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Aavas Financiers Ltd
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Ladies and gentlemen, good day, and welcome to the Aavas Financiers Limited Q1 FY '23 Earnings Conference Call.
Standard disclaimer. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions, and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risk and uncertainties that are difficult to predict.
[Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Sushil Agarwal, MD and CEO. Thank you, and over to you, sir.
Thank you. Good afternoon. You are participating on the earning call to discuss the performance of our company for Q1 FY '23.
With me, I have Mr. Ghanshyam Rawat, CFO; Himanshu Agrawal, our Investor Relationship team, and other senior member of the management team and SGA, our Investor Relationship Advisors.
The results and presentations are available on the stock exchange, as well as our company website. And I hope everyone has had a chance to look at it. I'm happy to inform you that during the quarter, the company's long-term credit rating was upgraded from AA- positive outlook to AA stable by ICRA. I take it opportunity to thank you all stakeholders for their continued trust and support.
During the quarter, RBI raised the repo rate by 40 basis points in an off-cycle meet on 4th May 2022, followed by another 50 basis point hike in the scheduled meet on 8th June 2022. Consequently, all the financial institutions have started hiking their lending rates, with borrowing amount. So we have also increased our prime lending rate by 25 basis points with effect from 5th June 2022. And further announced hike of 50 basis point with effect from 5th of August 2022.
For Q1 FY '23, we disbursed INR 10,936 million, registering a 136% year-on-year growth and achieving 85% of the disbursement done in seasonally strong Q4 last year. We continue to grow in a calibrated manner and registered a growth of 24% year-on-year as of June 2022, while maintaining our operating metrices and delivered a PAT growth of 49% year-on-year for FY '23. With our continued focus on collection, 1+ DPD stood at 4.67% and 90 days past due stood at 0.82% in June 2022, but we have categorized 0.26% of up to 90 days asset as the NPA following RBI's notification dated 12th November 2021 to harmonize IRACP norms across all lending institutions. As a result, the total gross NPA stood at -- the Stage 3 stood at 1.08% in June 2022. We'll continue our strategies of controlling valid delinquencies and strive to maintain 1-day past due below 5% and 90-day past due below 1%.
I'd now hand over the line to Ghanshyam-ji, to discuss various business parameters in details.
Thank you, Sushil-ji. Good afternoon, everyone, and a warm welcome to our earnings call.
During the year, company borrowed an incremental amount of INR 8,984 million at 5.65%. As of June '22, our average cost of borrowing stood at 6.86% on an outstanding amount of INR 104.76 billion. During the quarter, our long-term credit rating was upgraded by ICRA from AA- positive outlook to AA stable outlook, while CARE continued to maintain long-term credit rating of AA- with positive outlook. Despite the highest short-term rating of A1+, we continue to maintain 0 exposure to commercial paper as a prudent borrowing practice.
IGAAP to Ind AS reconciliation has been explained in detail for profit after tax and net worth on Slide #31 and 33 of the presentation.
Other key parameters: as on 30th June 2022, total number of live accounts stood at 158,979, that is 23% year-on-year growth. Total number of branches was 318, 34 new branches added in last 12 months. Employee count 5,389, year-on-year growth is 22%. Total assets under management grew 24% year-on-year basis to INR 118.94 billion.
Product-wise breakup, home loan 71.1%, other mortgage loan 28.9%.
Occupation-wise breakup, salaried 39.9%, self-employed 60.1%. Disbursements has increased by 136% year-on-year to INR 10,936 million for quarter 1 FY '23. As on 30th June 2022, average borrowing cost of 6.86% against an average portfolio yield of 12.67% resulted in a spread at 5.81%.
Borrowings, access to diversified and cost-effective long-term financing, a strong relationship with the development financial institutions, overall borrowing mix as on 30th June 2022 is 38.8% from term loan, 22.5% from assignments and securitization, 22.9% from National Housing Bank and 15.8% other debt capital market instruments.
Assets quality and provisioning, 1 day past due stood at 4.67%, gross Stage 3 stood at 1.08% and net Stage 3 stood at 0.84% as of 30th June. Gross Stage 3 of 1.08% includes 0.26% up to 90 days DPD assets, which have been categorized as a GNPA following RBI's notification dated 12 November 2021. During FY '22, resolution plan was implemented for certain borrower accounts as per RBI's Resolution Framework 2.0 dated 5th May 2021. Some of such accounts with an outstanding amount of INR 1,111.5 million as on 30th June 2022, have been classified as a Stage 2 and provided as per the regulatory guidelines. Total ECL provision include that for COVID-19 impact as well as Resolution Framework 2.0 stood at INR 646.8 million as on 30th June 2022. Liquidity of INR 22,910 million as on 30th June 2022. Cash and cash equivalent of INR 14,600 million and unavailed CC limit of INR 1,100 million, documented unavailed sanction from other banks of INR 7,210 million.
Profitability. PAT increased by INR 40 -- PAT increased by 49% year-on-year to INR 892 million for 3 months FY '23. ROA was 3.2% and ROE was 12.5% for Q1 FY '23. As on 30th June '22, we are well capitalized with a net worth of INR 29,050 million. Our book value per share stood at INR 367.9.
Now by this, I open the floor for Q&A session. Thank you.
[Operator Instructions] We have the first question from the line of Karthik Chellappa from Buena Vista Fund Management.
And congrats on the quarter. I have 3 questions. The first is, if we look at our NIM for the first quarter, compared to the exit in FY '22, it's actually come off quite a bit despite the spreads being stable. How do we reconcile that?
Yes, Karthik, you can ask all the 3 questions, we will reply, yes.
Okay. Great. The second question then, sir, is the one on Slide 29. If I look at the reversal income on earlier assigned loans, that is up almost 38% year-on-year in the first quarter of this year. Could you clarify what that relates to? And why is the growth so strong in that reversal income?
And my last question, sir, is again on Slide 25, where you have given your liquidity position. I noticed that the principal collections and surplus from operation estimate that you have in first quarter FY '24 is actually lower than the second quarter of this year and meaningfully lower than the fourth quarter of FY '23. I'm just wondering why that is the case. These are my 3 questions, sir.
Yes. Thanks, Karthik. I think NIM, generally, if you see in the trend of last few quarters, few years also, first quarter, generally, NIMs remain little low. Then if you start to mop up in the quarter 2 and quarter 3 as disbursement improve and AUM also start to improve in that category. Apart from that, I think there is nothing much difference on account of anything in the NIM because the trend is very much stable. And secondly, obviously, capital, our utilization is also increasing gradually, which will also have some basis point impact on the NIM. But overall, I think NIM is on the right trajectory.
Reversal. Reversal, basically, as I explained in earlier few calls also, as we are doing assignment every year around INR 700 crores to INR 800 crores to INR 900 crores depending upon the business, depending on the demand in the market, if we do one assignment, overall assignment book get increase. So reversal is also getting -- will increase every year, every quarter as we progress -- as AUM increase, as [ order book ] quantum has also increased basically. Because when we do assignment, income gets booked, then it gets reversed in the coming years, basically. So that steady state reversal will happen in that. As the volume will increased, it will also increase, basically.
Slide 25, yes.
So Karthik, in this principal collection and surplus from operation, so profit is also included. So Q1 profit is normally less, and Q4 profit will be high. That's the reason.
I see. Okay. Sir, as far as this reversal is concerned, this reversal of assignment income, this has nothing to do with, let's say, some of your loans either became BT-out after being assigned and hence, you have to reverse it, that it has nothing to do with that. This is just a normal process of reversal, is it?
Yes. It's normal process. Once the income gets recognize when we do assignment, average life of contract, the income get reverse because we adopt the behavioral life. So we give the loan -- let's say, contractual likely 14 to 15 years, income get recognized for 6 to 7 years, it gets reversed between 6 to 7 years also.
Got it. And can you just share the BT-out for the quarter, sir?
BT-out is, again, I think a steady state basis, I think we are observing in last few quarters also -- 0.5% of opening AUM per month basis.
Karthik, for the quarter, it is 1.58%.
Sorry, 1.5% of opening AUM, right?
Yes.
Yes.
Which is basically 6% annualized. Okay. Got it. Wish you and the team all the very best for the remaining quarters.
We have the next question from the line of Abhijit Tibrewal from Motilal Oswal.
And congratulations on a good quarter. Sir, I just wanted to understand, I mean, how should we kind of think about our operating expenses. They continue to remain elevated. So if you could just give some more granular color on, I mean, what is leading to this kind of higher operating expenses? Understandably, you have suggested in the past that -- I mean, you have onboarded employees, you have given out increments. I'm sure for FY '23, again, you would have effected increments from April or May onwards. But are there also components of investments in technology, infrastructure that you are doing, which are more in terms of capital investments and one-off in nature, and it can kind of -- might not repeat in the kind of coming quarters? So that's the first question, and kind of that I wanted to understand.
The other thing is, I mean, understandably, you are making a lot of investments and which is why perhaps the operating expenses elevated. But when can you kind of start leading to a higher momentum in disbursements?
And sir, lastly, I mean, on the asset quality side, I mean, there has been a kind of sequential deterioration, especially in the greater than 90 DPD bucket. While, I mean, if I kind of look at the other HFCs or if I look at the broader narrative today in the HFC space, I mean, everyone is kind of talking about an improvement in asset quality. And this is despite the fact that we have grown our region by about 5% on a QoQ basis. So -- I mean, is there a way to kind of explain this divergence that we have seen in this quarter?
Yes. So Abhijit, OpEx side, we have already given the statement in last quarter also that we are a going concern organization. We need to keep on investing on -- for future distribution, technology and other CapEx. And during the current 12 to 18 months' time, we are taking a large technology investment infrastructure cost and in the past, anyway, we have also invested in distribution. So we clearly told that this year will be -- our OpEx will be in the same range, but going forward then 20 to 25 basis point, 30 basis point incremental reduction in OpEx, we can assume for next 3 to 5 years.
On the disbursement side, yes, we have invested in capacity, and that's where you can see we are almost INR 350 crores to INR 400 crores per month business line. So whatever occupancy we have invested that is giving the results and we always say we will grow our AUM 20% to 25%, so we are in the right trajectory as per our plan.
Third is NPA. Normally, we always say that 1 day past due will be less than 5% we will attempt that and NPA around 1%. So if you will see, we are in the trajectory which we have defined 10 basis points here and there. It will always be there. Normally, Q1s are always 10 to 15 basis points elevated than the Q4. And on this side, I think we are much more confident on asset quality at this point of time. This quarter, from restructured book, around INR 16 crore restructured to Q3, but that was anticipated, so no issues on that side.
And sir, if I can just squeeze in one last question, sir. Even kind of excluding the reversal that we see on the earlier assigned pool, if I just strictly look at the interest income on loans and kind of try to calculate your core lending needs, I mean, interest income that you make on loans. Even there, I mean, we are kind of seeing some kind of a sequential deterioration. So is there a way to, I mean, explain that, given that -- I mean, last quarter, it was about INR 310 crores, this time it is INR 320 crores, increasing on an absolute basis. But if I kind of calculate the yield, it is declining from 14% to about 13.6%. And I'm assuming, given that, I mean, borrowing costs have started going up, you would have taken some maybe interest rate increase maybe in the month of May or June in the last quarter. And despite that, there has been a moderation in the lending yields. Can you briefly explain this?
Abhijit, which slide you are referring? Because Q1 and Q4 interest, excluding income is on increasing trend.
Sir, the interest income on loans?
Yes.
All right. No problem. Maybe I'll kind of take this online.
We have the next question from the line of Kunal Shah from ICICI.
Yes. So firstly, on this disbursement run rate. So in the first quarter itself we are almost INR 350 crores, INR 370-odd crores. So how should we see it -- in fact, we are investing a lot as well. And incrementally, we have seen branch expansion in Rajasthan, Maharashtra and Gujarat, our core market. So how should we overall look at the growth? And are we confident that instead of 20%, 25% now, we would be more near to 25% and above, okay, rather than being in 20% over the past several quarters here?
So Kunal, the way we always describe that on the sales side, we always keep around 40% to 50% buffer capacity and other departments are at 15% to 20%. And if competition doesn't come, we overperform for number and in the difficult scenarios also, we continue our consistent number, which we have demonstrated even in COVID 1, COVID 2, even during that difficult we were able to give 21% CAGR growth. And now the COVID is past behind, I hope so we will be able to deliver better number on that side.
Okay. But overall, in terms of the guidance, if you have to look at it, could it be more towards 25-odd percent now, we have already been more than 23%? And I think first quarter itself...
Yes, 20%, 25%, we always say we have capacity to deliver more. And this quarter also, some of the subsidy component is there. Otherwise, the growth is 24%, 25%. So that will be there. We will -- like you have already said, INR 370 crore to INR 380 crore per month run rate, even if we get INR 400 cores per month run rate, disbursement number should be around that range, and that will translate into, I think, 23%, 24% or 25% growth for this year.
Sure. And secondly, I'm not sure if you have touched upon this. But overall, in terms of the rate hikes, earlier, I think we have been slow in terms of passing it on. But now what would be the stance in terms of maybe the increase in the rates going forward? And looking at our profile, okay, wherein there is some components which are -- when we look at it in terms of the fixed rate, that's also like almost INR 5,000 crores, INR 5,500 crores is like we fixed it on the asset side. So how should we look at it in terms of the margin? So in fact, the floating would only get repriced and fixed would [ reality ] time to get repriced here.
So Kunal, if you will see our liability profile, Slide #23. So our floating and fixed rate borrowing versus floating and fixed rate lending, both are almost same. So we have 40% fixed rate borrowing, 48% fixed rate lending, and we have 60% floating rate lending and the fund is in tune with that. And we have done 25 basis point increase in last quarter and from 5th of August, we have also announced 50 basis point increase in our PLR rate. And this is a ALCO decision. Every quarter, we have discussion and at co-committee meetings we will see the next 2 to 3 quarter situation of borrowing rates and how it will impact. And accordingly, we take the decision. But at this point of time, if you will see, this quarter also, we were able to maintain our spread. And I hope for next 2 quarters, with this hike, we will be able to maintain our spread. So on that fixed and floating rate side, I think we're perfectly matched on ALM.
Sure. So 50 bps from August, and that will be having an impact on the floating...
Yes, 5-0. Yes, 50 basis points.
Yes. And this floating, how does it get reset?
Rest means, like 5th of August, we will reset -- from 5th of August it's [ implemented ].
So this is 1-month, 3-month kind of a period not to reset or...
No, no. So like in this ALCO, we have decided and from 5th of August, which is our [indiscernible] cycle, we will implement it.
Okay. So right from 5th of August on the entire back book, this will get repriced.
Yes.
Yes. Okay. And overall, maybe our stance in terms of earlier, we have been highlighting that at this time in the rising interest rate, we will slightly go slow in terms of hiking the rates and trying to pass on some benefit to the customer. But I think overall borrowing costs would have also gone up to a similar extent. So broadly, then we should be comfortable maintaining the spreads and the margins here.
Yes. So if spreads are stable in the next 2, 3 quarters, we are seeing that it will remain stable in that range.
We have the next question from the line of Shreepal Doshi from Equirus.
[Technical Difficulty]
Mr. Shreepal, would request you to kindly come a little closer to the mic, we are unable to hear you much?
Yes, sure. Sir, I wanted to understand how are the approval rates or the log-in rates, the log-in to approval rates in the newer states that we have entered versus the same in the vintage states that we are present in? So from the cases that -- from the applications that we receive, what percentage would actually get logged in and what percentage would actually be approved? So I just wanted to understand this trend for our vintage states and for our newer states.
So normally, at company level, number of cases, well, we source 13,000 to 15,000 cases and 5,000 gets approved and disbursed. On amount-wise, we are sourcing almost around INR 1,600 crores per month and disbursements are INR 375 crore per month. Normally, in new states, when we go, first 30 months, we go slow because it takes time to understand the local nuances, cash flow patterns, [ feasibility ], things which impact our mortgage and other things. So in new states, first 30 months we go slow, so it might be a little bit less sanction percentage in those states in the early time because focus is that, first 30 months there should not be any [ 30-plus ]. And if you'll see last 4 and 5 states where we have entered in the last 4, 5 years, we were able to see this getting successful. And once we become comfortable understanding the local business sales, income pattern, feasibility, how do we see works, how the other market works. And then we go for a normal business kind of a stride in the new market. So maybe 5%, 6% less than the mature market in the sanction rate or limited percent rates.
Got it. Sir, basically fair to say that 35% would be the approval rate in the mature states and probably [Technical Difficulty].
Yes.
Second question was with this -- the asset quality. So I think somebody else also touched up on this question. So if we look at the 3B stage bucket, which is actually the more than 90 DPD bucket, so there, there is increase. So what explains that increase?
So if you will say, we have a restructured book of around INR 100 crore, which is in Stage 2. Out of that, around INR 16 crore has slipped to Stage 3. And so that's where -- but I think we always say that this 1% of NPA, absolute term 82 basis points, the new guidelines because we implemented last November itself, it is around 1.1%. And in first quarter, if you are marking them NPAs because in the next 3 quarters, you are able to resolve it within a year's time. So that helps us maintaining the asset quality over a period of time. So from restructured book, shifting to Stage 3, that is the reason for this quarter's increase, but we are comfortable with around 1% kind of NPA overall on the book side. And 1 day past due less than 5%.
Okay. Got it. Sir, the last question was with respect to the borrowing, so on the liability side. Sir, the bank borrowings that we have, that would be linked to the MCLR. So if you could give some color on the -- what -- like what percentage would be linked to 1-month, 3-month sort of MCLR?
No. If you see, total bank borrowing is around -- we mentioned around less than 40% we have from banking systems, and the 90%-plus book is linked with the 1 year MCLR.
1 year MCLR?
Yes.
Okay. Got it. And good luck for the next quarter.
We have the next question from the line of Nischint Chawathe from Kotak Securities.
Just one question from my side. And this is on your incremental borrowings cost. I believe last quarter, it was around 6.04%, and this quarter, it has gone down to 5.65%. So I wanted to check, first of all, is this accurate? And what would be the reason for the same?
Yes. I think both numbers are accurate. Obviously, in both the quarters, we have borrowed good money from National Housing Bank also. And there are certain deals we negotiated earlier period also, which got disbursed in this quarter. That's why we see a very -- I think, a good price around INR 1,000 crores borrowed from new [ actors ], very good rate during this year also. But there is no harm to assume that interest rate is on a rising trend. Banks have increased their MCLR also, capital market rates also increasing. So going forward, our cost of borrowing will also have impact of rising interest rate scenario.
No. Just to put the same question differently. If we now go to a bank or if we now get the quote from a bank for loans versus what you got around 3 months back, how much is the difference in rate of interest?
The difference is the same, whatever 1 year MCLR got increased. Earlier, we also borrowed at 1 year MCLR. Right now, again, we are borrowing at a 1 year MCLR. Both the time is the same rate.
No difference on the terms, right? In terms of fees or [indiscernible]?
No.
Sure. And incrementally, what is the plan this year? You will be probably doing more of NCDs or borrowing more to link to repo or how does the borrowing plan for this year compared to last year?
As you know, market is very dynamic in the last one quarter, and we are observing that market is again dynamic because interest rates are hiked by [ fed ] and decently again, a hike by RBI. And I think, again, meeting is there from the RBI on the interest rate. So we -- it's difficult to comment on that where we will focus. It will depend upon how market reacts. Because obviously, we have a very huge strength with the bank's relationship, we generally borrow with very large rate, with large tender we borrow. So all large banks, already we got a few sanctions, where with small tranche we are taking from them and locking our rate for coming few quarters. So majorly it will depend upon the bank side, and we don't see any major changes in whatever mix we are seeing today.
And just one -- maybe one more question is, when interest rates go up, have you seen in the past typical borrower behavior, where he will come in and probably prepay a loan?
So Nischint, right now, there are no signs in the past also that was not designed. We will -- we are anyway closely monitor the situation. If anything changes on that side, we will come back to you. But at this point of time, there is no sign on that side.
We have the next question from the line of Nidhesh Jain from Investec.
Sir, on the fixed rate loans, are they end-to-end fixed rates for the full tenure there fixed on the asset side?
So Nidhesh, they are 3 years based, though, our borrowing are full tenure fixed loans. But on the lending side, we have a clause where we can retest very 3-year.
Sure. Sir, secondly, on the MSME book, which we are building, we have seen good traction there. So can you share some more details in terms of ticket size? What is the collateral behind these loans? What are the yields on these loans?
So interest same, business owners requires a loan for the business purpose. Average ticket size is somewhere around INR 8 lakh to INR 10 lakh. Tenure is normally up to 7 years, and yields are up to 15%.
And these loans are backed by which collateral, sir?
Secured by SORP, self-occupied registered property.
Okay. So it's most like a LAP sort of loans?
But in the LAP, it can be used for personal use also, the tenure is 10 to 15 years. Here, it's the only business use and tenure is almost up to 7 years.
Understood. Thirdly, sir, do we source any loan from DSAs? Or it's completely in-sourcing from our own employees, which we do?
So of the total business, 98.9% business is through direct team, and 1.1% business is through LP-connected, DSA, et cetera.
Okay. And lastly, sir, can you share the incremental leads on home loan and back book? Home loan and non-home loan book?
It remains normally the same in the past and because past -- 12.67% overall...
For this quarter.
And home loan is around 11.6% and non-home loan is 14%.
We have the next question from the line of Sanket Chheda from B&K.
Sir, I just wanted to ask that in terms of asset resolution, so apart from, sir, surprising, which are the other tools that we use or have we done any sale to ARC in recent quarters?
So in the collection, there are 5 stages. One is the X bucket, which is first -- current month bouncing. There we use call center and mostly digital mode of payment collections from the customer, then it comes to the bucket 1 to 30 and plus. 1 to 30, we do use call center plus field collection team, and mostly mode of payment is digital. From 30 to 90 bucket, we use a field collection team, along with we use Section 138 proceedings. And after 90 DPD case, it's the field team and successive proceedings. So these are the normal terms of collections.
So have we done any sale to ARC, maybe apart from this?
Sorry? No. So in last 2016 we did.
Okay, sir. Sure, sir. And sir, the second question was on, say, employee per branch and maybe AUM per branch and AUM per the employee metric. Now, we have seen that since last 4, 5 years as AUM per employee and AUM per branch has almost remained stagnant. So AUM per employee is around INR 2 crores, INR 2.5 crores and AUM per branch has been between INR 30 crores, INR 35 crores. So that metric has not moved much in the last 3, 4 years. So where do we see it moving going ahead? Do we see the operating efficiency coming in? Or are these metrics that are looked upon by you?
Yes. So normally, if you will see, that basically some of our business, 100% sourcing is through in-house team. Then ticket size is INR 8 lakh to INR 10 lakh. Then we are working Tier 2 to Tier 5 basically. And every year, we are opening 30 to 40 new branches. And then branches are also classified into A to E category depending on the town potential. Since all the metrices remain the same, this is there. And I hope for the next 2 to 3 years, this will remain in the same because we are increasingly -- increase our distribution network of branches also.
Sir, initial 1, 2 years is okay when we are adding new branches, we have certain set of branches. But over the period of time, maybe 5, 7 years, that becomes a part of the business as routine, wherein the back book or the bank branches should at least start displaying higher efficiency, right?
Yes. So you are rightly said, but like our 85% of the branches are C and D category, which are Tier 3, Tier 3, Tier 4, Tier 5. And normally, most of our branches becomes ROE positive in 12 months' time. And in those towns, we are doing consistent business also, if a town is doing INR 1 crore business within first 12 months, it continues to doing INR 1 crore, INR 1.25 crore, it will not raise to go [ teakwood ] and that's not the expectation from our side also. So that's the -- so we see a metrics like whether branches are ROE positive in first 12 months or not, whether the branches OpEx are met by the fee income from those branches or not. So those are the critical things, we are seeing, when the branch operating or [indiscernible] economics are coming into the picture.
Okay. And sir, the 1% you said you source it through DSAs. Is it incrementally also or it's a similar split between in-house and DSA?
No. So that includes LP also Aavas Mitra, DSA, maybe some bit of it. So we will mostly remain in-house sourcing model next 3 to 5 years.
Okay, sir. And lastly, we had a CBO change recently, right? I mean, now Mr. Siddharth Srivastava has come in. So any reasons why Mr. Ram left? And any light you can throw on, on the new CBO?
Yes. So as you know, we are an organization which has a very robust employee organization, we have layer 1, layer 2, layer 3, layer 4, and we have a very strong management team. But yes, Ram has helped us in the last 7-year journey, and we have to thank for his contribution. This organization remains the same and now Siddharth has joined. Siddharth has 22 years of experience out of his 20 years around in ICICI Bank. He has seen most of the other products. Below Siddharth we have almost 40 people leadership team in place, which is more or less same. So that will be there in all the organizations.
We have the next question from the line of Nitin Kothari from [ Mantra Capital ].
Sir, I have 3 questions. Sir, currently, we are doing ROE of 14%. So what are the factors that would lead to ROE expansion? And what is the long- to medium-term ROE guidance? Sir, and the second one is, we are doing NIMs of around 8%. So are the NIMs sustainable over longer term, given that opening up of market would lead to higher competitors? And can you give us a breakup of where the mortgage loan, like how much is LAP and how much is SME?
Yes. So I'll go by the third question. So incremental non-housing loan book, we are almost 40% MSME and 60% on MSME like LAP and other loans.
Coming back to NIMs, normally, Nitin, we work on a spread and we try to maintain 5% spread with -- when we started our journey, we said that, though, in last 12 years, we are able to maintain 5% spread, but at the scale of size, there might be a chance that we might not be able to maintain 5% spread. But quarter-on-quarter, right now we are able to maintain because of the support, rating upgrade continuously and the segment which we focus. But we always say that, even if there will be a contraction in the spread, we will be able to sustain our ROA more than 2.5% or if we are -- if it is less, we can be more on that side. And now, we can bring those efficiencies in our OpEx cycle. If you see, pre-COVID, we were able to reduce our OpEx 20 to 30 basis point year-on-year basis. During COVID, it remained stable and increased now behind investment in technology, et cetera. So for first 12 to 18 months, this will look at the same level. But again, next 3 to 5 years, we will be in a portion to reduce our OpEx by 20 to 30 basis point year-on-year basis. So that's the trajectory will be for the spread and ROA.
ROE, we see this is a -- ROA and leverage output. So if ROA remains on 2.5% to 3% and leverage increase over a period of time, I think ROE will improve in a sustainable growth manner in next 3 to 5 years.
Okay. Understood. So sir, are we looking to venture into some other fee-based income products to improve our ROE?
No. Right now, we don't have any explanations on that side. We think the market in which we are, there is huge potential for growth in the next 10 to 15 years, 20 to 25 kind of percent growth. And with that growth rate, anyway every 3, 3.5 years, you are doubling your book. So at this point of time, we are not seeing any fee-based products in the business.
[indiscernible].
We have the next question from the line of Piran Engineer. Mr. Piran Engineer, can you hear us?
Sir, just a couple of clarifications. In June, we hiked our yields by 50 bps and now another 50 bps in August. Is that correct?
No. So in June, we hike the PLR by 25 basis points and from 5th of August, another 50 basis point hike.
Understood. Okay. The NHB borrowings of INR 1,000 crores, this is over -- like over the last 1 year we've borrowed and these are at floating rate or fixed rate?
No. So NHB borrowing for us is not INR 1,000 crores this quarter or over the period of the year. But NHB borrowing is comprising of different kind of instruments. Some of them are fixed, some of them are floating. Some of them are at lower interest rates. Some of them are GSEC-linked. So there is a combination of borrowing, depending on your lending pattern and organizations rating and other standards. [ Isn't it ] right?
And just to confirm, the yield of 12.67% and cost of funds of 6.86%, that is as of July 1, right? That is how you all report.
Yes, yes. It's a contractual rate on the -- you can take 1st of July.
We have the next question from the line of Bhavya Sanghvi from Fortress Group.
I had 2 questions. I wanted your view on the competition. So we've seen large organizations with almost AAA or AA kind of rating profile entering this business line. So can you give us your sense on the competition?
And second question was on the credit rating upgrade. So congratulations on that. Can you tell us what is the incremental benefit that you would get because of this rating upgrade?
Yes. So Bhavya, on the competition landscape, the areas and geographies where we work, I think housing loan penetration vis-a-vis a number of families living there are almost average less than 5%. Some market is 2%, 3%, some market is 9% to 10%. And that market has huge potential. So even if large players will come there, everybody can sustainably grow for the next 10 years with 20%, 25% kind of growth. So we don't see a large threat on that side. But those markets requires a special kind of knowledge for which we have created our niche over a period of last 12 years and with the use of technology and the kind of niche we have created, we are hopeful that we will be able to maintain our standpoint in those markets. And with the use of technology, we are improving customer experience, that will also further help us strengthening our position in those markets vis-a-vis competition.
Got it, sir. But sometimes the cost differential that the larger organizations would have, wouldn't that play a part in your sense?
So now with the larger player and our cost of borrowing, I think there is not much of difference more than 25 to 50 basis points. So we are more competitive in those geographies, I think.
That was the last question. I now hand it over to the management for closing comments.
Yes. Thank you all for attending the call. For any further information, we request you to get in touch with Himanshu, our Investor Relationship team or SGA, our Investor Relationship advisor, they would be happy to help you. Thank you for coming on the call and giving us opportunity to showcase the company and clarifying the doubts or the questions which our audience had. Thank you very much.
Thank you. On behalf of Aavas Financiers Limited, we conclude this conference. Thank you for joining us, and you may now disconnect your lines.