Ladies and gentlemen, good day, and welcome to Arman Financial Services Limited Q3 FY 2022 earnings conference call hosted by Emkay Global Financial Services Limited. We have with us today Mr. Jaiendra Patel, Vice Chairman and Managing Director, Mr. Alok Patel, Joint Managing Director, and Mr. Vivek Modi, Group CFO. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Manjeet Nair from Emkay Global Financial Services. Thank you, and over to you, Mr. Nair. Hi, this is Manjith here. Good evening, everyone. I would like to welcome the management team of Arman Financial and thank them for this opportunity. I shall now hand over the call to the management for their opening remarks. Over to you, sir. Thank you so much. This is Alok Patel here, and a very good evening to everyone. It's a pleasure to connect with all of you once again, and thanks for joining in. The purpose of this call is to discuss our financial performance for the third quarter and 9 months ended FY 2022, and to also attempt to answer any questions that you may have. We have issued a detailed press release and investor presentation as always for the quarter, and I hope you've had a chance to review it. I'll start with a brief overview of the industry and the business during the last quarter, and then we'll move to our financial performance. During the quarter, due to the newly evolved Omicron variant of COVID-19, there were very minor disruptions which were thankfully very limited and had a very small impact on our overall operations. Although the number of infections were high, the severity was much less, and there was no major impact on the business and the cash flows of our borrowers. The government, RBI, and other regulatory bodies are also fully supporting the banks and the NBFCs in all possible ways. These include unchanged interest rates, also includes RBI's accommodative stance in its decision to allow relaxation to the lenders until September 2022 to comply with the new regulations for upgrading the NPAs, which, as you know, stated that, you know, an NPA can only become standard once, post clearing all of their dues. The budget announcements to increase infrastructure and other spending should also make sure that the positive growth momentum for the economy continues. The overall picture today definitely looks positive or at least much more positive than you know I imagined it to be a year and a half ago. Now I will give a brief overview on our financial performance for the fourth quarter, and post that we'll touch upon liquidity, disbursements, and collections in more details. On the performance of the quarter, it gives me immense pleasure to inform all of you that our consolidated loan book as on December 31, 2021 crossed the 1,000 crore milestone, reaching INR 1,045 crores. This was a milestone that was delayed for over a year due to the ongoing COVID crisis. Thanks to all the support received by our stakeholders, we have managed to cross this very important milestone, and with your continued support, we hope to cross many more milestones in the years to come. We registered a growth of 45% year-on-year, led by the addition of more than 35,000 new customers, with branches reaching optimal disbursement levels along with increase in average ticket size in the second cycle borrowers in the microfinance segment. Segmented AUM for microfinance stood at INR 856 crores, higher by 56% year-over-year. The AUM for MSME stood at INR 139 crores, which is higher by almost 20%. For the two-wheeler segment, our AUM stood at INR 49 crore, unfortunately down by 9% year-over-year. Consolidated loan disbursements during Q3 FY 2022 stood at INR 296 crores, up by 63% year-over-year. The total MSME and two-wheeler disbursements in Q3 were INR 38 crore and INR 16 crore respectively, while microfinance disbursements stood at INR 242 crore, higher by 64% year-over-year. This encouraging performance was mainly due to better penetration, the addition of new customers, combined with an improved macroeconomic environment. I would like to highlight that while we grow our disbursements, our core focus still lies on maintaining the quality of our assets and on enhancing profitability. Our repayment rate of the portfolio created post the first lockdown, that is portfolio created post September 2020, 18 months ago, is still hovering above 99% despite having the second and third waves in between. The gross total income during Q3 FY 2022 stood at INR 59 crore, up by 23% year-over-year. The net total income increased by 9% year-over-year to INR 33 crore. The profit after taxes increased by 140% year-over-year to INR 7 crore, aided by the lower provisioning requirements due to better asset quality of the loans disbursed post-COVID-19, as I mentioned earlier, since September 2020. Consolidated GNPA stood at 5% and NNPA stood at 1.1% for December 2021. The company has steadily created adequate provisions to take care of the unprecedented impact of the COVID pandemic, and I feel that the worst is definitely behind us in terms of NPA provisioning. Loan impairment costs for the quarter reduced to INR 6.6 crore. The company prudently created extra provisioning of INR 1.9 crore and took an aggressive write-off of INR 4.6 crore in this quarter. Accumulated loan provisions stood at INR 64 crore as on December 31, 2021, covering 6.1% of the on-book AUM. Overall provisioning reduced due to the better asset quality and aggressive write-offs aimed at reducing the NPA burden of pre-COVID doubtful assets. The company enjoys a healthy liquidity position with INR 126 crore in cash and in bank balance, liquid investments, and undrawn CC limits. The consolidated debt-to-equity ratio stands at approximately 4.35x as on 31 December, and shareholders' equity stood at approximately INR 202 crore. We are pleased to inform that the company has closed a INR 100 crore direct assignment transaction with SBI in January, which represents the largest DA transaction in the company's history. The ALM continues to remain positive, and the company continues to have access to new sources of funds due to the company's robust balance sheet and prudent lending practices. Coming to the collections. Collections across segments continue to improve since the last two quarters with overall collection efficiency of 94% in January 2022. Microfinance collections picked up with the repayment rates reaching 93% in January 2022, despite the minor impact of the third wave. Two-wheeler and MSME collections continue to be well north of 95% during January 2022. As mentioned earlier, post-COVID disbursement loan book collection efficiency stands at 99%. While the collection seems to be getting back on track, we anticipate that they should return to pre-COVID levels by, at the very most, by Q1 of FY 2023, if there are no further disruptions due to the pandemic. Our branch expansion plan is doing well on track, and we have opened 24 new branches during the month of December, January, and February till date. Our total branch network is expected to reach around 280 to 290 branches by March 2022. By expanding our branch network, we will improve our penetration capabilities in geographies that we are already present in, along with expanding our reach into the new geographies such as Bihar. Going by our asset-light business model, the CapEx required for each branch expansion is fairly minimal, allowing us to reach branch level breakeven quite quickly. The overall picture looks quite positive in terms of better collection efficiency, easy liquidity, pick up in the credit demand across segments, better asset quality. Nevertheless, there's definitely some scope for improvement, which will be seen in the coming few months and quarters. I strongly believe that our strong borrower base, our resilient business model, continuous customer engagement, growing reach, robust balance sheet, passionate on-ground workforce, and experienced management team will ensure sustainable and profitable growth going forward without compromising on our asset quality. Finally, to conclude, I would like to express my sincerest gratitude to all of our stakeholders for their continued support during these very difficult times, and a special note of appreciation for the company's field staff, who continue to show perseverance during these difficult times that seems to keep on coming. I would like to request the operator now to open the floor for the question-and-answer session. Thank you very much. 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 handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants, you may press star and one to ask a question. The first question is from line of Anish Goyal from Empyrean Services. Please go ahead. Good afternoon, everyone. Thanks for this wonderful opportunity. I noticed that the percentage cost of funds has increased as compared to previous quarters. Can you please give the reasons for same? I'm sorry, I didn't understand. What has increased you said? Sir, percentage of funds. Percentage cost of funds increased compared to the previous quarters. Percentage cost of funds has increased from the last quarter? Ha. The weighted average cost of borrowing you are referring to? Yeah, yeah. That has overall declined, sir. I think, what you might be noticing is timing differences of, you know, uploading of, you know, certain processing fees and things like that of the increased borrowing that might get recognized right away. Overall, weighted average cost of borrowing is decreasing. If you compare quarter to quarter, there might be some timing differences here and there, which is making it appear to increase. Okay. Sir, microfinance yield is also falling. What are the reasons for the same? I noticed that at twenty- Yes, you are right about that part. Microfinance yields are falling simply because of government regulations. Two reasons actually. Number one, the interest rates have been falling in the market and there is a cap of what interest rates that we can charge to our customers which is, and for the benefit of others I'll just mention what that is. That is either 10% of our overall cost of borrowing or 2.75x of the average base rate of the top five PSU banks. That number, the latter number has been continuously falling for the last five or six quarters. The second fact is that we have accepted a lot of CGS funds under the corporate guarantee scheme. Pardon. Please repeat, sir. We have taken money under the government CGS scheme, the Credit Guarantee Scheme. Okay. Which was extended to microfinance institutions, which provide basically a guarantee to banks in case of an MFI default. However, the caveat for accepting those funds is that it has to be done 3% lower than the lowest base rate by RBI. In our case, we'd have to do it in about 19.8%. That's what you are seeing there. That's why the yields are declining along with, you know, overall interest expense as well. The margin remains somewhat consistent. However, that is by the way, just kind of a little bit of a side note here. Overall we are sort of anxiously awaiting the new RBI white paper to convert over into actual regulation for the MFIs, and that would remove all kinds of margin caps. There's fingers crossed that it comes out soon and we can take advantage of that not only in terms of the increase in margins, but you know, penetration into other areas of operations and of course, better competitive environment with the removal of regulatory arbitrage with other MFI players such as SFBs. A lot of other benefits as well. Yeah. Thanks for the detail on Arman. Sir, and any update on opening of new branches as you have earlier told in quarter results that December or January new branch openings will come? Yeah. I think as I mentioned, we have opened up about 24 new branches, mostly in UP, Bihar and Rajasthan. Okay, okay. We plan to open at least another 15-odd branches by the month end. Of course, Bihar, we have just very recently expanded into just about a month and a half ago. Now we are operating in, how much is it? Eight states right now. Okay. Any, sir, updates from the equity infusion from QIP because you have mentioned that after 1200 AUM you will be looking at QIP. AUM already crossed 1050. Any update on that? No. Unfortunately no update on that. I think I'm waiting until this new RBI circular comes out. Okay. Okay. Hopefully- By then you will be looking at the debt to raise funds? Yeah, yeah. I mean, of course debt raising is a continuous process for us. I think even right now we'll have at least INR 300-INR 400 crores in the pipeline. I mean, from a debt equity side, yes, the leverage has increased to be concerned. Yes. For now, approximately 4.3 or something. 4.35. For us to, you know, be absolutely comfortable on our CRAR and continue to further leverage. Then there are, as Alok just informed, that we've already done INR 100 crore of off-balance sheet transactions with SBI wherein we've sold off a portfolio of INR 100 crore. You know, the equity market, you know, might take some time, everything will be corrected. I mean, whatever is required to be done to ensure that the debt continues to flow and there is no problem with our branch expansion is being very taken care of. Okay. Thank you, sir. Thank you very much. Sure. Thank you. Participants, you may press star and one to ask a question. The next question is from the member Savi Jain from 2Point2 Capital Advisors. Please go ahead. Yeah. Hi, Alok. So you know this PPOP growth was, I mean, it was negative, so obviously, you know, there are few reasons for that. If you could just again summarize what are the various reasons why despite a 40%+ income growth we had a negative PPOP growth? I mean, are you talking of pre-provision profits? Pre-provision profit, yes. There's a combination of, as I mentioned to the gentleman earlier, the margins have been kind of falling down. We are at about largely a 21.8% cap, which is roughly 3% lower than what it was, about a year and a half ago or a year ago. On top of that, we are incurring a lot of operating costs for the branch expansions. Believe it or not, collecting money is also quite an expensive endeavor, as you can imagine, with all the COVID-related stuff going on. Yes, there's pressure on both sides, on the income side and on the expense side as well. I think what you will notice is... I'm not even sure if I can say this, but probably next quarter by Q4, all of those things would have been a little bit streamlined. I think Q4 should be slightly better, at least in terms of you know, those both aspects about the income side and the expense side. You will still be operating at those yields because of the absence of that RBI notification. It still hasn't come. Even if the RBI circular does come out tomorrow, there is not going to be any magic wand that will. Unfortunately, all the assets which I've already created on my books are at the lower yield. Correct, sir. It'll be the weighted average will start to increase, of course, but that will still take some time or a few quarters to bring real impact on the P&L. Vivek, anything to add on? Yeah, you know, on the pre-provisioning side, what also happens is, as we mentioned earlier. It's not, you know, to an extent there is a pressure on the NIM because of the lower yields that we have to do on our MFI. Alongside, you know, the funding, the interest cost has in particular gone up, and the overall branch costs have gone up for that reason. Overall, you know, as the portfolio growth continues, the yield and the revenues should start kind of going up. Yeah. This RBI thing, will it be like again a draft circular or will it be a final notification? No, it will be a final notification. It will be effective immediately? I wish we could address that. No, based on, you know, earlier circulars which have come across the industry, what do you anticipate? I think it would not be immediately. I think if it comes today, it might be effective from first April or something like that. Okay. Yeah, I mean, I think a lot of players were talking about this coming through in the last quarter, December quarter, and we are in February and it's still not come. So. You know, every industry gets glued to the budget for some or the other reason. I and Alok were glued to the budget speech for this one only. Yes. I think the government had more important things to take care of. not only that, when I was watching the governor's whatever it was. I thought, "Okay, monetary policy meet. Monetary policy. Monetary policy. Yeah, in that they don't discuss it. I was speaking to the management of CreditAccess Grameen. They are also obviously being the largest player, very anticipating this, and they said maybe after this policy meet is when they're finally going to discuss this. Let's see. Again, this is pure speculation, but I believe that the go ahead has been received by the government and now it's just awaiting some final touches, but that was about a month ago. There's only so many touches that somebody can give to something. Let's see. In terms of provisioning for the, you know, bad book, is there something still left? You mentioned from FY 2023, maybe it will start normalizing. Do we expect another quarter of higher provisioning? The Arman book is completely provided for. In fact, more provided for than you know, so there were like buybacks and stuff also, and when written off assets were somewhat collected in the last quarter. In the micro side, I mean, I think, as I said, the worst is definitely behind us. There might be some minor level of provisioning which comes in. You know, as the portfolio keeps growing. Anyway, you have to provide for 1% of standard assets, so it's not like the provisions will stop. The COVID provisions have slowed down quite a bit, and I think, they'll continue to slow down as it keeps going. I think I was mentioning as far as the repayment rate, we are expecting the repayment rate to normalize by Q1 of FY 2023. Coming up in another 4.5 odd months. Unless something drastic happens and, you know, I keep jinxing it by saying that, but something or other always comes up. Let's hope, I mean, after the third wave, there was a little bit of a very negligible impact on customers and staff members that were sick for three or four days, so the collection might have come in a little late or something, but nothing crazy happened. You know, I think people are used to it by now. My staff and members and all of us are just kind of used to these minor COVID related disruptions and they take it in stride. I think after you know after a year and a half of this or almost two years of this people are. You can get used to anything and I guess we are used to it by now. This daily stamping of NNPA did not have an impact on the financial services sector? Okay. Sorry. Generally what happens is, since largely our loans are unsecured loans, if a customer manages or closed down every third or fourth bucket and becomes an NPA, even historically, we've seen that nine in ten cases never comes back to a pre-NPA or less than 90 days DPD. They continue to be in more than 90 DPD because they might come back and pay us one installment regularly, but that doesn't make them move anywhere into the 60 DPD bucket. Overall impact, because of the kind of profile of the customer is not really very, you know, very, very impactful. Still, in the longer run, we feel that it could have an impact, at least to the extent of increasing the NPAs in a standard, you know, stable kind of a condition by about 0.5%. The other thing also is that, see, as far as we are concerned, the largest chunk of NPAs are in the old pre-COVID assets, right? Those who are already well over the 90+ DPDs or the newer assets which were created, as you heard me, I mean, we have not been facing too many issues. The overall impact anyway is not going to be very, very large. Now there is a new, I think they have delayed it until September, the implementation of it. Yeah, as Vivek said, maybe about 40 bps or 50 bps at the very most. Okay. Just a couple of more questions. One is, you know, are we still doing group lending, or we now move to like, you know, stop giving JLG loans and doing more of individual loans? What is it? No, we are still doing JLG. You know, we are doing individual loans as well. I believe that in the MSME side, we are doing about INR 15-1INR 6 crores. In the micro side, we are doing about INR 4-INR 5 crores. So almost INR 20 crores of disbursements we are doing in the individual lending business in a month. Rest of them is JLG. Yeah, JLG is becoming a smaller proportion of the overall book, is it? No, no. What probably Alok is trying to say is that MSME is anyway an individual lending book. In microfinance, as during the last call, we kind of said that we've already started looking at a pilot model of individual lending book. There, you know, we've seen about INR 3 crore-INR 4 crore of disbursements. On a monthly basis. Yeah. Are we doing group meetings? Is it, I mean, in this kind of For the JLG book, we are doing group meetings, we are doing the whole JLG thing. Yes. It's not, I mean, it's not completely out of fashion or anything. No, it still continues to bread, butter and cheese everything. Yeah. Bread, butter, cheese, jam, whatever you want to call it. Microfinance will continue that. When I say that the individual loan is the future, what I typically mean is I'm talking about five years down the road. Today's scenario, I mean, JLG is still the king. Right. In terms of, you know. Right. Lastly, you know, Maharashtra, are we still lending there, or is going to become smaller than the book? The book is shrinking. We are still lending in the branches which are not that badly impacted. Other branches we are not. Overall it's declining. Yes, we are disbursing in Maharashtra. Not as much as it was pre-COVID, but we are. These new states, you know, like for example, Bihar is kind of, it's likely maybe a riskier state based on experience of some other players. Are you know, obviously diversification is good, and we are already quite diversified now with, you know, five states being a large part of the book. Is it really necessary, you know, to get into some of these other states which might be slightly, you know, riskier and obviously costlier also because operating expenses will be higher? No. You know, I've been considering opening in Bihar for at least three, four years, five years. The outside perception is risky, but I think if you look at the data, the hard data, the numbers from both Demonetization and COVID, it would appear that Bihar is one of the best states to operate in India. So that's what really allowed me to pull the trigger in a small way to say, okay, well, let's open in. Now, there are of course its fair share of issues, law and order issues and whatnot, which are there in Bihar. But as far as the quality of the customers go, at least on the numbers, I mean, it's much better than even Gujarat or, it's much better than even in Madhya Pradesh or any other place. You know, it's a little bit crowded there. It seems that I'm not the only one who can read numbers, so there are a lot of other players also moving in. We'll have to do it carefully. You know, we are expanding from the border regions of UP through our existing branch network in UP, and that is what we typically do. But I think, I mean, it's you know, as microfinance matures, either you make inroads into new places or you'll be left behind. Sir, couldn't we tackle that by getting into newer products rather than newer geographies? Just to, you know- We are doing both. We are trying to get into newer products and new In terms of new products, you know, two-wheelers maybe you did a tweak with that, rural. Otherwise for the last few years, I think we've not really piloted a new product per se, maybe something like, say a micro-housing or something which, It's not the right time to get into new things. I understand what you are trying to say and, of course. You know, just to draw a parallel, for example, we have these two small finance banks, Ujjivan and Equitas. One went to that entire geographical diversification and one went to the entire product diversification. You know, in hindsight, Equitas seem to have done a much better job, as compared to, say, Ujjivan. Just, you know, keeping that playbook in mind, I was just asking whether it is better to also look at more products rather than more geographies. You know, in my experience, I think you need a little bit of both. But as far as, you know, doing product diversification which is related to what you know already, that is safer to do at a time like this because, you know, I mean, like all companies and all people, you have limited resources. My management force and everybody is busy, you know, kind of trying to take care of COVID related issues at this point, right? With so much kind of unexpected stuff into the future, you know, I don't want to get into something which I don't know exactly how to do. I mean, during good times when you have a lot of profit and things are on auto mode, you have lot of time to concentrate on newer things. Right now is not the right time for it to get into something completely new. Individual loans, all of those things, you know, they're distant cousins of what I'm already doing, so that's not really that big of a deal. But this is a whole another. Affordable housing is a whole another completely different segment. Got it. Thank you. Thank you. Participants, you may press star and one to ask a question. The next question is from Ankit Gupta from Bamboo Capital. Please go ahead. Good evening, sir. Many congratulations for crossing INR 1,000 crore AUM. Thank you. I have a couple of questions. As an industry in MFI, like, if I consider the period of pre-COVID and the post-COVID period that is going to be afterward, I mean from, let's say from 2022. Do you see any fundamental changes in the NPA trend that were in pre-COVID period and from the period of 2020 to onwards? I mean, is there any fundamental shift in the industry because or the average is going to be higher than pre-COVID? If I understand your question correctly, what you are asking is, compared to pre-COVID and post-COVID, let's forget about COVID related losses, but as the regular operations resume, will the NPAs on a steady state be higher or lower or same than what they were pre-COVID? Is that your question? Exactly. They will be higher, very frankly speaking. Not by a very large amount, but they'll be slightly higher as the ticket sizes continue to increase and as microfinance continues to penetrate deeper and deeper. You know, the lower hanging fruits kind of go away and you are taking slightly higher risk on other customers. You know, I think people are getting used to credit. They have a lot of different areas to get credits from. As competition increases, it's natural that the NPAs will probably increase slightly as well. I mean, I've said this often that, you know, we were in a golden age for like a good seven, eight years in MFI where loan losses were less than 1%. I mean, those, unless you're doing gold loan or something like that, it's unheard of, right? Even in the secured business, even in two-wheeler, it was never the case. As an industry rather than probably lying to ourselves that things were a bit good in the past and will continue to be good in the future, it's better to be mentally prepared for something will be worse than it was in the past. If it's the same or slightly less, nobody will be happier than I will be. Okay. My second question, do we do any kind of, or any percentage of loan that we disburse in cash? No, no. We are 100% cashless in all segments. Almost four years now. Yeah, almost four years. Okay. single rupee of cash has gone out in the last four years. Okay, okay. You know, it is also mentioned in the investor presentation that your collection efficiency of loan book of a post-COVID loan book is around 99%. Okay? When I look at the disbursement of last five quarters, it is around INR 1,140 crore and total loans outstanding on your balance sheet is around INR 965 crore. I am not able to understand the math here because you say your overall collection efficiency is between 92%-95% and your post-COVID loan book collection efficiency is 99%. Yeah. Correct. What? Yeah. Please. No, no, go ahead. No, I mean, that's just the way the math works out. It's just that whatever is left now that is pre-COVID, right? I mean, that has a much lower collection efficiency because the stuff that was good has already been paid off to an extent. That INR 1,100 crore that you mentioned, I'm sure it's correct. I don't know what the disbursement has been in the last five quarters, but that also gets repaid, right? You can't really compare that. I mean, you know, since inception, I have disbursed maybe INR 5,000 crore. That doesn't mean my AUM. Even the good portfolio continues to repay, so that will bring down their overall weightage in the repayment calculation. Basically what you are saying is that a good portion of INR 1,140 crores, okay? You know, you are saying that a lot of loans that you disbursed after September 2020 got repaid before the loans you disbursed pre-September 2020, right? Is that a very big, I mean. No, imagine if I lend you INR 100 today, right? You pay me say INR 2 tomorrow. Your outstanding will become INR 98, right? Yes. Now, that same INR 100, if I gave it to you 2 years ago, your outstanding might be, let's say INR 15, and you pay me INR 2, that will become INR 13. Both go, I mean. The overall portfolio weightages will be different than the repayment weightages because both EMIs are INR 2, right? But the portfolio is very different. One is INR 100-INR 98, the other will be INR 13. Yeah. Basically there might be couple of scenarios, right? Wherein the loans you disbursed post COVID are short, are of shorter period, and the earlier loans would be for the longer period. The second scenario you mentioned would be something of that sort. Look at it this way. That is absolutely not what we are saying. INR 1,100 crore, you know, the outstanding of the INR 1,100 crore, let's say, out of that INR 10,045 crore of total AUM, which started approximately 70% of the AUM. Out of INR 1,100 crore, about 20, 35, 40% would have run off in a regular course of, you know, something which has been disbursed one and a half year ago in September, would have, you know, repaid for 15 installments already. Something which was disbursed in February and March of 2020- with the moratorium, it would be almost close to being run off enough. But still there'll be like a few months left on it, but the EMIs will be the same. Anyway, we'll probably let you move to your next question. Maybe you can call Vivek for the mathematical understanding of this. Basically, can you tell me how on your consolidated balance sheet, there is a loan book, I mean, loan of around INR 965 crore. What would be the percentage of pre-COVID and post-COVID loan book in this 965? What is it, Vivek? About 25% would be pre-COVID. About 75% would be post-COVID. Roughly speaking, we can probably give you a better answer. About 75% is post-COVID. The pre-COVID is less than half of that. The repayment, it would probably be higher than that in the. Because again, this is. So, so- Again the case in point would be like, say for example, NPA cases. Out of my 3.8% of NPA, there would be hardly a case which is a post-COVID disbursement. The entire NPA would be pre-COVID. Right. Right. Wherever there's demand, the collections are not happening. I mean, the collections are much less than 30%. Right. Okay. That's all from my side. Thank you so much. Thank you. Participants, you may press star and one to ask a question. Next question is from line of V. Srinath from Bellwether Capital. Please go ahead. Hi, Alok. You guys can hear me? Yes. Yeah. Can you just take me through plans for MSME? You know, what is the growth outlook? Disbursements have somewhat kind of come back to pre-COVID. Where are we standing? Then there was a particular line in the presentation that said that you have tightened the cash flow requirements and COVID impact layer. You know, can you kind of explain that too? Again, given that we are coming out, and if there are customers who have cleared credit screens in the last two years who have not defaulted, you know, wouldn't it be better at least to leave the norms as is, because you know, you would already have kind of clean data coming from the bureaus. Yeah, just wanted to understand broadly how are you seeing MSME over a 12-18 month kind of time horizon? No, I mean, we are very... We love MSME. It's a great business to be in. You know, the returns are great. The losses, if you compare it with microfinance, are probably same or less. As I said, Arman, we are already out, and we are at a situation that we are writing back. It's a great business. But it takes a very specific kind of customer to find that customer, and of course, the kind of volumes and the volume gains that you can expect from the microfinance side, you know. It's at least post-COVID, it's been difficult to keep that up because it takes you the specific... It takes you and your team to find that specific kind of customer who can, you know, afford the rates and you can evaluate their cash flows. The rejection rates continue to be high. That being said, we are, you know, I think the disbursement levels are increasing. We are, you know, continuing opening branches in that segment as well. Plan of opening about 10, 12 branches. We have already opened about three branches in the last couple of months, geographically Rajasthan as well. Geographically, we have expanded into Rajasthan and areas we found to be good for doing this kind of a business. Overall, I mean, I'm quite bullish on it, but it's going to take its own time. COVID did have a setback. I mean, we tightened the underwriting norms, and it was very difficult to evaluate the cash flows. It takes a very specific, as I said, set of circumstances to disburse the loan to the MSME customer. We are working on it. Otherwise, I mean, I love the business. There is absolutely nothing wrong with the business. What was your second question? On what- Do you expect a ramp-up there also in disbursements to start? Yeah. Probably in a quarter or two, you know, similar to MFI we have now crossed. Looks like we are firmly on a growth path there. Do you expect MSME also to kind of hit a growth path in a quarter or two? How are you seeing it? Absolutely. All our efforts are going towards that only. I mean, if we didn't go to that path, then clearly, I mean, you know, we have not succeeded, but our efforts are going towards that path, as you say. Perfect. One final housekeeping question on MSME is for MSME book also the loans given post April are they 99% collection efficiency similar to MFI? Is that trend similar? No. Yeah, absolutely. It is 99% plus collections, yes. The last one is this, we've seen two-wheeler kind of ramp up from INR 7 crore - INR 16 crore disbursement. Is this ramp up coming from rural two-wheeler or the erstwhile business that we had, you know, we were looking to kind of ramp down? No, that's a statistical kind of a benefit because October, November of this quarter are supposed to be the best months for two-wheeler sales. Diwali period, you know, so got it. What would be the rural two-wheeler contribution in the INR 16 crore? What was the contribution? I think maybe about- Very, very roughly. Yeah. In the rural. In the rural. About INR 6 crore would be in the rural and INR 10 crore in the urban. Got it. That is scaling up at a slow pace, but it's scaling up. Yeah. In terms of percentages, actually in terms of disbursement, especially in the festive season, it would have been upwards of 25% of the overall two-wheeler sales, which kind of is now reflecting on the overall, you know, growth of the portfolio itself. But again, as I said, to a large extent, obviously it says so much about the festive season also in the two-wheeler segment. Great. Thanks, guys. Thanks a lot. I'll get back into questioning. Thank you. Operator, please unmute star and one to ask a question. The next question is from the line of Sachin Motwani from Param Capital Research. Please go ahead. Yeah. Hi, Alok. Alok, my first question is on the MFI business. Like, you know, in your presentation you mentioned 35,000 average ticket size, but you have been hovering around INR 22,000-INR 23,000 for many years now. Like, you know, it's. I think you were at INR 20,000-INR 21,000 average ticket size, which is now INR 23,000 something. So, this and the other rate of AUM per branch, like, you know, we've been at around INR 4 crore per, you know, INR 4 crore AUM per branch for quite some time now. So why are we not able to scale these numbers up? Just wanted to get your thoughts on that. That was my first question. On the average ticket sizes, I think pre-COVID we were at probably around INR 28,000 or INR 26,000, if I'm not mistaken. On the disbursement side, yeah, INR 28. INR 28,000 or so. Which has gone up to 35%. Which has gone up to 35%. I mean, there are no better excuse than to say that's where the trend of the market is going. In the microfinance segment, you don't really compete too much on the interest rates and things of that sort. What you are competing a lot on is on ticket size and turnaround time and things of that sort. The trend towards the market is going towards increasing ticket sizes. Okay. Your AUM average should also start reflecting that. To give you a little bit more comfort around that, you see the higher ticket sizes are only in the future cycles. Largely speaking, it is on the second cycle, third cycle and so on and so forth. Right. Now, when we are lending money, I would say at least 15%-odd of the microfinance customers for now have been kind of taken away from the market. Because we are not lending money to anybody who has defaulted during COVID, right? Even if they are, I mean, even if they didn't pay for four, five months during COVID and now are doing okay, we are still erring on the side of caution and saying that, "Okay, we will not lend money to them." The customers who are left are like the clean customers, right? Even for us. These are customers who have continued to pay us without any kind of difficulty or any problems during COVID, during first, second, third wave, whatever it may be. Am I comfortable taking a slightly higher risk on them? Yes, maybe. I mean, I think it would be fair to say yes. You are left. I mean, a lot of these customers which we are giving higher ticket amounts to have been through like the worst test that you can imagine, right? COVID. They proved themselves, so I think it should be okay. As far as the branches go, listen here, I think overall the branches, the AUMs continue to increase, but we have a policy that splits the branch once it approaches a certain AUM. Once it crosses INR 5-INR 6 crore ka AUM, we split that branch into a new branch because that's part of our risk mitigation side. You'll see that as a new branch, but our policy will not allow an average branch to be more than a certain AUM. Understood. How is the competitive intensity? Because when you mentioned that, you know, 15% of MFI customers are now you're not touching and the 85 are clean customers. Is the competitive intensity relatively lesser, benign, especially post-COVID now or during COVID times? No, it's honestly as competitive. I mean, it kind of ebbs and flows in that sense, you know, like during the waves and stuff, nobody's lending anything, and then everybody remembers that, oh, we have targets, and everybody starts disbursing left and right. It's kind of all over the place, if you look at it throughout the year. Let's say today, like for example, February or January, I mean, the competition is just as high as it was pre-COVID. I don't see any relief from that, and that is fine. You know, competition is okay. We can manage competition. for you see it more from the SFB side or MFIs or the universal banks? It is more from the MFI side. I mean, probably this might be a better question to ask my Chief Operating Officer. But based on my knowledge, it is not so much on the SFB side because SFBs are facing their own issues, at least in the areas that we operate in. I could be wrong on this, but the MFIs are also. See, there's a lot of funds available, let me tell you that much also. People are not facing so much of a liquidity issue, it seems to me. Again, I don't have numbers to back this, but you know, based on the CGS schemes, as I mentioned, and other schemes that the government's been running and the overall availability of liquidity in the market, along with PSL guidelines and things like that, the MFIs have. The good MFIs or at least the decent MFIs have a good supply of money flowing in, so that has not been an issue. Okay. Got it. Next question I have was on this direct assignment with SBI. What would be your broader terms? You'd be earning a 10% spread? Your margins would be similar as the current business? How DA works is can we take the assets that we own and sell it. There are no, like, margins to worry about. Yeah. The deal we did was somewhere around 10%. I mean, it's kind of a complex thing, right? All-in cost would be somewhere around 11% for us after considering the processing fee and the other requirements, the stamp duties and things of that sort. The published rate would be somewhere around 10%. Generally, a DA could work in favor of increasing the NII and kind of addresses the Yeah. There is no margin requirement on DA, which is what I always said through the years, that if it allows you to get a little bit better margin then I'm all for doing off-book transactions, and this was such an example. Got it. Just one correction on your slide, actually. On your Slide number 13, your reported cost to income is 28%, which I think you've taken the, you know, cost to income as a, as a percentage from a total, gross income instead of the NII plus other income. Absolutely possible. Thank you so much for highlighting. No issues. Congrats and all the best for future purpose. Thank you so much. Thank you. The next question is from Rupesh Tatiya from Intellect Capital. Please go ahead. Hello, hello, sir. Can you hear me? Yes, yes. Okay. My first question, Alok, is you are at roughly INR 300 crore roughly disbursement in Q3. In quarter four of next financial year, are we all set to reach let's say INR 500 crore kind of disbursement, approximately? INR 500 crore this quarter. In quarter four of 2023. That seems a little bit out there, but let us say somewhere in the neighborhood of about INR 450 crore should be doable. Maybe might be that I don't want to overpromise anything. INR 450 crore kind of per quarter seems quite doable by Q4 of next year. Yes, 12 months from now, yes. Disclaimer always is, let us see what further disruptions are coming due to COVID. Okay. Then my second question in terms of business designs, so to say, is the cost of funds. You have always maintained that MFI is not a cost of funds business. It's more of, you know, a distribution business. Your edge lies in, you know, finding first-time borrowers or rural borrowers and kind of areas where, you know, competition will take some time to come in. That is, you know, kind of, your, let's say edge that, whatever I have observed your business for so many years now. But I mean, you are also saying that two things are happening, right? The penetration is gonna increase with this RBI circular also the penetration is gonna increase and the ticket sizes are, you know, increasing. These are the two, you know, trends in the industry. How long do you see that the cost of funds won't matter to you? Like, are you okay for let's say next five years that cost of funds won't become bottleneck in terms of, you know, business design? The costs mattering as soon as this new RBI circular comes out. Because once you remove the margin caps, then the idea is. See, today whatever cost savings I get from my borrowing cost, I have to pass it on, by law, pass it on to my customers, right? At least on a weighted average. Once that is removed, I have to worry about three things instead of two things, right? I have to worry about my top line, I have to worry about my interest costs, and I have to worry about my operating costs. All three of those things will matter to the bottom line. It will be a balance of those three which will be. We are in a place right now where it's going to start mattering very soon, and hopefully sooner rather than later. I mean, that is still about 10% cap, right? That, I mean, that probably everybody is looking at as an increased bottom line and more distribution. I think the industry players like you are looking at that margin cap removal in this way. No, my margin cap will get removed. If I'm able to save 1% on my borrowing cost or if I'm able to charge 1% more to my customer, then that will directly impact my bottom line, right? By that. Yeah, yeah. You're, I mean, that way you are looking. But my question is, I mean, our cost of funds disadvantage over, let's say, SFBs or someone like Bandhan Bank is really huge, right? Yeah. We have been, you know, kind of smart to pick these rural pockets and stay in those rural pockets and get kind of yields that we get, right? I mean, how long that can continue? Sure. Let me couple of things. My cost of borrowing disadvantage, so to speak, is far from huge now. It used to be quite huge. Today I'm at a place and at a scale where I'm able to attract funds at a lower cost. Our rating has also, I mean, you know, we are at an A- at this point as well. While there is a little bit of a disadvantage, I'm not going to deny that, but I have other advantages that SFBs do, like my operating cost structure, you know. In fact, a lot of them are not making very much money with their scale, or a lot of them are making losses. I have not made a loss in any quarter. Let us put aside the differences between an NBFC- MFI structure and an SFB structure because I've always said that these are two they are apples and oranges, you know. They might be fruits, but they are different kinds of fruits. As far as other MFIs go, I mean, there are few MFIs that have a distinct advantage over me, maybe CreditAccess Grameen or somebody like that. But there are companies which are much, much larger than me, and I have managed borrowing at a lower cost. It's not just as a function of scale. I think your vintage matters, your rating matters, your overall, you know, profitability, your governance, and lot of other factors play into what rate that you borrow from. Yeah, I don't disagree with you that our, you know, our, I mean, you know, our core competency has always gone out to find the new customers and get into the niche areas where there is not a lot of competition and we can service these customers in a way. Slowly that might be going away not by choice, but because the market is expanding and there are a lot of players and players are expanding and everybody's opening new branches. That is the reality of competition. I think we've done a good job with the places we were good at and I think we'll continue to do a good job hopefully with as the market environment keeps changing. Okay. Sorry to harp on this, but how are ticket size? I mean, let's say if you want to lend a really good customer at INR 50,000-INR 60,000, does your, you know, business decision kind of prevent it because of your cost of funds? I mean, how does cost of funds impact your ticket size, say in terms of, you know, a good customer or in terms of risk to portfolio? Cost of borrowing is not going to really impact my ticket sizes. Cost of borrowing has two advantages. One is it increases your portfolio faster and thereby your potential interest income that you can earn. The second thing is that it reduces your overall cost or operating cost as a percentage of your portfolio. It comes with a risk that you know if you are giving a lot of money to somebody who can't afford it, your loan losses might increase to that extent. This is a continuous balance that needs to take place. Me personally, I don't like large ticket sizes. If my hand is forced due to competition and stuff like that, of course I have to run a business and I have to consider practical applications. In the long term, I mean, there are peers right now which I'll not name that are doing INR 75,000 microfinance JLG loans, you know, second cycle loans and INR 60,000 first cycle loans. I mean, that's absolutely ridiculous. I would not do that at all. I mean, if you wanna do INR 60,000, INR 75,000, do an individual model, go down to their cash flows, try to understand their business, try to understand what they're doing, and then, you know, lend them INR 1.5 lakh if they deserve it. There's no problem. If you are trying to give a larger ticket size under the facade of joint liability, which is getting diluted day by day as we speak, then I think fundamentally there is something wrong with that business model. Now, you know, I'll be happily proven wrong maybe. Maybe, you know, their asset size will be completely okay and two, three years, four years down the road, there'll be somebody that tells me that, "Oh, you know, you should have done the same thing. Look at that guy across the street. He made a butt load of money at doing that." Which is fine. I'll have to make my peace with it if that happens. Today I think I have to go by my instincts, which is to say that you cannot do such a large ticket size under the JLG model. You have to do it under a MSME or individual loan model where you are actually going down and trying to do a little bit more underwriting. My last question. Are there any balance transfer out kind of, you know, data in MFI or in MSME? I mean, maybe balance transfer out is probably not the right term, but you understand, right? I mean, if customer is going to a different borrower due to better service, better rate or there are better repayment terms. No. You are saying that somebody getting refinancing from somebody else and they come with a check of another finance company and somebody takes over. That doesn't happen in microfinance. That might happen unofficially where they borrow money from somebody and prepay my money. These payments do happen all the time. But no, I mean, I don't have a single instance to share where somebody has bought over debt and because I mean, that doesn't make sense in unsecured, right? Bandhan was trying to do it years ago, and I think I said it, "How do you do that in an unsecured? Because what's stopping him from borrowing someplace else," right? I mean, we might see prepayments happening for obvious reasons that somebody might be getting a loan or a housing loan and- Yeah. -wants to repay the, uh- The higher interest. Higher interest or, just because, the housing company might have said that your EMI servicing is very high and you will not be able to get a higher loan. Why don't you repay this? Right. That kind of thing leads to about, prepayments every now and then. I mean, it wouldn't be very large. No, it's not very large. Maybe a percent or even less than that. That does tend to happen. That trend has not started yet where people are like officially refinancing and they get a demand draft of some finance company to close their loans off. Okay. Thank you so much for answering my questions. Sure. Thank you. The next question is from Savi Jain from 2Point2 Capital Advisors. Please go ahead. Yeah, hi. I guess looking at slide number 18, which talks about your liabilities. There is, you know, a 2% direct assignment and 1% direct assignment in the pie chart. Am I right? What you mentioned as DA? Yeah. If you are talking about the SBI DA transaction, that is in January. No, no. That I understand. What I'm asking is that, you know, you have separately written in the left chart that there is INR 581 million direct assignment, whereas in the graph it is only 2%. INR 581 million and INR 72 million. INR 7.2 crore. There is a note at the bottom, I believe. Okay. Is there some typo? Is that what you're saying, Savi? No, no, I'm not able to understand. You know, if it is INR 581 million, then it is actually much higher than 2%, which is shown in the chart. Like INR 58 million. Yeah, that's possible. Let us look into that. I mean, I'm not too sure. I'm a bit, like, color blind as well on this one. No, it is that only because after green there is DA, which is, you know, purple. So if- If it was 58 divided by 766, he's saying it should be 7.5% and not 2%. FY 2021, he's talking about on the left side. Usually on the FY 2020. Similarly on the right one also, which shows 1%, that is still quite close, not that different. Yeah, that could be still correct. Anyway, my question is, you know, what you're saying is. You remember often, you know, your direct assignment was like very small earlier. It was to the tune of some- Yeah. INR 10 crore. We do a lot of PTC, but after Ind AS, direct assignment definition has changed to completely without recourse. While pre Ind AS something was off balance sheet, we had to re-recognize that on the balance sheet if it had recourse. We were correctly, if I'm wrong. Yeah, yeah. On getting the accounting terms right. Okay. If you try to compare, let's say pre Ind AS and post Ind AS, it will be little hard to compare, but we haven't done a lot of DA transactions. The SBI one, which we just did, has been the largest. A lot of the DAs have run off also because the max DAs that we can do is maybe about 19 or 20 months because they require, I think, three-month vintage and then like another month or so for the rating and everything to be the pool to be rated and everything like that. The average tenure will be 17, 18 months. Since COVID- Right. We have not done a lot of DA transactions. You've not done. We've done maybe just any. Is it because, the SBI and because of that? Yeah. This one seems right to me. The it will be about 0.8%. No, no. Let me correct. I mean, to everybody hearing this. I think the footnote is incorrect. That probably has not got- The footnote is incorrect. The total DA outstanding would have been about INR 12.5 crores at the beginning of the financial year, at March 2021, which was kind of close to, whatever, 1% down south. Yeah. 2% or so. 2% down. 2% down. Good. This is all of this credit risk is assumed by the bank. You have no, you know, nothing, no credit enhancements that you've provided to the bank? No. DA structure as per the RBI policy does not allow any credit enhancement. Do you need to keep capital against? No, there's no capital at risk, if that's what you mean. This basically goes out of your book, right? Yeah. Yeah. That's what exactly. Is it like a profitable, you know, given that now you have these limitations to spreads, does it make sense to do it at 10%? Do you make money ROE on this transaction? It makes absolute sense to do it. The only problem is that the profit you have to recognize on it right away. Your profit for that quarter might appear to be inflated. Well, not inflated. That's the wrong term. While the operating expenses of servicing this loan might be over a period of two financial years, the profit from the sale has to be recognized right away. Basically next quarter there will be a normal jump in profitability because of this transaction. That's right. We are recognizing only accounting side of it at this point of time. Not that we want to kind of say anything regarding the- No, no, no. That I understand. I'm saying we need to, you know, take it as an extraordinary income when it appears in the. The right thing to do would be to amortize it over the period of the loan. I agree with you. In fact, amortization is quite weird. Savi, what happens is we have to go by what the accounting standards and, Correct. Correct. The same is not true for securitization and it. Where does PTC appear in this? DA is securitization, which is a true sale. PTC will appear on balance sheet. in the- PTC is actually by Ind AS standard, not off balance sheet. In that case, you amortize the overall cost and the- In this graph, where does it appear? In this graph, it will be bundled up in the bank or the FI, wherever the. Oh, sorry. Where is securitization, no? No. There is securitization, no? The blue one. The blue one. Blue one we'll have to. It's a PTC. PTC. PTC and securitization are more or less the same thing? They are different. They maybe for nomenclature, let's understand, in our presentation, the securitization here means the PTC and the DA is a direct assignment which is a true sale and does not have any recourse to the investor, hence, off balance sheet. Could they also include the PLIs also? No. PLI is not there. Securitization, what is the credit enhancement that you provide to the lender? That depends on contract to contract. You know, well, I mean, you know, too specific to address at this level, but, largely speaking, there would be second loss credit enhancement that could happen through, you know, subordination and, there could be cash collateral and there is over collateralization as well. Generally, the recourse kind of thing available to the investor could be anywhere between 12%-25% depending on the overall structuring. Oh, that's quite a lot actually. Basically they don't really ever see any NPA on that then because, you know, your NPA would be your credit losses would be less than whatever 6%-7% even in the worst-case scenario. Only in the cases where the company completely flat out defaults. Correct. Only in that case. Yeah. Normal asset losses on an ongoing basis, typically they would not see any losses. There the cost would be lower? Higher. Higher. The coupons are generally lower, but the overall cost will go up because you will have a cash collateral, you will have a subordination that might happen through you know, second loss guarantee coming in. You know, the overall legal opinion, you know, the initial setup cost generally is high. Plus on the bank's books, a PTC is a treasury instrument. A DA transaction is, it goes directly into their balance sheet as a retail loan or whatever it may be. There are, I mean, there are a lot of differences. It took us a while to also get used to these instruments. Every instrument has, you know, first, second, third loss kind of framework. Some of them come with guarantees. I'm talking about the PTC specifically. The costing, the overall coupon to the bank might be lower. You know, the cost of buying the asset go up. will go up because there'll be a negative carry might be on the cash collateral. There'll be a guarantee fee maybe, you know, that you have to provide for the secondary losses. So stuff like that. Thank you very much. The line for the participant called. Ladies and gentlemen, that was our last question for today. On behalf of Emkay Global Financial Services, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you. Thank you so much. Thank you.