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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 '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to the management. Thank you, and over to you.
Hi, good afternoon, everybody. On behalf of IIFL Finance, I thank all of you for joining us on this call. I'm Kapish Jain, the Chief Financial Officer. On this call today, I am accompanied by Mr. Nirmal Jain, our Managing Director; Mr. Monu Ratra, CEO of IIFL Home Finance; Mr. N Venkatesh, CEO of IIFL Samasta Finance. I'll hand over now the proceedings to Mr. Nirmal Jain to comment on the economy and the group's overall strategy, including performance for this quarter. Over to you.
Thank you, Kapish, and a warm welcome to everybody. In terms of economy and macro environment, I think we know that the environment is turbulent. But as far as Indian economy is concerned, our underlying factors still are positive. While all of us have noticed that the consumer demand had slowed down last quarter. Maybe a quarter before, there was a bit of a pent-up effect of our post-COVID demand, but as far as demand for credit is concerned, the [ other exhibit ] is robust.
Most of the segments have created -- basically continue to see strong growth, double-digit growth for the whole economy of nature as a whole. Interest rates have increased significantly. In fact, [ RBI Repo ] has gone up by 225 basis points, but most of it has not been transmitted because the [ longer-tenor ] loans, what we already had are at the contractual rate. And even at the incremental borrowing, we are able to negotiate a better -- given our track record and the way we have handled the crisis in the last 5 years. So the cost of fund has gone up marginally. And what we also passed on to our customer is a marginal impact above. Okay, the [ Repo ] would reflect in a tenor loan of 3 to 5 years.
Having said this, I think let's keep -- I don't want to comment on the geopolitical or the market volatility but underlying economy remains strong, whether it grew by 6.5% to 7.5%, that may be matter of debate, but the demand for credit is growing. And unless interest rates go up significantly from here, we see that the outlook will remain positive and very optimistic on that front.
Whatever interest rate hikes have happened until now, I think that this -- our customer segments have been able to absorb to that manner and to that effect.
Now I'll just briefly comment on our 4 businesses and then hand it over to Kapish for more a detailed deep dive into the financial numbers and then we'll take Q&A.
So we have 4 core businesses, as you are aware of. In Gold Loan, there has been intense competition because there are number of new NBFC players who just jumped in and also many banks and particularly the smaller banks have become very aggressive. And what they do is kind of undercutting the price where they transfer a brand [indiscernible] of the time, [indiscernible] people and offer to the same customers at a low rate. And sometimes, these rates are below the cost of funds in the hope that probably they'll be able to take the ratings till later.
What we are doing and what we've been doing in the last few quarters is that rather than react to this short-term strategy or approach, we track our customers. And we make sure that even if they go for our rates, which are not affordable for us, we track them. And whenever the competition, they try to take interest in highs in the manner which is not straight forward, we try and approach those customers again.
So what we have seen is that optional months are not good for our Gold Loan or [indiscernible]. But in December, we rebounded strongly. And the quarter, we ended with -- in 3% growth, but quarter-on-quarter. Y-o-Y growth remains fairly positive, about 30% for most of gold products.
And then, in fact, many competition now, they are understanding and some new FinTech were not able to raise capital. That undercutting price is not a long-term strategy. So -- and also our brand is positioned on what we say [indiscernible]. We try to be transparent, even if you lose business in short term, we don't resort to the [ knee jerk ] reaction or approaches where you are [indiscernible] rate and then later, it comes out to be something else.
Our Home Loan again, we are moving more granular, our ticket size is falling and in fact, there are subsidies received. That's what probably would have depressed the growth a little bit because subsidiary gets adjusted in the loan amount of the customer and through that effect -- to that extent, costs come down.
But here, again, probably we would like to see faster growth. The impact is the growth has not been as strong as we would have liked it to be quarter-over-quarter, primarily because we are moving to a smaller growth. So the number of loans that we are processing is going up more significantly. And the ticket size is falling. And our more and more business is coming from what we call [indiscernible] locations or smaller places compared to hub locations where competition is intensifying more. But I think as we -- as our network has -- and the Home Loan also, in fact, our branches have gone up significantly in last 9 months. And as we get into smaller terms and we get market share there, I think the growth will become stronger.
Our microfinance has seen very strong growth, in fact, 55% Y-o-Y. But in the industry, many good players have grown at that pace and the demand is strong. The environment has become far more positive with the very pragmatic [ repose ] by RBI, where a number of reforms, including the -- remove the price cap and income base assessment where the loan amount can be higher. And even our interest rate has gone up, but we should note that we are taking the interest rate increase only in the new loans and not reset the old loan interest rates. And therefore, the portfolio rate will grow at a slower pace, but over a period of time, we'll catch up.
And Microfinance, I think the industry has turned around very well. We are very well diversified geographically from a strategy point of view.
In Business Loans, we have a loan against property segment that has grown. That again is intensely competitive with NBFC and banks. But what we are trying to do is focus on small ticket property loans, which is like the ticket size typically can be less than 10 [ equities ] incrementally. So that's the sweet spot that we are trying to target. These are the homegrown customers on the same segments where they already have a loan, the loan has been repaid and they take a new loan, which is classified as the loan against property, private [ area ] self-occupied [indiscernible] property or smaller premises.
But the digital loans, we have separated this time because digital loan is a loan where we kind of do it [ untouched ] by hand, where the entire end-to-end processing is digital. Our strategy is to partner with big players who have got digital footfall. And digital only, if you look at most of the FinTechs and they don't make profit despite very high NIM, primarily because customer acquisition cost is very high.
What we want to do is that we don't want to incur customer acquisition cost ourselves by aggressive digital marketing, but we have tied up with a number of players. And many bigger relationships are also in pipeline where the testing is going on and the launch will happen very soon. So we get the lease from these players and where we share the NIM or the fee in a pre-agreed manner.
Now the digital loan can be personal when the business loan [indiscernible]. So in India many [ transport ] proprietary [ mom ] and pop shops are like difficult to classify it as a business or personal because many of these self-employed people also use their personal account for business purposes as well.
So the digital loan is loan where we're going to get digital -- I mean there actually branches may refer, but primarily, that happens through our apps and through website and the leads come from partners. So these are, I think, unsecured loans -- predominately unsecured loan. So you got to keep it separate for that loan against property, which is like a mortgage can be tracked separately.
So with this, I'll hand it over to Kapish to take you through the financial numbers and we'll come back for Q&A. Thanks.
Thanks a lot, Nirmal. Just to tell you about the financial numbers and the performance. IIFL Finance profit after tax without considering -- before considering the non-controlling interest part for the quarter was its highest ever equivalent INR 423 crores, which is up by 37% on a year-on basis. It's up by 7% on a quarter-on-quarter basis, same time last year.
This, ladies and gentlemen, is largely driven by the AUM growth and also some bit of expansion that happened on our NIM part as well. We recorded pre-provision operating profit of around INR 772.7 crores during this quarter, which was up by 26% on a Y-o-Y basis and 12% on quarter-on-quarter same time last year.
As what Nirmal mentioned, our loan AUM has grown by around 24% Y-o-Y and 5% sequential quarters to INR 57,941 crores. If I further dissect this and focus on our core products, which is what is entirely the retail products that we hold, that segment grew by 26%, 2% higher on a Y-o-Y basis and 5% quarter-on-quarter to INR 54,689 crores. And the core product segments now compromises -- comprises of 95% of our total AUM. The non-core AUM primarily consists of the constructions and the real estate financing, which further shrank by 7% on a Y-o-Y basis, in line with the strategy that we have shared with the market earlier.
As I mentioned, 95% of our loans are retail in nature and 67% of our retail loans are PSL compliant, which excludes Gold Loan products. But having said that, Gold Loan still qualifies for a 0 risk rate for the bank. And then for banks, even though they're not PSL, are keen to buy [indiscernible] from us.
Lastly, the retail and the PSL compliance, those are of significant value in the current environment where we can sell down and with the kind of the [indiscernible] asset performance that we have shown to this market, banks have always been keen to buy this from us. And we ensure that we have a proper management and oversee on these assets from a correction recovery and [indiscernible] perspective.
In line with the capital optimization strategy, 39% of our AUM is either assigned, securitized or under co-lending, and bulk of it is now under assignment and co-lending. And going forward, we'll see a larger share of co-lending emerging in this number. The assigned loan book currently stands at INR 15,939 crores up by around [ 67% ] from last year. Besides this, there are securitized assets of INR 1,049 crores which is going down. And the co-lending book is the key highlight here, which I should mention is from 0, almost going to around INR 5,700 crores in this particular quarter end.
It has been made possible by new relationships that we've added on the co-lending piece. We added Uco Bank and Punjab & Sind Bank for co-lending of our Gold and Home Loan products, including the MSME LAP products.
Also during the last 9 months to support our growth, we have added 669 branches and [ 4,318 ] employees in all across all our businesses which on the result shows a higher cost to income. But with the monetization happening of the newer branches and the resources and people, we strongly believe that we should be able to bank them, bring this number down. And this is actually has also held in our overall disbursement is going up by around 44% from 9 months to 9 months. Our annualized return on equity for the quarter is around 17.9% on a lower [ gearing ] because we had the [indiscernible] INR 200 crores which came in the previous quarter which is [indiscernible] getting down and therefore, has some impact on the overall ROE to damage on the current position. And the ROA stays strong and stable around 3.4%. Our capital adequacy for the stand-alone entity stands at around 21.5%, which is well above the minimum threshold of 15% which is clearly suggesting that we are able to grow our sales without impacting hugely on our capital position through the on book of book structure and model that we hold.
Our average cost of borrowing marginally increased by around 10 basis points and around 16 basis points Q-on-Q to around 8.79%. This is despite, what Nirmal mentioned 225 basis point hike in the repo rate and close to 100 basis point hike in the [ MCLRs ] or maybe 110. The gross NPA is sitting closer to our endeavor or the guidance that we have given of around 2%. It currently stands at 2.08% and the net NPA similarly stands at around 1.06%, significantly down from 2.42% and [ 1.22% ], respectively, which we gave and previously reported in the previous quarter.
With the implementation of the ECL model under [ ES ], the provision coverage ratio on the NPA today stands at [ 164% ]. Our earnings per share for the quarter and not annualized stands at around INR 10 per share which is up 22% year-on-year. And the book value of the share -- of per share now stands at INR 225.6 which is up by 41% year-on-year.
A brief update on our liquidity position. During the quarter, we raised around INR 4,340 crores of term loans, bonds and refinance, all now long-term money, which helps in [ ALM ] very strongly. Additionally, we did around INR 3,700 crores of direct assignments of retail loans to bank. Our cash and cash equivalents and committed credit lines from banks and institutions of around INR 8,562 crores were available at the end of the quarter. Adequate to me, not only for the near-term liabilities but also to fund the growth momentum. And I must mention that this liability and liquidity position is also helping us in negotiating our borrowing without showing any desperation when we go and fetch for new liabilities from our bankers.
We have a positive ALM thereby and inflows over and above, we're [indiscernible] across all buckets as you could see through the presentation that we have. The net to debt equity netting off with the liquidity position thus is down to 3.2% compared to 4.2%. And the total liquidity for the group, as I mentioned earlier, is around INR 8,562 crores.
Loans classified as digital loans are part of the unsecured business loans with an active customer count of around 3 lakhs. As what Nirmal mentioned on the digital front, we continue to focus on digitization and antics to improve customer experience and enable a [indiscernible] one-stop shop of purchase and is [indiscernible].
Our Gold Loan at home initiative which started approximately 2 years ago, also saw significant traction with disbursement Y-o-Y increasing by around 90% to INR 260 crores for this quarter. With this, I come to an end and we open to Q&A. Thank you very much.
[Operator Instructions] First question is from [indiscernible] [ Mishra ] from Phillip Capital.
Just wanted to understand the Gold finance business with written detail, what kind of tonnage do we have here and what kind of LTVs or running average LTVs on the portfolio? And we can also speak on the competitive intensity. There's been some mode balance transfer happening in the bank, so if you can speak on that.
So in terms of tonnage that we have, I'm -- I don't know -- I'd say our EBIT floats around 16% to 20%. So what is the tonnage? Do we have the number? Okay, maybe we'll get that number. I don't have it right now with me.
In terms of industry, so since last year, it became very competitive. But what we are seeing is that more -- I mean, there are a few new players and they try to do balance as well. And in terms of -- so there's a practice that happens in the industry. What we have to do is that from -- as far as we are concerned, we make sure that money is coming from customers' account because you don't want to [indiscernible] it even for a smaller amount of money laundering and the KYC process, what it is. And if you get our full money, obviously, customer has the right to take his gold back. But the competitor that is trying to do balance transfer has to put money in customer's account without the gold and to that extent. And then normally what they do is that people will accompany the customer, get the money transfer to customer's account, customer transfers to our account and then basically release the gold.
This is as far as our outbound that is transfer [indiscernible]. Inbound we don't enter it normally. Customer is very old and known. But other than that, I think customers have to come on their own.
Understood, sir. And tonnage, will you come back to me for?
55 tons I think.
55 tons. This has grown on a Y-o-Y basis on a Q-o-Q by how much, sir?
I'll give you that number, must be [ 80% ], but I think it will grow. So I'll get you those numbers, and maybe we'll try and put this on there. And before the end of the call, I'll get you those numbers here.
Sure, sir. And the second, just one last question. Sir, if we can spend AUM into less than 1 lakh ticket size, 1 to 3 lakhs and more than 3 lakhs as a proportion of [ AMC ] would be very helpful.
Yes. So I think we'll get you these numbers by the end of the call.
Next question is from the line of Saptarshee Chatterjee from Centrum PMS.
My first question is on the digital loans. Now if I see digital loans, the GNPA percentage has reduced year-on-year or quarter-on-quarter, but there has been [indiscernible]as well as AUM. Can you please [indiscernible] on what is happening in this side?
So you think -- sorry, what has reduced? The asset quality? Asset quality [indiscernible], that's what you're saying, right?
Asset quality has been better, but the AUM as well as [indiscernible], both have reduced. So should have been more progressive on this part, right?
Yes, it's a very valid point. So digital loans, what has happened is that there was RBI's circular in September, which basically laid down certain guidelines for partner sourcing. And particularly, I think from credit and [ Baidu ], the incremental loans have been insignificant and the earlier books are typically short tenor. So they run down very quickly.
So organic growth is there in that loan book and is very strong. Maybe what you are seeing is a quarter-on-quarter number. I mean that's where the September RBI's circular had an impact.
Now in terms of asset quality and all those things, so there was -- okay, some old book which has been -- which has written off or which has been closed, so that could be 1 reason. A year ago, the book was quite small. So the growth -- although you don't see growth in this quarter, but in the previous 2 quarters, there has been good growth. But this quarter, again, the continuing partners or where we have a direct -- where -- which we are fully compliant with RBI's new guidelines, that business is growing. But there are 2 large partnerships that actually has shrunk in this quarter.
Understood, sir. Very helpful. And secondly, as a data point, like in 9 months FY '23, I see that around close to INR 650 crores kind of provisions that you have made in the P&L. Can you please give a breakup of how much is coming from like write-off? How much is from the standard asset provisions that way?
No, sorry, can you repeat the question?
Can I get the breakup of 9-month provision numbers in the P&L?
Okay. I think there is a slide, but I'll give to you. Well -- okay, I'll get these numbers because I think that these numbers are quarterly. So for 9 months, we'll get you these numbers before the end of the call. So I mean to the previous question of [indiscernible], the Gold Loan's tonnage has grown by 20% Y-o-Y.
Okay. And sir, lastly, if you can give like -- if I see your investment book, investment book has grown by around INR 1,000 crores quarter-on-quarter also. So what are the general breakup of the investment book and how much investment -- like how much investments we are doing on the IIFL wealth side on their funds?
No. This data is not correct, actually. I don't think we've grown quarter-on-quarter by INR 1,000 crores. Including mutual fund on the liquid assets in this. So [indiscernible] INR 1,000 crores number from.
So if I see your balance sheet from quarter 2 to quarter 3 and both, including like cash and as well as short-term, long-term investments.
Okay. The -- in short-term investments in liquid mutual fund, whatever liquidity we have. So they will keep rating based on sometimes we put in liquidation for something put on [indiscernible]. But other than that, there's hardly -- there's no change in the investment.
Okay. So as on [ debt ], like we have around INR 3,000 crores kind of an investment, what is the like exposure towards IFRS debt listed funds?
So IFRS debt fund, there's nothing much. But the [indiscernible] about INR 1,000 crores, INR 900,000 crores is there in that front in total.
Next question is from the line of [indiscernible] from Laburnum Capital.
My question was again on the write-off part, the MFI book, we've taken around INR 100 crores of provisions this quarter. And again, there's apparently been some write-offs here because the PCR has gone up. So can you quantify this amount?
So there is going to be to write-off in the MFI book. And primarily, because there are some of the old loans. Although we continue our effort to recover, but about 180 days or the older loans that we've written off. And there was a provision last time also. So there is a provision which is there last time and also additional provisions being created on the book, which is growing faster.
If I see the provision has actually come down quarter-on-quarter, the overall provisions on the MFI side and...
[indiscernible] provision release is taking care of that, the new loans. So I think the total hit to the profit/loss on the MFI, how much? Because I think the provision was created and done in last 2 quarters. And against that, we have written off the loan book. So some of the older loans they get fully provided for, given the provision policy that we have in MFI. And out of that, some of these things have got written off.
Can you quantify the amount again for the write-off?
Yes, I'll just view them in 1 second.
And have you seen incremental slippages because if I look at the stage 3, again, it's come down very -- by around INR 35 crores only. That is the provision we've adjusted is around INR 100 crores. So do we continue to see some slippages in?
[indiscernible] in MFI, we have taken INR 105 crore of total net provisions including the write-offs. So the write-off plus new provision minus old provision is INR 105 crores.
I wanted the write-off figure, actually, sir. Just the write-off figure.
[ INR 123 crores. ]
[ INR 123 crores ]. And sir, are we continuing to see incremental slippages here? Or is it broadly now [indiscernible]?
No, incremental business after November '21 is doing very well. The older one where we had a moratorium on restructuring cases, that is what we been trying to sort out. So that I think is becoming -- I think the problem is just getting sorted out. So older loans, whatever we can recover -- and there's a good recovery also. Or wherever we can close by onetime settlement, so we are doing that. So what we have done is that we have divided a book in 2 parts, the order book where during the COVID period, all the restructuring of [indiscernible] was given, we are handing the books separately and wherever cases are getting closed, we just write it off primarily against provision and just get over with it.
On the credit cost, overall, you guide for 150 to 200 bps for the year. So how should we look at it now and going forward, sir?
So I think it will remain in that range. But as the book grows probably, no. So if you see our book is around INR 40,000 crores, give and take. So if you see that 150 basis point, then every quarter, you'll see around INR 20 crores.
Okay. So we should stay in that range for the whole year?
It is slightly on the higher side of the range, primarily because the microfinance things are getting sorted out. But I think in terms of guidance or expectations, I think we'll be in that range.
Okay. And sir, on the Gold Loan side, you mentioned this on the growth we're looking at. You mentioned that the growth is not as per the expansion. But how should we look at it going ahead? I mean, given the competition which has come in, both on Gold and Home Loans, how should we look at the growth here?
Okay. Just your question, the investment what you're seeing is the investment done by HFC in [ CP Stewarts ], which is just short-term instruments because we have received money from [ RDR ] last quarter. So that money is not fully deployed, so that money is invested in short-term instruments.
Coming back to the question on Gold Loan and Home Loan. So Gold Loan in last 10 years, we have seen these kind of things happening in [indiscernible]. There some new players come and they see that they can take the market by undercutting. And after sometimes they also realize that this is [indiscernible] game in which nobody wins.
What I think about Gold Loans and what we are seeing this quarter is gold price has been clogged and Gold Loans should do well now. Whatever we have seen is the worst is over, at least in terms of the cuts of competition and the impact of that in fact, on that on the price and if you don't want to compromise or you want to be in that game, then obviously you lose the growth. But I think that is over and we should see a much better time for Gold Loans.
Coming to Home Loan, again, the segment that we cater to, which is a mid-segment is around [ 10%, 15% ], Monu?
Yes. Yes.
Maybe you can take this question on a discussion about that how do we see Gold Loan on competition of the environment.
Absolutely. Yes, we have seen that with the interest rate cycle going up and some competition also beefing up but if you would see that in the last 2 years, we've been expanding ourselves pretty deep in the geographies in the Tier 2 and Tier 3 terms. So we see that as our distribution also increases, if at all, there is any slight slackening in the hub areas -- hub or metro areas, we should be able to offset it by a distribution, which we have in Tier 2, Tier 3 terms. And our ability to price competitively with co-lending also in place. I think we are good to see the growth in Home Loan to continue.
What is -- the competition is intensifying mostly larger cities. So maybe say top 20 cities or top 30 cities. But our strategy is to expand beyond that where still competition has not reached or is expensive maybe because the business is not so much as to cover up for many new players, and we can guide on the golden brand network as well. Am I right Monu, that's what you were going to say?
Yes, absolutely. So the distribution and reaching our Tier 3 too and for markets is there, and this is reflective in our current quarter performance as well.
But here, the problem, as you mentioned, is like basically the ticket size is much smaller. So the overall delta on the book will be lower, right? Or like -- but do you expect even the smaller ticket price, we'll be able to generate enough volume to give the 20% growth we've been targeting?
Absolutely. So I think to answer this, if you will see that there is -- if you look at the HFC numbers, there has been an increase in distribution and the operating cost also there. But at the same time, we are able to have a very consistent growth plan. For example, whatever we grew in the last complete year, we've already done that in the first 9 months itself. So we are pretty confident of continuing this growth because of the efficiency of the technology which we use as well. And obviously, they come up with a better spread than what we get in the urban areas. So we should be pretty consistent to -- for growing as well along with the profitability as well.
So our ticket has only come down quite a lot in last few quarters. So now this is a level at which we -- this is the ticket size, which is a sweet spot for us to operate. So that damage to growth or the impact of growth has already been taken, I think, more or less because we are now at 40 lakh, 50 lakh of the ticket size. So we've already gone into these smaller places.
Okay. Okay. And sir, one last question on the co-lending piece. So a lot of our growth has been coming, but with the deposit growth for the system slowing down, would we see a slowdown here in the banks not wanting to extend the balance sheet on the -- or the co-lending business and trying to cater to their own customers. I mean, how do you look at it? Would co-lending be affected as the deposit growth slows off of the system?
No, I think it's very unlikely because today, if you ask me, the demand for co-lending is maybe 10x what we can offer. So what is happening today is that banks still need -- in the last many years, if you see [indiscernible] banks and many other banks, [indiscernible] in particular, they have really expanded the network while the economy and credit demand has grown much faster or they expanded slower.
So the demand is much, much stronger. And still the credit deposit ratio is quite low. If you see the [ PH ] benefit, then they still have to catch up. But keep that effect for a moment, say that the deposit environment really becomes very difficult. So what is happening is that [ Casa ] is moving to fixed deposits. It's not that the money is not there in the system.
And secondly, I know if you look at as a company, even if we have to take the loans in our own books, it will not be very difficult for us, supposing for [indiscernible]. Also I don't think that there's an approachable future that we don't have to do co-lending. We can very well keep the loans on our book and grow like any other industry for the better.
Will we have the mandate for that, sir? I mean...
The bandwidth that we have, we are managing the loans as of our own. You are talking about equity maybe.
Yes, liabilities, probably.
So that's not a problem today, actually. So in terms of liability to equity, so like our [indiscernible] in housing finance is [ 49% ] and that [ gearing ] is 3x. So we have enough room to grow on our own, should there be a need for that. But at this point in time, we see that this is [indiscernible] on latent demand. And in fact, we are not able to -- and of course, it takes time to build up your systems, deeper, train people and network, but the demand is very, very strong.
Looking for both, what is happening today. The banks also 9% -- 8%, 9%, their cost of fund is 3% to 4%. They get [indiscernible] credit where the losses are minimal and they need these for their [ PSL ] and for their balance sheet. So it's a win-win relation. It is a mutual -- in fact, many times that we are talking to, we are talking about long-term arrangement. We have [indiscernible] commitment that every quarter will deliver so much of co-lending or direct assignment. So we negotiate on that front, actually.
Next question is from the line of Deepak Poddar from Sapphire Capital.
Many congratulations for the good set of numbers. I just wanted to understand on the credit cost, you mentioned that it will remain in that range. I mean I just wanted to clarify what is that range you're talking about. Is it -- is it on percentage basis or on an absolute basis, we are talking about?
On a percentage basis. So on the book loans around 200 basis points in a year, that is what you should try and look at.
Yes. So that's what we have been maintaining, right? But I think currently, it is around 350 basis points, right, as on second and third quarter.
Not really because if you see second and third quarter, we are in the range of INR 200 crores per quarter, right?
Yes. So total is about INR 330 crores, right?
No. This quarter, it's INR 200 crores, INR 230 crores and last was INR 195 crores. So INR 213 crores is this quarter. Last quarter is INR 195 crores.
Okay. And so you look to maintain that 200 basis point kind of a credit cost, right? Even in FY '24 if we talk about.
Yes. So there'll be some benefit from old things getting sorted out. But we want to be [indiscernible] because we have digital loans, which are unsecured and probably will -- I mean the 3 small business is growing, so we need to keep. So I think that is what probably will be -- I think one can factor in that as the expected cost.
Understood. Fair enough. And in terms of, I mean, growth, how do we see the growth going forward? I mean, I think currently, we're at about 25%, right?
I think 25% is the growth that we can -- we should be able to maintain in the next few years.
Okay. So 25% CAGR for next 2, 3 years is the likely scenario.
That's what we are targeting, yes.
Okay. Okay. Understood. And lastly, on the cost-to-income ratio, I mean, the current -- is there any improvement on efficiency we are looking at in the cost-to-income?
So there are slight improvement from 40% to 42% in last quarter. And we will see some -- I mean, you'll see improvement over the next few quarters. Maybe you can say that -- actually, our target internally is to bring it down to 35%, which will take a few quarters or 1 or 2 percentage points every quarter. If you can bring it down, then we'll reach there in the next 5 to 6 quarters.
Okay. But ROE, 3.5% is what we have been maintaining, right?
ROE will be -- Okay. [indiscernible] ROE has come down a little bit in this quarter because [indiscernible], the [indiscernible] equity infusion has added to the network. And that basically -- so that depresses ROE a little bit. But over the medium term, I think our ROE should be 20% plus.
The next question is from the line of Arun from Unifi Capital.
Congratulations on the good set of numbers. Just wanted to check on the capital adequacy part. Currently, the capital adequacy is at 21.5% for the stand-alone entity. What would be the capital adequacy that you would be comfortable working with, sir? And at what level you would look to refresh equity to support both, the stand-alone business and also to support the capital requirements of the subsidiaries.
So you're saying at what level would we raise equity, yes?
Yes.
So I take equity -- okay, the way we have structured our business that we should not need -- we should not be desperate or we should not need equity for a very long time. Having said that, kind of when we raise equity also depends on the market relation, but it's unlikely in the near future. So I think our business model is a little different. Once market and investors have understood it very well, and when we believe that they are giving us a fair value, there's a time we can look at it or is there an acquisition opportunity or something you look at it, but at this point in time, we don't see any need to do these things.
Okay. Is there any covenant with the lenders that the capital adequacy shouldn't be less than 20% or 18%?
Yes. So I think that the microfinance -- with microfinance has been much below in terms of credit rating, but we'll negotiate because we don't need that kind of covenant and give our track record. But yes, some lenders in more microfinance have a covenant of 18% capabilities.
So coming to one question about 9 months and our profit/loss account is INR 657 crores for loan losses and provisions. And in terms of total write-offs, we have done the [ 736 ] on the net basis. The additional provision is the provision release is INR 79 crores. Yes. Sorry, you can go take to the...
And also, [indiscernible] [ INR 2,000 crores ] in HFC. Similarly, are we looking for external investors in the MFI subsidiary, also, sir?
At some point in time, yes. But right now, we're putting INR 200 crores of the parent in the company as it is growing, and we have to keep [indiscernible] properly. So we have INR 200 crores of equity investment that happened from the parent in microfinance. But at some point in time, we look at a strategic or a financial investor in microfinance. What has happened in microfinance is the industry has passed through covenants in roller coster kind of a time period. But after RBI reforms and the recovering economy, the industry is doing well. And some of the leading microfinance companies have seen that their values are [indiscernible]. Time -- at appropriate time, what we can do is over the next 5 years, I mean, that's not immediate future is that [ HS ] and microfinance and they become large enough then they can be separately listed. Just like we did in our parent company. We are here at 3 businesses: wealth, finance and securities. All of them, we get large enough, we can split them.
The way we do the demerger, there's no equity dilution required because porting companies shareholders get shares of subsidiary companies and the holding company seizes to exist. But that is something which is not in the immediate future, but sometime later this can happen.
Next question is from the line of [indiscernible] from [ Aryan Capital ].
A couple of things. In last quarter, you had mentioned that there was some high-cost borrowings amounting to [ $270 million ], that is likely [indiscernible]. So has that happened in the quarter?
[ $270 million ] is outstanding. I'll just reconfirm the numbers. And that is being -- that is I think new for payment in April '23 and which we are fully prepared because our cash is much more than that. So we're talking about roughly INR 2,000 crores or thereabout. And there also, if we get an opportunity, we can prepay some or buy the bonds in the market and close them faster. But at this point in time, what is out selling about [ $275 million]. So that we are fully prepared to be paid.
So nothing has come in this quarter, right?
No. Now, I think that the [indiscernible] term is so short that it will be difficult to [indiscernible] just 3 months of everyone will wait and just close it. Just about 2.5 months left.
Okay. And broadly, how do you sense margins out in next fiscal. Given the fact that the current [ lendings ], do you feel like you can sustain this current high level of margins going forward?
Yes. I think our strategy is to go granular, and that is how we can maintain the margin. So the smaller ticket, we do -- I mean the impact on operating costs and the network required, but that basically allows you to have higher margin.
Okay. And on the Gold Loans, you described, but if you can mention details about how do you see growth happening on that side because for other [indiscernible] then where AUM growth is not happening or [indiscernible] that have to come for the [indiscernible] side.
So actually, in 2020 and '21, we expanded our Gold Loan brand network very aggressively and we have -- as you would have seen, if we've been tracking our company for a few years, that has resulted in a significant increase in operating costs because the branch network has almost gone up by 40%, 50%. So that is what is helping us to maintain some growth. But logically, I mean, I think the industry revised and we should grow faster than what we've been growing given the expansion that we did. So I think other plans that you're talking about, if they've not grown their network maybe as aggressively then obviously, the sales -- store sales, what you can call them have this under pressure in last few quarters.
Likes [indiscernible] in this quarter, but I think probably you'll see some recovery in this quarter.
Okay. And on the home loans, do you see the competition relatively less and smaller sized loans like [ 10% or 20% ] whereas there is -- for higher to [indiscernible], we are seeing the competition and plus as we slow the growth across the players for the parent company and for the NBFC as well. So how do you think?
In Home Loan, we're smaller, you're right. In the smaller ticket size, the competitive intensity is slightly lesser. Although there are some NBFC, but they're very small and regional. So when you look at the whole country, then relatively speaking, the small ticket size, which is less than INR 20 lakhs, INR 15 lakh, INR 16 lakh or even INR 10 lakh, INR 12 lakh, the segment that we are now catering to has lesser intensity of competition.
Again, we should understand it's not easy for anybody to become a competitor in this segment because it requires network of branches and people who can do to say that a verification valuation is smaller places and which is operating cost. And when you have small ticket, it takes longer to break even. So our competition [indiscernible] the banks are also very comfortable doing co-lending and even long-term co-lending partnership with us.
Okay. And the personal loans are nothing but the business loans, right?
Business was personal. As I explained in my beginning of this call, that is many times [indiscernible] mom-pop shop or a one-man professional or a self-employed. And even the business is done from his personal account. So that is one. Secondly, we tied up with [indiscernible] also. So that also we are getting certain loans from the relationship as well. So these are personal and business loans, both. Mostly the salaried employees will not come to us because they'll get it much cheaper rate from -- salary is actually a form of sector. So they will get in a much cheaper rate from big banks like [indiscernible] but the people who come to us are self-employed or some of them may be salaried, but in informal sector where the government for their [indiscernible] are not foolproof, that's it.
Okay. One last thing on the brand expansion side, what outlook can we expect for? On the brand expansion side.
Yes, the brand expansion side. We have slowed down the branch expansion, but expansion will continue. We have a team that does the [indiscernible] and keep tracking the opportunity areas and we set up branches. I think branch expansion that normal pace will continue forever. But the aggressive sport, where we did like 40%, 50% expansion in 18 months, that kind of thing will not happen. But 15%, 30% or 10%, 15% expansion every year will continue.
Next question is from [ Saraj ] from Laburnum Capital.
Sir, on the sales, I want to know, is there any one-off sale on account of [indiscernible] -- on the NIM, is there any one-offs you're seeing on due to assignment [indiscernible] something? Or normalized NIM?
These are normal NIMs.
Normal NIMs. Okay. And sir, on the Home Loan side, if you could just give some light on the customer segment, is it more self-employed on the -- so I understand you're going more to the Tier 3 terms probably now. So what is the segment of customer we're getting, how is our edge here?
Yes. Nirmal, can I take this?
Yes, please.
Yes. Yes. So typically, our customer -- about 60% of our customers are salaried people and 40% belong to the self-employed segment. The TG, the target group, which we are looking at is people with a household income of below INR 50,000 in the urban areas. And in the smaller terms, it could be a household income of less than INR 30,000, INR 35,000. Typically, if you see these people would be in the blue-collar jobs and usually, these people could be working in private limited companies or even sometimes in proprietorship as well. So this is the kind of a target group, which is there.
As Nirmal mentioned earlier also, the edge or the moat for us is about the distribution, which we have set up for the past so many years. And along with the NBFC network available of Gold Loan branches for us to reach, and breakeven is much faster. The opportunity has always been here for everybody else, but to make it a profitable business, if you would look at our cost income ratios also would be fairly better off than the industry, affordable housing players. The reason for that is how we use technology to enable this and have a faster growth path as well. So I think the distribution, understanding of the local policies process and the technology has put together -- gives us a good moat to scale up this business further.
Okay. And sir, the yields here would be around -- what would the yield rate, around 11%, 12% or higher?
Yes, nearly 11%, as you can see, it's for 10.9%.
It has gone up in last one year.
Next question is from the line of [indiscernible] from Investor Capital.
My question is on Gold Loan. So just want to know what would be the count of Goal Loan branches today? And what is our target for branch expansion and overall AUM growth in Gold Loan for FY '24?
So out of 3,955 branches, around 2,800 will be Gold Loan, roughly. These exact numbers, sorry, Gold Loan is 2,589 branches.
And what is our target for FY '24 in terms of branch expansion and AUM volume?
I think we set up [indiscernible] branches, maybe we'll reach 3,000 [indiscernible]. Our average cost is about INR 8 crores that we'd like to take it higher than INR 9 crores, INR 10 crores. So I think 20% to 25% growth is what we target in most of -- all our core products.
Next question from the line of [indiscernible] from [indiscernible] Securities.
Two questions from my side.
[indiscernible]
Your voice is not clear. May I request you to speak through the handset, please?
Is this better now?
Yes, sir.
My question is -- first is on the Gold Loan branches. Just to clarify, you don't need to take any regulatory permission for added branches, right?
No, we -- okay. Now there's a bit of ambiguity on there, but to the safe side, we take regulatory approval. So we took approval, we got approval for 1,000 branches in 2020. We've got another approval for several other branches. Out of which would have set up maybe another 200 branches. So we've got an approval for 500 -- 400 to 500 more branches in this. So we are taking approval, a little vague whether we need approval or not. But okay, I'll give a background that earlier, there was a circular in the Gold Loan industry came under pressure in 2013, '14, saying that the Gold Loan companies, if they expand their brand that was beyond 1,000, this should take approval.
Now whether we are a Gold Loan company or not, is again a difficult question. But on the overall portfolio, we are less than 50%. But if you take a look at stand-alone NBFC, we may be more than 50%. So around the side of [indiscernible], we go to RBI and take their approval. And we actually presented the exact data of how we've got into under-penetrated market. And what has been a track record of earlier approval and what have we done. So we have the approval now. I think so and I know we have adequate approval for next 1 year.
And just to -- just from my understanding, your branches are not exclusive gold loan branches, right? I mean what you have essentially is IIFL branch and then you probably do gold or -- I mean, you can do multiple products on the branch. So it's not exclusive gold branch that...
So practically speaking, if you look at our Gold Loan branch count is 2,589. Our housing finance home loan is about 370. So what will happen is that many of the gold -- some of the gold loan branches will double up as the home loans also. And many times what happens that the home loan works in a hub and a store model, like say, in Bombay, we have about 100 gold loan branches, but there's only 10 home loan branches. But what happens, those 90 gold loan branches will feed the reach of home loans to those 10. So something we have a branch in Borivali, [indiscernible] base area will give those home loans to the Borivali branch. So we [indiscernible] the branches to get the lease, but out of these 2,589 branches, almost 2,200 will be actually only gold.
Got it. Got it. And just one little bit clarification on numbers. Your cost of funding is going up by around -- by the sequentially around 10 basis points and sequentially 15 basis points and annually around 10 basis points. So just trying to understand, what is the secret cost?
what is it?
what is the secret cost?
This is a good question. So I'll -- one is that, we have a longer tenure loan. And I think if you see the loans before 2018 were even more -- the industries were higher than what it is today. And so what is happening is that sometimes when these get repaid -- what we are getting now is even after the MCLR increased, is still not too bad. The dollar loans, which are at a very high rate, I think we have been able to bring that down by 130%. Third thing is that in [ NSVe ] refinance what we get, because we are affordable and really getting to the low-income group. We get from MSPs different schemes. 5%, 6%, 8%, depending on what kind of loans you are doing. So the refinancing is also at a competitive rate. And also, given our track record, we are able to negotiate with bank better. So with the premium or what we're saying to MCLR now, we can be able to negotiate with MCLR, sometimes even better than that. So it's a combination of everything.
Sure. And I just want to understand, in IIFL Finance stand-alone, as against your weighted average cost of borrowing of 9%, what would be your incremental cost last quarter?
Incremental cost last quarter was --one second, the incremental cost -- the new loans. It's similar, it's around 9%.
Next question is from the line of [indiscernible], individual investor.
I have two questions. First, your leverage profile of course has improved quite significantly after the ADIA money raise. So is there a timeline by which you're looking to revert back to the earlier leverage profile, if you are looking to it? That's my first question. And second is your stand-alone results across your total income PPOP, there's been a dip sequentially as well as Y-o-Y. So while you've mentioned some reasons on the gold loan competition, et cetera, but if you can throw some more insights on that.
Okay. There was also a component is a markdown in the value of investment, which the valuations happen every quarter. And that's why you see that the fair value is getting a little negative. And so the stand-alone book basically comprises the old business loans, the construction finance and gold loans. Gold loan has been under capacity pressure. And there is a bit of a markdown on the investment that we made. But those additions happen every quarter. So that is like it's a quarterly movement.
Understand. On the leverage bit, sir, your leverage, of course, after the ADIA money raise is a lot more conservative, so...
So last year, I think we had a covered bond again. What was it is, [indiscernible], can you just...
So in the last year, we had the -- some of the book as sitting into a trust, which when they get closed, there was a one-off profit, which came up around INR 202 crores in the [Sandoz] financials of IIFL finance. It didn't affect the consolidated numbers, but in the standalone number, this aberration of INR 202 crores of additional interest income came in. But the control it gets knocked off. So which is in the stand-alone numbers looking low compared to last year. That's one one-off impact. Other is the impact that you talked about mark-to-market on the investment network.
Sir, the second question was on the leverage. Are you looking back to leverage?
I think we don't want to go back to the 5, 6 or whatever. So from 3.2, I think we'll be comfortable at least whatever we discuss in the board to go up to 4. And we -- I think we'll try and contain -- I mean, that should be the level that we should [trend] -- not cross.
Okay. And by when would you look to sort of reach that level? Because that obviously means your ROE also perhaps would improve to that extent.
So I think given that incrementally, we can do core lending. I mean we can achieve that level in 12 to 18 months and stay there, and increments -- the business mix stabilizes at whatever level we want. So it could be 12 to 18 months time when we get the leverage back to that level.
The next question is from the line of Nikhil Agarwal from Tusk Investments.
My question is on the mix of the co-lending securities and on-balance sheet book. So right now, we are at around 37% to 39% book balance sheet lending. So can you talk on the breakup of the balance sheet lending and on the balance sheet lending different businesses that you have?
So primary Gold Loan, Home Loan and [indiscernible] are off book. The construction finance is obviously completely whatever we have is on book. And business loan or the digital loans are new. I mean the culture is probably more or less on book. So in terms of liquidity, I don't have the exact number, then you can work out the numbers from the lower AUM and the assets on balance sheet difference, which is there in the presentation, but total assigned assets are INR 15,939 crores and total co-lending is INR 5,700. So on book is around [ 36,300 ] and off book is around [ 21,600 ].
Okay. Got it. And incrementally, in the microfinance book, are we doing more co-lending or any assignment is happening...
Microfinance also probably will do more co-lending and assignment going forward. It requires some signaling. And I think going forward, there's also a great product to be partnered with bank.
Just to give you a perspective in the microfinance, the similar objective of capital optimization stated, we did around INR 15 crore, INR 50 crores of assignment in [indiscernible] compared to INR 250 crores that we did in the same time last year. So that's where we are building the similar arrangement ordering of book assignments for this business.
Last year, we couldn't do much because the -- because of the COVID restructuring [indiscernible], business was in a bit of a turbulency.
Got it, sir. And this time, microfinance growth has been 17% quarter-on-quarter, which has been the [ media ] driver for the growth in the book.
[indiscernible] 17% but yes. Is just a bit of a aberration actually. I don't think that growth will continue, but it will be a strong growth for the next few more quarters. I mean within 55% Y-o-Y, 17% quarter-on-quarter is difficult to say. And I mean, if that level would sustain forever, but 25% to 30%, 30%, 35% is quite doable in this year and next year.
The next question is from the line of Ashwin Kumar [ Parasuraman ] from HSBC Asset Management.
I just wanted to check in terms of the capital on the stand-alone entity. So the Tier 1 is 13.8%, so what -- up to what level of Tier 1 would you be comfortable going with? And also this has declined from about 18% last year. So any reason for the decline from 18% to 13.8%?
So actually, the last year, in the December quarter, there were more assignments and the book has come down significantly. We have not done that in last quarter, but for the March quarter, the quarter when most of these assignments happen. I think we would like to keep it around 13%. 13.5% is a level that I would like to maintain for Tier 1, at least.
Next question is from the line of [indiscernible] from Aryan Capital.
Yes, is there any update from the asset quality stand-point on the CRE book?
No, I think in terms of the CRE book asset quality continues to be what it has been. The CRE environment is improving. If you see the demand for housing in the real estate sector, in general, is seeing good traction. So I think most of the projects sales are picking up much faster than historically what they have done.
Okay. And can you tell us what was the total income run rate from [indiscernible] in Q3 versus Q2?
So I think these numbers are there in the off book is [indiscernible].
[indiscernible] that is purely coming from off book.
Non-fund income that you see, INR 530 crores in Q3, [ INR 476.6 crores ] in Q2, that is off-book income.
The next question is from the line of Trupti Agarwal from WhiteOak Capital.
I just have one point that this time we have given an excel sheet, which is like a data book, which has got a lot of these general details that we've been asking for, you can find those numbers in those excel sheets and the numbers on the excel sheet so that you can you compare or you can use -- you can analyze on your own. Yes, go ahead, Trupti.
Just 2 quick questions. [indiscernible].
Your voice is not coming very clearly. May I request you to speak to the handset, please?
Just give me one moment. Yes. Am I audible and clear now?
Yes, yes. Go ahead.
So what I just wanted to understand is that on the co-lending of term loans, I see a quarter-on-quarter decline in the disbursements from about INR 889 crores to INR 643 crores, that's about a 20% decline. So I just wanted to understand the reason for the same, it could be talking about very big opportunities in this space and a couple of new tiers that we've done in this quarter. So that was one. And my second question...
It's the [indiscernible], we are sitting on a huge cash on which we just earned 3%, 4%. So although we have a relationship in the bank, otherwise ideally we shouldn't do any co-lending until we utilize our cash and have a [indiscernible] negative carry that. But maybe, Monu, you have anything to say on this?
Yes. So this is one reason which is where, as Nirmal mentioned, and also, we have been seeing that we have also been now added a bit of our non-HL book, the loan list property also has got into co-lending as well. So if you put both together, they're almost the same as last quarter. But as Nirmal said, we have ample liquidity we're sitting on, so we'll better consume that first rather than having a negative carry.
Sure. Did you say that now we are doing the lap along with [indiscernible]? So put together, the disbursement would be almost similar to that.
Yes.
Okay. And my second question is that I just wanted to understand the reason for such a sharp increase in operating expenses in the [indiscernible] finance subsidiary, both on a quarter-on-quarter and 9-month basis. What is the nature of these?
Yes, yes. There's expansion of branches and people happening mostly in -- yes, you're talking about HFC, Monu, you want to talk -- you talk about it?
Yes, yes. So if you will see that in the last almost from the last 1.5 years, the count of our headcount and including the branch network has also increased reasonably. So we are in that -- once again, in that investment phase. And we -- because as we are setting ourselves for a brisk growth in the coming years, so this investment has happened in the last 1, 1.5 years.
However, as you will see the -- as we are going to Tier 2, Tier 3 terms, there is an increase in the operating cost. Similarly, the spreads have also improved because in those markets, you can earn a better spread. So now the investment phase is evening out. From here on, we should be able to come back to our original operating ratios as we get these branches more productive.
So how many annual branches do we have at the end of the quarter?
370. Total about 370 branches.
Got it. I'm sorry, if I can just ask one last question, which is in the business loans, what exactly you have seen the issue on the digital loan side?
The digital loan side, RBI came up with a circular, which put down certain guidelines about partnering with FinTech in terms of [indiscernible] credit, the money is to go into customers account directly and not through these partners. So there are a number of such conditions were put. And that is what has impacted -- so there are -- we have many partners in digital loan and particularly 2 partners, which are fairly significant, that's why the business has come down.
I think it's a process change because like money going to customers instead of through the partner and many such things, we are just operational issues we put in and we try and sort it out. In terms of underwriting, we always want to do credit underwriting ourselves. So some of these partners in business will also come back. It's just a matter of time. I think this saturates [indiscernible] sometime in late September. And that is why you see last quarter, there's some impact on a couple of parts of the business.
As there are no further questions, I would now like to hand the conference over to the management for closing comments.
Yes. Thank you very much, ladies and gentlemen, for joining us on this call. I think it was a very detailed conversation, and I hope we were able to address all your queries. The data which should also help you to get to further analysis and [indiscernible] for your convenience. If still anything further remains, do come back to us at our Investor Relations human ID and we'll be happy to address it back to you. Thank you.
Thank you so much. Have a good day. Thank you.
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.