Ladies and gentlemen, good day and welcome to Mahindra & Mahindra Financial Services Limited Q1 FY 2023 earnings conference call hosted by IIFL Securities Limited. 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 0 on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Alpesh Mehta from IIFL Securities Limited. Thank you, and over to you, sir. Thank you, Lizanne, and good evening, everyone, and thanks for joining us for MMFS 1Q FY23 earnings conference call. From the management side, we have Mr. Iyer, vice chairman and managing director, Mr. Vivek Karve, CFO of the group financial services sector, Mr. Amit Raje, Whole Time Director and Chief Operating Officer, Mr. Raul Rebello, Chief Operating Officer, core businesses, Mr. Dinesh Prajapati, Head, Accounts & Treasury, Mr. Rajesh Vasudevan, Senior VP, Accounts, and Vishal. Now without much ado, I hand it over to Mr. Iyer for the opening comments and after which we will have a Q&A. Thank you, and over to you, sir. Good evening, thank you everyone for joining this call. Let me first kind of start from what we saw this quarter and what do we see going forward. I think, after a very, very long time, we are able to see disbursements continuing to maintain growth. This is the first time that we have seen the highest ever growth in the 1st quarter of any year in the past of a disbursement and even sequential growth. That's one good news that we saw, that the demand is holding up, the sentiments are positive. Inventory levels are going up, but it's still an issue from an availability perspective. Nevertheless, we clearly saw demand for vehicles, tractors, pre-owned vehicles in all the segments that we are operating. Also that, given our deeper reach relationship with dealers and our wanting to get into different segments in the rural market has helped us gain market share for almost all the product lines that we are in. The disbursements clearly are a good positive from what we are seeing as a growth. I think, also from an asset growth, therefore, we have now started seeing the AUM beginning to grow, which is after a very, very long time. In all the recent past, you have seen our assets actually degrowing, but we have now started registering the asset growth. This is contributed by an overall growth from all the products that I just talked of. On the collection front, we again had good traction even in the 1st quarter. Our collection efficiencies were pretty good, I would think. Again, this is, if you look at any time in the past in the 1st quarter, we always have had pressure of collection leading to increase in NPA substantially. Very clearly that trend has been featured in this particular quarter. One of the reasons for that is, unlike in the past, we saw in this round the economic activity levels were pretty high. The tourism was at its best. People movement was high. I think, all of that definitely contributes to a better customer cash flow, which leads into a better collection for us. All of this put together, I would think that the quarter gone by has been a favorable quarter from our perspective, and I think, we clearly see the trends going forward to register even a better trend from what we saw in the 1st quarter. This was not very contrary to our belief of, what we thought would happen. If you kind of recall in the past quarters that we've been talking of, we've been repeatedly saying the rural sentiments have turned positive for us. We are seeing good customer cash flow and therefore our belief was that the growth would come back and the asset quality would hold up. We have taken some aggressive stand when it comes to repossessions and disposal of vehicles, and that has resulted into a little higher provision on termination that we have done. Again, go back to the last quarter that we discussed of, for some high delinquent account, the repossessions were aggressively done and we've been able to transact on those vehicles and, liquidate those repossessed assets. But definitely we believe that this is not what is likely to be as the year goes by, because if we are today at, eight percent kind of a gross NPA number, we don't need to now resort to a very aggressive repossession stance. Also it is corroborated by the fact that our stage two has also come down substantially to what it was in the past few quarters. Putting all of this together, we are very confident on how it's likely to go forward in terms of asset quality, in terms of collection efficiency, in terms of growth. Just as I said, the sentiments are positive. The contracting segment is doing well. Of course, it's a monsoon period, therefore you will see some drag on the contracting activity. The good monsoon is also a good indicator of how the harvest is likely to be going forward. Therefore, we are very hopeful that even the festival season will be a buoyant festival season. We are preparing ourselves for taking full advantage of the coming up festival season and therefore the second quarter would definitely be a positive quarter if the 1st quarter has gone the way it has gone, and that will lead into a good second half of the year, and which is where our confidence on maintaining the asset growth in the direction that we are seeing, maintaining the disbursements growth in the direction that we are seeing, and therefore the delinquent NPA numbers would also look very different from what we are already in. Putting all of this together, I would also like to make upfront comment on how do we see the new RBI regulation that would come out from October that we need to follow. We very strongly think that the way we are seeing correction to our NPA, the way we are seeing the overall collection efficiency is improving, it may not be very relevant to look at what the number looks like now because what is more relevant is how do we end the second quarter and how do we open up the new account going forward. Our belief is that even if we think a forecasted increase of 2% NPA was to happen to the IRAC numbers, we may not need to have provisions to be made at a higher level given the provision that we are already carrying. We have taken an aggressive stand to maintain higher coverage. I think we are currently at about 58% coverage, and we would continue to maintain that level of coverage in our NPLs and therefore the confidence that we may not require to make substantial provision going forward is where we come from. On an overall basis, I think the sentiments are very, very positive and I have been repeatedly saying that we believe for the next three years it's the rural geography to watch for growth. The opportunities will be phenomenal. The infra, as I said, is opening up in most of the geography. Monsoon is, even though it was a little delayed in UP, Bihar, Jharkhand, et cetera, but it has caught up and normally these states do get monsoons a little late, but it was not anything to be overly worried about. Now it is really a widespread monsoon and I think that should to be our advantage as we see the festival season open up. On the cost of funds, definitely we have seen increasing trend on the interest rates. We have taken one price increase of about 40 basis point or so on product, but as we repeatedly say, we will watch this space very closely and then keep increasing our rates by geography, by product at different points of time and I think we would catch up over a period of time even through the increase in price. It will also be an outcome of a certain product mix change as we see pre-owned vehicle demand being high, that comes at a better yield. Tractor demand is picking up, that will come at a better yield. Putting all of that together, some correction to the mix will happen through product mix change, some will happen through the lending rate passing on to the consumer. Even if we were to retain some rates for some high-end customers, that would be more than offset by a low operating cost for such customers and a very low delinquency from these customers. At the ROA level, we may not really have a much pressure because of the borrowing cost increase. Even our borrowing cost increase will not all happen at a time. It will definitely happen over a period of time as our past liability begins to mature. I would think very confidently of the growth back to disbursement growth happening on all fronts. Clearly the EM growth therefore beginning to happen, asset quality well under control and, our ability to maintain high collection efficiency should all lead to better profitability and better return on equity as we pass through the quarters ahead of us and as we close the year. No pressure on liquidity. We are of course backed up with our own three months stock of liquidity even if we were to face any emergency situation. Even otherwise as we look at the market, we don't have any pressure on the liquidity front and as I said, on the interest fronts, we are more than preparing ourselves to absorb some and pass on some. Putting all this together, I think we believe the year ahead for us is very, very positive and if we were to look at the next 3 years ahead of us, we would feel very confident and comfortable about the way we are structured. We are investing sufficiently in our technology space, in our data space and I just want to take you back to the Project Udaan, the transformation agenda that we talked of in the March results call, where we clearly set out on how we look at the next 3 years. I think the program is well on course. On each of the front we have taken a very deep dive understanding and initiatives are put in place. Our promise that in three years we want to almost kind of double the balance sheet seems to be on course in the direction and we are already seeing the beginning of growth happening and we are confident that in the 3 year space that we have set for ourselves, we should not lag behind on that strategy clearly. On our various new initiatives, the first one on the leasing front, definitely we have seen good traction from the institutional requirement more so for the CTC car, et cetera. On the retail we are a little cautious. We want to make sure that we understand the residual value pricing correctly and as we put in that in place you would see us also in the retail space taking a better participation. Definitely leasing we believe is a future product and we see good traction in that front. As far as our small ticket loan, consumer durable loan, the digital initiative is concerned, that again is now well set. The states that we operated in have given us some insights and we have brought in all those inputs and we have made necessary adjustments to the product design that was required and it is now beginning to pick up. It's too early days to say what the number will look like during the year. This year we'll still be setting it up and growing it in a direction. In the 2-3-year space that we are talking of, this will become a very key vertical to really participate on. If you recall, we had talked of new verticals that we would begin mainly also looking at SME and loan against property as the 2 growth engine possibility. On the SME front again we have seen tremendous traction from the Mahindra ecosystem, from the overall auto ecosystem, and we are doing pretty well both on the working capital support of bill discounting backed up by the OEM support as well as on the expansion programs of the suppliers. We would see a growth of this business scaling up well during the three-year period. This year itself, it should do at least about INR 2,000-3,000 crore very clearly as a book as we move along in that direction. As far as loan against property is concerned, we are first setting it up. We are putting a team in place. We have not yet begun any disbursement in that front. I think a bit before close of the year, we would come back to all of you and tell you how we are set it up and what is the real program. That's not something which will add to any disbursement during the year, but SME for sure would add. Leasing and digital FinTech again may not be a volume disbursement this year, but will add up in the following year. Clearly, market share growth, deeper penetration, new segment of customers from the rural and semi-urban segments, what we call as affluent financing, all of that will definitely add up to the overall growth. Fortunately, we are seeing growth potential from all fronts, whether it is in the auto front, whether it's in the car front, whether it's tractors, commercial vehicle, say, pre-owned vehicle. In all the fronts, we are seeing good traction and good positive demand that we are seeing very clearly. That gives us confidence that the festival season and run up to March closing will be an excellent six months to watch for. Putting all this together is where comes our confidence of what we think the year will look like and what we think the 3 year strategy that we put out would look like. I think we are very comfortable to make a commitment that we are in line with our commitments that we made earlier, and we believe that we would be able to achieve those targets as we have planned for doing that. I would stop there and then invite questions from all of you. I think we will then holistically cover what the intent and the direction is. Thank you. Thank you. Ladies and gentlemen, we will now begin with the question and answer session. Anyone wishing to ask a question may please press star and 1 on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment for the question to assemble. The first question is on the line of Mahrukh Adajania from Edelweiss. Please go ahead. Good evening, sir. I have three questions. My first question is on provisioning. How do you think we should look at provisions? You did say that, I mean, you had an aggressive repossession policy and a lot of it may be behind us. How do you look at provisions of credit costs? Could you then forecast in the next few quarters that if the macro environment remains as it is today, then your next quarter's credit cost would be 700 minus your repossession losses. say if your repossession loss is INR 300 crore odd, maybe it comes down to INR 50 crore-INR 100 crore, and then we're looking at a INR 400 crore-INR 500 crore run rate of provision because that's the most confusing part right now on how you, I mean, how you could forecast your provisioning. So let me first quickly cla- Given the transitioning. Yes. Let me first clarify this question to you before you go to your second and third. I think, very clearly, you know, if today the credit cost, taking all the elements of provisioning as well as termination loss and disposal loss, all that put together, if they are at about 3.2-3.3 type numbers, we would clearly see at least a 1% correction to this number during the year because this is not the same level of repossessions that we will be required to do in the future quarters. Because this was required to be done from the level of NPA that we were in. As we were correcting it and as we saw the COVID impact on certain segment of customers who either wanted to surrender the vehicle or move out of the business, we did resort to settlements, we did resort to taking back of the vehicle. I think those elements are all done with. Clearly one should look at end of the year as we pass through the next two, three quarters, you would see this climb down at least by 1% from where it is today. Okay, sir. Got it. My next question is on margin. How do you see the outlook on margin? No. As I said, you know, fortunately, the entire new borrowing cost is not going to impact us almost immediately. It will impact us over a period of time, and we would catch up by our lending rate movement as well. As I said, we have already passed on 30-40 basis points through our lending rate, and we would continue to watch that space and keep increasing the rate in line with the borrowing cost increase that we are witnessing. Truly, I don't think we should have a huge pressure on the margins as far as the borrowing cost is concerned. You will see some compression of the NIMs happening because there is also a product mix change that will happen, which means when we get into a little high-end customer, definitely the rate at which we'll do business with them, the yields will be different from other segment of customer. That should then kind of reverse back itself through lower operating costs and a lower delinquency. You may see some compression on NIMs coming through a product mix change, but it also be to some extent offset by the change in the what you call pre-owned vehicle financing or tractor vehicle number going up. Put these two together, we should see itself offsetting to some extent. The borrowing cost, as I said, would be offset through a lending rate. There could be some lag for sure. We can't simultaneously pass on all borrowing cost increase unless the market responds to it in some form. There could be a quarter or 2 lag effect will be there. If you were to look at the year-end number, you may not see a very different NIMs number from where we are. Got it, sir. Sir, my last question is, you are seeing good growth traction right now. You said festival season will be good. That's one part of the story. On the other hand, we are faced with a global macro slowdown. Given the segments you are in, those remain unaffected by that narrative. Correct? The growth outlook for the next 3-4 quarters, or say 3-5 quarters, according to you, should be good enough coming off a low base of COVID? Surely. We don't see any reasons to relook at our disbursement targets. We are pretty confident. Let's not forget that surely there'll be a price increase from OEM, which will come through in the next couple of quarters, and that would be an added support to the overall disbursement number. The first is we don't see any volume pressure that we will not be able to get those numbers, and inventory levels are improving and the demand is definitely positive. Add to that, there will be a price increase from OEM, which will also be a good support to the increase in the overall disbursement. At this stage we are not relooking at reversing our number downward on the disbursement. Okay, sir. Thank you. Thank you. The next question is on the line of Rikin Shah from Credit Suisse. Please go ahead. Thank you for the opportunity. I had a few questions, couple of them relating to the medium-term strategy, right? First, when we talk about NIM compression due to a product mix, is it a customer mix or a product mix? When we speak about rural affluent category, I believe the yields are closer to 10% versus our current book yields of 14%-15%. How does one, you know, expect the overall yields to trend over, say, 2-3 years and not just near term? That's the first one. Second one is on OpEx. While we have talked about reaching OpEx of 2.5%, currently it was elevated and much higher than expectations even in the quarter at 3.2%. What is the cost efficiency measures that we can undertake to bring this back? Thirdly, the question was also relating to housing business, where we saw NPAs again going up from 11% to 14%-15% in the quarter sequentially. Any color there? Last question is on the deposits. We have seen last 4-5 quarters of sequential deposit contraction. Is there any rethink in terms of how we want to set up our borrowing mix or there is more to it? That's it. Okay. I will try and answer them, but I don't know if I would remember all four questions. First is on the NIM. Clearly, when you ask whether it is product or customer, I think, First of all it will be customer because when we look at affluent financing, that is high-end customer of rural, that's one from where we will get little pressure on the yield. Like you said, they are low yield, but they are not going to be a very large number which will tilt the whole balance. The other element of the mix change is the product mix change, which is when you have a higher disbursement in pre-owned vehicle, higher disbursement in tractors, they are definitely high-yield products, and therefore that will give us an advantage of the margin improvement and not margin shrinkage. Therefore, you must look at it from both angles. One is there is a segment that we are adding which is a low-yield segment, but that's not a very large number in disbursement. Second is the product mix change, which will definitely be a beneficial product mix change when we do pre-owned vehicles as well as tractor little more than what is happening now. That's on the product front as concerned. The second on the OpEx part that you talked of, you know, we have sufficiently invested and there are definitely some advanced investment that's happening when you take people, when you invest in technology. All doesn't come off immediately in one quarter. If you see the way the asset is growing and the disbursements are beginning to happen, you will see definitely this cost climbing down with the asset growth happening, and we are not proportionately going to keep investing more and more. Only cost that will keep coming for the growth will be the variable cost, which will be directly proportional to the disbursement that is happening. On the fixed cost front, whether it's on the people front, whether it is on the technology investment front, et cetera, I think we would have more than done enough for gaining the growth that we are looking for. which is where the confidence that if the asset starts to grow well, and even if it goes up to a 15%, 20% kind of a growth over a period of time, we don't have to substantially invest to achieve that, and that's where you'll start seeing the cost coming down. For us, the housing NPAs are concerned, you know, that's typically the business where 1st quarter increase is happening, unlike in Mahindra Finance where the trend changed because of the earning assets doing better. Whereas the housing assets are still dependent on their different sources of revenue, which is more, you know, farm-related revenue, et cetera. They therefore, their trend couldn't change in the 1st quarter. The similar trend of what we have seen ever in the past continues to plague them even in this quarter. They will also correct themselves in the third, fourth quarter, like typical correction that happens. They are, in spite of that, they are at a little elevated level. They are also looking at their book very, very closely, and we will take some very aggressive corrective stance on settlements with customers, et cetera. Because what we have seen is the last two or three years that whatever businesses that have been done, they are at a much, much lower level of delinquency. Some of these delinquencies we are struggling with are of our very initial days when we set up the rural business and it was kind of an experimentation that we were doing on the low cost lending there. That got us some quality issues and therefore a close look at that and some corrective actions will be put in place and you will see that happen in the next two or three quarters. On the deposit front, Dinesh, Vivek, you may want to take this question, please. About the borrowing cost, right, sir? Yeah, no, he asked about the I think fixed deposit. I don't know. He asked about the total borrowing mix and the. Yes, yes. The question, Vivek Sir, was pertaining to the absolute levels of deposits in the balance sheet that has been coming off the last 4-5 quarters. Is that intentional, a planned reduction or there is something more to it? It is not a planned reduction. Fixed deposit, they continue to be an important source of funds for us. We have recently taken up our rates also in the fixed deposits by almost 75 basis points. Therefore, we expect the flows to start drizzling in once again. Any reason why it was contracting for last 4, 5 quarters? No. During the COVID period, there was accelerated deposit flow in the FD. As this COVID situation eased out, because of the rate remaining competitive at a market rate, the flow in the FD reduced, which led to a drop in the FD deposit base. However, as we now once again have started raising the rate, we believe that the flow will start improving further going forward. Also, you know, what happens is, FD also needs to compete with other sources of funds. If the other sources of funds are available in plenty and we would. Hello. We would remain selective on increasing our FD rates. With the inflationary pressure which is seen across the sources of funding, we believe FD should start increasing slowly as a share in the overall borrowing mix. Got it. Just one last clarification question for Mr. Iyer. In your opening remarks you mentioned that to comply with the RBI norms we may not need to take substantial provision. In last quarter when you mentioned we may need additional INR 500 crore-INR 1,500 crore of provision. How do we reconcile between the two? Now, are we confident that we may not need any additional provision? little premature to make the comment, but when I said we may not have to take substantial, so you can discount that the INR 1,500 may not be the requirement for sure. Then as I told you about the example, if you were to go up in NPA only by 2% and if you have to maintain a net 6%, you know, if you compute it, you will see we are not required to make any provision because we are carrying substantially high provision in the book already. Our endeavor is to make sure that by September we do bring down these NPA numbers to a much lower level and therefore ensure that the requirement of provisions are very, very limited. I think if you give us some time to get a much better color, maybe we'll do a specific call sometime in September to even let everyone know how things look like. At this stage, our projection is that we may not be required to take a very high hit in the last quarter. Got it. Thank you. That's all from my end. Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in this conference, we request you to limit your questions to two per participant only. The next question is on the line for Abhijit Tibrewal from Motilal Oswal. Please go ahead. Yes. Thank you for taking my questions. Again, kind of, a question on asset quality and write-offs that we've been taking. While we kind of keep saying that some of ECL provisions on the balance sheet has been kind of coming down, but large part of the P&L credit costs that we've been taking over the last few quarters has been because of write-offs. We've already taken around INR 4,700 crores of write-offs over the last two fiscal years, which is FY 2021 and 2022, and this quarter we had another INR 570 crores of write-offs. Basically, is there a way to give some kind of a guidance of what kind of write-offs that you are expecting in maybe in this fiscal year? That's one. Secondly, sir, I mean, from what I understand, we have not implemented the RBI NPA circular as yet in our books of accounts, while everyone else has done it. Don't you think that given that we've not implemented it, customers have not had the time to kind of adjust it to the new RBI NPA norms, and you'll probably have to go through the same grind again to discipline them, to kind of tell them that they need to kind of pay their installments on time. Sir, lastly from Mr. Vivek Karve, what is the quantum of increase in portfolio borrowing costs that you're anticipating, maybe over the remaining nine months of this fiscal year? Okay. So far as customer education is concerned, you know, right from the time the circular has come, we are already on the job and, we are continuously communicating to the customer, meeting the customer, and we are seeing definite movement, positive in the direction of ability to collect on or before that due date kind of a situation. For us, I don't want to comment on everybody has moved to this. There is some comment that you made, I'm not too sure, but that's not the point of debate at this stage. Honestly speaking, when you need to do it only from October, moving it now it does not really make any big difference or sense because at the end of the day, thirtieth September, whatever will remain in your NPA is the one which you will have to collect all installments before they can come out of NPA. From first October, you must make sure that your forward flow is substantially arrested. If you look at our efforts and see it from the stage two number, you will see that there is a continuous improvement to the stage two that is happening. We would like to keep a stage two improvement continuing so that we are able to hold customer at that level and not allow them to forward flow. The challenge in the new circular is when you allow them to become an NPA, you can't reverse them unless you collect all installments and bring them to zero. Therefore, the education, the effort, the internal systemic change, all of the contract allocation to field executive for collection, all of that is aimed at ring-fencing the contract from a forward flow from stage 2 to stage 3. That is where the confidence that we have to believe that why we may not be required to take higher provision because we, I think if I'm not wrong, in the 1st quarter last year when we ended, we had a stage two level of upward of 90-odd% or so. That we have brought it down to now close to about 12% or so, and our endeavor is to keep taking it even lower so that we have a much lower problem to begin with. Similarly, from a gross NPA perspective, if we are able to bring it down to a level lower than where we are, then that further reduces our problem to address this. You must please look at it from the efforts producing what kind of a result and therefore the confidence as to why we would not be required to go in that direction. As far as your write-off question is concerned, you know, we made this statement even in the last year's last quarter, et cetera, that we have assessed various customer segment and someone who have been severely impacted because of the COVID and if we think that it's difficult for them to move out from where they are, we have taken a view to make a provision like we moved our, if I'm not wrong, 100% provision thing to 18 months and below. We are continuing to move in that direction even in this quarter. In this business to take a higher provision and remain provided for, especially when you have substantial capital support as well, is always a good thing because then you can put more efforts through a specific action around these contracts and you can have better recoveries happening. Now to your point of 1st quarter, if you have had some INR 500 crore provision, is that the same number we are going to look at in each quarter? The clear answer is no, and I think someone asked this question even in the first round. Our answer is very clear that we don't need to resort to same level of repossessions that we had in the 4th quarter and the 1st quarter. That's not the kind of number we will need to look at for the next 3 quarters. Therefore you will see a lower provisions that we will be required to make on the front of write-offs. You will also see some recovery that is beginning to happen from all the provided accounts. That will be a good net off that will be available to look at. On the third question of funding, I think, Vivek, you will take it. Yeah, yeah. Yeah. Yeah, yeah. It's a difficult question to answer because it also depends on what further action does RBI take. Our assessment is that, compared to the levels of the weighted average cost of borrowing, that's there as of thirtieth of June, for the rest of the 3 quarters, we may see maybe a 50-60 basis point increase. It is completely a function of, what actions does RBI take from here onwards, which also is, in a way, a function of how Fed reacts. This 50-60 basis points is assuming there are no more repo rate hikes? No, no. This assumes a further repo rate hike. Yeah, yeah. Right now the repo is about 4.9%. We are expecting at least a 50-75 basis point- 5.75, okay. increase, if not in one shot but maybe at least in couple of tranches. Got it. Assuming another 50-70 basis points increase, we are expecting weighted average portfolio borrowing cost to increase by 60-70 basis points is what you're saying. 50-60. It's a very ballpark estimate I'm sharing with you. We have some advantage of ECL, so we have factored that, and based on that, this is what we estimate. Got it. This is very, very useful. Thank you, and I will come back to questions. Thank you. The next question is on the line of Chirag from Laburnum Capital. Please go ahead. Hello, sir. Thank you for the opportunity. My question is on the SME book. The book has grown around INR 1,500 crores while the disbursements are around INR 700 crores, INR 750 crores quarter-over-quarter. Is there some reclassification in SME and other part into book? I will not know. Dinesh, anybody can answer. Is there any reclassification? No, because SME and others is also, there are elements of our DigiFinCo business, elements of our leasing business will all be there, right? We don't consider. Okay. No. Yeah, and also. Maybe somebody can. The bill discounting disbursements are also not counted there. Yeah. Maybe somebody, Dinesh or Vishal can provide the number separately later. Yeah, yeah. That's what I was watching. Sure, sure. We will do so. Supply this information offline to you. Okay. Regarding the write-offs, do we have a specific criteria for writing off a loan against providing for these things or how does this happen? Yeah, yeah. It is a board-cleared proposal. Vivek, you may want to explain how we have moved from 36 to 30 months and- Oh, yeah. Up to 200% provision on 18 months and whatever. Sure. We have a board-approved policy, and as per the board-approved policy, any exposure, whether live or alive or matured, which is outstanding for more than 36 months overdue is an exposure which is written off in the books of accounts. Of course, it's a technical write-off. We continue to put in all efforts to recover monies from these accounts which are written off. This will definitely, once we write it off, then it'll form part of the write-off line item. Mr. Iyer also alluded to 100% provisioning that we have done for all 18-month plus DPD contracts. They continue to be part of the gross NPA. They are fully provided for. The 100% provision that we carry on this portfolio is nothing but the overlay that we are showing on the balance sheet. Okay. That's it. Could you give the NPA numbers as per the revised RBI circular? I know you haven't implemented it, but maybe just another time. Do you want me to take this question, sir? Yeah, yeah, please go ahead. Yeah. Yeah. There is a reason why we have not disclosed it, because as you know, these provisions will become applicable on the 1st of October. Therefore, what is more relevant is the situation or position as on that particular date. As Mr. Iyer said at the beginning itself, that we have already initiated efforts to control these NPAs, and we believe that the favorable outcome will reflect in a much reduced level as on the 1st of October. Therefore, number as on 30th June is a very theoretical number, and that's the reason we have not disclosed it. Given that, can we expect another further write-off for at least one more quarter, given that we like to get that NPA sum, number reduced? No. As I mentioned earlier, our write-off policy is a board-approved policy, and it's followed in a very clinical way. The RBI NPAs are those NPAs which become 90 DPD, probably come back below 90 DPD, but have not paid all the overdues and hence they need to be reclassified as NPAs. There is a difference between the exposures that we are writing off and the IRAC NPAs. Hope I'm able to explain this. Right. The basic question was effectively, what we'll try is on 31st as on 1st October, we'll have to limit, reduce the number of GNPA to the lowest amount, right? Because those accounts will be hard to get back towards the end of summer. There it'll be logical to have some excess write-off to get that number lower as of that date. No, that's what I'm saying. It is not about write-off. It is about controlling those overdues and trying to bring them to zero DPD. No overdues. Just to explain to you, if you are willing to take a write-off, then we can as well make provision under IRAC also, no? That's not the approach. It's not about writing it off and keeping the NPA low. It's about having a correct level of closing NPA by efforts of recovery, repossession, settlements, whatever that we will do. If we just write off and bring the gross NPA down, what's the problem in just keeping it as an IRAC NPA and making the provision? The effect on the P&L is the same. That's not the approach. The approach is to efficiency-wise, do better collections from them, settle accounts with them, repossess and settle with them if necessary. More importantly, I'm re-emphasizing, more importantly, under the new rule, you should have many, many contracts moving towards stage two and stage one and control them there and not allow a forward flow. Which is where the confidence of high collection efficiency, which leads to reducing stage two from what it was to where it is today and increasing our zero bucket and stage one bucket. That is the attempt that we are making, and which is why we keep emphasizing that putting out a number now will be very theoretical. Once we finish with these actions as we reach September, I think we'll be much, much clearer to say what it will look like. Okay. Thank you. Those are my questions. Thank you. Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in this conference, we request you to limit your questions to two per participant only. The next question is on the line of Manan Tijoriwala from ICICI Prudential AMC. Please go ahead. Hi, sir. I have a couple of questions. I hope I'm audible. I was just running the numbers. The SME business has seen a decent bump up. Basically, what exactly is the flavor of the lending that we do under this segment? I think Raul is on the call. He will explain to you in detail, but we stick to definitely the overall auto agri ecosystem when it comes to CapEx and things like that. We have looked at bill discounting opportunities from the Mahindra ecosystem and similar like Mahindra ecosystem. As well as we have just about started some lending to well-rated NBFCs as refinancing a very small portion here. Raul, you are there on the call? Yes, yes, I'm there on the call. Can you take this call with- Yeah, sure. A little more details, please? Yeah. Thanks for the question. The SME composition includes, like Mr. Iyer said, we have the traditional, short-term loans that we classify as business and retail enterprises, and this is largely done in the auto ancillary food agri processing and engineering space. We continue to do that, and we've increased our distribution. We were in fact not in many branches where we also offer our other auto products, so we've increased the strength of our SME team and large amount of the growth we are seeing because of increase in manpower and distribution capabilities. Second is our bill discounting volumes have gone up, quite decently, and that is largely again on the auto ancillary and within the M&M ecosystem. The third, business which we recently started and, Mr. Iyer alluded to at the start, the LAP business. We have the policy in place now, and we've just started in Q1, which has seen some encouraging volumes pick up. It's again secured business. That's a business which is incubated. Lastly, we have a line of business which is lending to very well-rated NBFC. This is a new business which has just started right now. Very small steps here too. This does not have any component of the new businesses that we are talking about as yet, right? Sorry, I didn't get that. The new businesses that we are discussing don't form any significant part of this portion right now. These are all our growth engines and all of them are kind of adding up because as I mentioned, our organic businesses also volumes have started to sequentially increase because of the investments we made last year. We started investing in manpower last year, and that volumes are starting to show now in Q1. Fair enough. Sir, one question on that tractor segment. What would be the average yield in this segment, and what is the collection frequency? As in, how are the EMIs structured? Yeah, we don't publish, you know, yields product by product, so I'm not going there. When you talk about the collection frequency, we have a decent pool which is on a monthly MI, and wherever we give wherein the cash flow from the customer is largely linked to a crop pattern, we do factor that and have a three to six monthly interval for repayment. Great. Fair enough. Just this one last question. On this IRAC provisioning versus the Ind AS provisioning, when we will come to the date when we have to compare and figure out how much provisioning needs to be done additionally, if at all. It will be compared on the entire stock of provisioning under Ind AS versus IRAC or do you think it should be under the stage three versus the GNPA provisioning that will be compared? It's a gray area. We will have to look at both and then wait for regulator to respond. Okay. Fair enough. Sir, so basically when in December you had disclosed the difference between your IRAC GNPA and the Ind AS Stage 3 was around six percentage points. Do you think this number should come down meaningfully, the spread between the two? Yeah, yeah. We are already seeing that. See, that's why I said it is not meaningful to put out anything now. I mean, on that day, even our normal gross NPA was much higher, right? That itself has come down now to 8%. You will see a simultaneous reduction and the gap going down as well. Right. Fair enough. It could be fair enough that this 6% could even have as a difference between the two, right? Oh, yes. See, that's why again and again, guiding everyone to look at the Stage 2. See, the Stage 2 was very high. One would always imagine that the forward flow from there will happen. As you see, due to collection efficiency, Stage 2 reducing continuously gives all confidence to believe why this gap should be much lower. Right. Fair enough, sir. That was on my side. Thank you. Thank you. The next question is on the line of Piran Engineer from CLSA. Please go ahead. Hi. Thanks for taking my question. Just a couple of number clarifications. Firstly, was there any one-off in interest income this quarter? If not, adjusted for the interest reversal from last quarter, why has the top line declined when the loan book has grown? Mr. Iyer, if you're okay, I'll take this question. Please, Vivek. Go ahead. Yeah, yeah. Yeah. Your observation is correct. You'll have to look at it in the context of the extent of reduction in the gross stage three in Q4 and a small increase in the same stage three level in Q1. As you would know that, when there is a reversal in stage three on the net basis, the interest gets accrued under Ind AS. Which got accrued in Q4 and because there has been a marginal increase in the gross stage three in Q1- To that extent, there would have been a reversal of that income in Q1. These are running in different directions, and that's the only primary reason why you will see a movement of about INR 100 crore after you adjust for the excess interest hit that we took in Q4. However, at the core level, which is that IRR that we charge to the customers on a portfolio level, there has not been any material difference between Q4 and Q1. Well, just to clarify the write back will be three months worth of interest, right? Yeah. You should look at the extent of that reduction from December last year to March last year. That was quite substantial. Which was INR 1,000 crore. If I assume an average yield of 15%- No, it was more. It was almost INR 2,700 crores, Piran Engineer. From December to March. From December 2021 to March 2022. Okay. Under Ind AS you have to anyway do it on the provision, right? You don't do it on the entire- No, we have to do it on the net business only. On the net, right? Exactly. Yeah, yeah. Exactly. Only on the provision. The provisions have declined by INR 1,000 crores. That can't lead to a INR 100 crore quarterly interest income impact. No, it doesn't work that way. Maybe we can take it offline and we can explain to you. That's the primary reason, Piran. Okay. My next question to you is just on an absolute basis, can you help us how to model OpEx for the rest of this year? How to model? OpEx. absolute basis, it'll be difficult, but we can give you the guidance on OpEx as a percentage of the loan book. That is something which we have already stated when we had met after the Q4 results, wherein we said that you can expect a slightly elevated level of OpEx in and around 3%. I think that's what we had mentioned. That really means you have to reduce OpEx a lot because you all are already north of 3.5. Yeah. There are always some phasing issues, Piran Engineer. Sir, balance sheet growth. The balance sheet growth to that extent will also act as a hedge against the rising percent, the higher percentage in Q1. There are upfront investments we make in Q1, so there may be one-offs which may not have been incurred in the rest of the year. Okay. You are confident that the 3% target will be met on the year? The only way I like to put it is, you know, for the further growth of book, we don't need to incur any substantial additional cost. If any, will be little variable cost that will come with volumes. But all the required fixed costs, whether it is for branches, people, technology, all of that would have been almost incurred. Therefore, the growth of book will not come at the same proportionate increase in cost that will continue to have. Got it. That's it from my end. Thank you so much. Thank you. The next question is on the line of Nilesh from Investec. Please go ahead. Thanks for the opportunity, sir. There's two questions. Firstly, on the IRAC norms. When we move to IRAC GNPA from first of October, will it be on incremental basis, that the loans which will slip into 90+ post first of October, only, those loans will be there will be differential in GNPA plus stage three or it will be on the stock of book? That is the first question, sir. Nilesh, do you want me to take this? Yeah, yeah, please go ahead. Yeah. Okay. It will be like this, that, those NPAs, which are 90 DPD plus as on thirtieth September will continue to be called as NPAs under IRAC till such time all the overdues are repaid. That is first part. The second part is, those exposures which are below 90 DPD, as on, say, thirtieth September and get into or slip into 90 DPD plus on first October, the moment that happens, they are tagged as NPAs and they are upgraded if and only if all the overdue are regained. Today, that is not the scenario. Today, the moment it comes below 90 DPD, they move out of NPA. Come first October, they will have to remain in that NPA bucket. Which means the starting number as of first October is the stage three. Stage three and GNPA IRAC will be same, 1st of October, and then it will diverge over a period of time. You are precisely correct. Secondly, sir, if you look at the write-off number over the last 9 quarters after COVID, it has been almost 8% of the book has been written off. If we compare that performance with, let's say, some of the unsecured lenders, they have also seen similar sort of 10, 8, 10% of the book being written off during COVID. How should we think about this? Should we expect significant recoveries from this write-off pool in the future? Because operating in a secured segment is not leading to significantly different outcomes versus unsecured segment. Mr. Iyer, would you like to take this? Hello? I couldn't hear fully. I got cut in between. What was the question? Sorry. Can somebody repeat? Yeah. Sorry, go ahead. I was asking that if we look at the total write-off, which happened in last nine quarters. Yeah. Post-COVID, it is almost 8% of the opening March 2020 book, March 2020 AUM. This number is pretty large in my view. If I compare it with, let's say, some of the unsecured segment, they've also seen 10% sort of write-off. How should we think about this write-off? It is the actualized cost that is borne, or we expect some recovery from that over a period of time? No, no. Like Vivek said in between, these are formula-driven write-offs that we take, and definitely there are efforts to even recover. Currently we are writing around INR 20-25 crore a month that we recover from there, and that's now a separate vertical which is focusing on to even recover better. Now, in the last one or two years when these write-offs were taken, we didn't have the ability to go back and recover from these customers, these bad debts because of the conditions that we were all in. It's now is the cash flow improving, people able to travel, meet people are earning, all kinds of things happening. You will definitely have to expect that there will be a write back coming from there, or in the sense recovery coming from there, and that will to some extent offset this. Second is, you know, the termination losses that we incur, you will see also improvement in the resale price that will begin to happen in good time, and that by itself will start dropping the termination losses that come in. You have to look at both of that as to, first of all, do we require to go out and repossess so many more vehicles like we did during that period? The answer is clear, no. Is there a possibility to recover some of the write-off amounts? The answer is that like 18+ provisions that we make and then we write off, they are not in the nature of nothing going to be recovered from them. The underlying vehicles are available, we'll repossess them. If we were to repossess those and sell, there is no further provision required. In fact it will be a write back. You will see some very differential action that comes through on these write-offs and provided accounts. You may not have to necessarily see it in the same way that we saw the last two years. The last two years has been a very abnormal period where even many people who suffered from wanted to surrender vehicle and get out of the business. That's not the trend that you would see in all the portfolios. Any estimate of what from this write-off pool, how much could be recovered? It'll be a very wild guess. I don't want you to hold me to that. I think clearly an INR 300 crore, INR 350 crore kind of a number to start with is what we are focusing on. Then it will only keep enhancing from there based on how we see it. We have put in a legal effort around that. We have put in a separate vertical around it. Take this as a guess number now, but maybe another 3 months, 6 months, we ourselves will like to refine this number in that direction. Sure. Just first one follow-up on the first question is that if the calculation is that the starting GNPA will be same on first of October, then why would we require additional provision? Already the net NPA is 3.5%. It may further decline. No, no. less than 3.5. The additional provision was talked of from an IRAC perspective. Under the IRAC perspective, if we were to imagine that the gross NPA was to go up and to maintain a net 6% under IRAC versus under Ind AS provision that we have made, if there is any gap between the two, that difference will have to be provided. It looks like there should not be much difference. that is what I'm explaining, that we may not require to have a big difference the way we see our gross NPA settling down and the way we see our stage two settling down. That is why we are not putting out a number on today's basis. We want to see it through this couple of months and then put out a number to say what the reality looks like. Sure. For sure. That's it from my side. Thank you. Thank you. Ladies and gentlemen, we'll be taking the last question. That is on the line of Sanket Chheda from DAM Capital. Please go ahead. Hi, sir. My question was that, this reporting requirement of, say, 6% or reaching 6% net NPA, wouldn't it be a year-end requirement under PCA threshold? Yeah, it should be a year, it would be a year-end requirement, but as a company we would like to see it from whenever it needs to be implemented. See, because nobody clearly knows the response of a regulator when they start reviewing you or inspecting you. They can tell you it has to be quarterly. They can tell you it has to be yearly. It can be half-yearly. There's nothing that's very hardcoded on that. The current belief definitely is that it is to be at the year-end because that's the time they would review you to give you a direction on what you need to do. You know, if you have to move in that direction, it is better to start from the time the rule comes into play anyway. Hypothetically, suppose it's, say, in October, then that number is 7%. We will provide that 1%. We can see another 2 quarters which are usually stronger in recoveries and then look for providing in Q4. Rather we will do it in October and then reverse if- There are 2 areas on which clarification would be required. Will the entire provision that you carry under Ind AS whether phase one, phase two, phase three all together is what they will look at it to arrive at the difference or only phase three will be looked at is one question that requires some understanding. 2, if it is only year-ending position, then whether you need to do in that October. These are a little premature, but you know, we would definitely set out and we will tell everyone in that quarter that if we were to make a provision, what it would look like. Or if we have already provided, we'll say what is that additional provision. Which is why we are again saying, putting anything out on the basis of today's number will be a futile exercise because this is not the number that we are looking at. It'll open up on first October. It's just a theoretical exercise at this stage. Got it, sir. As of now, the understanding is that 6% net NPA is the year-end requirement. Is that right? That is how RBI will look at it. Again, I mean, I don't have a clear answer on this because I don't think they have said it from when you need to do. They have just said it is postponed to October. Okay. Okay, sir. Got it. That was the only question for me. Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Alpesh Mehta for his closing comments. Okay, thanks. Thanks, Priya, and thanks, Mr. Iyer. Before we close, I just had one more question related to the previous question. If we are carrying the additional provision under IRAC under Ind AS of around INR 1,850 crores, right, can we use this for the additional requirement under IRAC? And in case there is a shortfall, can we route the provisions through balance sheet? Because that thing is allowed, right? If the IRAC provision- That is allowed, but I think that's not what we would do. I mean, if we have to make whatever little provision, if it does come to that, this is just because you asked the question, I'm making an offered answer. I would prefer that it routes through P&L rather than directly to balance sheet. Again, I don't know if Vivek has a view on this, but that's the way I would look at it. As far as the provision that we are carrying is concerned, definitely all provisions that we have, at least on stage three, whether additional or whatever, will all be considered for this offset purposes. Logically, it doesn't look. The question was whether Stage 1 and 2 excess provisions in Ind AS versus IRAC. That I said even in the previous question. Yeah. That's a gray area. Yeah. We will have to test it out. We'll have to talk to RBI. We'll have to take their input and then only decide which way, because we don't want to be caught by surprise by deciding on our own. Okay. Vivek, just sorry to harp on this point again. Even if I look at the stage three provisions, we are almost INR 1,000 crore excess versus IRAC requirement, right? Which is almost 1.5% of our book. Even if I were to assume that your gross NPAs will go up by around 4%, and you would need to put whatever 35%-40% kind of IRAC requirement, then this provision. Should be sufficient, right? That No, you are right. Shouldn't be any major hit. No, you are right. You're precisely correct. You're right. Okay, great. Thank you so much. Thank you, Mr. Iyer, for allowing us to host this conference call. Thank you everyone for joining us. Thank you. Thank you, everyone. Thank you all. Thank you. Ladies and gentlemen, on behalf of IIFL Securities Limited, that concludes this conference call. We thank you for joining us. You may now disconnect your lines. Thank you.