Ladies and gentlemen, good day and welcome to Poonawalla Fincorp Limited, Q1 FY 2024-25 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing the star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Hiren Shah, Head of IR, Strategy and BIU. Thank you, and over to you, sir.
Thank you, Steve. A very good day to all of you, and welcome to the Quarter one FY 2024-25 earnings call. At the onset, I would like to welcome on board our new Managing Director and CEO, Mr. Arvind Kapil, who has joined us on 10th June 2024, has an impressive 25+ years of experience in banking. Mr. Kapil needs no introduction. He is a stalwart in the financial services industry in India, who brings with him wealth of knowledge and expertise in consumer banking space. He has introduced groundbreaking innovations such as industry-first 10-second personal loan, alongside digital loan against security, digital loan against mutual funds, and digital auto loans. Mr. Kapil has done his advanced management program from Harvard Business School, master's program in management from Global Enterprises, jointly from IIM Bangalore, UCLA Anderson, and SDA Bocconi, and City University.
Also, he has done Master's in Management Studies from Bharati Vidyapeeth Institute of Management Studies and Research, and a Bachelor's of Engineering from K.J. Somaiya College of Engineering, Bombay. His expertise will enable us to capitalize on opportunities, drive growth, and enhance our market position. To discuss strategy and way forward and the quarterly financial performance, I have with me our Managing Director and CEO, Mr. Arvind Kapil, our Executive Director, Mr. Sunil Samdani, and other senior management officials, and myself, Hiren Shah, Head of Strategy, BIU, and Investor Relations. Now, let me hand over the call to Mr. Kapil to discuss the future strategy and way forward in detail with you all. Over to you, sir.
Thanks, Hiren. A very good morning, everyone, and thank you for joining us on the earnings call. My name is Arvind Kapil. I am the new MD and CEO of Poonawalla Fincorp. I'm in the process of taking over. The results this time are based on past assumptions. Having said that, first and foremost, I would like to thank Abhay, the outgoing MD, also express my gratitude to our employees, our customers, our esteemed investors and partners for their trust and support in the organization. Let me begin by introducing myself. I worked with Axis Bank for over 25 years, and I thank them, first of all, for the invaluable experience and growth I've achieved during my tenure with them. I've seen the bank become a very strong institution.
It is a great experience, wherein I got the opportunity to launch various industry-first digital and physical products, and I owe a big gratitude to both Managing Director, Mr. Puri and Mr. Jagdish. Before moving to Poonawalla Fincorp, I was handling close to INR 750,000 crore in advances. At the outset, it's also a good time to thank the board of Poonawalla Fincorp and Mr. Adar Poonawalla for the exciting opportunity I have here. My endeavor is to make Poonawalla Fincorp a preferred choice of customers for their financial needs. It can be done step by step and process by process with the right foundation and building blocks and with a long-term perspective. Let me now take this opportunity to introduce our new management team members to you and the depth that we are creating.
Starting with Shriram Iyer, who's one of, in my limited view, one of the best guys in the industry in credit collection analytics. He comes with an experience of over 25 years in credit and processes, which adds immense strength to Poonawalla Fincorp in terms of capabilities on risk, credit collection, plus attracting and retaining the right talent, which is an extremely important aspect as we build on the foundation from here on. Added to that, we now have two chief business officers, CBOs, Vikas Pandey and Raghavan Iyer, who come in with over 22, 25 years of experience in retail lending across products, businesses, geographies, cultures, partnerships, and experience of scale. They have in-depth knowledge of building quality portfolio, and their strength lies in their ability to cross-sell. And we all know that as we start building...
Start setting the building blocks and start attracting cohorts of customers, we will have to build our skill sets for better efficiencies in the cross-sell of the model so that the efficiency goes up. We also have a new Chief Human Resources Officer, Harsh Kumar, who comes from another bank with over 25 years of experience. He comes with strong tech skills and a mindset, especially to add value, even in our AI-first initiative. Very rarely do you get HR heads who have an ability for AI skills. We have recently appointed seasoned professionals to the job of head of compliance, head of internal audit, and chief risk officer. Above-mentioned new management team members have managed various economic and financial cycles, thus having the strength to create sustainable, predictable, and productive businesses.
They have in-depth knowledge of identifying businesses and scaling it up, which is the value I believe they bring to Poonawalla Fincorp from now on. We are glad to have a combined team of seasoned bankers and existing talented resources in the company for optimized utilization and creating a combined massive expertise from here on. I'm excited about that. I see this depth adding requisite strategic direction in terms of the right product mix, which I think is very important for us to create the right balance of risk and governance, and most importantly, building a culture of collaboration, integrity, and excellence in an uncompromised way. Our franchise has built strong experiences in distribution and underwriting across its core segments.
It is my prerogative to now build the organization for scale and get it, get the foundation ready for long term, 5-10 years, as a clear line of focus from here on. As I look back at my own career, this is exactly the time I took over HDFC Bank retail assets portfolio, probably 12 years back, and scaled it to where it is today. I'm confident that we will build Poonawalla franchise to great heights with the management team, the combined strength that we have in place now on.
As part of the best practices followed by various established large companies in the industry, from now on, we will follow a prudent measure to share indicative guidances on overall AUMs, probably for the year and for a five-year perspective, five- to six-year perspective, so that we have an idea on what are our building blocks, what are the businesses that we're talking, what is the kind of scale we are talking. Because then the scale accordingly desires the right kind of strategies in the first one or two years. Let me take another two minutes here before I step into the precise strategies on the macro environment, and correlate it to the retail credit, especially from our perspective, maybe. Yeah. India obviously continues to hold its momentum in growth terms, even as the global economy has shown mixed signals. India recorded highest ever GST collection.
It's exciting for us to be part of the economy that's showing this kind of trajectory right now. You can see the UPI transactions are clearly soaring one way up, probably INR 2,000,000 crore mark, and on a very progressive growth engine there as a country. While it is difficult to make short-term predictions, I think there's enough confidence that India will continue to outperform the global economy at large, driven by growth in consumption expenditure, especially digital consumption, increasing multiplier benefits from CapEx, and the government focus on exports and capacity building in key sectors. All these indicators are positive for retail lending in the country, as we typically see high correlation between GDP and the growth and health of retail lending.
Therefore, despite the high double-digit growth of retail lending over the past decade, there's still significant headroom for further growth, and this, I'm talking as an industry. Specifically for Poonawalla Fincorp, I think the market share, if we put in the right focus of a strong foundation from now on, over the next one year, one and a half years, Poonawalla Fincorp, in my limited view, should see market share growing year on year for five to 10 years, and we could be in a very sweet spot, in my limited view. The numbers at a macro level also clearly show that penetration potential remains material. Example, individuals having one or more lending products is estimated at 230 to 250 million.
So the total number of individuals in the age of, say, 18 to 60, that can be lent to are in the range of almost 400-450 million. So having income over and above the cost of necessities, and that's important for us. With elections behind us, we are optimistic about economic stability with continued growth. Having said that, now let me take you through my strategy over the next 5-10 years. The last 40 days since I've joined, I'm in the process of taking over and realize that for scalability, a few things that you immediately pick up when you join is it's important that first and foremost, I see the need to strengthen our collection and infrastructure framework in line with a long-term strategy.
Because if we want to run and start talking in the range of around 5-6 times our book size on a 5-6 years period, and we're talking about a growth of probably instead of 4-5 relevant products, we're talking about almost doubling those product range. We're talking about a fairly large company and a large long-term perspective. For the first two quarters, we believe it's important to consolidate the existing businesses by reviewing in-depth processes, risk management, governance portfolio. Risk management in any finance business, especially the pedigree with which I've had an experience to work with, is going to be a key focus area, and hence we're closely monitoring the unseasoned STP portfolio, which was launched in the quarter over the previous financial year. Going forward, this portfolio will be calibrated both the credit policy as well as collection standpoint.
Our idea is that every existing business, we will calibrate both on credit and collections and build strength. It could take a quarter or two, but that's fine. It's important we are absolutely certain what product mix we are going to build our foundation on. The team and I are committed to transparency, and hence, we have enhanced the disclosure in respect of asset quality and liabilities in our presentations that we've uploaded. From now on, this one is, I think, very important, for me, and I'm reiterating this one, is that from now on, our fundamental guiding philosophy for all businesses, and these are not just words, they mean a lot to me, it has to be predictable, it has to be sustainable, and it has to be productive. So we plan to create a predictable, sustainable model.
So when I choose a business, I need to be sure I can, with investments and foundation set, it shouldn't be too complex to figure out that probably two years later, three years later, what's the sustainable profits that are going to roll in? What is the sustainable distribution investments are going to roll in? And it should get far more easier, to build building blocks thereafter. So we plan to create this model, starting with the first year AUM growth. My limited estimate shows we just joined the quarter already passed, but I think we are estimating around 30%-35% year-on-year growth, because the product mix is very important to kind of set the stage right for the first year. And maintaining a ballpark AUM growth, I feel, of 35%-40% over the next five years.
I believe this will help us build a retail business the way retail businesses are built. They're not built over a day, they're built step by step, they're built process by process, with solid risk management, with a mix of right products. We want to achieve 5-6 times in 5-6 years. We are ambitious on this figure, and we are determined to make it happen. We want to create... This is another important aspect in my mind. I thought it's time probably to share that thinking. I want to create an arithmetic mean on projection of probably even profitability. I don't understand the stock market. We are like engineers on the building blocks of business. We understand businesses, this much I can tell you.
But I would rather have an arithmetic means of profitability from the third year onwards, after we set the foundation in the first 1.5 years, mirroring close to the AUM projections. The idea is to create, again, predictable, sustainable business for years to come. We want to make it a stronger institution with definite. A quick sense of the 4 businesses that I have in my mind to venture in with high focus in addition to the existing plans of consolidation and growth. Let me begin the first one. Quick sense, consumer durables. One of the fundamentals to scale consumer finance business is to have a large customer base, which could be running much faster than the growth rates of the customer that normally the company ranks. The consumer durables opens many doors for us of the middle class in India.
This will help us in a large funnel of credible customers to lay a foundation for solid work on digital and analytics thereafter. This is one of the important fundamental strengths. As part of this business model, this gives us huge visibility. Since, remember, it's a point of sale business. It's also known industry-wide to create a strong, high-yielding cross-sell model from the second year onwards. The basic concept remains very simple: high repeat loan cross-sell is the best way to enhance and sustain healthy margins. But to do that, you've got to launch products where your customer acquisition grows at a substantially accelerated rate, and we actually become a much larger franchise on the customer base. In the second year itself, probably end of second year, we expect substantial strength from this business. Coming to the next business, a quick sense, we feed on our shopkeeper loans.
We believe that this, this business happens at the point of the kirana store, and we all know well that kirana stores have been in existence for a long time. And, it's not that you actually need a customer-facing outlet to meet them. You can actually have your teams right in the city and operating out of a fairly hygienic and nice place, but the point of contact can be to the kirana stores, and you can start engaging with them. It needs teams across geographies to capitalize. In this product as well, we would evaluate, by the way, both physical and even digital options... Now, coming down to the next one, which is strengthening of personal loan prime. Now, remember, STP is not prime personal loans, the way I understand it.
What we want to strengthen is, can I get the corporate top 100, 200 corporate India? Can we be the preferred choice of these customers? Can I have these quality of families walk into Poonawalla Fincorp, and we can become a preferred choice? We have our strength of digital. We have a management depth, which can create policies and digital, which could add a lot of strength there. We are agile. We are building in agile technologies and AI. We believe it's a good time for us to work on this area, both physically and digital, for prime customers. This also will help enhance our quality of customer intake of better quality. The next business is used commercial vehicle. We will start building it by incubating it for the first 8 months, and we'll gradually expand.
As a matter of fact, a lot of these businesses, we will incubate for 4-8 months and gradually build the building blocks to test the processes and technology before we fully launch them. All the above new businesses will have a bias to healthy margins and healthy portfolio quality. On distribution, almost all of them, we will use physical and digital distribution to the extent the law of land allows. Please note that our investments to this business will be biased to the first 4 quarters, and that's very important. So that, like I shared with you, not only does AUM start lifting to a different quantum, also the businesses start generating the revenue lines as we proceed forward. This also includes investments in collections and technology for laying the foundation, including the new management team.
All these incremental business add to the existing 4-5 key business to create a stronger franchise within the next 6-8 quarters. A quick sense, I've already covered the macro indicators, but I think in India, we believe there's a huge opportunity for credit growth and substantial base of 250 million, plus new to credit, and of course, under-penetrated customers. In my own experience, we find that the cohorts take multiple loans, and the cost of these products, once the loyalty sets in, will add substantial amount of advantages on the efficiency side. I'm maybe repeating a point here, but I think that's an important area for us to remember. That's a strength that we want to very deliberately add. Having a large customer base across different segments also obviously becomes a huge strength.
That's the foundation required for our sustained growth over 5-10 years book growth, and of course, predictable, sustainable franchise for profit generation, in my limited understanding, in an arithmetic mean form. Winning across these products and strengthening the existing ones will require investments in multiple capabilities. Let me summarize them quickly. Investments in collections, which I've already covered, is an imperative one for a stronger franchise that we want to do. Key differentiator between a successful and not so successful customer fund-finance business is the collection efficiency. Approximately 3%-4% improvement in resolution rates, from my experience, eventually leads to 15%-20% difference in accumulated net credit losses. So in the collection strategies, we want analytics-driven treatment strategy.
We want to focus on embedded digital payment channels to give you guys a feel, having a modern digital interface between the field agents and the telecallers to build efficiency, having segmented approach for different set of customer segments, AI-powered natural language processor, NLP, for customer interactions, omni-channel communication stack. The reason I'm specifying all this is because the need for all these to be strengthened. AI, artificial intelligence, will be another very important strategic investment for us, whether it's personalized targeting to credit and fraud models, whether it's building a robust, data pipeline, which is near real time on insight, one of the very important areas we'll have to invest in. Because this will be the strength for our digital on the go.
Keeping a strong governance to ensure compliance and privacy norms, investment in talent, platform, and machine learning, that can improve the number of models and efficiency. These are just to give you guys a flavor of the things that I personally will be involved in. On the tech stack, to differentiate based on AI and personalized targeting, probably ability to streamline, integrate with partners, BRE-based analytics deployment, the ability to keep elements of the stack modular, which we all probably know, and so that its rapid changes can be done and it's more agile. Finally, investments in the new management team, which I've already specified, is because they are the seasoned people having seen different economic cycles. Finally, to quick summarize, in the first year, we build a foundation with higher investments in collections, technology, launching the new businesses.
We expect AUM growth of 30%-35% in the first year, and second year, we focus on 35%-40% for the next five years, starting second year.... Third year projection, the profitability will be closer to an arithmetic mean, middling close to AUM growth. We aspire to scale AUM by 5-6 times in 5-6 years on a business model that is, again, predictable, sustainable, and of course, productive, our fundamental guiding philosophy for all businesses. It's very important that these 1.5 years investments are up fronted to lay a foundation for us to be a long-term player from now on. All our perspectives will be long-term from now on, on the basis of predictability and sustainability and productivity. This will help us build a retail franchise.
Again, I will specify step by step, process by process, solid risk management, and mix of the right products. All these four points are extremely important and not just mere words. I'm excited to begin this journey at Poonawalla Fincorp. I would like to now hand it over to Sunil Samdani, to take you through the update on the Quarter one, FY25. Thank you.
Thank you, Arvind, and good morning, everyone. Let me take you through the quarterly financial and operational highlights. The asset under management stood at INR 26,972 crore, reflecting a growth of 52% year-on-year and an 8% quarter-on-quarter. In terms of AUM mix, the MSME finance contribution is at 35%, followed by personal and consumer finance at 28%. Loan against property and pre-owned cars at 17% and 14% respectively. We continue to maintain a balanced, secured to unsecured mix of 49%-51%. Our net interest income, including the fees and other income, stood at INR 676 crore for Q1 of FY25, which is up 42% year-on-year and 5% quarter-on-quarter.
While our cost of borrowing remains flat, quarter-on-quarter at about 8.16%, the debt equity ratio went up from 1.9 to 2.1 times, quarter-on-quarter. This resulted in increase in interest expense. We continue to grow our pre-provisioning operating profit at a healthy rate, up by 47% year-on-year and 6% quarter-on-quarter at INR 432 crore. This was driven by productivity improvements on the back of technology enhancements, bringing in higher level of operational efficiency, and the same is also reflected in our OpEx to AUM ratio, which stands at 3.86%, down 13 basis points quarter-on-quarter.
Despite the high interest rate scenario, we've been successful in keeping our cost of borrowing at similar levels quarter-on-quarter through a dynamic treasury management, with one eye on cost of borrowing and the other one on liquidity and the asset liability management. Talking further about liquidity, we remain comfortable with positive cumulative mismatch across all buckets and a surplus liquidity of about INR 5,200 crore as of thirtieth of June 2024. The total borrowings at the end of the quarter was INR 17,121 crore, which approximately 70% of them are on variable rates, whereas fixed rate borrowings are relatively shorter tenure. This places us well to take advantage of lower interest rate environment envisaged in the future.
We continue to maintain a healthy asset quality, the gross NPA further improving to 0.67%, down 75 basis points year-on-year and 49 basis points quarter-on-quarter. While net NPA is at 0.32%, down 44 basis points year-on-year and 27 basis points quarter-on-quarter. However, it is pertinent to note that we have stopped cold lending, which also includes some elements of FLDG commitments during Q4 of FY 2024, and have started booking self-originated business. This book is unseasoned and needs to be monitored. We focus on continuously improving our risk framework. As Arvind earlier mentioned, we will also be investing into building a robust collection framework with manpower technology to ensure strong gatekeeping throughout credit life cycles of a customer with us.
Coming to profitability, the profit before tax for the quarter was up 46% year-on-year and about 1% quarter-on-quarter at INR 390 crore. The profit after tax at INR 292 crore was up 46% year-on-year, however, down 12% quarter-on-quarter, mainly on account of one-time tax benefit of INR 41 crore, which we had got in Q4 of FY 2024. Our capital adequacy continues to be well above the regulatory requirement, with CRAR standing at 31.57%, of which Tier 1 capital is at 30.09%. With respect to technology and digital capabilities, our technology stack today is a major enabler to business, with end-to-end customer onboarding without human intervention.
40% of our new origination is through straight-through processing, and even for the origination of the remaining business, there is a significant use of technology which is instrumental in improving our productivity. The key initiatives for Q1 includes the complete UI/UX revamp of the web and mobile app, the implementation of enterprise data lake platform, the contextual communication in web and mobile app. As mentioned by Arvind earlier, we will continue to further invest and strengthen our technology and digital track, primarily focusing on AI. In line with our vision to be the most trusted financial services brand, customer service is pivotal to our operations, and it continues to get disproportionate mind share of our management.
As per our latest customer satisfaction survey, the Net Promoter Score, or the NPS, as it is called, which is a leading indicator of customer brand loyalty, is at all-time high of about 72% across all moments of truth, that is sales, onboarding, service, and exit. Customer insights and identified opportunities of process improvements are being addressed and as part of continuous improvements. Our CRM has been customized to provide a 360-degree view of customer interactions across all touch points to all key functions, whether sales, operations, customer service, and collections. This ensures consistency, continuity, and the focused customer interactions. Adoption of IVR and bots have further improved our turnaround time, resulting in increased operational efficiencies and customer delight. In our continuous endeavor to increase digital collections, we have introduced QR codes and virtual account numbers, which has further brought down the cash collections.
On the people front, during Q4 of FY 2024, we were certified as Great Place to Work. I'm delighted to share that we've been recognized among the best place to work in the NBFC sector in 2024 by GPTW. Thank you, and I would like to open the floor for question and answer sessions.
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handset while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is on the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.
Yeah. Good morning, everyone, and thank you for a very detailed presentation and opening remarks. Arvind, sir, I mean, I have one question for you. I mean, you come from HDFC Bank, close to 25 years, and they've always kind of prided themselves on distribution focus, collection focus, and something similar we are looking to do here as well. So, I mean, 40 days into the organization, while you acknowledged a couple of times that you're still taking a transfer, trying to pick things up, what are the weaknesses that we identified during these last 40 days, which is where we are now talking about strengthening the distribution, strengthening collections?
The entire senior management team, right, has seen a rejig, where you have had your colleagues from HDFC Bank joining you now. So, I mean, what are those areas that you've identified where the organization was weak and where we need to strengthen now? Why I'm asking this is, I mean, after we acquired Magma, we were running down or closing down branches, reducing the strength of collection personnel, and now we are doing just the opposite. We're talking about expanding distribution, we are talking about strengthening collections, again, which is, I would acknowledge, a good thing, a very good thing. So if you could just throw some light on that.
Sure. I think, first of all, an excellent question, I must confess. But I think you've touched on multiple things. Let me make an effort. If I miss something, I, you know, you could repeat it, and I could cover it, okay? I'll just jot it down. First and foremost, I would not like to look at it as a weakness when I mentioned about collection. My collections, infrastructure, technology, AI, is focused, as Arjun's eye, on building a 5-to-10-year franchise. I think when you want to make it as a machine, which probably, let me take you back in history, if you remember, HDFC Bank at Aditya's time, for 20 years, that's the pedigree with which I have come. Those are my learning grounds. So it's. I've seen very high sustainable profit for many years.
I've seen that happening because they were planned well in advance. The foundations were run well in advance, so a lot of homework was done in the initial years in a thoroughly grounded way. Also, I think a new management, the reason I started with a new management team is, you know, it's different having capabilities, and it's very different having a seasoned management team, combined with an existing brilliant team that they will get. So I think all of us are building it as a long-term franchise. When you build a long-term franchise, I'm very clear it's not an experiment for us. We've come with that kind of skill. We are very clear on what should be the next building steps. These are not something which are new for us. So I think from existing trends, we are going to build step by step.
... notice, I've also put it on, in my sheet already. I think there's one business, STP, that we wanna closely review and, closely, measure. I think it's an interesting business. But I think we wanna, for a quarter or two, both on credit and collections, I've asked my team to review it more closely. I think that could be just a minor area where we need to tighten ourselves and, work on it closely with credit and collections. But overall, I think, most of my comments should be viewed in the context of five to 10 year building blocks of a larger organization, and that's what I specified. It's long term in nature, and, there are multiple small, small strengths I see at Poonawalla Fincorp today, and those strengths I'm gonna calibrate.
Over the first 2 quarters, like I specified, we wanna consolidate, and that's what it's gonna be. As a matter of fact, we're gonna go into each strength that they have. We want to optimize those strengths, and add that digital franchise. On your physical distribution, if you notice, there are 2 or 3 businesses. I've added consumer durable because it kind of really accelerates my customer franchise and starts building a solid entry into. It's the fastest, surest way to enter into a large customer base of middle class India, and that's really the foundation for a prosperous India over the next 5 years or 10 years.
So I want to accelerate that as an investment because you are well aware that investment in the first two years actually multiplies your returns in a more consistent manner, in a much more bulbing effect. That's exactly our aim to do it, because, you know, you're creating a compounding energy by creating the building blocks now instead of trying to play it very safe. And because, you know, this whole management team is fully well-versed, it's not an experiment for us. We are very clear on what we want to do, and we are very clear on the risk management philosophy involved with it. We are in a lending business where we will lend where we can manage risk. Wherever we think we don't have expertise to manage risk, we will accordingly fine-tune the product mix and build what we can sustain.
Because at the end of the day, we are responsible to all stakeholders. We have our own reputation very clearly on the line, and we truly respect that ourselves. So I hope I gave you a sense. So if building blocks are the branches, I would like to look at it previous versus now. This management depth is substantial experience. We've seen all the strengths. If you remember, I have personally launched cutting-edge digital products, which have worked. But despite that, I fully respect the physical infrastructure which can make business sense. Because it's in India we're talking about, which probably has multiple demographics, multiple lines of opportunity and business, and I'm not gonna leave any opportunity where I see margins, because we are in a business. My aim, end result is to make business with healthy margins and which stays sustainable for many years after I'm gone.
So I'm very clear on that, and that's what I'm here for. For me, reputation of mine comes first. Management team, Poonawalla Fincorp needs to become a preferred choice for customers, and our credibility will come first. So I hope I gave you a quick sense, my friend. Yeah?
Yes, sir that , thank you so much, and this is very, very reassuring. Just one follow-up there. While you talked about, I mean, building distribution, if you can also throw some color on how we are looking to kind of ramp up our physical presence. And another thing, sir, that you spoke about in your opening remarks was predictability. So I mean, if I just look at our, I mean, margins today or NII, to be more precise, I mean, this quarter, despite cost of borrowings not going up, they were stable QOQ. This is probably, I would say, in the last maybe seven, eight quarters, the smallest QOQ growth that we saw.
So just kind of trying to understand how do we bring more predictability in our earnings, given that you yourself spoke about that STP is one product, short-term loans is one product, that maybe we might be doing a little less or closely monitoring. Yeah, so that is the second question that I have.
I think, see, first of all, fundamentally, I'll explain to you the fundamental concepts that I understand, which will throw some lights into what the thinking is. And then I'll hand over to Sunil and our CFO, will anchor, to probably add value to your precise question. First, let's understand, if you have three, four businesses, and you, you know, in that, if you're trying to play with one business contributing both to your ROA, I think the first step which I see is that I think it's very important we launch tried, tested, stable, sensible, margin-oriented businesses between digital and physical, and that's what I covered in my starting speech. So you are almost doubling, ballpark, your range of businesses in the first.
So you might land up putting more investments in the first four quarters on multiple things to get gear up for it, because you are well aware, finance business is a lot of strong collection is not the way normally. And a strong collection has huge value in terms of the way you proceed ahead also, both ways. And whether it's technology, whether our ability to connect dots, whether it's AI, whether these businesses, I don't want to delay in launching this, because we are well exposed in these businesses, so it's not something new for us. And so I think what the stats will be... Sunil, you want to give a second?
Yeah. So, so specifically to your point, you know, between quarter-on-quarter, all right? You, you are aware that, Q4 was the 1Q where, you know, we started onboarding customers outside the co-lending arrangement.... Right, which essentially means, you know, and, and the basic difference between when we take customer on our book outside co-lending, is we look at long term. We, the average tenure of our customers that we onboard today is more than 1 year in a small ticket personal loan, which in a co-lending arrangement used to be shorter tenure as well, right? Could be 3 months, 2 months, 6 months as well. So when you have a longer tenure, portfolio base, while it helps building in stability in the book, the amortization of the fees also happens for a longer tenure, right?
As for while the fees percentages are fixed as a percentage of disbursement, the amortization of which also impacts your NIMs, and that essentially is the slight difference that you see quarter on quarter.
Got it, sir. And this is useful. Later, during the call, if you could just address that given that we will be in investment mode over the next four quarters, and I think during your opening remarks, Arvind, sir, you said that from third year onwards the profit growth should start narrating the growth. So I mean, how should we look at profitability over the next couple of years?
You should see... I mean, I'm expecting that thereafter you will see a much more predictable and sustainable. That's the reason I use these words. You should have an arithmetic mean, my friend. Otherwise, I mean, as a CEO, I and you have to be on the same page. How do I give you these returns till I am very clear it can come?
Right. So I think, I mean, I come back to the question to you, but thank you so much for answering this question.
Thank you. The next question is from the line of Avinash from Emkay Global. Please go ahead.
Yeah, hi. Yeah, good morning, and congratulations on the results, and also thanks once again. The first time I got this opportunity to raise this question to you. Yeah, couple of questions. The first one I mean-
Please speak louder. We are unable to hear you properly.
I'm sorry, but just can't hear you.
If you are-
Can you hear now?
Yeah. Can you hear me now? Yeah, I'll try again. Yeah, yeah. Yeah, so congratulations, Anil, and thanks for the opportunity. Two questions. The first one, of course, you have kind of an elaborate explanation, but again, I'm coming in the backdrop that the product suite that you offer or like, plan, is still a little bit limited, and it's kind of a ambitious growth. And this is coming in the backdrop where, I mean, the RBI governor has repeatedly kind of, kind of, trying to flag that, I mean, you know, exorbitant growth, particularly in the retail unsecured. So in this kind of a backdrop, the 35%-40% sustainable growth for next 5-6 years, and forget about the size, right? Forget about the brand and stability.
But I'm just speaking from the point of view that right now you do not have a mortgage or a, you know, a new vehicle loan; these are typically the kind of anchor product for the prime retail customer. So in this regulatory backdrop, RBI is a bit kind of focused towards having a moderate growth in this segment and overall to retail unsecured and all. So how, I mean, you see this? And the second one would be more of a legacy and not really for you. Last year, yeah, last year, you had taken a kind of around INR 900-INR 1,000 crore of previously all this legacy book. Now, how that can be utilized and how that will be running down?
Because what happens here that, you know, the credit cost that comes in this quarterly number is really, I mean, kind of impressive. But the kind of a write-off number that comes into annual report, that's totally out of line, nearly 4% of the income. So if, I mean, if you can provide some color around that, what has happened with this, you know, the provision that was created and where sort of, legacy look at time and, and connectivity with write-off and all this. Thank you.
All right. So we could gather some bit of your question. Let me make an effort in the first part, and I'll request Sunil and Milanka to chip in on the second part. Okay. On the risk management, like I said, the risk management has to be looked at holistically across all products, processes, and the entire organization. So over the next quarter, the quarter we've entered, I'm gonna put in a lot of time in that. If you look at consumer durable, it's considered as a secured product. If you look at commercial vehicle use, sustainable business models, which are sustainable even from a healthy margins perspective, keeping the mind of the way we have built the foundation so far.
If you look at even loans against property, which I didn't cover here, but we probably right now only barely operate 35 locations. So aim is to probably go two to three times the geographical expansion immediately. And further details, as after 60 days, probably I'll be in a better position to give you more insights on how we're gonna build that. And that's the reason you see the first four quarters. Yes, on the governance and RBI, I think when they talk about risk management, it's my understanding is it's equally important to enrich and move up the ladder of the quality of risk of unsecured as well. It's not just about as simplistic as unsecured and secured, and secured becomes literally secured.
There are a lot of unsecured businesses, like, for example, I mentioned 100 and 200 India's corporate, which probably are the most educated, the best paid employees of this country, and those customers we don't have today in Poonawalla Fincorp. I'm gonna target those customers digitally and physically, and imagine these customers will be one of the best profiles of the customers from there on, because they will be a younger crowd.... and they will be the growing India from here on, and this is the India that makes money on the salary side. So apparently, it's still called unsecured, but as we start calibrating, so the first thing is, even in unsecured and secured, I think it's important to lift the quality of risk management in unsecured with very significant steps. That's what we are doing, sir.
Now, over to your second question quickly, Sunil and Hiren, both of you can quickly give him a sense on where we stand on that. Yeah.
So on the legacy book, and the discontinued book, we still have about INR 350 crore, which is outstanding. In addition to that, there is a DA book which we had acquired, that's about INR 770 odd crore.
You know, that the connect between the, you know, the write-offs that comes into your report and where are we with this 900-odd crores, INR 980 crore provision that we have created on this acquired/legacy book, when we had sort of sold our housing finance, and we have sort of used this INR 980 kind of a buffer. Where that stands today?
Yeah. So, typically, about 80% of our write-off pertains to this book that we are talking about.
Okay. Yeah, and what is the status of that?
Avinash, your audio is not clear. Could you please call back in the question queue?
Okay. Okay. Perfect. Thanks.
Thank you. The next question is on the line of Nischint from Kotak Institutional Equities. Please go ahead.
Thanks for taking my question. Actually, I have three. You know, first one is on the STPL book. You know, have you seen any red flags in your STPL book, and how are you dealing with it? The second one is, you know, slightly more long term in terms of how do you clearly look at the business composition, whether it's gonna be secured versus unsecured. You have a particular number in mind or just a high ROE, low ROE business mix that you have in mind? And the third one is slightly more short term, is on the cost of funds, where we have seen almost stable cost of funds on a sequential basis.
So if you could give some guidance on that, and more importantly, what proportion of the 66% of bank loans are linked to EBLR or repo? Thank you.
Okay. Again, I'll take the first two and request my colleagues to take and give you guys some insight. Quickly on HTPL right now, the reason I singled it out was because I think I clearly see in the 35-40 days, a sense I have, and we need to... To be honest with you, I need to deep dive more in it, to be more precise. Okay? It could be early stages, but I do have a sense that I think we need to tweak some credit policies, and we need to beef up our collections abilities. And we, as I speak to you, we have Shriram, who joined a week later than me, and within the first 20 days itself, we've seen some promising results already.
So I think, my perspective on that is that if we can make it a strong, viable business, it'll be a, a strength we add. But I think, the reason I single it out is because you will see me talk the way I see things and the way we build, businesses in fair transparency. So I think the idea is that over the next one quarter itself, we should see significant, strength emerging out of it, and that's saying. We might also evaluate, at all times, showing, businesses in our balance sheet, with STP, with much more details as we go along. As far as risk management, I think you mentioned to me, if I got your question right, what's my perspective on risk management in more detail?
Like I alluded to it a little while back, you know, the easiest thing is to say is secured and unsecured, whereas if you realize that the unsecured also has various categories of risk tolerance. And I think that's very important criteria, because I have seen with our past experience on an extremely large scale, and in that time also, there was regulatory advisers to probably review. And over years, we've seen that certain quality of unsecured businesses actually surprisingly show much lower risk than even some of the secured businesses. So I think my priority will be risk management of a solid order, which we can manage both with credit as well as with collections, and build a book which we all can be proud of here. I'm very clear on this. I'm not here for short-term gains at all.
I'm here to build something which I, I can look back and feel good about. And I think that should give you a sense of where we come from and what I want to do. But there will be some bit of calibration, some bit of work required. In 30, 40 days, I can't have a perfect finger on the pointer yet here. Yeah.
And no red flags on unsecured, right?
Sorry, I missed your question. Sorry.
Sorry. No red flags or concerns on the unsecured NBFC.
Right now, these are not concerns. These are more observations to make it better. And remember one thing, this book is unseasoned, that's why I singled it out, not because it's showing concerning flags. See, when you have a 20-25% of the business, which is probably where the co- lending stopped, and they started probably Jan or Feb, 4-5 months ago, I think it was important in the earnings call to probably make a mention of it. That's about it. There's nothing else that we have visibility of right now, which we'll go deep dive and check.
Regarding your question on the cost of funds.
Sir, while of late, there's been increase in MCLR by multiple banks.
... But we anticipate that our cost of borrowing broadly will be in similar range, okay, in future quarters. And regards to, okay, external benchmark linked portion, it is about 20%, of the total borrowing, which is linked to external benchmark.
No, so between MCLR and EBLR, about 70% of our liabilities are variable linked and 30% is fixed. And the fixed rate also, what we see is largely capital markets, so which means we are shorter than a loan. So on the whole, we are well placed, you know, given that we envisage a low interest rate scenario going forward, so we are well placed to take advantage of that situation.
Also, I think I covered it, but just because you alluded to that, I think we have increased our disclosure with respect to asset quality and liability. I'm just mentioning it. Thank you.
Yeah. Perfect. Thank you very much, and all the best.
Thank you so much.
Thank you. The next question is from the line of Kunal Shah from Citigroup. Please go ahead.
Yeah. So a couple of questions. Firstly, in terms of, the investments which you alluded to and, maybe the leadership strengthening. So any, any, further capability build up, which, you think you would be doing at the, senior management level, which, we should expect, in the near term? And overall OpEx to assets, how should one look at it? Because that would have played as a lever, but now you would be in an investment phase again. So how would, OpEx to assets, pan out? Yeah.
I think conceptually, getting a good management team also finds revenue streams. You know, that's what I have learned from my experience. But you know, the timing could be quarter here, quarter there. But I think what's more important in this earnings call is our long-term direction. And imagine if I don't invest, let's say, I mean, hypothetically, I'm quoting a figure just to drive the point. We don't invest in collection, let's say, INR 60 crore or 70 crore or 80 crore, whatever the right figure, I mean, when we come to that figure. Now, you know, you can either show an 8% increase in profit, or you can show an 8% increase in investment.
When you build these collections, you can have the risk appetite or something my seasoned credit guys can take it from here, you can launch these whole businesses. You can create 5, 10 years of visibility, of profitability mirroring close to your AUM projected. I think that's the line of thinking, sir, which is more important right now. I mean, if I have a 2-year perspective or a 3-year perspective, one could think totally different, and which is, which we don't have. I'm not looking at it from a 2-year perspective. I'm looking at it sitting with you guys in the third year, fourth year, fifth year, and you guys hopefully having a smile on your face the way I envisage it. So thank you so much.
Yeah. And secondly, when we look at it in terms of slightly pull back on the growth, to say 30, 35% from the current run rate, and this quarter, we actually saw very sharp buildup on personal and consumers, almost going up 30-odd% quarter-on-quarter. So which are the segments wherein you will see the pull back on the growth side from the existing businesses? And when we look at, say, personal and consumers over here, or say MSME, and compared to what you have articulated with respect to shopkeeper loans, how different were they, maybe in the earlier business model, and how different would it be now, yeah?
Sure. No, I think SPB, I've asked my team to not accelerate further right now till I get a full 100% control on it. Okay? So I think the plan may have been to accelerate at a much faster rate. I want to get a total fix on that, and I think we will, but I need to do that. And the other businesses that we are launching on the shopkeeper loans, it's a very high margin business. It's. I mean, the entire India is at your disposal. We can be the best in class in that. And I love that business. We've done that in the past. It's not a surprise to us. We've run this business. I started this business, by the way, in the bank. So it's something we are well experienced with.
We have Raghunandan as a Chief Business Officer who ran it personally with his team, and there's fair amount of experience. There's a difference in having a variant of business loan and having this, because, you know, this one is like the kirana store over generations and family businesses have been there for, you know, last 40 years or 50 years, you find different families are running it. And it has a very different collection perspective or different, very different risk perspective in my limited understanding. So every, just the way every salary segment doesn't have the same risk because it comes under a category of unsecured. An Infosys employee, or for that matter, an HDFC Bank employee is well educated, the risk matrix is very different.
Similarly, you have a very different risk matrix of a kirana store versus probably a trading business, maybe. Of course, it also has various other factors in terms of interest, seasoning, and multiple criteria for credit rating is there. I think broadly, our aim is to build it step by step and process by process. While these look like words, that's how retail businesses get built, and that's the way I've seen it, and that's the way we will build it, sir. Thank you.
And, Arvind, just, the earlier question with respect to the senior management in terms of-
Yes, yes.
The capability build up, any changes anticipated, any levels which needs to be filled up or maybe changed or something, how you are looking at it?
I was expecting you to ask me that I've changed everything almost. So point is that is we've actually got a combined strength, a fantastic strength of existing management at Poonawalla, which is, I think is absolutely respectable, and we've added few strengths of the bank. And I think combined, it's gonna be one solid team with one jersey color, which is gonna walk in the market and build it step by step, my friend.
Okay. Okay, thanks, Arvind, and the team, yeah.
Thank you. Ladies and gentlemen, due to time constraint, that was the last question for today's conference call. I would now like to hand the conference over to Mr. Hiren Shah for closing comments.
Thanks, Dave. Thank you everyone for joining this earnings call with us. For any further queries or communications, please write to us at investor.relations@poonawallafincorp.com. Thank you.
On behalf of Poonawalla Fincorp Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.