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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good day, and welcome to the IIFL Finance Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to the management. Thank you, and over to you, sir.
Good afternoon, everyone. On behalf of team IIFL Finance, I thank all of you joining us on this call. I am Rajesh Rajak, Chief Financial Officer, accompanied by Mr. Nirmal Jain, our Managing Director; Mr. Monu Ratra, CEO IIFL Home Finance; and Mr. N. Venkatesh, CEO at IIFL Samast Finance.
I'll now hand over to our Managing Director, Mr. Nirmal Jain, to comment on the economy and the group's overall strategy and plan. Over to you, sir.
Thank you, Rajesh. Good afternoon, and welcome to the analyst call. So macro environment, as we all know, the global environment is turbulent. Yesterday, FED hiked the rate by 75 basis points, which is a little aggressive, but maybe most people say that was much required or called for.
Market rallies, maybe for a variety of regions, but the fact which very few people doubt is that there is an imminent slowdown or recession in the developed world, particularly U.S.A. and Europe. So the global backdrop is worrisome. But in the backdrop, if you see India, then the underlying momentum in the economy is very strong.
So if you look at all the headline numbers of GST collections or the consumption demand or auto sector, monsoon, at the same time, there are recovery signs in the rural economy as well. And also, this is corporated by earnings, particularly of banking, financial sector, IT sector as well as capital goods that the momentum has been very strong.
So India seems to be a sweet spot in this global economy. And coming to NBFC sector in our company, the NBFC sector also has come out of a long crisis, which begins with IIFL and then a few more other corporate defaults and COVID. And the sector seems to have consolidated and now the liquidity as well as credit demand is improving. The environment is becoming a lot more positive.
Coming to IIFL, I think we had a good quarter. So our loan growth of the core products. Now I would like to emphasize more because these are the products where we are focusing for growth, and now they account for almost 95% of our portfolio. Growth was 26% in terms of loan AUM and the pre-operating profit -- pre-provision operating profit was up 33%. We had higher provision this time again, and the post provision pre profit before tax and profit after tax were up by about 24%. So the provision requirement was higher as we have micro finance tool and in fact, close to INR 400 crores, which are restructured that came out of restructuring in last quarter.
I mean it would have come -- the payment would have become due last quarter and maybe some in this quarter and where we are seeing some stress and we have been conservatively, we provided for it aggressively. We've taken about INR 100 crores additional provision in micro finance. But I think what is not worth it this quarter is that NPAs have started falling and GNPA at number, which is 3.2% at margin, even following RBI stricter norms, which RBI has given some discretion, but we continue to follow the norms that will come in force very soon, maybe by September.
And with that, our GNPA number was 2.6% for the entire book. NNPA or the net nonperforming assets after provision for Stage 3 was 1.5%, down from 1.8% and provision coverage ratio has improved and is now 137% as against 123% in the previous quarter.
Our net gearing, which if you net of the cash liquid and cash equivalent and deem debt, where contractually legal is not debt, is around 4.4x, significantly better than what it has been in the last few years. Our capital adequacy for IIFL Limited is 22.8%, [ up state ] lower than 23.9% last quarter. But IIFL GHome Finance capital adequacy is at 30.7%, which is significantly better. Almost half of our business now is done by our hogifinance company.
Operating cost, again, has gone up quite significantly last quarter. 200 new branches were commissioned, and more than 2,000 people got further added to our man power streight. So our total man now has crossed 30,000. And we continue to invest in technology and marketing as well.
Along with this, also the annual salary hikes, and in an environment like this, there have been pretty good. So that impact also is visible in the first quarter operating cost. The outlook is positive because, as I said, that created demand is showing strength the collection and the general credit quality is also improving.
Interest rate hike is always a worry for any lending distribution. But as far as we are concerned, given our retail small ticket granular book, and even home loan, we operate in affordable housing. Relative to the rest of the financial sector, I think we'll have better capacity or better superior ability to pass on the interest rate hike. I mean as long as it is a reasonable band. If it goes up significantly, it can impact demand. But at this point in time, the economic movement time is so strong, it looks like that will be taken this time.
So with this, now I hand it over back to Rajesh to take you through details of our profit and loss and some developments during the quarter, and then we'll open it for Q&A. Thank you.
Thank you, Mr. Jain. So in line with the momentum of the previous quarters, our profit continued to grow. The profit after tax for the quarter was highest ever at INR 330 crores, which is up 24% on a year-on-year basis and 3% sequentially. The major drivers being the volume growth of 22% in AUS and the higher nonfund based income.
The PPOP was at INR 674 crores, again up 32% on a year-on-year basis and 1% sequentially. Our loan book structure is such that 95% of our loans are retail in major and 67% of our retail loans are PSL compliant, with the exclusion of gold loans, which are not classified as PSLs, but they have other benefits for banks in terms of capital charges.
This is in line with the capital optimization strategy that 39% of our AUM is either a science securitized or under the co-lending model. The same number for the previous year for the same period is 34%.
Since April '21 till June 22, that is a period of 15 months, we have added almost 11,000 employees and over 1,000 branches. This has obviously affected our cost to income, which has increased to 43% in Q1 FY '23. Last year, same quarter of 38%. But the expansion has paved the way for accelerated growth in the future.
The annualized ROE continues to remain above 20% at 20.5% and largely driven by annualized return on asset of 2.9%. Our capital adequacy, as mentioned, at 22.8% is significantly higher than the regulatory amount. Our average cost of funds for the quarter at 8.5% is 48% down on a year-on-year basis and in fact, 9% down -- 9 basis point down even on a sequential basis.
At the quarter end, we had liquidity of INR 5,520 crores, which was adequate to meet not only all near-term liabilities but also to fund growth momentum. Two important events took place during the quarter. One is we entered into a joint venture with Open Financial Technologies Private Limited, which is Asia's largest SMB-focused new banking platform. With this, we aim to strengthen our offering, our entire product rate available to MSME customers.
The second update was that the Board of Directors of IIFL Home Finance Limited approved a transaction involving investment by a wholly owned subsidiary of ADIA, Abu Dhabi Investment Authority, of INR 2,200 crores for a 20% stake in IIFL Home Finance Limited.
A brief update of digital properties that we have, we largely do our DIY sales, loan sales through Whatsapp and my money the apps more than 45,000 customers have been onboarded till date under the other initiatives and the DIY disbursement in the quarter 1 was at INR 260 crores.
We also have another initiative of gold loan at home, which continues to see significant traction, and it has increased INR [ 44 ] crores to INR 206 crores during the quarter. Also, in terms of servicing transactions for customers, they can do it through IIFL Loans and My Money app. They continue to increase in usage. We had about 3,500 active users during the quarter, which is in line with the overall digitization strategy of the company.
So these are the brief updates. We can now open the floor for further questions. Thank you.
[Operator Instructions] The first question is from the line of Sukriti Jiwarajka from Laburnum Capital.
Just on the first part, you mentioned the stress that you are seeing in the restructured book is only the MFI restructured loans or the overall INR 400 crore restructures that you reported last quarter?
I think MFI was a large part of it. And the other restructuring actually came out and relatively lesser. So the strength that we are seeing is predominantly in MFI.
Okay. No, because last quarter, as of 31st March, I think the MFI restructured book was 0, right? So this is a...
That came out was -- yes, so what happens that came out -- supposing the getting out of restructuring is over on 31st March, then your payment will become due sometime in the next quarter. And once you have defaulted for 90 days, then only it becomes GMP or restructured asset for -- or as we start defaulting on payment when it is due, then it becomes stressful.
So all of this has slipped into NPA, right?
Not necessarily because the -- as they come out of restructured some customers do pay. And some of them don't pay, some of them are not able to pay the full amount that is required as per RBI's new policy, then they get into this thing.
But many of them, there's a recovery process and there's a connection. So it's not that if somebody has not paid for 1 or 2 installment, it will definitely go into losses. So some of that is recovered and some of them come after a lag, so there's a recovery from pool that is identified as NPA also.
So can we quantify this, looking at INR 400 crores of -- about INR 375 crores of restructured MFI loans, maybe a quarter, 2 quarters back, how much has slipped, how much is in Stage 2? Because what I'm seeing is also that your Stage 3 provisions for MFI is still at 67%. And MFI customers don't usually come back. So I'm just trying to understand what has gone where.
So these are COVID-related restructuring because all these -- many of these customers had their income and livelihood suspended for some time. So I think that out of INR 300 crores, INR 375 crores, we should be able to recover at least half of it. And the process is there. So whatever recovery is happening is not that it's 0 or whatever, it's not that -- see what happens with the customer under normal circumstances not paying for, say, 90 or 180 days, then you are right, then it becomes very difficult to collect. But when you give a holiday for a time period and then you come back and it takes some time, that is a different situation.
Okay. The half that you expect to recover, the other half...
Now the entire thing has come out of restructuring. So in last quarter and this quarter, I think we'll understand -- we'll know exactly the total stress [indiscernible].
Sure, sure. No, just for the half that we don't expect to come back, are we 100% provided there?
We have I think INR 271 crores provision in total for LSI. And -- so maybe...
INR 270 crores including the INR 100 crores this quarter?
Yes. I think that's the provision that we have total provision [indiscernible] MFI. We may need some more in the next quarter, I guess.
Yes, yes. Got it. INR 275 crores, you said, right, total provision in MFI? .
INR 271 crores.
INR 271 crores, but that includes all assets, not only stressful assets, but even the normal book.
Got it. Got it.
So on these assets, we have provided about 66%, 2/3 of it.
Yes, got it. Got it. And then my next question is on [indiscernible] product segment, but does look like the customer -- your customer is being able to absorb the higher yields. And like you said, you probably have a better ability to pass it on.
But I just want to get a sense of the competitive landscape in the sense that is competition being rational -- and has everyone really baked in the core products in home and gold in business loans also?
No. You think competitive pressures on the yield, on the interest rate?.
Has everyone been rational enough to raise rates to the same extent? Or are we...
Yes. I think group cash. In gold loan, in the last financial year, almost from September to March, people were actually quite irrational in terms of the interest rate that they're quoting, like 49 basis points per month then 6%.
And many of these players have cost of funds more than that. And they thought that they'll get the customer and they'll be able to raise the price by some default or whatever. But then it doesn't happen to that extent and many of these -- so I think the industry and this cut-throat competition in gold loans is easing now because most of the players are now raising money and becoming rational.
So one is that rationally increasing the price, the 90 basis point bank rate has gone up, the interest cost might have gone up by 7 basis points. There is one part of it. The second was that easier rate and trying to -- and there was like spoiling the market, that tendency has reduced significantly.
Got it.
See 50, 100 basis point price pass on in this industry is never difficult. But what was challenged in the last 1 year was that many players are coming with the teaser rates, which are like -- which are completely irrational below their cost. And obviously, customers actually see this over 6 months, 9 months that the rate that what was promised to them when they took the loan actually is very different. So I think that tendency is getting away and which is a good sign for the industry.
And in home and business are people raising rates like we have?
In home loans, I think 1 rate hike has been done, which is -- so in home loans, typically, what happens that -- maybe Monu is there, Monu can answer this. The first goes into tenor, but if it gets into EMI then -- Monu, why don't you explain the home loan.
So I think your question was that has the industry also moved in tandem with the interest rate increase, right?
Correct.
Yes. So it has moved in tandem. And right through, whether it is the public sector banks or the private HFCs or private banks, everybody has moved in tandem. So the difference -- everything has moved in tandem. So there is no gap widening of the gap created by us increasing the rates.
Yes, yes. Monu, but as you're here, also the -- I'm not -- the business loan strategy is not entirely clear to me. I think a few quarters back, you had said that you're going to start focus on this. Is it part of the growth portfolio because I do see that it does seem to lag the other core growth segment. And what do you want to grow here? I think do you want to run down the unsecured booking? Just reexplain the strategy. I think I'm repeating maybe you've covered it before.
No, one thing -- you are asking about strategy for Housing Finance company or for the Group?
No, no, the business loans.
Okay. So business loan, if you see 73% is secure. And -- so in business loan, there are 2 parts of business loans. So one is which we do through HFC, which is led by Monu; where it's mortgages, against the -- loan against property. . The other is we do digitally, which is unsecured, which is done through parent company, where also a significant part of it should we try and get it insured, but there the ticket size is small and loans are secured.
So I think -- and what we are trying to do digitally is more focused on unsecured. But what we are doing through our network and particularly the housing finance is mortgages. The split is around 70%, 30%, 70% is secured and 30% is unsecured. Both the businesses -- both the segments will grow.
Okay. And the open will come into your digital unsecured mortgages...
Open Will come into unsecured to start with. Over a period of time, we can get lease from there for secured home loan also.
Okay. Okay. Do I -- can I squeeze in one more...
Please go ahead.
So at 15% Tier 1, do you think -- I mean I know the regulatory limit is much lower, but you never want to go there. So do you want to -- is the foundries likely in the parent in this year?
No. I think given the co-lending model and the co-lending assignments, probably they gather momentum in the second half, we won't need capital. And actually, the capital that we raised in HFC, we will make sure that, that is also utilized productively and leveraged adequately so that we generate enough ROE. So at this point in time, there are no plans to dilute equity in the parent.
Next question is from the line of Amit Mantri from 2point2 Capital.
First of all, congratulations on a very good quarter. So my question is on the provisions front. So this quarter, we have done almost 2.9% of the book on an annualized basis as provisions since large part of that is micro finance. So what is the credit cost guidance for the full year that we have now? Because I think last quarter, you had given a credit cost guidance of 1.5% for this year. So as of now, what is the guidance for the full year?
So Actually, what you're saying is right, that the provision is higher than expected and almost like -- so INR 100 crore of additional provision in MFI. So I think you should -- the -- now it should be between 1.5% to 2% for the whole year. See, if you see now the provision is around INR 250 crores in a INR 52,000 crore book. And the year -- so full year, I think we should be anywhere between 1.5% to 2%.
So this provision is on the own book, right, which is almost around INR 33,000 crores, INR 34,000 crores. So because the rest of the book, is anyway, we don't take the risk on that effect?
Yes. I think I should -- I stand corrected. What you're saying is right that the provision is on own book, which is INR 34,000, INR 35,000. And even the percentage, I calculated on that basis.
And on -- so now in the presentation, you have guided that even in another 2, 3 quarters, you will continue to see a high rate of provisioning and after that it starts tapering. So...
Yes, what we're seeing is, right. That's why I'm saying that we may end the year with 1.5% to 2% because we -- so there are 2 things. One is the provision amount that we take. The MFI thing may come, it may taper off for a period of time, but it can continue in the next quarter.
So 1 quarter we've already seen, probably we'll see some impact next quarter. But I think I would like to underline something unexpected happens, should -- the unusual impact of COVID restructuring moratorium should start easing now from the next quarter.
Because if we continue to have the current run rate, then the provisioning will obviously be much higher than 2% because currently INR 250 crores run rate, if we have for even 2, 3 quarters, then the full year provisions will be probably more than INR 800 crores. So then the -- on a 35 -- even that good book becomes INR 40,000 crores, it's still higher than 2%. So...
No, on a -- yes. So what you are saying is right. But then obviously, our expectation is that the provisions will fall. Hello? Hello? Can you hear me? Sorry, I lost you in between. Hello?
Mr. Amit, please go ahead and speak. Mr. Amit, your line is muted. Please go ahead and speak.
Can you hear me?
I think in between your voice is cracking. Tell me.
Sure. So in the microfinance book, when you look at the Stage 2 plus Stage 3 assets, that is around INR 600 crores as of now. And corresponding to that, we have, say, INR 270 crores. And even if you take out some standard asset provisioning, we still have INR 200-plus crores of provisions that are corresponding to that. from the other players that you're hearing on the 30- to 90-day book. Most of them seem to have 90% plus collection efficiency. So how much of this Stage 2 book is expected to slip into NPA?
So Stage 2 book -- now when you say Stage 2, it's up to 60 then if you look at it. There will be, I think, 90% collections should happen. So 60 to 90 days, it goes into a little lower and the 90 days above becomes even more difficult.
But I think -- see, this restructuring thing is new because one is that people on a regular basis don't pay 1, 2, 3 installments, and that people were allowed to take some time and then they ask to come back as things become normal. So we should be in line with the industry, I think, at least in terms of -- and what we have done in last quarter is that we have increased our collection force, we have also -- in terms of teams we have separated the sales and collections as some of the people who are in sales, we identified in collection, put out a proper incentive scheme for them. So we want to handle this on a war footing so that this gets resolved properly in the next 1 or 2 quarters. .
Next question is from the line of Harsh Shah from L&T Mutual Funds.
Congratulations, Nirmal and team, for the good set of results. Just a couple of questions. Firstly, on a few of your business segments, like, for example, gold finance, how has been the competition intensity now? And what has led to increase in yields on quarter-on-quarter basis?
Competition intensity is easing. And the cut throat or -- I spoke about it, some [indiscernible] kind of prices, they are now going out of the market. So what happened is that these teaser schemes, we also sort of tried to follow the industry, but very quickly, we withdraw them in the last quarter itself. And we realized that even if volume growth is slower, sometimes then we have to sacrifice something. But we'd rather be -- and as our taglines [indiscernible] they will be more transparent [indiscernible] to the customer that is interested rather than say something else and start something else. And so last quarter, we suffered -- this quarter, we are a little bit back. And hopefully, yields should improve a little bit from here also.
Correct, correct So I was asking from competition because of the perspective that there are other NBFCs, like, for example, yesterday, Bajaj also very aggressively commented that they are now starting to open stand-alone gold loan branches aggressively and also will offer gold loan in its existing branches.
And at the same time, the customer base is different, but bank intensity continues to remain same. Earlier, there was this hypothesis that once such kind of competition is seen, you've come down the yield curve and overall NIMs and ROA in this business segment will get depressed. So does this philosophy still remain the same? Or you think that from your overall business dynamics can improve and we can generate superior returns versus last 1 or 2 years?
So our yield actually compared to the larger gold loan players has been lower actually, historically. Secondly, what we have learned in the last 1 year, this gold loan competition drama and the cutthroat pricing, that the market is so vast, and the customers are looking for many other things.
So it may not be the right thing to fight on comp price and if somebody is reducing the price and you just panic and do something. So there will be some pockets where you may have some volume sacrificed, but there are some other pockets where you still have your strength in terms of brand, service and customer connect. So I think we would be continuing with the fair pricing.
And actually, see, gold loan what happens, people think the 17%, 18% price is very high and a lot of margin. But what people don't realize is that the operating cost to loan is also 6%, 7%, is not something -- or it can anywhere between 5% to 8% depending on the scale. So like kind of large players might have 5% or close to that, and the smaller players, sort of volumes are lower than -- can be 7%, 8% also.
So it's not that 17%, 18% stated are going into margins. So if you do pricing, which is more intense or like lower, then you discover that business line become loss-making for you. So -- but whatever we are seeing that we have our geographies, our areas, our branches and our brand and connect with the customer, we should be able to maintain.
Okay. And you had mentioned that you have opened around 200 branches. Any specific breakup, what kind of businesses these branches will cater to?
Out of this, 50 branches are for housing finance. So now housing finance, we have only about 330-odd branches. So the -- what we have done is that we have started relative to what base we have, we are scaling a little faster than housing finance because as idea money comes in, probably Monu and his team will have more ammunition.
Monu, you want to talk about it, [indiscernible] plan?
Yes. So we are, Harsh, looking at expanding our footprint in HFC business, which earlier was moderate. And with this idea money on the annual, we are moving to Tier 2, Tier 3 towns in specific states. So we believe that there's a vast opportunity out there for affordable housing, and we should see some serious scale-up of the housing loan business in the coming years.
So other than that, they were for microfinance and gold loan, also.
Understood. And just last question from my side. Your cost of fund has come down this quarter on a quarter-on-quarter basis. So was it repricing? Was it smart ALM management? What was it?
See, it has come down only by 10 basis points. So if you look at people are talking about interest rate increase, but the current interest rate even after increased are lower than what it was, say, anytime before 2018.
So what happens is as older loan gets repaid and we borrow now at a relatively better rate, the interest basically come down. And also, as our financials have been consistent and our credibility with the bank and banks have their own -- and the lender has their own scorecards, so we are able to negotiate a little better as the liquidity is improving.
So what's the outlook for cost of funds when you're entering Q2 and [indiscernible]...
The RBI increases the rate and the liquidity is tightened, the liquidity is a very important factor, just not the RBI rate. So there can be some impact. I don't think that if the interest rates are taken higher across the system and across the economy will remain aloof. But hopefully, we should do better than our peers.
Understood. Just one last thing that I want to squeeze in, if I can. Since we are very aggressive on co-lending and off book and also, we have great tie-ups with this bank, does that side of the business help us getting a better pricing on our liability side as our relationship with them have significantly got better over the years because of the...
Yes, relationship is good. But yes and no, because even their rates are tied to MCLR. So like in case of home loans, we take a price increase for the customer. So even that goes to banks also for any other -- so on the co-lending by itself will not help producing or increasing cost of goods.
But only good thing about co-lending is that the is the long term or financing scope terminates with the asset. So supposing you are giving home loans for 15 years, it's very difficult to borrow for 15 years in Indian market because the market for long-term borrowing doesn't exist for corporate share or is very small, very thin.
But when you do a co-lending, then it almost becomes like funding for 15 years, but you don't do again refinance it. So for -- it's taken cared for the entire tenure of the loan, whatever it be. I mean, I guess, pre-paid, it can get started, but -- so as of -- co-lending advantage is that the asset level you're making is automatic 100%.
Next question is from the line of Saptarshee Chatterjee from Centrum BMS.
Congratulations on a good [Audio Gap]. Construction and real estate business, last quarter, I think we had around Stage 2, Stage 3 presented at around close to INR 250 crores exposure. This quarter, this has come down drastically. Can you please give us the breakup of write-off and recovery in this?
No, it's difficult to give breakup of write-up and recovery, but some instance they develop and there are some -- there's a recovery as well. And also there are new roles also in this. So this CRE is one -- it's not that we are setting it down, but the new loans are from HFC for the approved project and a smaller amount.
So I think it's a mix of this. And even the DCC portfolio, what we had has come down. So DCC portfolio last quarter was [ 8 19 ], down to almost [ 4 40 ], something like that?
4 90.
4 90. Okay.
Understood. But the reduction would be largely like a write-off or be more like recovery...
Both, both. Hello? Yes, it's a combination of both the things.You have part recovery and partly write off kind of thing.
Okay, sure. Second question is we have, I think, high equipment dollar bond of around INR 24,000 crores. Can you -- you have talked about buying it back. But can you please talk about how much quantum and maybe time line for buying this back?
2,000 -- no, no...
INR 2,400 crores, I think, right?
INR 2,400 crores, yes, yes. I think what is outstanding now?
INR 323 million.
INR 323 million. So we had done a INR 400 million total issue, out of which we bought back, INR 323 million is outstanding and which is due in April next year. But what we plan to do is that we'll try and buy back more and so that by the time the maturity comes, the amount outstanding will not be very significant, and they're fully hedged.
Okay. And in the annual report, you have mentioned that in the investments book, we have around to exposure of total INR 1,000 crores in the IIFL 1 value fund Series B and C. Can you please talk about which are the current state lines? And how the accounting of income from this book will come?
So these are the -- some assets that we transferred to the funds primarily and accounting basically is done based on the fair value, based on NAV [indiscernible] [ CRISIL ] or [indiscernible] who does it. And basically, there's a fair value NAV does is the accounting is based on NAV. So every quarter, NAV is computing and based on that accounting [indiscernible].
Okay. So every quarter, it will come under the non-fund [indiscernible] income, right?
It will [indiscernible] -- if there's a change in anything, that will come there.
And this will be majorly real estate exposure? Is it correct?
Yes. Yes.
And one last thing is, in the AUM, can you please quantify how much would be floating and how much would be fixed in terms of interest rate?
I think we have -- interest rates -- home loan and LAP are floating primarily. And other than that gold loan will be fixed -- but there also, we have in a way -- that way, everything will be floating because we'll always have flexibility to increase the price. But practically speaking, home loan and LAP recruiting and the smaller tender loans are fixed.
Understood. And the -- in one of the slides where you report the portfolio yields across the segments, does it also include the assignment income or it is only pure interest income?
No, not of anything.
No, this is interest income. This is on book asset.
Next question is from the line of [ Ray Panda ] from BCP Securities.
I believe that some of the persons [indiscernible] raised 1 question is actually in regards to the '23 notes. Did I hear right that you guys intend to gradually bring it down?
No, sorry, can you repeat, please?
So in regards to that 2023 notes that's maturing, they were on in April, right? I believe somebody raised that question. I just want to make sure that is that right that you guys intend to gradually pay it off and don't plan to expand that notes any further. Is that right?
Yes, that's right. So we will be able to pay it off based on RBI guidelines, which allow us basically -- I mean it's a little complicated formula by which it's calculated how much you can buy back. But if you can have ECB, which is external commercial borrowing dominated in dollars, you can use that money to buy back.
So we keep adding our -- so at this point in time, we don't have any intention to renew the dollar bond because the cost is significantly higher than our borrowing cost locally.
So what we intend to do is that we'll pay it off gradually and whatever the balance we'll pay it off on the maturity date. That's what our current plans are. You're right.
Understand. It appears that India is pretty close to the other remaining emerging countries in Southeast Asia. It seems that a lot of them, they either redeem it through sort of local loans or we just somehow have extra cash, and they will intend to pay off as fast as they can. That's how I interpret or how I see it now.
Do you want to take it?
Yes. yes. So rate, if you see our dollar bond -- yes. So if you see the INR 323 million that is outstanding and in terms of liquidity that we have as of June end, that's about $700 million. So while we plan to buy them back before their maturity, but on the date of -- on the due date also should not be a problem to us to redeem them because of the rupee liquidity that we have on our balance sheet. So RBI rules prohibit us from prepaying it using rupee liquidity. But on the due date, we can always use the rupee liquidity that we have.
Next question is from the line of Vivek Ramakrishnan from DSP Mutual Funds.
My question was -- I have 2 questions. One is on the capital adequacy ratio calculation itself, it has decreased from 16% to 15.3% -- or 15% in March. And if you see your loan book and securitized book, I think you have to provide capital for securitized book also has barely grown.
So what explains the dip in capital adequacy? And given the fact that they are doing co-lending, would gearing be a better ratio to look at, at the company? That's question number one.
And question number 2 is -- I heard Nirmal's remark about the center of the economy, do you expect collection efficiency to go over 100% that's going to next quarter because a lot of the COVID-related problems will be over? And does that bring down the NPA numbers?
Overall, it will take a little time. I can understand that because there should be 1, 2 payments behind. But do you expect the collection efficiency to go beyond 100%?
So collection efficiency, technically, it goes above 100%, then will have to come down because it can't get over 100% forever because -- so the way they calculate is that the overdue amount and the due amount and what you have collected. So it can be over 100% only for a short time period, not for a longer time period. And only if it was lower then it has to be bounced back to above 100% to catch up.
And about your question about capital adequacy, Rajesh, maybe you can explain.
Yes, yes, yes. so Vivek, this capital adequacy is obviously for a stand-alone company. And in the stand-alone company, our loan book primarily comprises of gold loans. Quarter 1 was a bit subdued just like any other quarter as far as assignment, though the volumes were high, but compared to, say, March end or the amount that we distributed or the assets that we originated was a little subdued.
So our gold loan assets were higher to the extent of INR 1,000 crores, on balance sheet higher, and kind of that explains it. But then with the increased level of increased level of assignment in the second quarter, which is the current quarter, this would fall in place back to the earlier levels.
Next question is from the line of Ayush Vimal from Clearview Capital.
Congratulations on a great set of numbers. I had 2 questions on the gold loan book. The first question is what is your outlook on the gold loan book in the light of falling gold prices? The reason I'm asking this is because a lot of the larger gold companies seem to have derived their growth over the last 4, 5 years from the change in prices of gold rather than tonnage. So I just wanted to check how it's going to impact us in the future if the trend continues?
So the gold loan price, actually in India, the fall has been lesser than the global because the duty has increased. But if the gold loan prices continue to fall, obviously, your ability to loan on the quantum of gold that you or your customers have reduces. So that now negative impact on the growth and the growth can slow down for the gold loan industry as a whole, we should be able to gain market share in the organized sector with our increased network of branches.
But of course, if the gold price is -- what you're saying is right that the last 2, 3 years, and particularly 2021, the significant increase in gold loan assets of the gold loan companies are primarily because of the gold price increase.
So what happens if tonnage grows? What you can also monitor for most of the players is where I think you know that the volume grows. So that's for the industry, the organized sector, I think we've been doing better. We have about 10%, 12% gold tonnage growth in our vaults.
And hopefully, with the expanded network, we should aim a little higher. But I think your point is correct. The gold prices go down, the industry growth will also slow down.
One more question that I had on the gold loan book is I see about 20% of the loan book exposure to Gujarat. So just wanted to check on whether we have lumpy loans in the book, if you could tell me what is the proportion of the outstanding loan book where the ticket size has been more than INR 1 lakh, that will be very helpful.
No. Gujarat is -- so what has happened is that we were a little late entering in the gold loan. And strategically, we saw that the earlier players were very widely entrant in South. So we started with Gujarat and went there as a flagship state. But so we have more than [ 350 ] branches in Gujarat alone.
And the gold loan book is very granular and distributed. So there's no [indiscernible] exposure at all in this. So any of our gold loan book anywhere in the country is all retail.
The next question is from the line of Deepak Poddar from Sapphire Capital.
Sir, I just wanted to understand, first, on your credit cost. Now you mentioned about 2% of credit cost for this year, maybe 1.5% to 2%. So even if I take the higher band of that 2%, so we are looking at maybe INR 750 crores kind of a credit cost this year, with the 25...
The book will also grow, yes.
Yes, yes. Assuming the 25% growth in book. Now so about INR 250 crores, we have already done. So we are left with INR 160 crores kind of a credit cost per quarter or INR 160 crores to INR 170 crores for the remaining 3 quarters in this year.
So ideally, what we are saying is that from this quarter onwards, our credit cost should normalize. Is that the right interpretation? Yes.
So this quarter onwards -- okay, if you -- I mean what the way it logically should happen, but nobody has a precise view on the future. So this quarter onward, next quarter, all 3 quarters, we should see going down.
Provision should go down quarter-on-quarter, right?
Yes.
And overall, we are looking at 2% -- 1.5% to 2% for the entire year, right?
Yes, that's right.
Okay. Understood. And sir, my second query is regarding, I think we have been guiding about AUM growth 25%. Similar growth on PPOP is what we might be looking at?
What are you saying?
A similar growth in PPOP is what we might be looking at?
Yes. Yes, some of the impact also came because of deemed NPA, which came from RBI last quarter. So that also has led to increase in credit cost.
The next question is from the line of Mudita Nahar from Abacus AMC.
Congratulations on the good set of numbers. Sir, just a couple of questions. Sir, MFI book in the last quarter due to the RBI guideline, the disbursement was quite slow. So how is the disbursement picking up from July, sir?
So actually, last quarter, we are focusing a lot more on setting up collection infrastructure and collection operators in place. So this quarter onward, the disbursement should pick up. So how much would be the percentage, right, sir? So if you see microfinance definitely last quarter, which is INR 734 vis-a-vis INR 3,500 crores in the previous quarter. So I think we should look at something like INR 2,000 crores as a normal number in a quarter.
Okay, sir. And sir, on the employee expense quarter-on-quarter the employee expense has increased strictly by 10%. So is there any involvement of variable expense in this quarter?
No, we take our salary increases, make it effective from first April. So this year, I think 7%, 8% of that would have come because of salary hikes alone.
Okay. And on the securitization book, sir, in the last 7 to 8 quarters, this is the lowest that you have done securitization in a particular quarter. So any color on that, sir?
Because the core landing has grown now, so that obviously is eating into the book that could have been securitized. So I think if the co-lending and assignment grows, then obviously securitization is not our focus.
Going forward, what is the trend that we can expect out of this one?
You should look at co-lending, securitized and assigned together. These are all 3 off books. And I think our focus will be more on I see sometimes what happens that there are, like, say, foreign banks, they will take securitized and they don't take assignment or co-lending. So they are offering a good rate then you could do a transaction there. So I think you should look at the fleet together as 1 pool as off book.
Next question is from the line of [ Akhil ] from Axis Mutual Funds.
I joined late, maybe you may have answered this question. Just, sir, wanted to understand this decline in Stage 3 book. Last time, I think we also had something which was classified as a deemed NPA. Now has that subsided onto the Stage 3 or we have done away with it. Sorry, I just wanted to understand what has happened?
So in the Stage 3, we have taken some write-offs, and we also provided for it. So -- and some resolutions have been done. So it's all put together, what we are seeing is the decline from INR 885 crores from I think it was about a little over INR 1,000 crores last quarter, INR 1,074 crores to INR 885 crores.
Okay. No, last time, if I combine your normal Stage 3 and Phase 3, including the deemed NPA, it was closer to 18 57, which has now come down...
No, no. It was INR 1,074 crores. So INR 1,074 was combined number.
So INR 1,074 was a combined number.
I think he's adding the 2.
But see, if you see the slide, so this INR 1,074 crore includes INR 783 crores.
Okay, okay. I get your point, sir.
Yes. I mean so that number combines both the things. Maybe it's not presented properly, but INR 1,074 crores is odd, it's not INR 1,800. So there's a little bit of decline, maybe 10%, 15% discounted.
Get it, sir. Get it. Sir, last piece on the construction book where we have seen a decline in your Stage 2 and Stage 3, could you throw some light on what exactly has transpired? Is it a write-off? Or is it a repayment that has actually happened?
So we have been setting aggressive settlement and write-offs also to bring this book under control.
Okay. Okay. So largely, could we settle this to, let's say, write-offs from your -- because the book has actually also declined. I think last time, the book was closer to INR 2,900 crores, which some time has come down. So...
So it's partly -- both the things. It can't be entirely -- so it's both -- it's combination of the 2 things.
Next question is on the line of Anusha Raheja from Dalal and Broacha.
I just want to understand, you said that you're looking at AUM growth of around 25% odd. So I want to understand where the growth will come from? Because with the drop in the prices of the core AUM growth will be very difficult to come then.
And on the MFI portfolio, also the growth will not be that significant. So large part of growth, I mean, if AUM has to grow by 25%. I think home loans will have to grow at much higher rates. So do you foresee that, that higher growth is possible there? What will drive this...
Okay. First, gold loan will grow maybe at a slower pace in case gold prices continue to fall significantly. So there are 2 assumptions here. First of all, the gold prices will fall, but we don't know about it. And even the gold prices fall that we may grow slower.
Growth will plan at least 12% to 15%. So that is one. Secondly, home loan will of course grow, grow stronger. But even micro finance now to start growing because, as I said, that the disbursement in the first quarter was lower as we are focusing more on connection, but the industry is growing, in microfinance also you'll see good growth.
And then the fourth core product is business loan. There also, I think the growth will be there. I don't think that it will remain static, it will also grow.
Okay. So over the next 2 years time frame, how do you see, I mean, this number panning out?
I think home loans would grow faster because that is how we got the company also funded by equity. Gold loan is again a little bit dependent on the gold prices. But given our expanded network, we should grow that also. MFI industry looks good for the next 2 years because I think it passed the difficult phase for last 2, 3 years. So these should grow.
And in terms of business loan, base of -- is not very big, but I don't see any issue there also in terms of growth. So that will all look good. But in terms of -- you can probably say that relatively home loans should grow faster and microfinance followed by that and then others.
Okay. Also, on the cost side, over the next 6 months to 1 year, there will be increase in the cost, right? So assume that you pass on to that cost, will it impact growth? And on that higher lending rates, how do you see your book from asset quality standpoint?
So the cost of borrowing, how much it goes up? It goes up -- this is again, my personal view, and everybody can have a view on this because nobody has future certainty. So if it grows by 50 basis points or whatever, IIFL will be taking a stride. Now if the cost goes up by 150 basis points, it may impact more maybe the mortgage of the home loan demand because that is a little rate sensitive more than others.
But more than rate one also should look at the economy because the interest rate hike has impact on economic growth as well. And that has, in turn, impact on the demand for credit. So many of these things are linked, but the way things stand today, the economy seems strong and then hopefully, everything should be good.
As there are no further questions, we have reached the end of question-and-answer session. I would now like to hand the conference over to the management for closing comments.
Thank you, everybody, for being in the conference. And in case we have any more queries or any questions, you can always reach out to our Investor Relations or CFO's department. Thank you, and have a good day ahead. Thank you.
On behalf of IIFL Finance Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.