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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 IIFL Finance Limited's Q3 FY '20 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, I thank all of you for joining us on this call. I'm Prabodh Agrawal, CFO; accompanied by Nirmal Jain, our Chairman; and Sumit Bali, CEO of IIFL FinanceI'll now pass the mic to our Chairman to comment on overview of the group's strategy and plans.
Thank you, Prabodh, and welcome to all. So normally as I speak about macro environment and then how our group strategy fit into that. So obviously, the economic growth and the macro headline numbers, it's still like challenging they are not what we all would like them to be. But our hopes are still on the budget. And the only good news, I hope, we can have is that government perceives it a problem. They're committed to make sure that the economy is back on growth path, and all the sectors, all the segments should be revised. But coming back to IIFL Finance and the credit market that we operate in, the positive thing is that the lending capacity has decreased for the system as a whole. And therefore, I would say that in the core segments that we operate in, the competitive intensity has eased or has become more sober. In fact with the immediate players and new players obviously, the market becomes a little more challenging and [ you can see] example of IIFL loan, property market because rates have gone down without factoring in the risk premium. So all the core segments that we work in, the operating environment seems to be much better than that is reflected in our results as well. So our strategy remains the same as we had articulated earlier. In terms of growth, we want to focus on retail, small-ticket, granular loans. So ultimately, we are focusing on that. And those loans now are almost about 87% of our portfolio.The remaining 13% primarily, developer portfolio. In fact, a lot of apprehension about this portfolio. But I said this earlier and I reiterate that, at least our developer portfolio is not in the high priced segments of Mumbai where there is a supply overhang. And the large-scale projects are not selling or they are -- they expect for end-year demand. Most of our -- almost entirely our development loans are in the suburbs of Mumbai or NCR or in smaller towns of Habib, each and every project is monitored very carefully. And we are actually working on a significant part of the portfolio or entire portfolio, a simple part of portfolio can be transferred to an alternative investment fund. So IIFL asset management custom, which is part of our wealth and has shown interest and [indiscernible] have started, but I'll give more information on wealth as we go on.Having said this, in terms of retail business model, we are focused on using technology to leverage growth without increasing operating costs. And that's why [ we have focused ] [indiscernible] time of last 15, 16 months, we've been able to maintain our net interest margin and our return on assets. So in the last quarter, we have seen that the volume growth in some segments of our business is coming back, and we are seeing that the outlook for this quarter is even more optimistic. And as we gather -- as we get the business volumes back, I think even the margins will improve, particularly in businesses like home loans, where our fixed cost structure is borrower [indiscernible] because of lower reserves the last 9 months but I think as we go along, the environment is improving. Significantly for us, metropolitan bank has reduced the interest rate which will allow us to be more positive in the home loan segment, which is more price sensitive. Now I'll hand it over to Prabodh, our CFO, to take you through our financial numbers in greater detail. Thank you.
Thank you, Nirmal. IIFL Finance's net profit was INR 192 crore in third quarter FY '20, up 11% Q-on-Q and 78% y-o-y, excluding the onetime impact of reversal of deferred tax asset in second quarter FY '20.Loan AUM grew 11% y-o-y and 3% Q-on-Q to INR 36,015 crore, excluding [ CDs ] in AUM , which was divested in fourth quarter FY '19. Our Tier 1 CAR stands at 17.9% and total CAR at 21.4%.Primary drivers of our AUM growth are small ticket home loans, which grew by 10% y-o-y. Gold loans, they grew by 41% y-o-y and microfinance, which grew by 70% y-o-y. On the other hand, the share of developer and construction finance and capital market loans continues to decline. In home loans, our focus remains primarily on small ticket loans to the salaried and self-employed sections. The fastest-growing segment in home loans is the affordable home segment or Swaraj loans with average ticket price of INR 13 lakhs to INR 14 lakhs. IIFL Home Finance has been a significant player in Pradhan Mantri Awas Yojana - Credit Linked Subsidy Scheme. To date, it has provided benefits to 34,000 customers and disbursed subsidies of nearly INR 800 crores. Retail loans, including consumer loans and small business finance constitute 87% of our loan book. Another strong characteristic of our loan book is the large proportion of loans that are compliant with RBI's priority-sector lending norms. About 61% of our home loans, 48% of business loans and 92% of our microfinance loans are PSL compliant. In aggregate, nearly 44% of our loans are PSL compliant. Some details on the profit and loss account. Our interest income comprises of gross interest on the loan assets and interest spread on assigned assets. Loan assets, including securitized assets. Net interest income on loan asset has gone up by 5% Q-on-Q and declined by 13% y-o-y. Net interest income of assigned book has gone -- has declined by 5% Q-on-Q and gone up by 118% y-o-y. This is broadly in line with Q-on-Q and y-o-y growth in loan book and assigned assets. Our NIM for the 9-month period was 8.2%, excluding the 2% spread on assignment, the normalized NIM was 6.2%. Our average cost of borrowing fell by 9 basis points Q-on-Q and rose by 39 basis points y-o-y.The other income of INR 66.9 crore comprises of interest rate that is upfront amortization of interest on assigned assets of INR 21 crore. Fee and commission income of [ INR 26 crore ] and other income of INR 19 crores. Interest in this quarter is lower compared to previous quarter as the volume of new assignment was lower. Operating expenses are flat Q-on-Q and are up 11% y-o-y due to increase in the number of branches, employees and related overheads. The number of branches has increased by 25% y-o-y to 2,366 as we added new branches for our microfinance and gold businesses. The number of employees increased by 9% y-o-y to 18,309. The operating expenses were flat Q-on-Q as our headcount and thus the salary costs are slightly down Q-on-Q. We were also able to cut down several discretionary expenses like marketing and advertisement and traveling expenses. Loan loss provisions of INR 34.8 crore were down 77% y-o-y and 42% Q-on-Q. Effective tax rate for the quarter was 22.6%. For the 9-month period, it was 23.5% versus 9 months last year of 33.4%. The other comprehensive income shows a gain of INR 4.3 crore, which is a partial reversal of the previous quarter's mark-to-market loss of INR 12.7 crore on our foreign exchange loans as the foreign exchange loans are fully baked, both principal and interest. This is just a notional gain or loss, which will be eventually nullified. We completed securitization, assignment transactions amounting to INR 2,381 crore in the third quarter. Compared to INR 3,721 crore in second quarter and INR 4,595 crores in first quarter. We sold down both PSL and non-PSL loans in 5 product categories, including home loan, LAP, SME, gold and microfinance to government, private and foreign banks. Access to long-term funding has significantly improved this quarter. We raised long-term loans to the tune of INR 2,721 crore in this quarter compared with INR 403 crores in first quarter and INR 1,723 crore in second quarter. Our funding mix is well diversified, including 22% from NCDs, 36% from bank term loans, 4% from NHB refinance and 38% from securitization and assignment.Our asset liability maturity is well matched with surplus in all buckets. Consolidated gross NPA was at 2.27% of loans and net NPA at 0.98%. This was a significant improvement over the previous quarters, GNPA ratio of [ 2.51% ] and NNPA ratio of [ 1.51%. ] Provision coverage, including all standard assets stood at 95.4%. Return on assets for third quarter FY '20 was at 2.5% and return on equity at 16.8% for the 9-month period, ROA was 2.26%, and ROE was 16.3%, including -- sorry, excluding the impact of one-off items. IIFL loan apps popularity with customers is increasing. Customers are increasingly using it for payments and top-up. This quarter, we had 1,22,600 average monthly active users on the app. We have improved customer experience and the rating on Android Play Store has gone up to 3.9 and on iOS App Store, it has gone up to 4.4. Thank you. We'll now open the floor for Q&A.
[Operator Instructions] The first question is from the line of Anitha Rangan from Hsbc Asset Management.
The first question I had was, you had said that you had raised about INR 2,700 crores -- sorry, INR 2,300 crores through assignment and securitization. So -- but your overall assigned book is like flat. So can you explain how this works?
We had raised INR 2,300 crores by long-term debt, which is bank loan and nonconvertible debentures, bond. So that basically is borrowings.
No. This -- securitized assigned loans of INR 2,381 crores?
Yes. Okay.
Yes. So the thing is that -- yes, so we had new assignment securitization of INR 2,381 crore in this quarter. But then there is also a rundown of the existing book. So the net impact is that Q-on-Q, it is almost a flattish kind of balance sheet book.
So the earlier securitization asset would have got paid off as the customer pays back the money, we pay it back to the -- or it goes back to the banks. So the number of the assets go down.
So this like around INR 2,300 crore is the quantum, which we can see like maturing every quarter, is that...
What happens, the gold loan, which was basically the mixture of [indiscernible], but I -- just one thing [indiscernible] how many mixed categories is it?
[indiscernible].
Around INR 2,000 crores. Yes, I think, yes. So for next quarter also, it will also be similar number, yes.
Okay, okay. Also, in your housing segment, can you explain like what kind of customer profile you have when a yield looks like 11%?
No. 11% is a weighted average yield on basically. -- so the...
Boarding yield is...
Boarding, huh?
Boarding yield is 10%.
Boarding yield is 10%, it's not 11%. And profile of customers -- every ticket has INR 16 lakh to INR 18 lakh almost there's a 50-50 split, but now it's more increasing towards salaried people, which is slightly more than 50%. So these are maybe government employees or people in smaller towns, places like Nashik, Nagpur or Bhuj. So most of our -- or maybe where -- Virar or Panvel or Thane or [indiscernible] or these kind of places in there we operate. So most of these can be either self-employed [ creditors ], businessmen or salaried people. That's the profile of people that you'll have. I think, typically, they do INR 6 lakh to INR 8 lakh or INR 6 lakh to INR 10 lakh income range.
Okay, okay. Just one more question on your loan loss provision of this quarter. Are there also any write-backs, which you have taken this quarter? But as compared to Q3 of FY '19 it's quite small, just trying to understand that.
Yes. So normal course, there are write-backs and write-offs, so they basically happen on this thing. So there's a -- some of the cases will have write-backs, some of the cases will have -- so they are recoveries and so -- and therefore, there can be some write-backs. You are right.
Okay. So there is like an expensive write-back in this quarter, we can understand [ the message ].
One second. I don't think it's expensive, but there'll be some write-back. You are talking about which corporate role? Or you're talking about...
No. Generally, in your consolidated results, loan loss provision, that's what I'm trying to see.
One second. Sure. Sure, Yes. Your -- Prabodh, you want to talk about it?
Yes. So see, the thing that -- there will be some write-back, if an account is upgraded from, for example, say, from stage 2 to stage 1, from a [indiscernible] to stage 1, there will be some write-backs. So that has happened in some cases, like what really is in corporate loans..
But the provision's extended yes because -- not because of write-back alone but...
New slippages were low.
New slippages are low.
Okay, okay. So just one more thing. I'm trying to see your results, which you've posted like, do you see the financial results. The impairment on financial assets is like a positive INR 33 crores. And there was a line item called net loss on derecognition of financial instruments. So just trying to reconcile what those items would be in this -- within the loan loss provision?
Prabodh? We'll check the numbers and give a view. I mean the clarification -- I mean, the breakup of this.
Okay. All right. Yes.
You're talking about [ which ] numbers, you're not talking about...
Yes. There is a -- under expenses category, there's a third item called net loss on derecognition of financial instruments, which is like INR 49.38 crores, and then there is also another line item called impairment on financial instruments, which is a positive INR 35.82 crores.
Okay. We'll get back to you on this.
The next question is from the line of Rakhi [indiscernible] Advisors.
My first question is around your gold loan book. That seems to be having a very good traction. So can you compare your gold loan book to the 2 leading players of gold loan? And how do you compare with them? And what's your expectation there?
So okay, it's an interesting question. But now, I'll take you back a little bit to the history. So in 2015, 2016, our gold loan book had come down, but we did not shut down many branches. And we also expanded our branch network very recently. So if you compare with the 2 leading gold loan players, then still are loan, what you call principal outstanding, our branch would be lower than them. I think we will be in the range of INR 4 crores, whereas the lead player may be in the range of INR 7 crores. So that just shows that there's a capacity to grow these -- I mean, we can also be in that similar range. Our capacity to grow in terms of our loan assets from this branch network. If you just focus on marketing and sales and being competitive in these areas. I really don't have the numbers of 2 players, how they have done in terms of growth. Also one of them is slightly more aggressive in terms of yield and their interest yield typically -- yield both of them, their yield typically tend to be higher than ours. Normally, we focus on customer relationship from a longer-term perspective, where we try to cross-sell multiple products, including insurance, mutual funds and other loan products. So our approach is very different, and maybe the customer segment also a little different because our focus may be on more -- even with the gold loan product on SME kind of clients where -- which is -- where we expect cash flow to basically take care of the loan. And therefore, if you really look at it, the number -- I don't know whether that number will be [ transparent all ] over or not. The -- what is the option to our loan book. So where we have something like less than 0.1%. So if you take loan of 3 to 4 months, then typically it will not option more than 0.3% or 0.4% of actual loans that we disburse. So we try and focus on more on the -- so that's why I might take the numbers, but what would I gather in terms of [indiscernible] I think this is what we gather.
Sure. But do you expect your gold loan book to continue to have traction or this was one-off? Can you just talk about what -- how you see the gold loan for yourself?
I think gold loan will have traction. Because as I said, that our branches are still -- in terms of their capacity, they are not fully utilized. Our loan cost per branch is still low, and therefore, our OpEx is high. So we can make sure that these branches go to the optimum level. Not only that, we'll also probably set up few more branches. So I think gold loan traction you'll continue to see for maybe next year also.
Got it, got it. Now coming to how you're funding yourself. I noticed that your assignment is now almost 31% after sources of the fact, right? So clearly, you are funding yourself significantly through assignment and securitization, where you are [ preferring ] a time limit. Can you just talk through the economics of assignment versus a securitization? And would you continue to be much more preferring assignment over securitization? Just give us some sense of the economics of the 2 modes of funding.
Yes. So maybe Sumit will explain it to you in terms of what our approach and what our strategy is.
So overall, if you see now assignment has taken over. And now our commercial -- borrowing on commercial paper is virtually made. Going forward, I think assignment will be in this range and probably slightly lower. The advantage of assignment is, this is a true sale, so you transfer the risk also and it goes off your balance sheet. So it's a more capital-efficient way of running the business. Having said that, at this level is where we would want it to be, and we would want more assets here after on book. And that's our strategy going forward. With easy liquidity, I think, we are set for a better Q4.
So how much capital do you have to set aside for when you're assigning versus securitization?
No. Assignment is true sale, so it doesn't -- you do not have to put aside any capital.
You will have to either over collateralize or have some cash...
It basically gets adjusted in the commercial. So typically, you have -- securitization is slightly lower. In assignment, the rate will be slightly higher because the risk of loss is also getting transferred to buyer of the assets. So typically, the way it happens is that CRISIL or some rating agency will make an estimate of the losses of the portfolio and they would do it with the [ history ] of the business as well as portfolio. And say -- they say that, okay, 0.6% is the expected loss of the portfolio through the entire life cycle of the portfolio. So if there are enough securitization happening at x price, then it can happen at x plus something. Alternatively, securitization will happen at the same rate, but then they will ask you for a cash collateral. So maybe typically say 5% of cash collateral you keep with them. On this, what happens is that, that can [ be backed ] fixed deposits. So you have a negative carry on that. And your book is running down, so your book is running down to almost 0 level. The cash collateral remains stuck with the bank. So that's how securitization happens. And therefore, from our point of view, assignment is a clean through sale where the risk is asset upfront, you are not dropping any cash collateral. And basically, it's going off the book completely. In case of securitization, the amount of cash collateral will get knocked down from your capital. So now more -- okay, practically speaking what will happen, if the banks that are buying the assets, if they are more comfortable with you, they have done business with you for a longer term, will take assignment, it'll be easier for them to take assignment, and the company's loan on their books. If you are a new player, they have not done business with you, then they might insist on securitization. Sometimes also when you're doing business with a lot of the banks, they may say, no, we don't want assignments, they want CDC, which is part of the -- which is securitization. Then -- so these are all negotiated transactions. But more and more, I think us -- given a choice would prefer assignment. Given a longer term, we have raised a lot of long-term [indiscernible] see our liquidity, at INR 3,300 crores cash in bank on -- in hand and almost favorable amount of uncommitted lines, now we are fairly comfortable. So we really don't need to -- we really need to weigh every transaction based on cost of funds, our cost of capital and our strategic requirement. So our segment will now become stabilized at this level. They would have increase as the percentage of our total loan assets.
Got it. Got it. And so the cost of funds for you from assignment versus the securitization is similar, the capital investment you're doing...
In the short term, in the immediate distance. But -- so supposing you're doing a mortgage asset assignment, you're going to securitization at 8%, but what you've done is 5% of cash collateral given on which you have a negative carry. So 8%. Supposing it's [ 38.7% ] complete assignment. Now what will happen, your yield every year, it will be less than 70 basis points. But ultimately through the [indiscernible] of the loan, you would make that up. Because if everyone's getting blocked, the losses are not coming to you and things like that.
Got it, got it. Fantastic. And so the assignment income, I think we talked about the assignment income was almost like 2%, right, of the NIM. And the...
No, not on the NIM. Not on the NIM.
Of the 8.2%, I think, 2% was assignment, wasn't it?
Yes. Yes. So the -- so is the 8.2% of the total -- of what -- the interest income. Of the -- so when you say, 2% -- if you ask me, the 8.2% is based on total loan assets, right?
Yes.
Out of 2% of the total loan asset is our assignment income. What we will do is that immediately after this call we'll upload our numbers, giving you breakup. So I think that will make things clear.
Got it. Got it. And sir, I think this is pretty good because it is keeping our leverage lower and it seems like it is a very good way of funding. And is it fair to assume that most of the assignment is happening from the home loan book because that is where it is a lot easier to do the assignment?
Actually, a lot of the assignment happened from gold loan book. Because you know what happens, gold loan is completely collateralized assets. So for bank, on their balance sheet, gold loan is 0% risk weighted because you are a full [ collateral ].
Right, right, right. Okay, got it.
So what will happen with gold loan SME also and home loan also. But I think it's not that it's only home loan, it's all 3 asset classes that we assign. Even microfinance is in there.
Sir, I will just add to the reply, what has also happened that since assignment and securitization have become very prominent on our funding side in the last 15 months, and the banks also have a first-hand asset quality experience on the assets in their book. So they know that this asset is 0, for example, gold gives them near 0 -- virtually 0 losses or home loan, we know the portfolio is good. So assuming they are willing to lend money, and their overall liquidity in the system, given the fact that they've experienced our assets, that's how we've been able to have conversations and raise money in Q3. And going forward in Q4, also I think most of the conversation is that if you want INR 200 crore assignment, you also give us about similar amount of term loan to create more assets to sell down for this. So all that has been helpful in raising liability.
Right, right. I absolutely feel that given the granularity of the book that IIFL has and your ability to assign, I think that makes you one of the few players to completely raise funding when we need it, right? Compared to the liquidity challenges many others are facing. Because that's actually pretty helpful. Now coming to the provision cost. I think the previous participant also asked this, and I also wanted to ask this, which is that every -- in you P&L, there is a negative provision that you have been taking the last few quarters. So if you look from Q4 '19 onwards, every quarter, you have an impairment of financial instruments, which is a negative number, which basically means that you are actually reversing the provision. Is that correct? And can you explain why that is?
Yes, yes. This is Prabodh, I'll just explain that, and this is also in response to the earlier question from Anita of Hsbc. So there are 2 line items in the expenses. One is the net loss on derecognition of financial instruments under amortized cost category, that amount is INR 49.38 crores in the latest quarter. Now that comprises of 2 items. One, there is a write-off of INR 70.6 crores, and then there is the interest chip, income of INR 21.2 crores, so the net amount is INR 49.38 crore that is the net loss on the derecognition of financial instrument. And the second is impairment on financial instruments, which is a negative number, which you're seeing. That is minus INR 35 crore the -- in the latest quarter. That is actually release of ECL, so the way it is accounted is that when you write-off, you release the ECL, so there are 2 separate items, the ECL, which is being released, that is credit item, and the write-off happens, which is a debit item to the P&L. So this INR 35.8 crore is the ECL release.
And -- so is it because your net loss due to categorization is always higher. And I'm not seeing the breakdown. Is it always that the write-off is equal to the negative on the impairment of financial instruments? So you're just balancing the 2 in the last 2 quarters [indiscernible]?
There are certain assets on which we have made 100% provision, in which case the ECL will equal to the write-off. And there will be certain assets that have made a 70% provision, so the write-off will be slightly more than the ECL release.
Got it, got it. Okay. In the MFI -- sorry, I'm taking too much time, if you want me to come back then I'm happy to do that.
We can take, okay -- one question we can take.
Okay. So in the MFI loans, you have this 100% credit linked insurance coverage. Can you explain what that is and how that works?
Yes. So essentially, that is the cover for the loan amount given. So every individual is covered to the extent of loan. And in the unfortunate event, if the customer was to have -- if customer would pass away, the loan is waived and insurance company covers that loan, that's what [indiscernible].
Okay. So this is only in the case of somebody passing away. It's life insurance.
Exactly.
I have a few more questions. I'll come back.
The next question is from the line of Savi Jain from 2Point2 Capital.
I have a question on your home loan business. So one is, you conduct all your -- the entire home loan business through your subsidiary, right?
Through the home loan subsidiary, you're right.
Yes. So in that, do you also do developer financing in that subsidiary?
Yes. There's a specific [indiscernible] in that subsidiary also. But when you see these numbers for the developers book, they are consolidated, therefore -- and we have [indiscernible] put together.
Okay. So the percentage that you are showing for your development and construction finance that includes loan given from the subsidiary as well?
That's right. Out of that, [ INR 4,000 crore ] -- INR 1,180 crores is from asset sales, the roughly INR 3,600 crores is from NBFC.
Okay. And second -- my second question was that your yield on the home loan segment is continuously increasing from 9.3% in FY '18, it has gone up to 11% in a declining interest rate regime. So are we onboarding subprime customers because this is also coinciding with uptick in your NPAs? And how exactly can we manage to continue to lend to salaried people at these kind of yields? And obviously because our cost of funding is increasing. So how do you see all of these dynamics playing out?
So our -- no I won't say surprised. But due to the market, the equity screen after [ Anderson ] everybody has increased the rate. This is a [ boring ] yield, not a portfolio yield. But already, we are seeing this from this month onwards, the interest rates are coming down. And when there was a -- in the last few quarters, our focus was more [indiscernible] on a very small town affordable and that PMI scheme in which government give subsidy. There are interest rates. Secondly interest rates of various subsegment, it has not changed much. But the relative contribution of the subsegment, which is the affordable category has gone up a little bit. But even there, we are seeing that interest rates is, as I said earlier in this call, that we have seen that MSG, which is [ interest rating, ] we are passing that on to our customers. So when our cost of funds have gone up, we obviously passed on to the customer, and focus on certain segments that we are competitive in. But as we speak, I think things are getting normal and back to where they were.
But when you have 57% of your loan book coming -- going to salaried segment, are these people better off taking loans from banks, who will also rely on their documentation to give them loans at much lower rates. So why exactly are they coming to you?
So that 11% is weighted average, this is not what we are charging to everybody. And at the same time, most of these people, see, today, if you really look at it in all the larger -- many larger players in the affordable home loan segment, they are -- I mean, I don't want to take names or anything but these 2 large players, they stopped disbursing new loans and they go out of business. And therefore, the competitive intensity in these places have gone down. These are the segments or the development areas, which are really what these 2 buy -- large players or where the -- your relationship with the developer or [ humbleness ], all those things better. And this is, again, the last 2 quarters where we have seen that the boarding rate has gone up in line with the market.
Right. So most of these loans are like standalone units, right, they're not like flats of big buildings or something?
No, mostly, they are flats or apartments in smaller towns. Home loan is around INR 16 lakh to INR 18 lakh. So the value of the house will be around INR 32 lakh to INR 35 lakh, so there you can't expect any big building or a bungalow for that price, no?
Right. And what is the risk weight for these loans that you carry on your -- do you carry [ like ] 50%.
No, the risk weighted...
[ 75% ] and the -- [ 35% ] and mostly...
Mostly it can be up to 75%, 100%, depending on what kind of loan is it.
[indiscernible].
Yes. So it varies, but it's typically -- small ticket loan can be 75%.
So at current status, what is the weighted average risk weight of the component book, do you have any idea about that?
No, I don't know, but we'll get back to you. So [indiscernible] put a note down and we'll give this number.
The next question is from the line of [ Chandra Kowan ] from [ Ashmore ].
In your opening comments, you mentioned that a substantial developer portfolio can be moved to AIF. Is it moving loan portfolio to AFR? Is it seeking incremental lending to the same developer from AIF? Why I am asking this question because if we are moving loan portfolio to AIF, we need to do paid value addition once again?
Okay. So if you look at towards the better provisions we have provided for, we are not carrying loan portfolio at price more than fair value, fair value of maybe even less than fair value the way it's carried on our books, net of provisions. Having said that, incremental growth for last 2, 3 years [indiscernible] so there are the new incremental loans, we have moved to our AIF almost 2 or 3 years back. And by now, we have got almost 6 or 7 years fixed fund. The latest fund India Housing Fund, where we had [indiscernible] and [indiscernible] we also have the sort of core investment sponsor, that is partly missed and we're not yet fully invested. But -- so the new royalty has been there. Now what we are talking about is the structure that we have done with another large developer also where we try and move this hybrid, you pull together all these assets, which are high-risk and high-yield. And basically, there are SME investors, so there are institutional investors who are looking at slightly higher risk. And only thing in the fund structure, you can have a senior and a junior unit series, series A and series B, where the cash flow timing can vary. And therefore, the different risk appetite can be made there. So this is still -- I think they're considering it, but still nothing concrete at this stage. Hopefully because of -- will work our diligence and when everything is over, we'll come back [indiscernible].
The next question is from the line of SivaKumar from Unifi Capital.
Sir we see that in the developer finance book, the GNP has come down sequentially from 4.8% to 3.8%. So what led to this improvement? And can we expect the same kind of trajectory going forward in terms of asset quality improvement?
I am just checking Balaji, who has real estate, one second. Yes, Balaji.
So as you recall, I think when last time around also when we had this conversation. So there are certain series of a lumpy exposures. So sometimes what happens is that some of these transactions tend to sometimes move over the quarter and some of them then get pulled back. So this is one certain thing. So there is sort of, again, otherwise, the book is doing fine. So sometimes, we do have these [ operations ] of 1 or 2 transactions going up and down. So that's about it.
Okay. So can we expect this 3.8% to also trend down going forward in the next quarters? Do you have any visibility of any improvement in the asset quality that way?
Yes, I think in the next 2 to 3 quarters, you will see improvement. So I think it should be.
Right. Sir in Q2, you had made a mention that the developer finance book itself would be run down to [ election ] of 40% over the next 6 to 12 months. Do you still stand by that commitment?
I think it will take, I think, a little over 12 months. So I think whatever we said last time around also, is that about a year or so down the line, we will see run down. So that is happening. So I think you should see that.
Right. And coming to the microfinance book, we see that there is this slight spike in the GNPAs from 1% to 1.3%. Can you explain what is the exposure to this troubled areas of some and some districts in Karnataka? And how is it looking like currently in terms of asset quality?
So the increase, as you rightly observed, is due to the agitation in Assam. Assam only accounts for about 2.4% of our overall portfolio, but it is -- the contribution -- the increase in GNPA largely comes out of Assam. So we're not doing more business there. Again, the [ imprint ] is also engaged with the finance ministry and the local government, and we hope to see things settle down there. There's been some -- also, I think, post couple of natural calamities in Orissa, specially, we've seen now things settle down and come on course. So by and large, we are in reasonable control of the situation.
Okay. And what about the Karnataka exposure?
So Karnataka, again, the problem specifically is only in the Bangalore region. Again that is not -- that's close to about 3.5% of our AUM. But that also has its peak. I think there is a fair bit of engagement with the local bureaucracy, who is very keen to ensure that the whole thing settles down. So we don't have large exposure in these areas. But -- and we are in control of the situation.
Okay. And sir for the business loan segment, we see that there is hardly any growth over there with the [ intake ], the GNPA at 4%, so what is the strategy going forward? Is this a course correction kind of thing wherein you want to not grow the particular segment, while you look at -- look to amend the asset quality issues over there?
So this is a segment where I think as broadly as an industry, especially on the secured LAP product, the risk return has gone haywire. So it does not make sense from our perspective to be doing large ticket LAP deals wherein the rates are very low. So we've course corrected and brought down our average ticket size now to about INR 20 lakh. And we do both secured LAP and unsecured business loan. So that combined, I think, now the -- there is a degrowth in the portfolio. But I think more or less, it is settled down now. So it'll be steady for some time before it starts growing. But we've identified the segments which we want to be in, which is the low ticket LAP and the unsecured business loan, those will be our growth drivers in this segment.
And currently, what are these proportion between the LAP and unsecured business loans?
About 57% -- sorry, 65% is secured LAP and 35% is unsecured business.
Okay. And what is the ticket sizes in each of them?
So LAP also incrementally is now down to about INR 23 lakh, INR 24 lakh, and the business loan is down to about INR 16 lakh, INR 17 lakh.
Right. Sir, and one last question on the capital market segment. We were under the impression that incrementally that would -- that, that segment has moved to IIFL Wealth and would hardly see any loans being done here. So is there a rethink in that strategy, and we can actually see capital market loans as an emerging segment at IIFL Finance?
No. So it still remains one of the synergistic segment, which is not the growth segment for us. Even when you talk of growth, overall, still, it is less than even 1.5% of AUM. And that's -- I think it's likely to remain between 1% to 2%. These are largely to our retail IIFL Securities customer, that's what we'll do. But as I said, this will remain in this region of [ up ] 2.5% for the year.
We will move to the next question that is from the line of Aditya Agarwal from Indgrowth Capital.
This is Kunal Pawaskar from Indgrowth. The one request was that to the team at IIFL Finance that on the subsequent slides, where segments are shown home loans, for example, business loans, right now, we see the AUM number quarter-by-quarter, but it would be great, if we could also see what the actual number on the balance sheet was. Because right now, in the deck, we are unable to see that by segment, that is. Because you have other tables somewhere else, which just captures the segments and how they add to AUM, but not how much they are on the balance sheet, if that would be there, that would be really helpful.
Yes, we'll give the number. And as I said earlier, and also this -- the interest income breakup, we'll put it up there.
Interest income breakup, okay, okay. The other question was that the number that is there on Slide 15 of 38 of the PDF, which is the 2% assignment gain that is put in the NIM chart on the top right. Does that number -- that number has basically kept on growing over the last 3 reporting periods FY '18, FY '19 and 9-month FY '20. What might that be due to? The reason of [indiscernible]...
So that's basically, this is the -- the total assigned assets are increasing. The assigned -- see the rate of the 5% margin on the assignment, which refers to 2% of total loan when you look at these numbers. So actually, when we look at [indiscernible] in a traditional way, that is what this explanation is. But otherwise, you have to look at these numbers separately. So there's a 6.2% NIM on the balance sheet assets. And then there is about 5% margin on securitized assets. And obviously, this income is growing generally with the total quantum of securitized and assigned assets that we have.
Okay. So to be clear, is it -- and maybe, please correct me if I'm wrong, but is it fair to look at it this way that for us to tag the 2 numbers together in one stack chart?
See what happens that you define NIM in a particular way, where you see the net interest income and interest expenditure difference. And that you divide by loan assets on your balance sheet. So you get this number [ 8.2 ]. But if you're ask me, analytically, this number doesn't make much sense because what is happening in this NIM, the interest income, we are getting net credit for assigned assets. So supposing our assigned set of asset is 10% and my yield is 15%, then the 5% is getting into the gross income without any corresponding interest cost for that. So we separate these numbers. But when we separate these numbers, we -- now we are taking the 5% income on assignment as a percentage of loan assets and balance sheet. So step [indiscernible], actually, that [ doesn't makes sense ]. The only thing is it explains that if you calculate the NIM based on balance sheet numbers, how would it look like? So where is this 2% extra coming from? But what I'm saying is that, as I said, today itself, we'll put the breakup of these numbers, which will make it very clear.
Okay, got it, got it...
So as we said the interest rate on our balance sheet assets, there's is an interest cost of balance sheet assets. So these are net interest income now add, but this is the income of securitized assets, the interest income. And then you get the total NIM as reported in the proper work account. We also had to make adjustments for the CV business because in the rural area, the CV business is not there for the last year or this year. But last year, interest income and interest cost will have the CV business interest income in this cost. So when you look at these numbers, numbers normalize, you'll be able to make sense of the ratios.
Okay. And one very last question, this is a bit more on accounting that when this income is booked on assignment, any assignment transaction happens, from the result filed with the [indiscernible], this -- strictly does it show any interest income hit?
Yes. The net -- the spread on the assignment assets comes in interest income as for Ind AS.
Okay. And is there any amortization? Or is it taken as a one short gain in that -- not one short gain, one short transaction...
No, it's interest income over the period of the asset.
Okay. Originally, whatever that asset was, okay, 5 years, so the net gets amortized over 5 years' time?
The income gets accrued over 5 years.
The next question is from the line of Nikhil from Sundaram Mutual Fund.
In the press release, point number third, you mentioned that during the quarter, a subsidiary of -- IIFL subsidiary has transferred its microfinance portfolio to some of some microfinance for a lump sum consideration of around INR 172 crores. So why was this done?
So what happened when we acquired this company, this company had a very small balance sheet and still the market spending was not -- we were still getting it established. But now it is known as IIFL subsidiary, and got a business which is very established. So earlier, they were ordinary assets and they are not properly capitalized. And the assets were on NBFC balance sheet. So they were acting as agent or so -- or a poor investment model where microfinance assets were sitting on the NBFC balance sheet because the MFI company did not have adequate capital. But now that's capitalizing is fully onboard. So the microfinance assets, we have transferred it back to the MFI.
Okay. And sir, second question is a data point, actually. Can you share your stage 2 assets number?
What number?
Stage 2 assets.
Stage 2 assets?
Yes.
No, I think, we have not disclosed this in [indiscernible] building so we'll just check this. So stage 1, stage 2, these new number keeps changing based on estimating every quarter. So we [indiscernible].
[indiscernible] [ 5% ], I mean, any broad idea?
We have not actually given these number earlier. And if we give it, we will give it as a part of presentation, so everybody has access to this.
Okay, no problem. And third thing is in that NCR, I believe, I think, for our real estate book, we would be having around 25% of the exposure in NCR. I just wanted to check with you, whether do we have any exposure in these accounts, radio, supertech, on-net, [ IDO ], [indiscernible], which I think one of our other HFC has classified these as just accounts, so just wanted to check whether do we have any exposure in these signings?
We don't -- we can't disclose the names of the borrower. But whenever -- if the asset has any problem, then we have already provided for and we have taken this as NPA. But I really can't disclose the names of the borrowers in a granular basis on the exposure actually. Because -- but as I say that if any of the [indiscernible].
So out of our 4,600, 4,700 of [indiscernible] book, we don't see any further assets slipping into NPA in the next 6, 7 months?
So see, based on the current state, whatever we can estimate or expect, we have provided for it. So at least, what we don't expect are further slippages in this.
The next question is from the line of Nischint Chawathe from Kotak Securities.
Just 2, 3 questions. One was on the home loan side, your book has been sort of almost flat for last 3, 4 quarters. So is it something where you just kind of slowed down disbursements because the rates or the offtake is low because the rates are higher? Or is it something that the repayments have gone up because of balance transfers?
No, actually, the boarding yield has been, as somebody has just pointed out. So we are basically pricing increase in cost of funds. But yes, profit was slightly lower because of businesses were slower, probably because of the rates we have, 1% and 2%, many places are very cautious because even if the builder is getting stuck and if there are at least -- we are financing the full project of finance, where then you know we can get that, even with business home loan, it might get in realty. But having said that, as I said, this is a easy now. So the rate of interest also -- the energy there is a principal refinancing organization there reduced interest rate. And we also realized this that if the key business is higher than maybe housing finance can [indiscernible] competitive [indiscernible]. So that has happened. But we are seeing good positive traction from December. We are seeing that in the month of December was significantly better than earlier sort of 8 months. And I think that will continue this quarter also.
Sure. And how many cities you operate from?
So I think we operate -- our gold loan and [indiscernible] product [indiscernible] city. But home loan probably is not in all the cities. But it will be in a good number of cities, maybe at this 200 to 250 cities.
No, because if you look at 200, 250 cities. It's -- I mean, obviously, a fairly large footprint that you have...
But see this footprint has recently expanded to a significant part of business still -- so we're expanding. We are training people, and we'll start possibly meaningfully in 1 year's time.
Your size of the book is not that large that if you're operating in like 200 cities, you know kind of struggle on growth of good quality developers across. I mean, you are already large. It's not that you are [indiscernible].
No, I think, see if you get into mutual investment in the affordable segment, we [ have less wanted to grow in ] [indiscernible] [ business side ]. So at INR 30,000 crore book, when the [indiscernible] around INR 15 lakh, the size is fairly good. As I said that from many of these cities, as we are expanding our footprint and will become fully -- we get to scale in a year's time. So that is what the price growth as we expand our geographic footprint, this is what strive for.
No, no. What I'm trying to say is that growth may not or quality of projects or stress may not be so much of an issue, given the fact that your size is small, and you already have a wide footprint. That's what I was trying to say.
Yes, yes, that's right. And we have been cautious in the last few months, but I think we are seeing that the environment is changing a little bit [ and focus is better ].
Sure. Just on MFI...
And also one more thing, Nischint, is that the segment that we are operating in, there are some other [indiscernible] companies, and many of them are shut down, a couple of them, at least, have stopped developing. So there also is an advantage in terms of making sure that we keep the credit threshold high and still shows the business.
Sure. On the MFI side, when you say that your ticket size is INR 20,000. Is it like ticket size per loan? Or is it average loan per borrower?
Ticket size per loan. But in MFI, you do not have too many multiple loans for borrowers. Because these are -- most of our loans are to joint -- [indiscernible] a good strategy [indiscernible] joint lending.
There are MFIs who have kind of multiple loans for borrowers for various needs. So I was just wondering whether...
No, I think, we have not done that. So what happened there are MFI regulations. So anyone can't have more than 2 or 3 loans from all the lenders, not only us alone. So if somebody has already got, say, 2, 3 loans from other MSME microfinance companies, then they are not qualified for a loan from us, forget about multiple loans from our side.
Sure. On the tax rate side, what really happened this quarter?
So this quarter is normal tax rate. Last quarter was slightly lower because the first quarter, we have provided for tax at a higher rate.
No, I think the...
So this quarter, it's 22%, which is applicable tax rate.
22%? I mean, you're getting any rebate for [indiscernible] products because I think the corporate tax rate would be higher, right?
No. I think this is the net tax rate.
It has intensified 22% plus surcharge [indiscernible]. [ If the average loan is 5 point ] ...
What is the benefit that we have?
[indiscernible]
[indiscernible] 22.6%.So on several different assets, if we're getting dividend that's why we take [ 3-year ] kind of things.
Okay. And just one final question. Prabodh was kind of clarifying this particular quantum in write-offs. And I think you mentioned that INR 70 crore of write-offs and INR 20 crore of interest rates, so I was just trying to understand what that interest rate was?
Can you tell him [indiscernible]?
Nischint, the INR 21 crores is the interest rate on the assigned assets.
Okay. Okay. And that is also something which you will -- but why will you write that off?
No, no, that's not a write-off. That's just an offset. So there is a INR 70 crore of write-off, and there is INR 21 crore of...
INR 21 crores of income that you have drawn on assignments.
So the net amount is INR 49 crore, which has been debited.
And this is the ongoing one, right? This is not on -- or this is on sale?
No, no. So every quarter, we book some gain because this quarter, we did about INR 2,300 crores of assignments. So every quarter, whatever is sort of new volume will book at interested rate on that. And also, there will be some amortization, which will -- so the net amount this quarter was INR 21 crore.
We will move on to the next question that is from the line of Rakhi Agarwal from [indiscernible] Adviser.
Sir I just wanted to understand on the DCF portfolio, I think it was asked that your quality is improving. But there has been a lot of concern around the overall real estate -- the sales. What are you seeing on your side? Are you seeing that the crashing is picking up now? Or if can you just talk about the broader real estate market that you are seeing?
Well, you are saying that the real estate market is improving or not [indiscernible].
Yes, yes. How are you seeing the real estate market?
I think the projects, which are there -- okay, there's a demand. And there's an agent, it's not that the demand has become 0. But demand is for affordable houses because now the demand has moved from end users, the investors has taken us out of the market. The demand is that location is good, and people think that project will get executed, and they'll get their apartment or house. So actually -- again, Pune, Hyderabad, Bangalore, these markets are doing well. Bombay [indiscernible], good location, there we're seeing good traction. And not only the project funded by us, but otherwise, also. The problem areas are, obviously, the very high priced pocket of Central Mumbai or certain areas of Guragaon, and maybe certain areas of -- Chabora is very large, [indiscernible] is very large. So certain locations which are little out of the main locations. So I think the problems are more concentrated there. But if you look at Central Bombay, there is [ very large amount ] of system credit. And therefore, people are concerned about the overall system. And as I said that the improvement in traction, obviously, is more affordable segment. So if you look at Bombay, [indiscernible] up to [indiscernible] affordable. If you look at Bangalore, it will be INR 50 lakhs. If you look at Delhi, it may INR 75 lakhs to INR 50 lakh, depending on which area you are in. Other cities, maybe INR 30 lakh, INR 40 lakh. So [ every city has ] a different market.
Got it. And what percentage of our loans would still be under moratorium?
Moratorium. You are saying that we develop a loan?
Yes.
So I think there are different stages. So I'm not too many [indiscernible].
There is no [indiscernible] or interest moratorium. Whatever would be there [indiscernible] and it will all be evenly built out.
So I think the most of the -- there's no interest given the principle moratorium [indiscernible] loan portfolio that I think is fairly spread out. So there are different stages. [indiscernible].
Got it. And then on the business loan side, I think we had in the previous quarters indicated that the GNP went up because it was a seasonal issue, right? I think in Q1, Q2, you talked about seasonality, possibly causing the GNPA to go up from 2.2% to 3.8%, 4%. Into Q3, we are still seeing it as 4%. So are we expecting this to go down? Or like what is the expectation around the business book?
So typically, what happens in this is that some of these cases will be treated legal during the course of the year, it takes about 4 to 6 months to bring the customer to the situation where either we get to sell the property or if he makes it online or balanced [indiscernible] loan. So we expect improvement this quarter. Also do understand that there is, given the slowness in the economy overall, there has been -- there have been headwinds in this sector. So that's also -- has meant that we kind of slowed down our growth there, and we've remodeled our business to look at pricing the risk appropriately, so you will see an increase in the boarding rate which is largely to account for -- to take care of the risk in this segment. And so our strategy continues to be that the price, we choose the risk, price it appropriately and do follow-on with strong connections. So that's how we will be.
Got it. So should we expect higher yields, and therefore, and also higher credit costs going forward in this particular business?
No, I -- no, no, that's not the idea. So we've increased the yield. But I think the GNPAs will remain at this level where they are or probably come down in this quarter. It depends a lot on in terms of resolution getting the case order from the arbitrator, et cetera.
Got it. Got it. And this is one of your segment, which was primarily cash flow based, and then you were using secured LAP, as you have mentioned, which is at -- now at 65% from more than INR 50 lakh. So clearly, you have brought down the ticket size here from what we understand, right, where you were getting the collateral in terms of the property. And so do you expect the secure LAP portion to continue to grow from 65% to even higher numbers? Like, are you looking at more than the cash flow as a basis for giving the loan?
So cash flow assessment is necessary for every credit approval because eventually, collateral is just a deterrent. So our policy is that anything above INR 50 lakh must have a collateral. Though, there are cases below INR 50 lakh also where we do take collateral. So cash flow assessment is necessary. Collateral, as I said, above INR 50 lakh must, below that is also certainly a segment of business, which we do. And that's how we priced it appropriately, and we've reduced the ticket sales. This is the way forward for this business.
Okay. Okay. All right. And then my last question is on the home loan. I think this question came up earlier as well, which is we have a boarding deal of 11%, cost of funds is 9.5%. But if you were to just look at other home segments and accounting for [ NHP ] finance and everything. What would you say is the cost of funds in this particular business?
In home loan?
Yes.
Cost of funds, around 9% or so.
But incrementally, it is coming down.
So as I said, that -- again, you know what happens is [indiscernible] different regional rates for different pools of assets. So when we are doing a very [indiscernible] ticket home loan then they give you loan for refinancing that at a lower rate. So home loan business is in the segment [indiscernible] and you have to apply different cost of funds for different segments.
Got it. And sir what would you be shooting in terms of a return on equity for a business like the home finance? Is it similar to the rest of the business, or this will be a lower return on capital business?
No, I think given our ability to securitize and sell assets as well as on cross-sell income of it. If you look at our balance for last year and maybe this year as well, it generates similar areas with return on equity. So we don't see loans -- I mean our target would be to, as we have said earlier, to take the annual revenue of 20% range, which is around 17% today. [indiscernible]. So home loan is [indiscernible] 80% to 20%, we did of return on equity very comfortably. And if you're able to continue the securitization in the assignments over a period of time that this can improve from there also.
And the next question is from the line of SivaKumar from Unifi Capital.
So what is the cost of funds -- incremental cost of borrowing in Q3? And what is the blended cost of borrowing?
Incremental cost.
What are the questions?
Incremental cost of borrowing and total cost of borrowing, can you [indiscernible]?
Yes.
So my total cost of borrowing is [ 9.45 ]. And my incremental cost of borrowing will be close to [ 9.25 ].
Okay. So with such a higher cost of borrowings, do you still think that you would be able to grow the home loan category at these rates?
So this is the [ 9.45 ], what we are saying is the weighted average or aggregate cost of borrowing. In home loans, as I said, we're getting refinancing at a lower rate. And so therefore, we have to look at it from that perspective. And I think the rate is brought down the last quarter by some of the refinance organization and we are very comfortable and confident that we can grow this business from late quarter onward pretty well.
Okay. Sir in Q2, you're expecting a new refinance line from [indiscernible], has it come?
No. [indiscernible] But let's go out and then discuss.
Okay. Sir and one question with regards to [ developer ] finance. Have you seen any of your clients get support from the real estate fund, which was launched by the government?
Not yet.
Are there any proposals wherein you're trying to access those funds for some of your stressed accounts.
So we have submitted a few proposals to them as to start with to see the process and the mechanism that they are [indiscernible] and interacting with the team also. So we will know probably sometime in the course of this quarter as to the outcome of that.
SivaKumar, you asked about numbers. So we've raised INR 150 crore in our MFI from [indiscernible] that came through this quarter, Q2, Q3.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for the closing comments.
Yes. Thank you so much, everybody. And if there are any more queries or clarification required, please be in touch with our Investor Relations. Thank you. Have a good day ahead.
Thank you. Ladies and gentlemen, on behalf of IIFL Finance Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.