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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 Q3 FY '21 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 for joining us on this call. I am Rajesh Rajak, CFO; accompanied by Mr. Nirmal Jain, our Chairman; Mr. Monu Ratra, CEO, IIFL Home Finance; and Mr. N. Venkatesh, Managing Director at Samasta Microfinance. I'll hand over to our Chairman, Mr. Jain, to comment on the economy and the group's overall strategy and plans. Over to you, sir.
Thank you, Rajesh. Good afternoon, and welcome, everybody on this call. So macro environment and prospects for V shaped recovery now look much brighter with no bad news budget that we had yesterday. And also the CapEx and investment outflow -- outlay that are provided in the budget that makes 11% GDP a very achievable target. Also, I would say that the execution track record of this Finance Minister and Government is past confidence about performance on the budget proposal next year and also later. And as the economy recovers from a negative to a very strong positive growth, we should see a robust demand for credit, especially for MSME and affordable housing. And the underlying trends of digitization and formalization of the economy will further boost the demand for credit. And we are fairly optimistic about our business prospects as almost our entire business is driven by these 2 sectors, which is MSME and affordable housing. So if you look at Microfinance, that's the first letter M of MSME, the micro businesses, income-generating activities that we fund. And also in gold loans, I guess, almost 75% to 80% of our loans are for short-term working capital requirements for the small businesses. In this context, we're also very pleased to note that now liquidity has eased; our creative demand is robust, interest rates are falling; collection efficiency is getting better; our construction and real estate, which had become an Achilles heel is likely to see a substantial exit very soon and so on. But still, from a longer-term perspective, what we have seen in last 2.5 years is that the liquidity situations can be volatile for NBFCs as they depend on wholesale sources of funding. Banks, as we know, have access to stable liability sources like deposits, and decides access to a lender of last resort RBI. Historically, banks have built an asset mix which is of large corporate loans and retail with focus on priority sector. In the last few years, we have seen that they are looking at a shift in their balance sheet mix towards retail assets. And this is where partnership between NBFCs that have established branch network, specialized underwriting still in the niche segment and a trained workforce becomes a win-win. While banks will grow their own network to meet requirements of the growing economy, more often than not NBFCs will be more efficient in terms of cost and also more effective in collection and servicing when it comes to small ticket loans. As it is not surprising that in the recent past, Finance Minister, RBI, State Bank of India's Chairman, everybody has emphasized co-lending as a way ahead for banks and NBFCs partnership. I think they all recognize that this is the most optimum and viable way to channelize our bank's liquidity into productive and credit start segments of the society over long term. So our experience over the last few months is encouraging while it takes enormous time to get agreements past legal, compliance risk and business departments of a bank and also workflow and technology integrated. And also bank starts flow will start with 10 branches, then they will scale it up to 50 and so on. But the good news is that most banks, almost all the banks that we have spoken to, are very keen on the partnership and co-lending; and two, the market size opportunity is very large. So when we look at our market share in, say, affordable housing or MSME is just about 1% to 2% or even in gold loan, if you look at the formal lending by banks and NBFCs, we may be about 3% to 4% market share; and similar in Microfinance. So we have expanded our branch network in 2019 and paused it in 2020, and we have seen positive impact of operating leverage in the results now. Despite being at the forefront of digital technology, we see the need and opportunity to expand branch network, particularly for Microfinance and also few locations for gold loan. And typically, our branches breakeven in 12 to 18 months. So the expansion will be gradual through 2021. In terms of provisions and write-offs, we take a prudent and conservative approach while write-offs, wherever feasible as per tax laws, can give us tax break. But our recovery and collection efforts are not impacted by the accounting. Also, collection efficiency is interpreted differently by different companies. We report based on dues for the -- the dues collected for the month. And then, therefore, we don't include in the numerator the dues for the previous months collected this month, whereas the many other companies have a different approach and they take the total amount of total cash received from the borrowers. Coming to technology, we have made substantial progress in technology and our plan to accelerate -- and we have plans to accelerate investment in digital technology in all the product categories in all our businesses. We are already listed on CREDAL as a vendor -- as a certified vendor, and we plan to be on OKIN network very soon. And before I sign off, I wish to highlight social impact our business is creating, and in this presentation you'll find a separate section on that, and efforts we are making towards environment and sustainability as well. It's covered in our presentation, so I'm not spending much time on it. With this, I hand over for question and answer. Thank you.
Okay. Thank you, Mr. Jain. I'll just begin with giving a brief update on the business numbers.
Yes, sorry, my apologies, actually. Our CFO has to speak about the financial numbers, yes.
And then we'll open it for questions. So IIFL Finance's net profit was INR 268.3 crores in third quarter FY '21, which was up 26% quarter-on-quarter and 47% year-on-year. We recorded the highest ever pre-provision operating profit of INR 615 crores during the quarter, which was up 9% quarter-on-quarter and 127% year-on-year. This was driven by volume growth, reduction in cost of funds and higher efficiency in management of operating costs. Our loan AUM grew 3% quarter-on-quarter and 17% year-on-year to INR 42,264 crores. Our core segments grew faster at 21% year-on-year to INR 37,365 crores. Our disbursements across core segments for the quarter are significantly higher than last year's same period, that is quarter 3. Home Loans have grown disbursement at 90% year-on-year, Gold Loans at 25%, Business Loans at 43% and Microfinance Loans at 61% growth in disbursements year-on-year. Retail loans, including consumer loans and small business finance, constitutes 90% of our loan book. A strong characteristic of our loan book is the large proportion of loans that are compliant with RBI's priority sector lending norms. About 68% of our Home Loans, 47% of Business Loans and 90% of our Microfinance Loans are PSL compliant. In aggregate, nearly 43% of our loans are PSL compliant. The large share of retail and PSL compliant loans are of significant value in the current environment where we can sell down these loans to raise long-term resources. Annualized return on assets for the quarter was 2.6% and return on equity was 18.4%. Our Tier 1 capital adequacy stands at 18% and total capital adequacy stands at 21.4%. Our average cost of borrowings declined 10 basis points quarter-on-quarter to 9% for the quarter. Consolidated GNPAs and NNPAs stood at 1.61% and 0.77% of loans, respectively, as against 1.81% and 0.77%, respectively, in the September quarter. Without considering effect of the Supreme Court interim order, pro forma GNPA and NNPA would have been 2.87% and 1.46%, respectively. Provision coverage, excluding standard asset provision under Ind AS norms on Stage 3 assets, was 170% for the quarter. A brief update on liquidity. During the quarter, we raised INR 3,987 crores through term loans and refinance from banks. Cash and cash equivalents and committed credit lines from banks and institutions were INR 5,149 crores as of 31st December 2020. We continue to have nil exposure to commercial paper. We have a positive ALM across all buckets, whereby inflows cover or exceed expected outflows. A brief update on co-lending and co-origination strategy. In line with our strategy of growing through partnership model during the quarter, we entered into co-lending arrangement with Standard Chartered Bank and ICICI Bank for extending home loans and secured MSME loans. They have already commenced business in partnership with CSB Bank for disbursing Gold Loans as announced last quarter. A brief update on digitization and analytics. We continue to focus on digitization and analytics to improve customer experience and enable a convenient one-stop shop for customers' credit and investment needs. We have completely digitized our business loans journey right from customer onboarding to underwriting, disbursement and collections. We are collaborating with the fintech ecosystem to further enhance our platform and customer experience. With these strong partnerships, we intend to co-create solutions for enhanced experience in SME lending. We have enabled digital top-up to retain quality customers in home loan and secured MSME loans, wherein the entire journey is paperless. Communication for accepting sanction letter and e-agreement to send for eligible customers sent via SMS. The disbursement is automatic with no manual intervention. Jhatpat Home Loans, our pan-India product for instant home loans, helps all the stakeholders in the housing finance industry. Individual home borrowers, developers and company get a loan in an instant manner. Our home loan disbursed via Jhatpat loans has gained significant traction. Out of the total home loan disbursed in the month of December 2020, 89% was sourced through Jhatpat loans. The corresponding percentage in January 2020 was 61%. In addition to digital top-up renewal of gold loan launched earlier, during the quarter, we have launched home pickup of gold loan, wherein the loan officer would visit the applicant's home or office, and the entire process is tablet-based, onboarding, sanction and disbursal. IIFL loans app is being increasingly used for various transactions by customers and has been especially beneficial during COVID lockdown times, giving customers ease and convenience of access. We have about 175,000 average active users on the app for the month of December. That brings an end to the update. We will now open the floor for questions. Thank you.
[Operator Instructions] The first question is from the line of Abhiram Iyer from Deutsche Bank.
Yes. First of all, congratulations for the results. I have 2 questions. One is with regards to the collection efficiency that's given in Slide #15. For the business loans, it's mentioned that quarter 3 collection efficiency is 75%, Microfinance is 77%. First of all, are these average numbers or ending numbers? That's one. And if these are average numbers, then it seems to me that they haven't increased from September '20 because if you look at your last set of results, it was 75% for business loan and 78% for Microfinance in September itself. So was there no improvement in the quarter?
Yes. So I think this quarter, things came out of COVID. And what we have seen is that the true picture emerges only after COVID -- just one second, of Slide #15 -- but there is an improvement in business loans from 60% to 75% and in home loans from 81% to 90% and Microfinance from 69% to 77%. So these are the monthly averages, but there's a significant improvement in this quarter vis-à-vis the previous quarter.
Yes, sir. No, I'm just trying to figure it out from the end of last quarter. Last time, you had given on a monthly basis and -- in September, it was 75% and 78% for the business loans and Microfinance. So Microfinance has actually come down over the quarter or -- and business loan has stayed flat over October, November and December?
No. So what happens that most of the time the collection happens mostly towards the end of the quarter. And therefore, when you see monthly averages, then they will give you the correct picture of how things are moving. And also, as I explained in my this thing that collection efficiency is measured differently by different players. So what we do is that something is due for the month of December, obviously, you'll collect November month also in December. And that is actually -- that happens, to some extent, in all our businesses. That doesn't get counted in collection efficiency. But if you look at then towards the end of the quarter, obviously, collection peaks up -- picks up. And therefore, you can't -- really compare September with October but you can compare September with December.
So what were the numbers of December, sir?
One second, December month, I'll give it to you. So December actually is 93%.
This is for business loans?
October was pretty -- October was down. So actually, October, November, but December it picked up. So 68%, 72% and 93%.
Sir, this is for business loans, is it? And Microfinance?
No, Microfinance.
This is for Microfinance. And business loan?
Business loan has remained -- so business loan is one segment which has remained a little sluggish because of -- so it has remained around -- it has hovered around 75% throughout the quarter.
Got it, sir. Got it. And is there any like programs in place to correct this because, obviously, this is sort of...
So -- okay. I'll tell you the collection is -- so collection is happening with some delay because these are small borrowers. So typically -- so you might see the 30 DPD. But when we look at 60 and 90 days, then we are seeing that the collection is improving.
Got it. Got it. Got it, sir. So basically, this has been pushed back by a month, but not exactly going into NPA status because it is developing...
This is a typical characteristic of a smaller borrower and smaller loans because you need to -- they're all passing through -- now things are recovering. So we see that the collection is also improving, but it's happening with a lag.
The next question is from the line of Thomas from Aberdeen Standard Investments.
I have 1 question with regards to liquidity. You've got a slide on this topic, which is Slide 20, and it shows that your reliance on term loan, on bank lending basically keeps going up. And equally, bond refinancing is trending down quite significantly. If you could share a little bit of color what the drivers are? Is it that risk EBIT side on the onshore bond market is still fairly muted or is it purely a reflection of pricing? Yes, a bit of color on that would be helpful.
Right. So significant of our financing is now happening through securitization of assignment, which is not debt. But what we are doing is we are selling down our assets. So last quarter would have sold down something like INR 4,400 crores and also the earlier sold down of assets of INR 2,000 crores would have got repaid. So that has become a significant contributor. Now coming to refinancing. Now refinancing happens in -- but if you really look at the refinancing then from INR 152 crores in Q2, it has gone up to INR 500 crores in Q3. The debentures or bonds that you are seeing has come down. But -- so in Q2, we had a bond issuances to the bank under the TLTRO scheme. So when banks are funding, actually, their appraisal and there, whether they're funding or through bonds or term loan is similar. The Q4 last year bond issue, which you see INR 2,856 crores is the dollar bond issue that we did, which has a foreign currency dollar-denominated bond that we issued in international market, $400 million. This, obviously, we'll do once in a while, maybe once in 2 years. Therefore, I don't think there's a significant change in mix. But the nature of business is such that sometimes you'll see some of the pieces of pie moving in different ways.
Okay. And then would you say -- just on a forward-looking basis, would you say that the dollar bond market remains important for the company to -- for refinancing purpose?
Not really. Actually, to be very honest, dollar bond market is more opportunistic and more a diversification. But in fact, when the dollar bonds have been quoting at a discount, we applied to RBI to allow us to buy back but RBI refused us permission for that. But this is a market which is there. And when the opportunity is right and the market is favorable, we can always tap it. But we aren't really dependent on this. But over a longer time period, this can be a good source of money on a periodic basis. So this is a market you can tap, say, once in 2 years or thereabout.
The next question is from the line of Ashwin Kumar from HSBC.
My question is actually on the collection efficiency part. So just wanted to understand some of segments like business loan and so on, it's only like 75%. But if I look at your NPAs as such, even if you exclude the Supreme Court dispensation, that's not gone up very significantly. So I mean, how do we look at this? Is it like a lot of customers are missing 1, 2 installments because if it is, on average, 75%, it means like -- I mean it would mean like one customer is paying in October and another customer is paying in November and so on, right like I mean?
No, no. This 75% means 3 out of 4 customers are paying in the same month. And the remaining 25% customers, maybe some of them 20%, 22%, 23% are paying in the next, say, second month or third month. So they don't pay for 3 months, then only they'll become -- they get reported in -- as NPA. And in business loan, our loan book GNPA is 2.46%. But if you look at our -- on a pro forma basis 6.5%. We've also taken aggressive write-offs and write-downs in this segment because -- see, wherever we see that from a tax point of view and from the age of the loan point of view, I mean, it's prudent to write it off, we do that. But that doesn't affect our collection efficiency -- collection effort because our collection people, they get the buckets of all the loans so regardless of how we have done the accounting. And also 2/3 of our loan book in business loan and more than 2/3 is loan against property is secured. There also, we are seeing slightly lesser stress. So business loan, there is a stress, and that is why our pro forma GNPA is 6.5%. But in a way, 2 things have basically helped us to contain the damage, which is one is significant part of our loan book is sectored and two, we have taken aggressive write-offs as required.
Okay. And similarly, if you can give some color on the Microfinance that again there also, I think it's only 77%. So I mean, what kind of credit losses are you seeing there? And I mean, which states are you seeing stress? Do you have any exposure to Assam as such?
So Microfinance -- fortunately, we are all over. We have a very well spread out network. And 88% of our business is from rural segment. So if you really see Microfinance industry, then the performance has been very varied across the companies. But in the COVID time period, the companies that have been more dependent on urban areas got impacted more compared to companies that have been predominantly servicing the rural areas. So if you look at industry-wide, I think, 46% is urban, 54% is rural. But in our case, 88% of our customers are from rural areas. Secondly, Microfinance, we have done -- we have provided additional INR 40 crores in this quarter because -- and GNPAs have gone up to 2.4% -- 2.24%. Secondly, we are also -- our Assam exposure is miniscule. And all over we are well distributed, we are almost there in 20, 25 cities -- 25 states now. So we aren't really dependent on any one state as such.
Okay. And how much will be your exposure to like Assam which has been in the news?
Our Assam exposure, I can tell you, 1 second.
It's 2%. 2% is Assam exposure.
2%, yes. 1.79% to be precise is Assam exposure. Maharashtra also has been very badly hit for some of the Microfinance companies. Our exposure to Maharashtra is only 2.79%.
Okay. And just 1 question on the Microfinance, again. The ticket size this quarter suddenly dropped significantly. So is there any change in strategy or something?
So the last quarter, probably we did a little bit of more individual loans which are a high ticket size. One second -- Venkatesh -- Microfinance -- Venkatesh, you are on call? Okay. So I can get back to you on that.
Sorry to interrupt you. Mr. Venkatesh is on call.
The individual ticket sizes are lower or slightly higher as compared to the group ticket size.
Yes. Sorry, I was on mute, actually. I can answer, I mean...
Yes, please.
In terms of the ticket size going up, it was for varied size. As Nirmal said, we have also added the individual loans to our portfolio. And plus in certain markets where we see traction of -- I think we have -- every state has got a segregated higher ticket size because we have gone -- in many of the markets we are getting into the second and third cycle. We gradually increase the cycle of -- I mean, ticket size of loans as we get into the different cycles. So that's another factor, which the loan ticket sizes have gone up.
[Operator Instructions] The next question is from the line of Prashanth Sridhar from SBI Mutual Fund.
Any guidance on restructuring or the DCCO extension?
No, DCCO extension for what? Sorry?
You, sir -- I believe you have a construction finance book as well which you're going to put that under AIF.
Yes. So construction finance book actually almost -- significant part of our -- substantial part of our book will probably move it to AIF. So all these things will become irrelevant because the book will be held by an alternate investment fund. That is what we're planning to do.
Okay. And what about restructuring on the remaining book? What kind of expectations do you have?
So remaining book will continue. And there, we have adequate provisions. So as at December end, we are carrying INR 458 crores of provision. And also, we have written down -- written off quite aggressively. Some of that money will also be -- will have potential to get collected. So I think we'll have a significant provision for the -- so the remaining book will have 2 parts. One is the smaller loans which are, say, less than INR 20 crores, INR 25 crores loan, and they have been generally doing better. So very small ticket loans, we are not planning to move it to AIF. And then there'll be a few residual projects for that we'll have adequate cover. But this will become insignificant part of our book. And as we have guided earlier that going forward, as a group, we are doing our real estate funding through alternate investment fund, which is part of our wealth management subsidiary company AMC. In the NBFC, HFC, we might continue to do the residual funding of the project that we already financed or the green and environmentally sustainable building that we are focusing on. But also, the typically small ticket construction loans in Tier 2 and Tier 3 where we can dovetail that or we can connect -- we can have a forward linkages to our home loans. But then the prime -- after the transfer to this AIF, this book will become insignificant.
Okay. Understood. And you would receive a consideration for the other investors portion in upfront cash or that will also be in some sort of securities?
So what will happen is that INR 3,600 crores is the target size of the fund, out of which, say INR 1,200 crores is the sponsor's contribution, the INR 2,400 crores upfront cash you get. And from an income and the other point of view, so our INR 3,600 crores -- so our real estate book has been generating return of around 14.5%, if you see last quarter. The -- what we can accrue on the remaining part of the book will depend on the valuation because this AIF will not be managed by NBFC. It will be completely independent. And approval -- our target is that the entire -- most of the exit will happen, say, over a 3-year time period. Till then, the income approval can be conservative. But at the same time, this will also save us the provisioning because in the last few quarters we have been really hit very hard by this segment of our business in terms of provisioning requirement.
Sure. Did I hear that right, you said the total consideration for the RE book is INR 6,600 crores?
So -- no, no, no. The total consideration for RE book is not INR 3,600 crores. We will transfer, say something like INR 3,000 crores of RE book to the fund, INR 600 crores is cash or liquidity in the fund, INR 500 crores to INR 600 crores. So whatever we are transferring, we'll be transferring at book value. Wherever required write-down or write-off, we've already taken that. The remaining part of book will remain in our book as construction finance or whatever it is. Out of this INR 3,600 crores, INR 1,200 crores will be the contribution which probably will be the AIF, which will remain as an investment in our book. INR 2,400 crores is cash -- maybe INR 1,800 crore of cash and INR 600 crores will remain in the fund will come to us.
Understood, understood. Sure. Sure. Sir, the second question is excluding the...
Sir, sorry to interrupt you. May I request you to come back in the question queue for a follow-up question. [Operator Instructions] The next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund. [Operator Instructions]
Hello? Is it clear now?
Yes.
Sir, may I request you to speak a little louder?
Yes. See on the business loan portfolio, your average ticket size has been coming down, but your onboarding yield has also been coming down. Is it -- I mean, typically, you would think that the smaller size you'd get better yields? And then also, if you see the collection efficiency has also been only gradually improving, which is part, of course, for these kind of smaller customers. How do you see the risk adjusted...
Yes. So I think -- no, it's a good question. But what has happened in business loan that incrementally, we are doing business loans only digitally. So there are very small ticket loans done, which are like maybe like INR 1 lakh, INR 50,000, INR 2 lakh, and that is bringing down the ticket size. So now if you see incremental business loan, there are 2 components of it. One is loan against property, which may be typically INR 1 crores or INR 2 crores. Again, there also, we focus on a smaller ticket size. So in loan against property, your average yield will be lower, but that is a major component of it. And then the smaller loans that we have started on digitally and then will continue. So today, we don't any longer have any sales force for unsecured business loans. So that entire thing we phased down. And now we have been pilot testing our digital model and we'll aggressively expand this as we get confidence. So there are a couple of things more we have done. Also, we have tightened our credit threshold. So even if it's a lower yield, but we are focusing only on good quality customers. Obviously, business loan for the entire industry has been very badly impacted because of COVID. But going forward, when we do digitally, our objective will be that charge have a lower yield but lower credit losses and almost negligible operating costs as far as unsecured business loan is concerned. And in secured business loan also, you may get lower yields, typically about 14%, 14.5% or maybe even lower sometimes. But then your collateral is there and the risk of ultimate loss is very limited.
Okay. Great, sir. So I guess, cost income, everything improves. So that's a good thing.
Absolutely.
Secondly, congratulations on the various tie-ups you have. Incrementally, what kind of -- what proportion of your loans do you think will be on book and what will be through the co-origination tie-ups?
Today, what is happening is that we are assigning and securitizing our books. So we are selling it down. The co-origination tie-ups, we have started with 3 banks, and probably we are looking at more. They will take, I think, 3 to 6 months before they become significant. But till then, we'll continue to sell down our books. And there's a huge market for that. So securitization and assignment also is a very big market. We'll continue to do that till this gathers momentum. But both these put together, the ratio, I think, is already 35%. So over a period of next 2, 3 years, probably, this may -- the incremental growth is coming from here. So if you really look at loan book using our risk capital has declined in this quarter also. There may be -- it may remain around these levels. And incrementally, it is 35% over next 2 to 3 years may become 50% to 60% also.
The next question is from the line of Kush Sonigara from Mahindra Manulife.
I have 2 questions. So one is on your gold loan LTV, so on a sequential basis, I've noticed that gold loan LTV has moved up from 68% to 72%. Now even if I look at the stand-alone 72% number, I mean, that looks too aggressive. So wanted to understand, I mean, what exactly is our strategy? How we are doing over there?
No. Actually, 75% is allowed. And during moratorium, some of the interest would have got capitalized, which is getting collected now. And also the gold prices in the last quarter -- so quarter before, gold loan prices -- gold prices have gone up, and that's why you saw that LTV was getting lower. But 72% is very comfortable. Today, banks are giving loans at 90% LTV. So NBFCs are heard up to 75% should be competitive, but this includes also the interest due is also counted as -- in LTV, when we look at the loans, we include the interest accrued and due but not paid.
Understood. But yes, so I understand 75% as the regulatory, this thing. But -- so one can expect the number to remain near this stage...
In this -- in the gold loan business, important thing is how do you value and what do you tell customers? So when there's a gold which is, say, valued it as a 20-carat or 22-carat, that can make a lot of difference in what you communicate to customers and how do you account your internally. But we are very conservative when it comes to valuing the customer's gold. So every jewelry will have certain deductions for impurity or certain other things in that, and that is where you have to build your cushion. But it will remain around these level, 68% to 72%.
Okay. Yes. So second one is on our Stage 2 number. So on a sequential basis, if I look at absolute numbers, so Stage 2 has moved up from around INR 1,700-odd crores to INR 3,100-odd crores. So I presume, most of it would be the COVID stressed book. But internally, how do we...
So if you see the Stage 2 significant component is gold loan. Now what happens in, say, home loan or business loan, money is collected automatically through banking channels on 30th day for 30 days, 60 days or whatever -- whenever it becomes due. In gold loan, still a significant part of collection happens in cash where customer either comes to the branch or you have to follow-up with the customer. So typically, branch people will start following up with the customer after 30 days. Should always see that 30 DPD is high, but most of it gets collected before 90 days. So 90 DPD will be very low. And loss given default in this case is almost negligible. So gold is a peculiar business where you'll see Stage 2 is a higher component, but that will not be -- and -- but that doesn't get into Stage 3.
Okay. No, because I was just looking at this earlier it was...
Our branches start reminding customers or following up with customers only after 30 days. So then they're already moved into Stage 2.
The next question is from the line of Savi Jain from 2Point2 Capital.
Hello?
You are audible.
Hello? Can you hear me? Hello?
Yes.
Savi Jain, you are audible.
Yes. So I have a couple of questions. One is on the dividend. I mean you've announced quite a large amount of dividend. So I just wanted to understand, given that our leverage is already on the higher side and we could also do with a better credit rating going forward. So given the growth ahead, I mean, isn't this a little too high? I mean, just wanted to understand your thoughts there?
No. I think our dividend is INR 3, and we have a dividend policy, which is board approved and declared that anywhere from 15% to 25% will be our dividend payout ratio. So it's around 18%. And if you look at our quarterly EPS is INR 7.1, so out of the INR 3 dividend is not so significant. And debt-to-equity ratio -- net debt-to-equity ratio has fallen in last quarter as our -- we have securitized and assigned more assets. So -- but dividend we have to maintain. So we have a consistent track record of dividend since listing, and we'll continue to do that.
Okay. Now given that our stock price, I mean, at least until the last week, it was not at a stage where you would probably be able -- want to raise more money. So that's the reason...
So every year, we have given dividend and we've been very consistent in that.
Okay. Okay. Appreciated. And second question is on the wholesale book transfer that you talked about. Sir, you mentioned it is that -- is it still at a diligent stage or I mean, is it like at a very advanced stage or where exactly is the process right now?
Yes. So there's final diligence is happening on that. So it's advanced stage, but yes, the diligence is underway.
And you mentioned we would not need to take provisioning once we transfer those assets there. So how -- I mean, how exactly will it work? It will show as investments on our book and we would need to write-off...
So if we do -- if we achieve the entire target and do INR 3,600 crores of fund, INR 1,200 crores will appear as investment in our books, as investment in alternate investment fund. So the units will be held by us, and that will appear in investment in our books, yes.
And some of the -- what part of the money we will get back?
So what happens in the sponsors contribution, normally the other investors get paid off first and then the residual comes to you. The provisions or not will depend on the fair value. So as we do we'll understand the process, but I think those units are valued on the -- and a fair value is taken in the book in Ind AS accounting, which can be higher or lower than the cost, and that depends on how the valuation comes out.
Okay. And last question is on the gold loan front. I mean, so there's obviously been a lot of competition by banks in the last few quarters. So just wanted to understand, are you incrementally seeing a large degree of market share loss and growth tapering off in the gold loan business? That's one. And second, is this growth buybacks a result of LTV increase which will probably reverse after 31st March or do you think they'll continue to grow at this pace that they're growing over the last few quarters?
No. I think gold, we are increasing the customers and the gold tonnage also in our custody. And secondly, yes, you're right, the competition has increased significantly. But there's a huge unorganized market. So those pawn brokers, money lenders, and that is moving to the formal market, which is NBFCs and banks, which is a good trend. So in the last few -- 4, 5 years, we are seeing that there's an underlying trend of formalization of economy where many things that were happening in informal sector are getting back to formal sector. So while we don't have precise numbers, but I think a lot of market share is coming from there as well.
Okay. And -- so you are continuing to see the same kind of growth that you were seeing in the last few quarters in the gold business?
Okay. When the gold prices go up, obviously, the LTV goes up and all the gold loan companies will see a much robust growth. So it might taper up. It may not be as strong as the -- in fact, in Q3, it's already a little lower than what Q2 growth was. But there'll be a healthy growth. So I think 50% to 70% growth is what one should consider as a healthy growth, in a year.
Right. Right. And branches, you mentioned you're planning to open -- so how many branches are you planning to open in the next -- in this year, probably?
So we can't put a number on that. But in both our businesses, like Microfinance business in particular and also gold loan business we need some more branches because there are some good locations that we left out because this entire expansion plan was paused in 2020 throughout the year, all of a sudden, in the early part of the year. So there are some opportunities. It will not be very aggressive expansion. Probably in 2019, we had a -- relative to number of branches we had, we expanded very rapidly. But -- so it again depends on the location study which is done by every area, every state. And depending on that, they decide on the branch network. So I can't give a number at this point in time. But as I said, throughout this calendar year, we'll continue to grow the network.
[Operator Instructions] The next question is from the line of Amit from Robo Capital. [Operator Instructions]Due to no response, we move on to the next participant. The next question is from the line of Abhiram Iyer from Deutsche CIB.
My first question was on the rating actions on the USC loans -- USC bonds rather. So Fitch has placed the USC bond on a negative rating outlook for close to 11 months now. Is there any update from the company on rather than discussions for this to be removed because it's quite a long time that it's been on a rating watch?
So I think rating agencies basically had a negative on the entire sector or most of the -- even the banks, very well-known banks in India. So we'll engage with them again. Our liquidity has improved, even our debt equity has improved, our profitability has improved significantly. So we'll make a representation to them. But I think as I was listening to in the budget speech or maybe some -- that India being fifth largest economy still is not investment grade. So somehow, I think rating agencies have been little, in my opinion, biased against -- or maybe not done a fair rating for any -- for the Indian Financial Sector. I'm not talking about IIFL, but all the banks and NBFCs. But as far we are concerned, we'll engage with them because what you said is absolutely right that our numbers have improved significantly, and it's a good time to go back to rating agencies.
Got it, sir. The second question that I had was on cash flows. So forgive me if I'm being a bit technical out with numbers right now. But if I look at your balance sheet and your income statement for the quarter, you've raised debt by about close to around INR 16 billion. Your operating income is somewhere around INR 5 billion. So that's close to INR 21 billion which you've received in cash and money. Whereas if I look at the other side of the balance sheet, the cash and balance investments have increased by only around INR 4 billion and the loans have increased around INR 10 billion, INR 10.5 billion. So there seems to be a discrepancy of around INR 6 billion or INR 600 crores, if I look at it from -- if I look at it. So my question was, is the -- is some of the income not coming in as cash because that's the only thing that seems to explain those.
Sorry, no, I mean, I'm not able to -- Rajesh, can you understand what is that question and what are the numbers he's referring to?
See what I've understood, Abhiram saying, is that you have your cash raise, right? But what you have to take into consideration, Abhiram, is also our AUM, our book is growing. We've had about INR 1,400 crores of increase in AUM as well.
Yes, out of which INR 10.5 crores is on the balance sheet...
I think -- yes. No, no, no. I think the discrepancy is the securitized assets as per Ind AS have to be taken in the book. Maybe -- so that is what could be causing some of the difference. So during the quarter, if you see from INR 1,000 crores of incremental securitization was done. So what happens in securitization -- securitized asset is that actually, the risk is off the book. But Ind AS accounting as per our address you can't derecognize. So you add the asset and loan both.
But that's not in form of cash, which is why there is a discrepancy?
Yes, yes, yes. So that is -- again, but in IGAAP accounting, we were not required to take securitized asset, then our loan book would have been INR 27,692 crores in instead of INR 30,000-odd crores that we have. But what we can do is maybe we can put a mail, then we can put the numbers in a reconciled, properly and put it so that everything is there. Yes, go ahead with the second -- you have another question?
The next question is from the line of SivaKumar from Unifi Capital.
Sir, just to clarify on the CRE AIF. You said that once the AIF takes over INR 3,000 crores of the CRE book, you'll be left with the INR 1,300 crores of residual CRE loans, right?
Right.
And they have already seen a provision of INR 458 crores. That's what you said?
That's right.
Okay. Sir, and coming to your own cash infusion for the AIF. So from our side, it will be about INR 1,200 crores of sponsored cash infusion?
So INR 1,200 crores include -- so the way we are planning is that we are trying to estimate that what is the last mile cash flow requirement for all these projects so that the money cap can be opened and the projects can get executed very fast. Because what we are seeing is that there's a demand for affordable housing. And in fact, the housing has picked up all over. And in some of the projects we are seeing amazing spurt of sales that in the last few months has come. So the idea is that provide enough liquidity for last mile so that project gets completed very rapidly. So what will we do is that when we transfer certain things -- so the total size of INR 3,600 crores, which includes the cash required for last mile. So we'll estimate it properly and will provide for that in the fund itself.
Okay. So roughly, what will be the cash infusion...
So supposing what -- out of INR 3,600 crores, whatever is cash requirements reduced and the remaining amount we'll transfer it to the fund.
I see. And will there be any first law stipulation on the cap infusion being done as the sponsor?
Come again? No...
There'll be any stipulation...
Okay. First, the entire 33% that way is the -- so okay, the way the AIF is structured and as has happened in the industry, that the senior holders, they get basically fixed return and -- but they get a priority cash flow. So whatever cash flow is generated from the projects will get paid out to non-sponsored investors, which is the 2/3 of the fund, and the residual is what comes to sponsor.
Okay. Okay. So as a sponsor, we'll be holding the junior tranche, right?
Yes, that's right. But the thing is -- yes. So there's a fixed will be holding the junior tranche, responsible is a junior tranche.
Okay. Okay. Sir, roughly, what will be the final cash infusion after -- you must have done some calculations on the cash requirements of each of those projects, right?
So will be about around -- maybe 15% of the total thing will be the cash broadly required.
15%. Okay.
See, if we provide for 15%, then we are safe. We'll make sure the projects get executed very fast. So what happens in the project, it also depends on what is the success on launch. So when you're constructing, if the launch, you get very good response, then the cash flow from the buyers only pay for the rest of the project. But if you are conservative and you say, okay, let me plan for -- even if the response is poor, but the project should not get affected. So then will provide for a little more. But we don't expect it to be more than 15%, 17% kind of a thing.
Okay. 15%, 17% of the total size of the AIF...
Yes. These are ballpark numbers. So I really don't have the precise numbers because it's still -- this is what is the work which is underway. And maybe next few weeks, we'll have clarity on that.
Any time line, sir, when this AIF will be tied up?
So as we have indicated, the binding term set has been signed and probably we'll consummate this transition in these next 2 months.
Next 2 months. Okay. And to that extent, the capital will be freed up for you, right, to be...
That's right. So the biggest advantage of this is that the capital frees up for us. And also we become focused on retail, as we always said, that then our core DNA and our -- the sweet spot for growth is retail and digital. So then it becomes a very focused business model for us. So we have a 4 product segments which are core, as we have always highlighted. So this non-core segment, which is already around 10%, we'll probably try to reduce it to as little as possible.
Okay. And in the Microfinance, would you continue to see the growth traction that we got to see in Q3?
Yes. I think Microfinance should see very strong growth. And the Microfinance business keeps getting local issues. But what our experience is that if you are a pan-India company with all over with your presence which is fairly balanced, then the damage doesn't become very significant for the entire book. But we see great opportunity in Microfinance business going forward.
[Operator Instructions] The next question is from the line of Jehan Bhadha from Nirmal Bang.
Sir, if you can sum up the asset quality, how much is the stress book? And what kind of credit costs do we foresee? Because this quarter, our provisioning was really low. So -- and on the other hand, the collection efficiencies seem to be a bit low. So if you can just sum up the entire thing.
No, our provisioning is not low. At INR 267 crores, provisioning is very high because historically, our credit losses provisioning have been around 80 to 100 basis points, which would be something INR 100 crores. So we have provided fairly aggressively in this quarter. And this significant amount of this processing is for CRE and MSME book. Hopefully, I think going forward, our provision requirements would reduce from here.
;Right. And the amount of stress book according to you would be how much?
So amount of stress book is what we have provided for, and that is not where we are carrying our provisions. Our provision basically -- if you look at without considering Supreme Court order, then 2.87% is our GNPA. And actually, if we look at our provisions, then they fairly cover that. So you can look at that as a book which is stress book.
Right. And we don't foresee this 2.87% figure to increase too much?
No, this will reduce now actually as we go forward.
The next question is from the line of Prashanth Sridhar from SBI Mutual Fund.
Just 2 questions from my side. One is, how would we look at the growth in disbursements? Would these have been more to existing or new customers? And number two, just looking at the Stage 2 and 3, excluding gold and real estate, that has almost sort of doubled. So how do we look at restructuring expectations over there?
So disbursement trend is very strong. You see Q3 disbursement basically has been already higher than the pre-COVID level in most of the businesses. Maybe gold loan, Q4 was INR 5,000 crores, which is now INR 4,900 crores. But other than that, disbursement is very good. And obviously, we add new customers every month about maybe a 1 lakh-odd customers we had every month, and that has been a trend even before COVID, and that is now continuing and probably will accelerate. So as they commonly recover, you see that there are new borrowers, existing borrowers also need more money. There is some case of balance transfer. So that is about disbursement trend. And in terms of our GNPA -- no, I don't know what we are saying about the stress book or whatever. I mean I'm not understood your question. I think if you look at our GMP, they've fallen from last quarter to this quarter.
Yes. My question was the Stage 2 plus 3 has increased excluding gold and real estate.
Stage 2 and Stage 3. Stage 3 is what is the GNPA which is INR 440 crores. And I don't know where are you referring these numbers from because these numbers have not increased. They've actually fallen.
Sir, I'm just adding up the Stage 2 plus GNPA. That's what I'm referring to?
What happens to Stage 2 is -- last quarter was moratorium, in gold loan in particular. So gold loan is something which will always till the Stage 2 numbers, so you have to look at it differently. And as I explained in the earlier questions response that gold loan collection effort typically starts up at 30 days. So this is where you'll see a significant bulging of amount in the Stage 2, 30 to 90 days. But most of these get collected by 90 days. And you'll see the Stage 3 is very minimal there. So last quarter, we're still coming out of moratorium. So this was not accurately reflecting in stage 2. But what we are seeing is a normal trend in the business now.
The next question is from the line of Thomas from Aberdeen Standards.
It's been addressed, my question. No further questions. Thank you.
As there are no further questions, I will now hand the conference over to the management for closing comments.
Thank you so much, everybody, for being on the call. And as always, if you have any more questions or queries, you can always get in touch with our Investor Relations, Alok Varghese. Thank you. Have a good day ahead.
Thank you very much. On behalf of IIFL Finance Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.