Ladies and gentlemen, welcome to the Q4 FY22 results conference call of Arman Financial Services hosted by Emkay Global Financial Services. We have with us today Mr. Jayendra Patel, Vice Chairman and Managing Director, Mr. Aalok Patel, Joint Managing Director, and Mr. Vivek Modi, Group Chief Financial Officer. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions at the end of today's presentation. Should you need assistance during the conference, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I would now like to hand over the conference to Mr. Manjith Nair from Emkay Global Financial Services. Thank you, and over to you, Mr. Manjith Nair. Hi, this is Manjith Nair 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 opening remarks. Sorry. Over to you, sir. Thank you. Thank you, Manjith. Good evening to everybody. This is Alok Patel here, and it's, as always, it's a pleasure to connect with all of you again, and thanks for taking the time out of your very busy schedule to join us, over this call and to discuss our financial performance for the quarter and the year ended March 2022. We have issued a detailed press release and investor presentation for the quarter, and I hope you've had a chance to review it. The presentation was uploaded with a minor delay today morning, so my sincerest apologies for the delay. I will start with a brief overview of the industry and the business during the last quarter and last year, and then we will move into our financial performance. The year gone by had its fair share of challenges, starting with the second wave of COVID-19, with the Delta variant during the Q1 and then the third wave with the Omicron variant in the third or the Q4. However, with several COVID waves and lockdowns in the past two years, we have managed the third wave with very minimal disruptions. The second wave, however, proved to be highly disruptive, as I'm sure all of you are aware. That said, the situation is a lot different today. For now, it seems that COVID is behind us and things are back to normal. With the normalization of the macro environment, the demand for credit is also back to normal. However, if another wave is hiding around the corner, we feel a lot more confident in our ability to deal with it. In fact, the disbursements made post the initial lockdowns have a repayment rate of 98% despite facing the second wave and the third wave. With the new RBI regulatory framework for microfinance loans, the NBFC- MFIs will have a level playing field with other microfinance players and also allow us to price in risk for different microfinance loans. Although the new regulation is targeted more towards bringing different categories of lenders, that is banks, NBFCs, SFBs, et cetera, under one regulatory umbrella, it seems that the NBFC- MFIs stand to gain. Our financial performance for the Q4 and the year ended March 2022, and post that touch upon liquidity disbursements and collections in more detail. Coming to the brief overview of our financial performance for the quarter, it gives me immense pleasure to inform you all that despite the challenges, our consolidated loan book as on March 31, 2022 stood at a record high of INR 1,233 crore, led by expansion in branch network, which helped catering to new customers in geographies along with pent-up demand from existing geographies. Our active customer base this year has crossed pre-COVID levels at over 4.6 lakh. Segmental AUM for microfinance stood at INR 1,022 crore, higher by 59% year-over-year. AUM for MSMEs stood at INR 165 crore, higher by 32%. For the two-wheeler segment, our AUM stood at INR 46 crore. Consolidated loan disbursements during Q4 and FY 2022 stood at INR 337 crore and INR 1,023 crore, respectively, up by 23% and 101% year-over-year. The total MSME and two-wheeler disbursements in Q4 and FY 2022 were INR 58 crore and INR 183 crore, respectively, higher by 7%, 99% year-over-year. While microfinance disbursements stood at INR 279 crore for Q4 and INR 840 crore for FY 2022, higher by 22% and 101% year-over-year, respectively. This encouraging performance was as a result of our consistent endeavor to remain in close touch with our customers and provide them with timely delivery of credit. I would like to highlight here that while we grew our disbursements in AUM, our core focus will always remain and always lie on maintaining the quality of our assets and on enhancing profitability. Gross total income during Q4 and FY 2022 stood at INR 67 crore and INR 235 crore respectively, up by 68% and 20% year-over-year. Profit after tax stood at INR 16 crore and INR 32 crore for Q4 and FY 2022 respectively. FY 2022 PAT grew by 3x year-over-year, aided by growth in disbursements and especially lower provisioning requirements due to better asset quality of the loans dispersed post COVID-19. These are loans dispersed post August 2020. The annualized ROE for the Q4 has also crossed 30%. Consolidated GNPS stood at 4.1% and NNPS stood at 0.7% for 31st March 2022. The company has steadily created adequate provisions to take care of the unprecedented impact of the COVID pandemic. Loan impairment cost for the quarter stands at INR 10.8 crore. Cumulative total provisions and write-offs for the year was INR 37 crore as on March 31, 2022. The total provisions on the books stood at INR 65 crore as on 31 March, 2022, covering 5.73% of the total on-book AUM. The company enjoys a healthy liquidity position with INR 150 crore in cash, bank balance, liquid investments, and undrawn CC limits, aided by pickup in collections along with incremental debt capital raised. The company has of course duly repaid all debt obligations that were due in Q4 2022 and last year, with debt equity ratio of 4.65x on 31st March 2022, and while shareholders equity stood at approximately INR 213 crore. 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, long vintage and prudent lending practices. Coming to collections, our consolidated collection efficiency saw further improving trends during the quarter and grew from 92% in Q3 FY 2022 to 95% in Q4 FY 2022. Collection efficiencies for the month of April crossed more than 98%. Robust collection efficiencies were a result of passionate on-ground workforce, continuous customer interactions, and a customer-focused approach. We have successfully completed our branch expansion plans and added 30 new branches in the MFI and MSME segment. Our total branch network as on 31 March 2022 stands at 292 branches. The expansion has not only given us deeper penetration by tapping into newer districts in existing states, but also given us an opportunity to explore new geographies. Due to our asset-light business model, the CapEx spent on branch expansion was fairly minimally, allowing us to reach branch level breakeven quite quickly. Finally, to conclude, I would like to say that our company remains dedicated to serving the most underserved and unserved population of India. Our endeavor is to make them part of India's growth story by making them financially independent. Today, India has a massive growth potential in the microfinance lending landscape. Financial inclusion remains a key goal of Government of India. With the new RBI guidelines, the outlook for the sector remains very much positive. I'll also conclude by saying that in September of this year, Arman will be celebrating its thirtieth year in operations. We have seen a lot of ups and a few downs as well. None of it would have been as enjoyable or meaningful without the relationships we have built along the way with our employees, customers, lenders, investors, the board, our peers, and all the other stakeholders. Big thank you from our side for your constant support. Thank you. I would now request Michelle, the operator, to open up the call for the question and answer session. 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 phone. 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. The first question is from the line of Amit Mantri from 2Point2 Capital. Please go ahead. Hi, Alok. Amit here. Yeah. Hi, Amit. Yeah. Just first couple of questions on this quarter's results. The yield has increased a lot this quarter, and even the provisions are fairly continue to be elevated. What is the reason for both of these things? The yields have increased because, for Namra, Amit, the yields have in particular gone up because we've done- Portfolio transaction, securitization transaction of INR 100 crore being offloaded to State Bank of India. Under the Ind AS requirement, the gain on first transaction needs to be booked upfront. There is a gain of INR 5.8 crore on this transaction in this quarter, and especially in Namra's balance sheet in Namra's P&L, which obviously flows into the consolidated. Even if I exclude this 5.6- Yeah. That's one. Overall, you know, in quarter three when we talk of if you were to kind of compare quarter three. Quarter 3, if you remember, was a quarter wherein the fresh disbursement had to take place at a lower yield because of the CGFMU, or rather the Central Government Guarantee scheme in microfinance. Those were at a lower yield of 2% at that point of time. On a comparative basis, from Q3 to Q4, the delta would be slightly higher. Just slightly. It's like, due to timing differences and due to an overall increase also in the yields in the last quarter. Maybe I can just also add a bit on the two-wheeler side, wherein again, the yield has been moving up. Primarily what is happening is about 30% of the books are now rural two-wheelers, wherein our yields have been higher. As that component keeps on increasing- On the provision side? Provision side, I mean, you know, I think we are pretty much done. I think overall, I think I keep saying this, on the Arman side, I don't think the provisions were very high. On the Namra side, we were doing lot of cleanup kind of an exercise. Can you hear me? Hello? Amit, you're audible. Am I audible? Yes. Okay. Yeah, I think the provisions were just lot of the cleanup exercises and the write-offs that we were doing, Amit. It is what it is here. I mean, besides that, I don't know. Generally, Amit, what has also happened in Arman is we've seen the overall provisioning requirement for the last couple of quarters anyway has been very fairly stable or rather on the decline. In Namra, because of the basically completely unsecured quality of the book, we've kept on providing as far as possible and required. At a consolidated level, since we continue to have about 5% provisioning on the overall AUM, I think we have largely, if we can say, we are well-provisioned and hopefully, I mean, I hate to say this because every time we say this something goes wrong maybe, but largely it feels that we've seen a few of the worst quarters that COVID had to show us. Yeah. I mean, a lot of this, you are seeing is related to, you know, the second wave specifically. Not so much the third one, but the second wave. That will be that. Thank you. Mr. Amit? I think we can continue. He might have dropped. Yes, probably. Reminder to all the participants, please press star and one on your touchtone phone to ask any question. The next question is from the line of Savi from Point to Point Capital. Please go ahead. Hello. Yeah, Savi. Yeah, I think Amit dropped out. I have a couple of questions. One is on the, I think, there's some loss that you have taken through the other comprehensive income. What is that? You know, Savi, on the Ind AS side, since we need to kind of mark to the market the portfolio and under the new rate of interest that we're charging in the future, the overall interest rate, average interest rates have gone up and based on that, the OCI will turn out to be, you know, a notional loss, if you can put it that way. It's more like an Ind AS adjustment. This must be a loss on your bond portfolio, but I presume that will be low duration. This is not a bond portfolio. Bond portfolio. This is for the entire portfolio under the Ind AS. This will be a liquid fund, right? No. This is not related to liquid funds. It's a little bit complicated to explain. It has no reality, if I want to put it that way. Basically, the market rates have moved up, and the portfolio that we have created in the past has a lower interest yield. Ind AS is required to take a notional loss through OCI. OCI. It has nothing to do with the cash flows or anything like that, so. This will reverse over time? Is it expected to reverse? Yes, it will automatically reverse. Let's say if you know, the interest cycles kind of come down. Sorry. Fundamentally, why this happens is that microfinance and MSME and even two-wheelers, so all our three segments, the lending is done at a fixed rate. You know, it's not a flexi rate which adjusts. Hence, if the interest rates were to rise, we will have a notional loss, and if the cycle reverses, then we might have a notional profit. Okay. Over a period of time, either as we keep on building the book, our average yield might increase and hence the loss, the notional loss, will become small. You know, a bit smaller. Or, if there is an interest rate cycle reversal in couple of quarters, then again, it might lead to a notional gain. Got it. Yeah. Even I don't completely understand it myself. No. Very. On the net NPA, you know, number, have you knocked off all the provisions, including floating provisions, while calculating that number? When you say floating provisions, what are you trying to mean on that? Like, this is net of all kinds of provisions that you have taken till date. Is this number net of all or only net of the specific provisions? No, net of all the provisions, because if my gross NPAs are, let's say, INR 100 as against that if. Sorry to interrupt. Mr. Savi? Yeah. You'll have to join the queue again, please. There are participants who also. We'll finish answering this question. Okay, sir. Uh. Thank you, sir. Yeah. You know, eventually, this covers, I mean, to cut the answer short, this includes the total provisions against each specific loan account. Sorry? This includes all the provisions, including the floating provisions specifically associated to that particular account or the NPA accounts. Okay. There is no, I mean, there is no additional separate NPA floating provision apart from what has already been deducted from the gross NPA to arrive at the net NPA. Okay, I'll be on the queue for the questions. Thank you. Anyone who wishes to ask a question may press star and one. The next question is from the line of Piyush Jain from Hansraj Virendra Capital. Please go ahead. Hello, sir. Many congratulations for good set of numbers. Can you just throw some light on the new geographies where you are expanding? Second question would be, in the new geographies, how do you see the market with respect to the home state, or I would say the Gujarat market? I mean with respect to either the loan disbursal or the collection, is there any process improvement or after seeing the market, are we doing something different to perform better over there? Let's say, what's the performance over there? If you can throw some light. No, I mean, I think we expanded into Haryana, late end of last year, early this year. We have about 15 branches there, and we have opened up around 12 odd branches, I believe, in Bihar. These are new geographies for us. Both of them as far as performance, as far as NPAs go, they are practically zero at this point. But that is not atypical whenever you move into a new area because, you know, you start very, very cautiously to begin with, and you have a lot of management bandwidth there to begin with. Both of them are slightly different areas. Haryana, the scope is probably just to open 50 odd branches. Being a smaller state and with areas relatively being richer, if I can use that term, the growth. There is no potential for a very rapid growth in Haryana, but it's still extremely good area to operate into, as far as our experience is concerned so far. Bihar, on the other hand, is a highly concentrated area. If data proves anything, it is one of the best areas in India to operate, considering that if you look at demonetization data and you look at the past COVID data, one of best performances has come out of Bihar as far as the repayment rate. That being said, it is a bit crowded and, you know, if we were going to expand into Bihar, it is better to do it sooner rather than later to gain market share. So far, I mean, it's the disbursement volumes are average, but it's a little early to tell. I would say we'd have to give it at least another six months to a year to kind of give you a real kind of a feedback on how that state is turning out to be. You know, if I can, I think your other question was how does it compare to my home state? Well, you know, every state is a little different and you have to approach it a little differently. The good part about microfinance is that it's replicable across state lines as well. You don't have to begin from scratch. You know, 90% of what you do in Gujarat is the same as what you do in Bihar or any other place. The trickiest part is managing the people. Otherwise the business is so operationally it's quite intense. You know, from an understanding perspective, it's not very difficult. I don't know if that answers your question. Yes, sir. That's all from my side. Thank you so much. Thank you. Ladies and gentlemen, may you press star and one to ask a question on your touchtone phone. The next question is from the line of Kuneh Ghelani from Vivriti AMC. Please go ahead. Hi, Aalok. Hi, Vivek. Good evening to you guys. Good evening. I wanted to understand how is it that you're going about, you know, reacting to the changes that are coming from RBI on? Sorry to interrupt, Mr. Kunay. There is a lot of static from your background. Can you please adjust your mobile? Sure. I'll try again. Hopefully I'm audible now. Yes, you are. I wanted to understand. Please go ahead. Yeah. I wanted to understand how is it that you guys are reacting to changes which RBI has come up with for MFI guidelines both with respect to the yields and also on ground processes, practices and underwriting norms as well. That's an excellent question. First of all, of course, you know, the yields have gone up as far as we are concerned. Our yields right now are between 24%-26%, depending on different geographies, we are charging the customer. Over and above that, the ticket sizes have gone up slightly as well. Currently we have begun some level of income verification from our customers, at least to the household verifications are concerned. A lot of it is work in progress, both from a credit bureau side and our own internal working side, wherein, you know, as far as credit bureau data is concerned, we have to capture the entire family's credit bureau data. Right now, there are auto algorithms which are pulling the member and the spouse's data as far as credit bureau is concerned, but anybody else, our system is not consolidating it. What's going to wind up happening is in the next one or two quarters, there is going to be a holistic credit bureau report generated for the entire family. A lot of complications, I don't want to get into it. It will take the entire, basically, session to talk about it. Yeah, there are definitely challenges in evaluating the entire household's indebtedness, both in terms of microfinance and any other loans that they may have, and both in terms of the income. When you talk about the income of the rural segment, by and large, a lot of these guys are involved in multiple activities and their earnings are also variable throughout the year, right? So whether, you know, there are always questions that come up whether you want to count it at the low end, which makes more sense, or do you want to average it or, God forbid, count it on the higher end as far as the monthly incomes are concerned. So these all remain very unanswered questions. But on the other hand, you know, when the RBI talks about an INR 3 lakh household income as the limit for a micro loan, that pretty much broadens the market quite a bit for us. If you consider that, you know, the vast majority of Indian households will make less than INR 25,000 a month. It, it's quite inclusive of what is considered as a micro loan. But yeah, margins have definitely increased, you know, and we are evaluating the customer both on a household income level and on a household indebtedness level. Thanks. Also just a follow-up, right? Because you mentioned margins have gone up, and hence you are able to, let's say, potentially recycle equity better, right? So to that extent, within the MFI book itself, right? So to that extent, how do you look at capital allocation between the three products? You know, the two-wheeler, the MSME is also a high-yielding product, but now, MFI also you are able to squeeze that extra bit of margin, right? So both from a capital allocation point of view between these three and the overall capital that you have, the leverage that you are at this point, what is the sort of runway that you're looking at, with the, you know, those sort of capital levels? As far as the, you know, the product mix itself is concerned, two-wheelers has become sort of negligible, so let's put that on the side for now. A lot of the lines which were drawn between what I had called MSME versus microfinance have today now started to blend, you know. When you talk about MSME versus microfinance pre-regulations. You were talking about, on one hand, a JLG based product with very minimal underwriting and on the other hand, the MSME product was, you know, doing an income evaluation on a household level and using FOIR to give a loan. All of a sudden that includes microfinance as well. The lines have sort of merged to an extent. What's going to wind up happening in the MSME side is that the utilization will increase and the ticket sizes will have to probably increase as well. Now as far as the product mix is concerned, as I said, I'm very keen to do more. As I said in the past, I'm very keen to do more MSME, and we have been growing that book, well at least in the last one year. I think from a percentage standpoint, the disbursements have increased and the AUM has also increased. I think that AUM increased by about 32%. 33%. 30%-35% over the last year. Microfinance today is still the- Dominant. Dominant segment for the company. That will probably likely change in the next three-five years. But today, microfinance will still remain at about 80% of the book. Anything further? Hello? Yeah. Thank you. I just had one follow-up, if I can very quickly squeeze it in. Just trying to understand from an overall leverage perspective as well, right? On balance sheet we are at 4.6% or so. If we add the managed as well, we go over 5%, right? To that extent, how is it that you're looking at leverage at a consolidated basis and possibly, you know, the equity as well? What sort of runway are we looking at right at this point? CAR ratio is approximately at about 24 odd percent. On a consolidated basis. On a consolidated basis. Normally, you don't need to look at the consolidated basis because these are two different entities. Right. In Arman standalone, it's about 29%. In Namra, we try to maintain something closer to 20%. Hypothetically, if we were to look at the consolidated, then it was about 24%. Right. And, uh- Wholly owned subsidiary. Basically whenever the subsidiary needs more capital, historically it has asked for it from the parent. Now from a leveraging perspective, I think your question is that, you know, how far can our equity push us? Right now, as Vivek said, we are at about 24 CAR. We have taken steps in the past quarter to reduce that or increase the CAR percentage even further by, you know, putting some of the off-book kind of transactions, which is the DA transactions. We are, of course, looking for equity as well. For now, we are comfortable. There's not much of a concern at this point. Sure. Thanks so much. Wishing you all the very best. Thanks. Thank you. Before we take the next question, may I request the participants to press star and one to ask any question. The next question is from the line of Sachit Motwani from Param Capital. Please go ahead. Yeah. Hi, Alok. Hi, Vivek. My first, like, you know, question is pertaining to what other large industry players are saying that post these new guidelines, April, May has been very slow. I just wanted to understand if you guys have also seen a similar trend in terms of April and May disbursement. No, in fact, it's been the opposite for us. The disbursements are quite high. It seems that the demand is quite high as well. Yes, operationally it has been challenging, but luckily we had a lot of practice with income evaluations and things through our MSME. That helped us quite a bit, you know, from an inter-segment kind of a way to take our learnings from the MSME segment and put them into microfinance. That, I think that's probably what you are referring to. I don't particularly know which peers that you are referring to, but lots of the peers were fa- None of them. ...lot of the peers were facing issues with income verification and, you know. Yes. Evaluating indebtedness and stuff on a family level. Right. I think we have done, if I can toot my own horn, a little better based on the unique skill set that we had from the MSME division. Got it. Further, if I can add, I think even within microfinance, we also started something which is called the individual business loans, which were individual loans. Right. That is still in a pilot phase, but since it was set into almost 70 pro-branches at one go in pilot phase itself, though a very small book there, about 2% only. Still, that kind of prepared us in income assessment in Namra itself at each of the branch level. Idea was a product that we had started doing in microfinance, to graduate the customers into an individual loan with a cashless repayment methodology. A higher underwriting, you know. Yeah, that's basically what Vivek was referring to. Got it. Your MSME would also be on similar lines, right? Albeit with a, you know, slightly higher ticket size. Yes. Correct. Okay. My other question was on the securitization that you've done. Now the gain is booked of INR 5.8 crores. Is there any future credit loss, or any guarantee that Namra had to give or any collateral or FLDG? Well, by definition, a DA transaction cannot have any recourse. I mean, Vivek, correct me if I'm wrong? Yes, that's right. There cannot be any guarantee or any cash collateral or anything of that sort. Okay. Otherwise, it would not be considered as a direct assignment transaction. Understood. Vivek, can anything to add there? Ideally what is happening is, as per the definition, under Ind AS, a true sale where there is no recourse, on the percentage of the cash flows which are assigned, you know, there cannot be any additional security in the nature of FLDG or, any enhancement structures. To that extent, you know, there is no additional, provisioning requirement on those, assets. Something similar to that are being done through PTC transactions, which remain on books only because, you know, overall, the credit enhancement crosses about 10%, 15% or 20% at times. Those are anyway on balance sheet and, are covered under the provisioning that is required for the entire asset class. Got it. After this, you know, INR 100 crore securitization that is done in the Q4, are you looking at more such deals coming in the coming financial year? Yeah, absolutely. I mean, it's kind of a win-win situation, because these are, I mean, the rates are also quite competitive on DA transactions, number one. Number two, it helps us with the CAR ratio, as I mentioned earlier, because the asset is completely removed from our balance sheet. Yeah, I think, given that there is enough market interest, we are open to doing more such transactions in the future. Got it. Even without the securitization income, if I look at your cost to income, it works out to be 40%. You know, obviously you are targeting some branch opening and all of that, but the scale at which you are, can we expect this to further moderate down the cost to income ratios? I think for sure. Now that we are charging higher interest rates and, you know, the operating costs will not increase to a large extent. I mean, it will take a few quarters probably because all the stock that we have created in prior quarters was at a lower interest rate. The weighted average interest rate will take some time to catch up to the current, whatever we are charging levels. Yeah, there is definitely a lot of scope for improvement with the new RBI regulations. Got it. Another was even without the DA transaction, the other income was a bit higher this quarter. Any particular reason for that? You had about INR 9.2 crore of which securitization was INR 5.8 crore. Remaining, what was the reason for the remaining other income? Was it that high liquidity that you were sitting on of INR 160-odd crore? It's basically. Yeah. You kind of answered it for us. Basically it's been that the liquidity has been generally high and that is reflected in those. Going forward, what liquidity would you be comfortable at on the balance sheet? I mean, as much as possible really because we have pretty decent growth targets. Ideally speaking, I would like at least one month's worth of disbursements worth of liquidity. Okay. Not been always the case for the past couple of months. You know, the Q1 is always light in terms of lenders. Yeah, I think, you know, it's just nice to have the liquidity available. There's been so many incidents in the last four or five years, Demonetization and DHFL kind of crisis and COVID and stuff where that extra liquidity has really helped us. It does come at a cost of negative carry, but I think it's well worth it to have it. Really want to work in a just-in-time kind of a system. What has really helped us in the past is having large CC limits. We are in a sort of a minority where NBFCs are concerned. Most NBFCs did not have very large CC limits. Most of the funding was done through term loan kind of structures. But now as the debt portfolio increases more and more, the CC limits become less and less meaningful from a percentage basis for us also. Okay. Negative carry will continue to impact us from a P&L standpoint in the future. Okay. Lastly, on the two-wheeler side, like, you know, though, like, you know, it has become like below 4% of your AUM and it's as good as meaningless at this point of time. You were at INR +100 crore AUM, at, in this two-wheeler book. I just wanted to get your long-term thoughts on this. Like, you know, are we looking at scaling this up to INR 200-300 crore AUM at some point of time? Right now it's, you know, the market conditions are such that it's kind of on ice, at the moment. As the conditions improve, we'll make a call, whether we want to kind of re-enter this segment, you know, on a substantial level or not. We are doing rural two-wheelers, which is- Which is generating pretty good. That is essentially an add-on product for our MSME book. It doesn't require a whole another operation to do it. It's being done through our MSME branches itself. A lot of it is being done through our MSME branches. You know, I don't know. I'm a little bullish on the EV side. I mean, it's a little too early to start it, but definitely something to consider down the road. Let's see. I think two-wheeler has been our bread and butter for a long, long time through very rough times when we were much, much smaller than we are today. There is also a bit of a sentimental value attachment to it as well. But of course, sentiments have no place in running a business. Still, you know, we don't want to completely shut the doors. We want to keep some doors open where we can get into it in the future. Got it. I have some more questions, but I'll come back in the queue. Yeah, no problem. Thank you. Yeah. Thanks a lot. Thank you. The next question is from the line of Yash Mehta from Greenberg Asset Management. Please go ahead. Hi. Thanks for the opportunity. On your MSME business, we had seen obviously a couple of quarters ago there were elevated slippages. That has obviously normalized to the current levels as, let's say, around 8% or so of the NPA. How do you see, let's say, the traction on this business and any guidance that you would like to give on the scale-up here? Scale-up on what? Which segment are you talking of? What are you talking of? MSME. The MSME side. No, I mean, we are trying to scale up. It's, you know, it takes kind of a unique customer, so it's not as simple. I don't want to say microfinance is simpler, but, you know, it takes a specific kind of a customer in a specific occupation to do a MSME kind of a loan. Of course, the margins that we enjoy in MSME are far superior as well, so there are no complaints there. But yeah. I mean, it's very difficult to grow the MSME book at microfinance levels of 50%, 60% a year, you know. Still, we are managing to grow at about 35%-40% on a year-on-year basis. I think you should see that continuing for the years to come. Let's say, obviously, on our current base of the MFI business that we have, what set of customers would you say actually qualify for some of these MSME loans? Like where they must have had some credit history with you and you would like to kind of upgrade them to becoming these MSME customers, right? No, I mean, these are not upgraded customers. These are completely different segments. We don't approach MSME like a lot of our peers do that, you know, you've been with us for four, five years and here's a higher ticket size loan and enjoy. It's not like that. I mean, we are trying to target customers who are one step above the microfinance customers, right? These could be male customers, for example, you know. Microfinance is purely concentrating on JLG female customers. It could be male customers. Their businesses would be at sort of a higher level than a simple like a household income generating activity, right? Like a tailoring machine or a buying one cattle or something to sell milk. It would be at a higher level. We are not relying on our microfinance customers to do our MSME book. Can you give some broad use cases for which you've been giving MSME? Like in terms of, let's say, the your pie of the mix. Say that again. I'm saying that, let's say, this is obviously not for just buying cattle. I'm saying in terms of the broad use case for the MSME book, the nature of it. It could be kirana wallahs, it could be scrap dealers, it could be people involved in the spice trade. Some business. It could be people who supply textilers, do embroidery job work. Even if they are dairy, then they have larger number of cattle, larger cattle on the dairy side. Primarily, I think, you know, one thing is that the MSME and Arman are completely different branches and segregated areas, and they do not kind of generally overlap with Namra's geographies, except for few of branches here and there. Generally, these are absolutely different geographies, and these are absolutely different dedicated branches for MSME and microfinance. Understood. My last question is, let's say we've seen our yields now, obviously currently at 22%, they're going to 24%-26% in that range incrementally. Then the question is, would you go deeper in terms of, let's say, a customer that you've not approached before? Because now your ability to price that customer also is much better. Like, you may have kind of left out a particular customer segment earlier at a certain yield level. Yes. Correct. Yes. Geographies we are definitely evaluating, so let's put it that way. Not on an individual customer level, but there were certain geographies that were more riskier than others or certain geographies that came at a higher operating cost than others. We would be looking at those for sure. All right. That's all from my side. Thank you very much. Thank you. You may press star and one on your touch tone phone to ask a question. The next question is from the line of Amit Mantri from 2Point2 Capital. Please go ahead. Yeah. Hi, Aloke. Sorry, I got disconnected earlier. Just again on the same question, just a bit more understanding. As of now in the new regime, you had mentioned that, one, you're doing region-specific pricing of interest rates. Is that the only criteria right now, or are there other factors also that determine the interest rates, be it, say, which cycle the borrower is, or anything else? Yes. There are numerous ways to divide it up. One is by ticket size, one is by geographies. The plan is to add a level of sophistication on the interest side. Of course, stuff like competition would also play a factor into the equation. Right now we are just doing it on geography because, you know, there's a lot to concentrate on. Amit, Aloke, if I can add. Yeah, please. Geography plus ticket size. Now, ticket size is, Amit, a function of cycle also. Yeah. You know, as you give larger ticket sizes, you are basically going to the same customer who's in the third or fourth cycle upwards. Correct with ticket size. But ticket- These days come higher risk. Higher risk. You know, to that extent, it might sound counterintuitive. Yeah. As we've kind of always said, generally speaking, the unsecured loan borrower is interest rate agnostic. Which doesn't mean that we kind of charge them anything that way. Generally, if a customer in the third or fourth cycle was limited to INR 40,000 and now we are kind of increasing it to INR 50,000 and INR 60,000, so the timely delivery of credit and you know the higher ticket size, there's a room for you know better margin there. Sure. Understood. That explains the ticket size increase, basically that, you know. That means there is tons of criteria that you can use, you know. Well, one is, of course, ethics, that you shouldn't really take advantage of a situation. The board has set a hard limit on what that you cannot cross a certain interest rates. Other than that, there is, you know, demand and affordability and competition and, you know, operating costs and risk premiums. Tenure also you can do or size, loan cycle, at least age of the branch, you know. As the number of customers increases, your operating cost in a branch decreases, so you can price it according to that. There is also estimated credit cost and what profit margins and what peers are charging. There are numerous possibilities for pricing. A lot of it that anyway as time goes on. Sure. Understood. On this, currently there are INR 65 crore of provisions on the books. Can you give a breakup of that? How much of it is, say, standard provisioning and how much of it is NPA related and how much, if there is anything else apart from that, of the INR 65 crore? Just to give a breakup between Arman and Namra, it's about 47 for the microfinance book and the balance 18 is on the Arman book for the two-wheeler and MSME book. In terms of, you know- I think INR 18 crores is on standard assets. NPA is about INR 30 crores. Specifically. Approximately. The overall NPA as far as the Namra book is concerned is approximately. We have provisions of INR 28 crore there for the NPA specific provision. As far as Arman is concerned, we just had. INR 21 crore total, and I think it's half and half of it. About 13 crores there as NPA provisions. Overall, you know, about INR 48 crores out of that INR 65 crores will be NPA provisions. 48 is NPA provision. The rest 17 would be standard assets, is it? Yeah, standard assets. Correct. Hello? Ye``ah, that would be correct. Did we lose him again or are we lost? Yes. Okay, let's move on. Moving on to the next question. The next question is from the line of Savi from 2Point2 Capital. Please go ahead. Yeah. I think, again, Amit, was lost. On this, the standard provisioning has not been netted off, right? If you net that off, the net NPA will go to zero, right? No, no. The standard NPA provision, say, the gross NPAs, if the gross NPA for, let's say, just speak for a minute about for Namra. Namra, the microfinance, the gross NPA is INR 34 crore, INR 34.5 crore. Against that INR 34 crore, there is a INR 28 crore NPA provision. The net NPA will turn out to be 34 - 28, which is about, let's say, INR 7 crore, right? That is the net NPA there. Similarly for Arman, the gross NPAs on Arman that we would have, let's say, to give you a segment-wise breakdown, the gross NPA numbers for two-wheeler is INR 3.17 crore, against which we have a provision of INR 2.23 crore of specific NPA provision. My net NPA is just 0.94 crore in two-wheeler segment. In MSME, our gross NPA is INR 12.89 crore, against which we have a provision of INR 10.67 crore, giving a net NPA of 2.2 crore. In Arman, the net NPA is about, you know, 3.15 crore, which means about 1.79%. In Namra microfinance side, it will turn out to be, you know, whatever, something like, less than a percent, 0.6%. Yeah, again, these, if you also knock off the standard provisioning, then. No. Okay. What you're saying is in terms of the provision coverage, just the provision coverage. Yeah. Yeah. I mean, you know, that's one way of looking at it. If you look at it that way, probably the overall provision for microfinance book would be much bigger. Got it. This is maybe about 130%. Got it. Arman will turn out to be almost 100, whatever, 50%. Again, more specifically, I think. We have 100% provision on NPA interest also. Yeah. That's. Got it. Yes, I mean, the ECL has really kind of confused matters on what is standard and what is not, because there is the RBI method of calculating, there is the ECL method of calculating, and you have to kind of take whatever is higher. Which in our case is always the ECL. I know where you are coming from the standpoint. Typically speaking, pre-Ind AS, we reported standard assets separate and then NPA provisioning separate. Now it is just kind of one big blended number, you know. Anyway, I think what we- We have to follow, I mean, next year. Again, Savi, just to further clarify. What happens is, generally we have seen this practice which, PCR ratio. Now, typically, when you're doing an expected loss calculation, I think generally speaking, it's a good ratio to just show, but it probably does not really mean too much because I require provisions against standard assets as well and against the NPA assets, there has to be a specific provision. I think the specific coverage is rather more important. My NPA gross assets have a coverage of, you know, roughly +80%. That's to our understanding a more important thing to be prepared for, because if my NPA assets are, let's say, INR 50 crores, and against that INR 50 crores, my NPA specific provisions on these specific assets itself is INR +40 crores, which is almost like 81%-82%. It's rather more definitive way of gauging losses rather than saying that against the INR 50 crores of NPA, I have a provision cover of INR 665 crores, which 130%. No. Got it. This quarter, what was the reason for increase in provisions? Was it to increase the coverage ratio on the NPA, or I mean, collections were pretty good, right? What was the reason? I mean, QOQ also, there's not been a decline. It's all the past stuff. First wave, second wave, all of that stuff, which is finally kind of we just have to clean up. I mean, something which is like pre-COVID and still not an NPA bucket, but is in say 30-60-day bucket or what we call as the stage two assets, we'll continue to have a higher coverage provisioning requirement because. What is also happening honestly is that a lot of these are moratorium interest disputes as well. A lot of the microfinance customers when they took the original moratorium or we gave it to them, there was an interest that was accrued during the moratorium period. However, you know that now it's disputed, a lot of customers don't understand moratorium interest. I think most people didn't before this whole COVID crisis came. They say that we have paid as per the regular schedule and what is this extra money that you are asking us? A lot of that was cleanup exercise as well, where there would be a couple of thousand INR pending per customer and that was disputed. You know, the cost of recovering that small amount was far exceeding anything. The cost would exceed any recovery efforts that we would make. The option was to just essentially write it off or Provision for it. Provide for it. This year in FY 23, will we have a normalized credit cost which is equal, near to the pre-COVID levels? Yeah. I don't think it's ever really going to go back to pre-COVID levels. Okay. Humble, pessimistic opinion. The days of 1% credit cost in microfinance are behind us. They were behind us even before COVID. I think the loan losses, you'll have to expect at a slightly higher number. I don't want to give you any number, you know? I mean, I'm not gonna say it's gonna be 5% or anything ridiculously large like that. Definitely it's going to be higher than 1%, maybe slightly less than 2%, even on an ongoing basis. You know, that's the way it is. Thankfully with the new RBI regulations, I can pass that on, right? It's not going to impact me too much. Anything, you know, specific to the COVID waves, all of that has been cleaned up in this quarter now, nothing extra is left there, right? By and large. By and large. It is, it has been cleaned up plus provided for. Yeah. Yeah. I meant that only. The reason why I say by far and large is that we won't know completely until August of this year, because you'll still get into those interest disputes and things like that, towards the end of the loans. By far and large, it's behind us. All right. On the outlook for growth, can you give a number for FY 23? Unfortunately, we are not giving it, but we are expecting a pretty good year. Yeah. You know, we are used to growing at 40%-50%, so at least that much. That will lead to significant increase in leverage unless you do direct assignment transactions. What is your thought on that? Are you comfortable with an even higher leverage from here on? We are evaluating different options. One obviously is raising more capital. Second is doing more DA transactions. Third is Tier 2- Okay. Tier 2 kind of structures as well. We are evaluating. If we can raise further equity, nothing like it, you know? It may also affect your credit rating, right? If you continue to increase the leverage. We'll never go beyond like 18% CAR or anything like that, you know? Let's- Last question is on your diversification. There has been some significant progress there. Now M.P. is almost equal to Gujarat and U.P. is even larger than Gujarat. I mean, it looks like a conscious decision for you to diversify across states. Exactly. What is the implication, in terms of, you know, cost to income and asset quality? What is the experience in the newer states, in terms of asset quality? How are you looking at that? Say that one more time. Geographically, yes, it's a conscious decision to kind of de-risk ourselves in our existing geographies of, let's say, Gujarat and M.P., that we had been historically present. Slowly but surely, we've moved into new geographies including U.P. and Haryana, Rajasthan and so on, so forth. U.P. definitely is a large state. You know, we've seen over the last five years that we've been there. Generally, UP has performed, I mean, touch wood, has performed extremely well during COVID. Probably, if you discount the newer states that we opened, it's probably been the best performing state. The worst has been Maharashtra. The plan is to not open branches there at least for the time being. Madhya Pradesh after that. Which specific district? Specific districts, Jabalpur and areas like that. Rest of the other states have performed well. You know, I would say between Madhya Pradesh and Maharashtra, that should be over 2/3 of our credit costs. Largely what we're trying to do is what we've been always saying, to reach to a situation that where each of these states kind of represents less than 25% and then slowly represent less than 20%. In terms of hiring, you know, you've been hiring a lot of people at the junior level. Are you also looking to hire people at a senior level now that you've become a large? Well, I mean, we've been hiring at junior, senior, and middle level in all the way. I think we just hired a chief risk officer as well. He comes with good 30-40 years of experience. In the banking sector. Banking and NBFC both. We hired a good IT person as well, so at a higher level on the software side. Hardware we already had. At all layers we are hiring. Got it. Yeah, that's. Thank you. That's it from my side. I think we'll have to call it. I have some obligation. I think, Michelle, probably maybe one last question, if there's anybody else or? Ladies and gentlemen, we will take that as the last question. On behalf of Emkay Global Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you. Thank you.