores of disbursal. We have 3% DLG, and let's say the partner has. Let's say the book eventually ends up at 5% NCL, right. The first 3 crores, so the partner now has 5 crores of credit cost. They get 3 crores from us, and on that performance level, over the life of the loan, Paytm would not only not have any additional cost to the partner, we will also make significant collection revenue from the partner.
Okay. Okay. Okay. Okay. This is. This is clear. But. But just one final story because this is an important thing for all of us to. Now the RBI is very clearly telling. As per the rules and regulations both synthetic FLDG and non synthetic structures like collections will be taken as a part of the overall 5% limit. Is somewhere down the line we are saying this collection is not a non synthetic FLDG because the RBI may view it as a non synthetic FLDG. Right?
I cannot speculate on that, Suresh. Honestly, this has gone through extreme rigor to ensure that this is an alignment with the regulations, alignment with market practices, of course, and to the satisfaction of compliance teams of both sides. So this is the collection revenue. The collection arrangement that we have is very much permitted and it isn't what you may call a synthetic DLG. We are not in the business of giving synthetic DLGs.
Okay. Okay. This is pretty clear. Thanks so much, Madhur.
Thank you. Please feel free to reach out if there are any other questions.
Sure. Yes.
Thank you Suresh.
Thank you. Next question is from Nitin Aggarwal. And this will be the last question for today. Nitin, you may ask your question.
Yeah. Hi. Thanks for the opportunity. Good evening, everyone. So, few questions. One is, like, what do you plan to do with the cash on the balance sheet now that has increased after the sale of the results? What is the optimal number will like carry forward in terms of cash?
I think Nitin, we want to address and visit that question with our board. I think one of the things that we've decided is we want to be consistently free cash flow positive which is not that far away from for us. Now before we take that decision to the board and come up with a sort of a firm guidance or not firm guidance as in a directional framework for what do we think of as excess cash? How do we think about returning that cash? And of course before that what are the uses of that cash? So yes, we have talked about this. This does come up on nearly every quarterly call. And I do acknowledge that we have INR 10,000 crores of cash. And I don't see any scenario under which we will be able to use up any meaningful percentage of that cash.
But I think we have decided that let's get to the most important thing is that business should throw off cash. Right. And we feel like we're getting close to that and we'll absolutely address that with our board and hopefully have a better answer for you once we have crossed that milestone.
Sure, Madhur. And the other question is like if I look at in metros and key cities there is already a good coverage of like digital payment penetration. So what is the tech that you really look at? Is the growth in merchants coming in more from suburban regions or say something like going one level down metros and both in numbers I mean as well as in the value in terms of GMV. What is the time that you are really looking at?
Hi Nitin, this is Vijay. And while we all see significant amount of Paytm and Paytm Soundbox all around us in metro cities, I am going to surprise you by saying that the penetration scope is nearly double of what it has penetrated as of now in metro cities. I'm talking metro cities only.
We are talking significant large amount of time in metro city themselves possible. The reason that metro cities I'm talking is because there is a consumer merchant network effect. Because more metro city consumers pay using smartphones mobile payments, the more number of merchant needs Soundbox number one. Number two, what we are seeing in metro cities and a little bit ahead, let's say top 10 cities or top 20 cities is that merchant now does not wait for a larger percentage of QR based payment Paytm QR based payments. They are starting to take soundbox very early in the journey of being onboarded itself. So here I mean numbers can be very comfortably. I mean you NPCI gave about 60 million merchant data although I do not know the uniqueness check etc. on that data.
But I can say that there is a market of tens of million more sound boxes out there.
Right. This is very interesting. And lastly, just as a data point, how many inactive devices do we have that we plan to pick for merchants? How much does that come with?
We don't. So nothing of sort of that. We know that this is the inactive merchant. We are trying to go activate the merchant and we say the device is not working or picking up because of that. So it's an ongoing journey. What I can only tell you one thing here then is that we found out that these devices which we are picking back from the market are more like battery outage or some plastic etc. Refurbishments, etc. We see which is not very large. So the keyword is that there you go with opportunity of picking them back and then installing refab device back. So merchant becomes active revenue starts coming back. So that is why you are seeing there is a larger amount of calls out there.
Thank you so much.
Thank you.
Thank you. Thank you.
Thank you. Next question we'll take from Sachin Salgaonkar. Sachin, you may ask your question.
Thanks Pranav. Apologies, I signed up late. So if any of these questions is answered. Sorry about that in advance. First question, just wanted to understand how fast could we see the wealth insurance business growing and what are some of the new areas which you guys are exploring in terms of secured lending and any color you could provide on that would be helpful.
Sachin. First of all, secure lending or the loans which are of low margin etc. We've learned that everything ends up becoming the book for lenders. And if we are assigning secure lending distribution also on the same side of disbursement allocation, we rather lose an opportunity of another high better product for the customer. So we are not doing large amount of secure lending. And that is one of the big factor by the way that personal loan disbursements were sort of not in line with what somebody would have expected. So in other words we are not aggressively going against secure loans. Let's say that. And then I personally suggested that this is something that we will look at later if at all we need to look at then.
When you talk about wealth and insurance, good thing is that these things especially wealth market has had a tailwind where there is a great amount of opportunity happening and opportunity coming in. But when you look at insurance there is a distribution that we are working on. Are they going to become materially important? That is exactly the reason if you notice we have started to give number of transacting users or number of financial services customers because overall the business model will look like payment customers and cross sell to them and cross sell per customer will be the revenue because disbursements are or GWP whatever we help distribute won't be the primary number but the revenue per customer is what we are headed for behind the scenes.
So yes, we expect them. Don't expect them in one or two quarters, but do expect them in due course. Let's say second quarter, third quarter onwards, showing up as better than today's contributions. And that is why we are trying to say financial services at large matters, not just credit distribution.
Thanks, very clear. A quick follow up out here. So from a loan perspective is it only the merchant loan book which should materially scale up let's say in the foreseeable future?
I think we see opportunities in both merchant loans and personal loans, Sachin. I think the demand side of it, the ability to do very very sensible business in both of those is enormous. I think the dynamics are slightly different where in merchant loans. You know I think the growth of our devices business after some interruptions that we had earlier this year is now creating that ramp up on personal loan. I think we did talk about this a little bit earlier. I'm happy to repeat that one of the key things that we had talked about over the last two quarters is adding new partners. So we're pleased to say that we did add some new partners this quarter, but quite frankly they're not ramped up yet. And we do have other partners in pipeline as well.
So we need to get the new partners as well as potential new partners integrated and ramped up and that will create the opportunity. There's no dearth of demand. It is just that we have to create more supply on the platform.
Very clear, thank you. Second question, just wanted to understand a bit more on what kind of steady state EBITDA margin should we expect from the business, particularly given the fact that business model has evolved a bit after some interruptions?
Yeah, I would say on, given that guidance right now. We have talked about, Vijay, last quarter about being profitable by having one profitable quarter by the end of the year. And despite the DLG cost that we talked about earlier in the call, we expect to not only meet that guidance but exceed that guidance so deliver some significant profitability this year. And then with all the tailwinds that we have especially on merchant payments, merchant lending, PL and the huge improvements that we have had in our cost structure, we expect to get very meaningfully profitable, so we are seeing this as getting to very meaningful profitability relatively soon, becoming a business that is throwing off cash, but specific EBITDA margin range I'll get into.
Okay, thanks. And my last question, Madhur, is just on any thoughts on potential cash return back to shareholders to your comments about, you know, trying to get into a cash position very soon. There's a guidance of EBITDA break even by let's say 3Q, 4Q and potentially at some point, you know, as and when the Paytm IPO happens, there could be, you know, incremental cash which you guys could end up getting. So if we add all together. Yeah, sorry, go ahead.
Sir, please finish.
No, sorry. The question was, do we see some kind of a potential cash return to shareholders maybe not immediately but at some point in the next 12-18 months.
Yeah, so I think your observation is right that we do have more cash than we need for any organic or inorganic opportunities and we do expect to get back in a position where we are generating cash. This question was asked about 10 or 15 minutes ago, I believe from Motilal Oswal as well. What we have said is that we're going to do. I think we want to get to a position where we are sustainably throwing off cash and then have, you know, a very good robust framework with the board about how do we think about the cash balance, use of money as well as use of excess money. So hopefully in a couple of quarters I'll have a better answer to this.
Thank you.
On behalf of overall, a board discussion that we had that we need to be fairly long haul in generating free cash before we start to think about returning it to the shareholders. There should be a trigger or a reason for it. And right now these cash amounts that we are able to get, we are rather going to be focused on operating business and higher margin and more revenue and more profit.
Thanks. Very clear, Vijay.
Thank you.
Thank you. Next question will be from Vijit Jain of Citi. This will be the last question for today. Vijit, you may go on and ask a question.
Yeah, thanks. Sorry I joined late. This is a repeat. My apologies. My first question is, so within the merchant loans business going forward, what kind share do you think DLG will take as a, you know, in terms o f disbursements going forward? Are you looking at a mix in mind? That's my first question.
We. Honestly, that's not a metric. We are and we have gone through and we'll share the transcript with you, we've gone through the DLG economics in some detail early in the call, as you would imagine. But in summary, over the life of the loan, we see this business as very profitable. We see, you know, regulatory clarity on this. We see certain lenders having a preference for this. And of course we, we see a huge amount of demand. And this is very, like I said, this is a very profitable business for us with or without DLG. Right. So when you look at it from that prism, we are perfectly, perfectly okay for business to be done on DLG model going forward.
And I don't think there's a metric that we're trying to manage to that X% should be DLG and X% should be non-DLG. And we're going to find out more in the next few quarters whether it stabilizes to a certain number, in which case we can start talking about, hey, what do we expect? But we're certainly not managing to a number.
And my next question was going to... Be, you know, you know, are there a ny major areas within, you know, payments or financial services that you think you c ould still venture into? I know I've asked this question before, b ut once you get the RBI Payment Gateway license, does that open up things like cross border, i s that meaningful? Is that something that you would like to do? That's my first question. And if you can just comment on if there's a timeline on, you know, when you get RBI license and also o n the NPCI side. Thank you.
Thank you. Vijit. This is Vijay and I'm taking this question.
Hi.
Hi. So number one, yes. That is one of the big reason that I'm personally whenever this discussion of returning capital to the shareholder comes. I'm suggesting that there are tremendous large opportunities for Paytm to grow within the current frame of scope of work. The first and foremost, let's go back to the origination of the moment when Paytm bank originated. We gave the wallet to the bank, we transferred the bill payment business for the bank and in due course the UPI also was operated by bank being at arm's length being it a different entity, the payment bank had its own business priorities and instead of growing UPI market share, it probably focused on other business models. So consumer side UPI market share for Paytm Payments Bank was something that we all know was not in the range of what other apps were showing.
While when you look at Paytm operated Wallet or Paytm operated QR, Paytm operated different services. We were the market leader there very clearly and are the market leader very clearly now. The consumer base of UPI is an opportunity which is way bigger than what we anticipate in a conversation as of now. Remember, the UPI consumer for Paytm is an open and wide open opportunity. The product, technology, market ownership, customer ownership, everything belongs to Paytm. And I really thank RBI and NPCI for making this possible and partner banks that as Paytm we are able to get these consumers. So think about right now RBI asked and Paytm Bank transferred 130 million customers and plus 200 million handles to OCL. And now once NPCI will give us a confirmation, we will be able to grow.
And my friend, I'm telling you we are not in this to become a mediocre player or remain a fringe player. We are here to solve for the problem of concentration risk or a market share. And we remain that aggressively committing towards consumer payment like you've seen us committed towards merchant payments. So the very fact that Paytm will have an opportunity to play in UPI consumer market share will be extraordinary large opportunity. As you can guess, once we have the customer on our platform, ownership of our customer on our platform, we will be able to grow tons of cross sell of financial services to this consumer. And then obviously there are byproducts like marketing services and advertising etc. that you're talking about.
And remember in the UPI ecosystem when RBI allowed us to become a TPAP player, it very clearly marked us a responsibility to Paytm that we will be able to potentially solve for concentration risks that the system carries. As an Indian player, as a pioneer, as a pioneer of the mobile payment system in India, we remain committed and we remain committed to invest expand our offering. Remember as an Indian player, as India's homegrown champion, we are here to invest in payments and there is a tremendous large amount of opportunity in consumer payments. When you come about the merchant side as PA license you should know that online payment innovations are something that we were able to bring QR on a desktop so that the customers higher trust less fraud prone and superior payment checkout systems happen.
Since two years we have not acquired new consumers, but we built dramatically large amount of technologies including cross-border multi-currency including quick commerce requires many other payment products. We are waiting to onboard as many more merchants so that we can onboard newer quality of product and offering to those customers, and I'm very happy to tell you you could figure out yourself this foreign transfers including another service that omnichannel payments systems are due to be very impactfully showed up in the market right now. Imagine Tanishq is a customer for us in offline, let's say, but they are not in online for us. We are not able to build a omnichannel payment, and India has to lead the way in the payment. I do believe that extraordinary amount of opportunity in payment for us to grow a larger term.
What we are right now focus as you could see is monetization, and we are showing the market that we can very well optimize and monetize, and in due course we will, when we get an opportunity, we will expand the time of the consumer and merchant both together.
Thank you so much, Vijay, and best of luck with everything and hope you guys have a really good festive Diwali ahead. Thank you so much.
Thank you. Thank you. Thank you everybody for joining us. Wish you all a very happy Diwali festive season and wish you all that the support means a lot to us. We've been here and see you again after Diwali.
With that we come to an end of this call. A replay of this earnings call and a transcript will be made available on the company website subsequently. Thank you all for joining. You may now disconnect your lines.
Thank you.
Bye.