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Aavas Financiers Ltd
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Ladies and gentlemen, good day, and welcome to Aavas Financiers Limited Q2 and H1 FY '22 Earnings Conference Call. 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 the date of this call. These statements are not the guarantees of future performance and involve risks 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.
Good afternoon, everybody. Thank you for participating on the earning call to discuss the performance of our company for Q2 and H1 FY 2022. With me, I have Mr. Ghanshyam Rawat, CFO; Himanshu Agrawal, Investor Relationship team, other senior member of the management team of Aavas. Also, we have SGA, our IR advisors. The results and the 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 outlook was very strong AA-/stable and AA-/ positive for -- by CARE. I take this opportunity to thank all of you and our stakeholders for their continued trust and support. With the calibrated reopening of various states and the success of the nationwide vaccination drive, the economic activities have shown a robust and continuous environment across the country. For quarter 2 FY '22, we disbursed INR 901 crores, registering a 35% year-on-year growth. This is almost 90% of disbursement in Q4 FY '21. So in terms of incremental business, we are very close to the level prior to second wave of COVID-19.All this while, we have maintained our operating metrics and delivered profit after tax growth of 31% year-on-year as per Ind-AS accounting and 22% year-on-year as per IGAAP accounting for half year financial year 2022. Further with our philosophy of consistent growth, we registered AUM growth of 21% year-on-year as of September 2021. As mentioned during the earning call of Q1 FY '22, based on our regular interaction with the borrowers and the payment behavior exhibited by them, during the first wave of COVID-19 FY 2021, we expected to see a similar improving trend in collections from Q2 FY '22 onwards. In line with our expectation, 1 day past due has improved markedly from 12.67% in June 2021 to 8.88% in September 2021. From here on, we should witness a gradual improvement and hope to reach same level as March 2021 by March 2022, if there is no third wave in the subsequent quarters. I would now hand over the line to Ghanshyamji, CFO, to discuss various business parameters in detail.
Thank you, Sushilji. Good afternoon, everyone, and a warm welcome to our earning call. During the quarter, company borrowed an incremental amount of INR 8,899 million at 6.48%. As of September 21, our average cost of borrowing stood at 7.17% on the outstanding amount of INR 88,428 million. During the quarter, our long-term rating outlook was revised by CARE from AA- stable to AA- positive. While ICRA continued to maintain long-term credit rating AA- with a stable outlook. Despite a higher short-term rating, 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 the networth on Slide #31 and 33 of our presentations. Further a few important parameters, as of 30 September 2021, total number of live accounts stood at 13,453 that is almost growth of 20% year-on-year growth. Total number of branches 297, that is 38 new branches added in last 12 months. Employee count 4,627, a 31% increase year-on-year. Asset under management grew 21% year-on-year to INR 1,01,481 million as of 30th September 2021. Product-wise breakup, home loans, 72.1%; other mortgage loan, 27.9%. Occupation-wise breakup, salary, 39.8%, self-employed, 60.2%. Disbursement increased by 35% year-on-year to INR 9,016 million in quarter 2 FY '22, while 55% year-on-year to INR 13,641 million for H1 FY '22. As on 30th September 2021, our average borrowing cost, 7.17% against our average portfolio yield of 12.90 resulted in a spread of 5.73% borrowing, where access to diversified cost-effective long-term financing, we have a strong relationship with various development financial institutions. Overall borrowing mix as on 30th September 2021 is 36.8% from term loan, 32.7% from assignment and securitization, 23% from National Housing Bank and 17.6% from debt capital markets. Asset quality, 1 day past due, stood at 8.88%. Gross stage 3 at 0.96% and Net Stage 3 stood at 0.72% as on 30th September 2021. During the quarter, the resolution plan has been implemented for certain borrowers accounts as per RBI Resolution Framework 2.0 dated 5 May, 2021, such accounts with the outstanding amount of INR 1,482 million have been classified as Stage 2 and risk-based provision created as per regulatory and Ind-AS accounting principles. Provisions, total COVID-19 provision stood at INR 148.2 million as of 30th September 2021. Total ECL provision, including COVID-19 provision and provisioning for Resolution Framework 2.0 stood at INR 700.5 million as of 30th September 2021. Liquidity of INR 23,809 million as on 30th September 2021, breakups are as below. Cash and cash equivalent of INR 12,050 million, unavailed CC limit of INR 1,190 million, documented unavailed sanction from National Housing Bank INR 2,550 million, documented unavailed sanction from other banks, INR 8,100 million. Profitability. Profit after tax increased by 31% year-on-year to INR 1,522 million as on -- for H1 FY '22 as per Ind-AS accounting. As per IGAAP, we had registered year-on-year growth 22% to INR 1,548 million for H1 FY '22. ROA stood at 3.25% and ROE 12.25% for H1 FY '22. ROA was 3.90% and ROE 14.66% for Q2 FY '22. As on 30th September 2021, we are very well capitalized with a net worth of INR 25,700 million. Our book value per share stood at INR 325.7. Now with this, I open the floor for Q&A. Thank you.
[Operator Instructions] Our first question is from the line of Abhijit Tibrewal from Motilal Oswal.
First of all, congratulations on crossing this milestone of INR 10,000 crores in AUM. Sir, my question was more around 2 things. First is 1+DPD number. So in the opening remarks, you suggested that by the end of this year, we would want to go back to levels of about 6.4%, which was there, I think, at the end of last fiscal year. Just wanted to understand, is it more of a conservative guidance? Or can we, I mean, kind of reach that threshold of 5% in 1+DPD that you keep guiding by the end of this year? That's my first question, sir.
Yes. As you see this quarter, we were able to reduce our 1+DPD number by 4%. And customer behavior factor is improving month-on-month. The way I see our book is that out of 1 lakh -- around 40,000 (sic) [ 1,40,000 ] live customers, we have only 1,000 customers who have not paid the September month installment, current month installment. So that range is very encouraging. So now that is coming around 0.6%, 0.7% of the customer. So 8.88 between -- and 0.67, so there is a gap of around 8%. So these customers are paying current month installment. And if somebody has one installment due or somebody has 2 installments due because of COVID and other circumstances in the past, we need to see how quickly they can recover out of that and that will decide the part of our 1-day past due number. But as management, we see that now this number will come down gradually, and we anticipate that around 0.5% per month. We can see if no third wave is there, then that number is there. But as a management, we are committed to give our 100% efforts, and it can bring better result also if the circumstances will improve.
Sure, sir. Sir, the second question was around the operating expenses that you have reported during the quarter. I mean, are these, I mean, higher or looking optically higher because you've been investing significantly in branch expansions and building up employee bench strength.
So Abhijit, the way we always narrate our OpEx number is that we will continue to invest in technology, manpower distribution. Only concentration that is -- so like every year, we open 30 to 35 branches. Last year also we opened 30 branches. And this year, again, within the first half, we have opened around 18 branches. And so that will be there. The OpEx cost because we have built up the capacity in last Q4 and Q3. And you know H1 -- first half was impacted by COVID. And this time because COVID impact was 45 days to 60 days time, so we have not impacted regular salary, increment, bonuses, et cetera. So all those have been given. So it has 3 impacts. One is ESOP cost. So ESOP cost of around 3.5% is more than the Q4 in this call. Second is 18 branches which we have opened, that additional cost. Normally, we use to open new branches in second half of the year, but this time because we have prepared, so we opened this time. And third one is normal increment, last year increments were not there. But this year, we have given full increments as our company policy to all employees. So all these 3 things put together is there and since Q1 number was less than the normal number of around INR 200 crores to INR 250 crores, so it's a denominator effect also. But consistent basis, we say that we can improve our OpEx percentage to our total asset by 25 to 30 basis point over a year-on-year basis over a period of next 2 to 3 years.
Sure, sir. That is useful answer. And my last question is around the disbursements. I understand disbursements in 1Q were impacted by the second COVID wave. But as you have kind of guided in the past that we typically do disbursements of about 35% to 40% of the full year disbursements in the first 6 months, which is H1 and the remaining 60%, 65% in the second half of the year. So for this year as well, I mean, looking at, I mean, the kind of demand and the competitive based landscape, will it be fair to assume that you will kind of continue to deliver on that run rate? And lastly, Sushilji, if you can touch upon these 2 new states, I mean, Orissa and Karnataka that you have entered in this financial year, I mean, have we done any pilots already there? And after that, have we kind of opened up branches there?
So Abhijit, on disbursement side, normally, yes, it is same, first half is 40% and second half is 50% kind of number. And they are on same trajectory for this year. And this first quarter was impacted with the 1 month disbursement number, so my second quarter -- second half number, can be better than that also. Second, I want to touch upon our state opening and branch opening policy again. We are consistent in our approach. Every 5 years, we open 4 new states. So first year of operation, we started in Rajasthan, Gujarat, Maharashtra and MP. And after from 6 to 10 year of operation, which we have completed in 2021, we started UP, Uttarakhand, Chhattisgarh and Haryana. So now this is third span of our control. So for next 5 years term, we will again open 4 new states. So in that journey, we have started 2 new states this year, Karnataka and Orissa. And as we see a lot of potential, we have seen a data through analytics model, and we are confident that these markets have lots of opportunity in Tier 2 and Tier 5. And at the same time, the customer behavior is also in line with our philosophy. So we will add another 2 states, maybe 1 year ahead or 2 years ahead, but we'll continue our philosophy of developing 4 new states every 5 year in the journey.
The next question is from the line of Aditya Jain from Citigroup.
Sir, in the -- maybe a small point, but GS funds like GS 2 coverage is up a little bit quarter-over-quarter. It's a very small amount. But given the recovery from GS 3 probably GS 2 should also have moved down. So we have voluntarily increased coverage or is the mix of GS 1 plus GS 2 actually increased towards GS 2 a little bit?
So you are seeing that Stage 2 provisioning has increased that way?
Stage 1 plus 2 provisioning has increased, yes.
As I mentioned in the commentary, our pool, which has given a restructuring INR 148 crores, again since we created INR 20 crores provision [indiscernible] is lying at Stage 2, with that additional provision, the ratio was increased basically.
So when you talk about 30% to 35% -- sorry, 30, 35 branches being added every year. So for the next 2, 3 years that might give us maybe close to 15% branch growth. And then if we are, let's say, aiming for 30%, 35% kind of the growth numbers, the disbursement per branch would have to touch between INR 1.1 crores, INR 1.5 crores per month. So just your thoughts on that, just in terms of capacity utilization, where are branches now and how you see that changing?
So Aditya, we always say that we will be consistent in our AUM growth, which will be 20%, 25% growth for a period of time since we listed [indiscernible] 20%, 25% AUM growth. And for that kind of a AUM growth, whatever disbursement number is required, it is a combination of 2 things, one is no disbursement and second is containing the prepayment rate of the existing book. You can see, last 2 years, we have reduced our prepayment rate significantly in our portfolio, which has helped us. Despite doing calibrated disbursement growth, we are able to achieve our AUM growth. So in the future also, we will be doing the same. But the growth, how it will come, the growth has 3 elements to come, one is distribution, which is for next 3 years anyway, another 100 branches will be opened. Second is, whatever branches we opened in last 3 years, it has led efficiency. The first year when you open the branch, it operates around 50%, second year 60%, 70% and third year onwards it reach more than 85%, 90% of achievement. So that lag efficiency will come. So because of technology and other processes and investment in this side, we get under -- all the other efficiency on the book. And fourth one, which is a positive one for us significantly is that, our borrowing costs coming down, which also gives us opportunity to have much better customer segment and which we -- like more salaried customer and more [indiscernible] income segment customer, which earlier, we were not able to do because of our cost of borrowing. So I think all these 4 elements puts us in a framework where we can consistently deliver 20% to 25% AUM growth in the near to short-term future.
Right. And sir, the increase [Technical Difficulty] so the base as a 100% that you are observing that is how much as of now?
So we have [Technical Difficulty] so it's a mix of those kind of segment, but we are technically speaking with 300 branches, this should be around INR 1.5 crores per branch at 85%, 90% as capacity utilization.
Next question is from the line of Kunal Shah, ICICI Securities.
So firstly, in terms of restructuring, I think that has come from more than what we have been indicating. So obviously, it's reflected in terms of the collection efficiency, the way we have seen in 1+DPD [indiscernible] requirement being lower [indiscernible] movement from [indiscernible] restructuring has been or sort of when we look at only INR 37-odd crores for this quarter, incremental, is it all the incremental, or there has been some [indiscernible] or maybe repayments which have happened from earlier restructuring and this quarter would be higher than INR 37-odd crores?
So you are right, Kunal. From the previous restructuring which we have done, around INR 5 crores to INR 7 crores of customers had prepaid their loans. So increment in number revenue INR 5 crores to INR 7 crores [Technical Difficulty]
Okay, but it's only INR 5 crores...
Yes.
Okay. And secondly, in terms of MSME, so when we look at it, now we are getting towards the disbursements of almost INR 100 crores a quarter. So it's coming up, last time it was INR 32 crores INR 35-odd crores. So how should we see this business segment's scaling up? And [Technical Difficulty] probably had seen the uptick on the mortgage loan side [indiscernible] MSME as well. So are we deriving more comfort and we should see growth coming back significantly in these -- in that segment, too?
So Kunal, if you will see traditionally in all companies, H1 is a little bit less on housing loan and more on MSME and LAP loans. They are more on self construction housing side, and after [Technical Difficulty] then that has to pick up for the housing construction [indiscernible]. So in the actual, normally our housing loan disbursement in proportion of total disbursement becomes high. And overall, it remains 70% to 75% home loan or 25% to 27% of non-home loan. So I think we will be in the same trajectory. In the nonhousing loan segment, we have now 2 segments for MSME -- 3 segments, one is LAP, which used to be earlier 70% and top-up loans, somewhere around 20%, 25% and MSME was less. But our MSME is also 100% backed by housing mortgages which customer has, customer is living in. So difference for us in LAP and MSME is that second -- first end use is always confirmed for the business purpose; second, the tenure is less, 7 year around for the MSME customers; and third is we check all the government compliances, like [indiscernible] Aadhar, GST returns, et cetera, so that segment we are focusing rather LAP in our nonhousing loan segment. But going forward, again, we are committed that housing should be 70% to 75% and nonhousing loan should be 25% to 27%. And in that, maybe 40% would be MSME, 40% will be home loan -- mortgage loan and 20% will be top-up loans. But since last almost 15 months, we are very slow on giving -- advancing our exposure on the existing customer base because of the COVID situation. So we will review every quarter. And once we are comfortable that normal business scenario is there and customer requirement is genuine for the productive use, not for the distant purpose of the top-up loan, we can, again -- we will again go back to the 4%, 5% of our loan on the existing customers to the top-up loans.
Sure. And in terms of maybe the [indiscernible] list, which was there in terms of the nonhousing part. So is it like now the underwriting standards, they have been revised and they have made maybe earlier the way they were stringent, in fact, that they have been relaxed a bit, and we should start seeing more approvals coming through in that segment because of the stance -- change in stance clearly?
So Kunal, so in that segment, we have improved our filter after COVID so like earlier there may be 3 filters during the case, now we are using 6 filters for these cases. But we have not reduced our [indiscernible] and criteria. It's a natural demand which is coming up. And since we have a very large distribution base, we are sourcing almost 12,000 files per month and increasing -- this number is increasing quarter-on-quarter. So it's a natural demand. We have not prepared our collection criteria for the business.
Sure. And one last question in terms of this geographical additions to the branches, so again, it's primarily coming in Karnataka and Orissa, and there's hardly been any additions in the existing locations. So broadly, I think you have been earlier articulating that it would be like a 70-30 kind of ratio. So would we see the catch-up in the existing locations as well in terms of the branch additions or maybe there, the growth will largely be driven by the productivity improvement?
So Kunal, you are right. As we said, 30 branches every year, we will open. Next 5 years, we will open 150 branches. After 150 branches in the new states, we will have 50 to 55 branches and thus 9,200 branches within the existing states. So existing states, expansion of the branches will happen in H2. H1, we have started new state branches likewise. So we are consistent in that approach.
Our next question is from the line of Vikram Subramanian from Spark Capital.
So a part of my question has already been answered. You just mentioned about the split between home loans and other mortgages. And into which probably it will -- the cycle will correct back, and there will be more incremental home loan disbursement. I just want to ask a follow-up to that. If I look at that in tandem with the salaried versus nonsalaried split, there the salaried has increased significantly in the past [indiscernible]? So should we read it as a bit to move toward a bit of higher yield lending to other mortgage loans, but at the same time, keeping risk under control by doing more of salaries other mortgages? Is that a strategy that we are following or this is -- they are not correlated and it will -- both of these numbers will just correct back to the previous levels of 35% on salaries and 25% on other mortgages. Could you please give some explanation...
Yes. So first of all, there is no correlation between this. Actually, I've told that now our cost of borrowing has significantly come down. And with that, the new states where which we have opened, in the new states may focus more on less riskier portfolio for first 3 years or 4 years in the operation. So that's where our -- this salaried proportion from 35% to 40% or 39% has increased. And I think so going forward as our rating will improve and cost of borrowing will further come down, maybe this ratio can again further move to 42-58, but right now, we are seeing that this should be consistent, 40 to 60 ratio and we are okay with that kind of risk and profile mix in our portfolio going forward also.
Got it. So the other mortgages might come down a bit faster, but salaried might remain at this 39%, 40% range for a slightly more medium-term period, am I right on assuming this?
Correct, correct, correct.
Our next question is from the line of Karthik Chellappa from Buena Vista Fund Management.
Three questions from my side. Firstly, on a like-to-like basis, how have the loan needs of the home loan and other mortgage loans varied year-on-year?
So percentage of home loan versus home loan?
I just want -- the loan yield, how has that changed for home loans and other mortgage loans on a year-on-year basis?
[indiscernible] or home loan [indiscernible] percentage. So Karthik, home loan was around 12% and non-home loan is about 14.75%. And in the previous year and current year also, home loan is 11.92% and non-home loan is 14.78%.
Okay. So which means on a specific product basis year-on-year, there hasn't been much change in the yield of the individual products, right?
Yes, correct. Almost same.
Okay. And generally, sir, you said the mix is changing away from LAP to MSME loans within the other mortgage loans. What is the difference in the yield for our typical MSME loans versus LAP?
Karthik, it's around 100 basis point difference. The major difference is tenure. So in that, the tenure is around 10 to 12 years. In MSME loans, that tenure is 5 to 7 years. And MSME loan because there we can check the end use specifically, and we can also borrow shorter than a [indiscernible] like 3 to 5 years for that kind of portfolio, so the yield is [indiscernible] but borrowing cost is further 100, 200 basis point less for that kind of portfolio, for that kind of tenure.
So yes, you are trying to maintain it?
We are trying to maintain spread, which is 5%. As I've told you, because of COVID, though we have already passed on 25 basis points to all our customers as per [indiscernible] recommendation in last year, still our spread is around 5.73%. If there is no COVID wave 3, we would like to pass on this benefit to the existing customer base, as we have done in last 10-year history. So we match borrowing versus lending spread 5% on developed profile also -- portfolio also and very general level. We don't work like we have disburse [indiscernible] we will ask treasury to borrow [indiscernible] money. Whatever price treasury can borrow for money, we create portfolio and product around it and work around it.
This is very clear, Sushilji. The second question is, if I look at the securitization income booked this quarter of about INR 33 crores, on a securitized volume of about INR 170 crores, the yield works out to be one of the highest that we have earned in any quarter. What would explain this? Is it the nature of the portfolio that we have securitized? Could you give us some color?
Yes, so, Karthik, it was mostly portfolio of MSME. There, we were having the yield of around 14.5%, around 15% and the borrowing cost was 7.4% to around 7.5% to 8% kind of spread.
So it was relatively the higher [indiscernible] mature portfolio, which you have securitized this quarter, which explains the higher income?
Correct, correct.
Okay. The last one Sushilji is, typically, when we enter new states, our strategy has always been that for the first 12 to 18 months, we don't give any targets, we scan the market, et cetera. But this is probably the first time that we have entered a state with 11 branches initially itself, which is actually quite large because even in some of the existing states like Chhattisgarh or so, the number of branches are still single digit. So any color on what is so special about Karnataka that you see that you have chosen to enter with, let's say, some as high as 11 branches?
Yes. So Karthik, first is, they're 2 part of this 11 branches, 5 are continuous distribution approach because we are working in Maharastra since last 7, 8 years and the 1 portion of Karnataka, which was attached to Maharashta and Solapur branch. And we have shifted the same Solapur state head for us to this branch, they are [indiscernible] Hubli [indiscernible]. So that side of the distribution is continuous distribution for us. We were working in 50 to 100 kilometer of range in that market, we understand that market very well. And the new market which we opened is around 4, 5 branches in that site, and that is where we opened 11 branches in Karnataka. But we see, out of this, around 6 branches are in continuous distribution approach and 5 branches as a new state opening.
The next question is from the line of [indiscernible] Fortress Group. It seems the line from [indiscernible] is on hold. We will move to our next caller, that is from the line of Bharat Shah from ASK Investment Managers.
Now that it does appear that we as a country are reaching towards, hopefully, more normalcy and all businesses are looking over to aspirational and higher trajectory of growth, this may be a good time to revisit our original kind of a lending model in terms of ROA, ROE metrics. So if you believe that barring some [indiscernible] again on the pandemic side and if you believe that home loans in particular are showing a greater probability for growth in the lending side, can you structure maybe both kind of [indiscernible] booking in terms of spread, net interest margin, cost-to-income ratio and the credit cost and eventually culminating into ROA. In your case, ROE [indiscernible] because of the excess liquidity on the balance sheet, otherwise, ROE also would have been more critical outcome out of that work. If you can link it to that, to ROE metrics, that would be helpful.
So [indiscernible] it will -- say, our current quarter ROE is already 15% which we always to say that we will be [indiscernible] 2, 3 years 13% to 15% end of consistent ROE trajectory. So we have already reached this quarter despite COVID Wave 2 and, et cetera. And the way I see the business at least even for next 3 years, if we are able to deliver 20% to 25% growth trajectory, we will be double the book from INR 10,000 crores to INR 20,000 crores. And on that book, even if we can maintain 5% spread, which we used to maintain last 10 years but last 1.5 years, it is more than 5%, 5.75% despite we have transferred 25 basis points already to our customer base. So I think that kind of a spread for another 3 years, if we can maintain and -- credit costs, I am hopeful that we can contain our NPA around 1% and credit cost should not be more than 20, 25, it is fine, which was our earlier trajectory in the past 10 years. OpEx side, we have a scope of going 25 to 30 basis points down year-on-year basis that will give us leverage even if spread comes down by 75 basis points from today [indiscernible] still we can deliver our ROA numbers and ROE should incrementally increase with the increase of leverage in the balance sheet. So we have already quarter-on-quarter basis, 15% kind of ROE. So maybe in next 2 to 3 years, we can reach maybe up to 18%, 17%. And I hope in this kind of business, that kind of ROA is reasonable for long-term sustainable growth in our business. And on the growth side, if you will see we are very consistent, even in COVID time, we were able to deliver 22% AUM growth. We always keep bench strength on our distribution side, 25% to 20% -- 30%. And we always say that if the tough time will come, if the more competition will come, then we can deliver our number. And in both the scenario is favorable, we can over deliver our numbers. So based on that, I think we are hopeful given that 20% to 25% growth trajectory over a period of 3 years with consistent operating metrics.
So 20% to 25% business growth, about 5.5% to 6% kind of margin. And any pressures on the margin hopefully neutralized by cost savings [ as ] cost-to-income ratio, credit cost of about 25 basis points and NPA -- net NPA below 1%, that would be the kind of summary of the -- if we assume that the [indiscernible] is normal and interest rate should be looking better and more progressively interesting in terms of the growth, is that the metrics that you think you'll be working with?
Yes, so we hope so, right? The situation will not get worst from here. I think next year, it should be stable growth trajectory for us.
And what kind of ROA you could incur?
Well, ROA, we always used to say that we will be consistently delivering 2.5% as ROA. But as you know, our leverage is less. So right now, we are giving 3% less. But hopefully, ROA to leverage is a trajectory of ROE with [indiscernible] that it will be 15% to 18% kind of ROE range for the -- over next 3 years.
Okay. But Sushilji in a business like your essentially long-term lending for mortgage area, low interest rate environment in case of excess equity capital on the book is actually hurtful because it doesn't give you enough opportunity to put leveraging the balance sheet and enjoy the spread of the lending rates. Therefore, in the low interest rate kind of environment, excess equity capital on the book is a source of some kind of limitation. And this we grow at a rate much higher than return on equity, we will not be able to soak up or use excess liquidity or excess equity capital on the book. Therefore, our growth rate has to be significantly higher than return on equity in order for us to use excess equity capital, and therefore, use a more judicious kind of balance sheet where there is a little bit more lease rate rather than too much excess equity capital. That in turn drives ROA, as well as in turn drives ROE, won't you think that will be essential?
I agree with your point, but last 5 years, every year something is always coming [indiscernible] then COVID 1 then COVID 2. So if things will normalize maybe a little bit of next 1 year, 2 years, 3 years, say, we can think on other side. But til that time, as a management we see that survival is more important for us and a little bit less leverage gives us a comfort of sustaining long-term business. But I agree with your point in the next 18 to 24 months, things doesn't have any of the kind of survival events in the industry, we will -- we are in agreement with your advice.
So I'm bringing the question again. Given the fact that we have excess equity capital, and we've been very judicious in underwriting of our business by proper credit selection so that it doesn't end up damaging the -- doesn't end up reflecting in higher credit cost, which is the right thing to do to maintain that hygiene and discipline. But unless we grow it not more like 20%, but probably materially higher than that so that we are well over the return on equity in terms of the growth rate sustained so that, that becomes a source for improving both our ROA and ROE. So the financial structure becomes more balanced rather than lopsided in favor of equity capital.
Yes. So as I mentioned, it's just not improving 18 to 24 months. We will see to it. But sir, one thing you need to appreciate that because of this capital and low leverage, during COVID time, we were able to get to rating upgrades. And we have been given more trust by the lenders that in -- during pandemic time, everybody was ready to fund us and at a much cheaper rate on the balance sheet. So that borrowing cost impact, which is significantly down has also improved the shareholder return. But I agree with your point. And whenever we are coming next to Mumbai, we will come and seek your advice, and we'll see how we can improve the things in future also.
Always ready to meeting with you. One last question -- one last point I'll make, given our very prudent and wise lending practices, conservative asset liability [indiscernible] duration discipline that we maintain all these are hugely praiseworthy aspects of the way relatively smaller lending organization like yours, but is very prudently, intelligently manage the situation. The way I try to sort out the dilemma of excess equity capital on your books resulting in lower return on equity, optically, it results in a lower return on equity, I try to look at your total balance sheet and divide it into -- is this normatively in your normal debt equity ratio for the [indiscernible] lender should at least be 6 to 8x the equity capital, if not more. And I try to theoretically split your total capital accordingly and try to rework real ROA and real ROE. But at some stage, that imagine ROE in my head and still ROE have to kind of come together, is that [Technical Difficulty] growth rate results?
Sir, I will also do the calculation like you. So by this year, we should be somewhere around INR 12,000 crores AUM and around INR 1,000 crores of FDR on the balance sheet for the future lending. So INR 13,000 crores book divided by 6 INR 2,200 crore capital. Right now, we are having INR 2,570 crores capital, out of which INR 170 crores is securitization excess money, so INR 2,400 crores. So only INR 200 crores capital is excess. And I think that is sufficient that we should always keep in a buffer for the next year growth. Even around INR 12,000 crores, next year grow 20% to 24% to 25%. So the next year profit, again, it will be reaching in the same ratio, which you are talking.
Our next question is from the line of Shubhranshu Mishra from Systematix.
Two questions. First is on the customer segment. And when I look at the numbers, what category of customers do we have in salaried? I mean how do you split it into PSU, private, government employees? What are their average salary levels? And what are their average income and age when they are onboarded? And similarly, if you can dwell upon the self-employed segment, what kind of industries are they from? Are they more of traders, more dependent on manufacturing? What are their average income levels? What are their average family incomes? And do we look at cash flows, or do we look at the [indiscernible] term or we look at the mix of [indiscernible] and cash flows while underwriting them? That's the first. Second question is given the fact that [indiscernible] doing some amount of outside setting documents. So these documents sometimes also happen to be slightly haphazard, so how do we go about understanding those documents because the law stipulates that they should go back in history for 30 years. So how do we understand the entire history of the document, the vanity of the document? How many lawyers do we have, which are on roll, off roll? How do we understand that? And how do we store these documents as well? Is it centralized storage or a decentralized. These are 2 questions.
Yes. So you ask and then I will report in 2 years' time, but I will try to explain. So firstly, we have salaried 39% customer, in which our average ticket size is around INR 9 lakh to INR 10 lakhs, average government level is around INR 11,600. We have [ income to installment ] ratio of around 33%. So average salary level around INR 30,000 to INR 35,000. So in this, we have both public sector and private sector, but we don't differentiate between that line basis, whosoever is getting salary into the bank account, and that is [indiscernible] more than 22, 24 months, we keep them as a target customer and apart from that [indiscernible]. So that is the profile of salaried customer. In the self employed growth segment in the 60%, we have around [indiscernible] which we track. So none of the portfolio is more than 5% to 6% in the book. And last 32 quarters, quarter-on-quarter, profile wise, geography wise, we input the data into our [indiscernible]. By assessing these customers, we do cash flow accounting. In our underwriting team, out of 400 underwriters, I think more than 300 are chartered accountants. And now we have processed more than [indiscernible] over the last 11 years. So we have our own data learning and everything put into analytics, so that helps us assessing the self-employed customers in our portfolio. Coming back to your second question, from the very first inception, since we started working in parallel with [indiscernible] we have a deep understanding and knowledge of area where we are involved on the property title. Right now in company, we have more than 100 lawyers and 300 law firms work for us. In most of cases, we have 2 legal reports so one from in-house lawyer, one from outside lawyer. To tell you about that particularness of the -- how we get the best criteria is how many cases got rejected in [indiscernible] processing while you have done that. So in the last 11 years, not a single case against -- order passed against us by any [indiscernible] collector for the tighter correctness of the document. So I think that emphasis that now we have assessed all the customers and we have disbursed around 190,000 customers and live accounts are 1,40,000 book, we have significantly got understanding, knowledge and -- around the legal title where we [indiscernible] for any property where we cannot use the [indiscernible] processing. Hope I answered your questions.
Sir, the documents. Sir, are they centralized or decentralized?
Yes. So these all documents centralized at [ Depot. ] We have Iron Mountain facility, which is the world's best storage program in the country and the world. And we store our documents with them.
Our next question is from the line of Piran Engineer from CLSA.
Congrats on the good set of numbers. Sir, just a couple of questions. One is on your hiring strength, you all said you hired about 30% is your employee growth, right, on a year-on-year basis. So I just wanted to understand that when does operating leverage then kick in? Because our employee count has been growing faster than the AUM, faster than the branch count growth. And ideally, out of the 1,000-odd employees hired last year, could you give us a [Audio Gap] function [indiscernible]?
Yes. So Piran, normally, we always say we will keep on investing in distribution because we want to run this company for next 25, 30 years. So there always investment in distribution according to branches, according to business, according to circumstances. Last 6 months, there -- we had tough competition around the market. And as all policies, we say that we create better strength always for all businesses. And in the difficult times also, we will deliver, if the difficult time is not there, we will overdeliver. So that is the reason that our strength has grown more than the AUM growth number or development growth number, but the distribution has also increased on the other side. Second is most of it, so if you see our current manpower strength, so it is 2:1, 2% in the business side and 1% in the support side. So that is the breakup we keep always when we hire our manpower.
No, sir, I got that. But if I could just think about it bottoms up, if we've opened 30, 35 branches, each branch might have 5, 6 employees so that's maybe 200 employees there and in some centralized functions, et cetera, maybe another 50 or 100. So -- or if I could ask another way, maybe over the next 3 to 5 years, what sort of an employee count growth do we see?
So we are saying that we will grow our AUM by 20% to 25%. Though in practicality, we say that our employee growth should be less than the AUM growth because we are using the technology also, and that will also play a role. So that's a fact. Current growth is because we have created a buffer because of this heightened competition in the market. And everybody wants Aavas employee as a -- in their framework from all the smaller to larger SFC. So this here is a prudent practice on the management side, we have taken as a step. But yes, going forward, employee growth should be around 15%, 20% vis-a-vis AUM growth of 20% to 25%.
Okay. That answers it. And sir, my second question is actually more of a clarification. You said that the spreads today are 5.7%, 5.8%, and you're targeting about 5% or so. Is that something that happened in the near term or more in the medium term? And if that does happen in the near term, how should we think about your ROA and ROE? Do we expect ROE which is 15% now to sort of again drop because 70, 80 bps spread compression is quite severe?
Piran, if you have heard correctly, I have told that whatever spread will bring it down, we will save that much of cost in the OpEx.
Okay. So about 20, 25 bps every year?
Yes.
The next question is from the line of Shreepal Doshi from Equirus.
My question was on the restructuring front, what is the nature of restructuring? Like how much morat or extension will be given to our customers?
It's in the form of moratorium because in the COVID Wave 1, customer has taken the moratorium and that is the language they have correctly understood. So it is in the same line of debt. The moratorium is from 3 to 9 months kind of vintage according to customer requests and past experience and how much -- how many months moratorium he has taken in the COVID phase 1.
Okay. Sir, second question was with respect to like as you alluded that we have -- on the non-HL front, we are focusing more on MSME. So how about the underwriting -- is it done by the same credit underwriting officer at the branch? Or do we have a separate structure or infrastructure to -- because this would require a different set of understanding?
So we -- Shreepal, we have the strength of underwriting informal income business class since inception. As you know, we have a 65% [indiscernible] income. And that's where our 75% [indiscernible]. So for us, for -- in housing loan when we give -- we check [indiscernible] it's for purchase [indiscernible]. And same is here in MSME. We are assessing the same customer on the basis of cash flow, GST, [indiscernible] aadhar card, business is same. But what is a difference between LAP and MSME. MSME, we are able to get the end use of the [indiscernible] business loan. In the LAP, it can be used for personal purposes also, for [indiscernible] also for some other incidental also, and so here tenure was high and less probability of checking the end use. In MSME, we have more end use checking capability and tenure is less.
Got it. Sir, one last question was with respect to branches. So what percentage of our branches would be mature? And what -- how do we define -- like do you consider basically branch having AUM of INR 200 crores, for example, in a mature branch. And what percentage of our branches today will be mature? And what could be the OpEx [indiscernible] ratio for that -- for those set of branches?
Shreepal, for us, we -- I personally consider branch mature when it is positive ROE. So every quarter, we do the ROE calculation of each of the branches with fully loaded cost of entire balance sheet and mostly [indiscernible] within 12 months, all our branches become positive ROE branches. And for metro branches, yes, it takes 2 to 3 years to reach that kind of level. So out of 300 branches, more than 85% branches are ROE positive. And as you know, during last 12 months, we have opened another 40 branches. So that I'm hopeful 90% of it will become ROE positive in the next 12 months and remaining 30, 40 branches, which are not positive ROE in more than 12 months. We are working as a team, as I told some of branches, in the metro branches so anywhere target ROE 2 years.
So sir, like just a follow-up question there. So what is like the ideal OpEx [ upon Ind-as ] that we're looking at, what percentage of our branches will be already achieving that sort of metric?
So I will just give you one example for the understanding. Let's say, if a town has 4 lakh population divided by 5, 40,000 households. And when we open branch, we say in the next 15 years, they will cover 5% of the population. So 2,000 home loans we need to give 15 years. So divided by 180 months, we need to do 10 to 15 cases per month, so that is the potential for us for that branch. If the branch will do INR 1.5 crore business, we will earn 2%, 2.5% fee. So we make a criteria that this branch cannot have cost more than INR 3 lakh. So now then we'll take the OpEx, it should be INR 25,000 to INR 30,000, and other OpEx will be INR 15,000 then we'll keep around INR 1.5 lakh as the manpower cost. All those to deliver in next 1 year around INR 1.5 crores kind of volume, which will [indiscernible] more than INR 2 lakh [indiscernible] which should take care of entire branch OpEx, and that's our definition of viability of the branch. And because if the 15-year -- if your branch is ROE positive in the first year, then next 15 years lending minus borrowing everything should come to company as a spread.
The next question is from the line of Vikas Kasturi from Focus Capital.
Congratulations on a fantastic milestone. Sir, I had a question. So you have a branch in Jayanagar in Bangalore, which is [indiscernible] market kind of locality. So what is the rationale for setting up that branch? And the second question is, sir, you have a subsidiary called Aavas Finserv. So what are your plans with respect to that? That's it.
Yes. So anywhere new states we open, we need to open a regional office, which has been the main stream of the capital of that state. So Jayanagar branch will work like a regional office for entire Karnataka official for us, that's where we have opened a Jayanagar branch there. And second question was Finserv. So we have Finserv, we have applied for license to RBI. And whenever they will approve, we will do MSME business in the subsidiary, which will again be backed by mortgages. So that's the idea. It's still [ negotiated with ] RBI. So whenever it will come, we will operate.
[indiscernible] investor.
Congratulations on good set of numbers. Most of the questions are answered. I just had 1 small question. On the upfronting income on fresh assigned loans, what you see here is about INR 33 crores that is recognized in H1 FY '22 on a securitized volume of INR 175 crores. However, we also see about INR 36 crores of reversal in the P&L. So if you could throw some light on that? And is the company following a contractual cash flow or behavioral cash flow pipeline for recognizing this income?
So we work on behavioral cash flow. So we have already say like INR 2,000 crores of [ book ], which is assignment, [indiscernible] income is upfrontly booking. So whatever we have booked upfront, every quarter, there will be reversal. So whatever we have booked. So that reversal will come every quarter, so like first quarter, we don't have new assignment, so INR 18 crores is also reversal on the existing assignments. So this quarter, again, INR 18 crores of reversal, but INR 33 crores is the upfronting income. So that's why you are seeing H1 INR 36 crores of reversal.
Understood. Just a follow-up on that. So in H1 FY '21 last half year, we had about INR 150 crores of securitization against which income of INR 18 crores was booked. And there is a marked difference between INR 18 crores and INR 150 crores against INR 33 crores and INR 175 crores securitization. So if you could help me explain that, that would be great.
You're talking volume -- securitization volume versus income within this -- in this half year?
Yes, yes. So INR 33 crores and INR 175 crores is what you are doing. However, if you see last year, it was about INR 18 crores and INR 150 crores.
We will try question discussion again. I think this question was raised earlier also. In this quarter, we have assigned MSME and LAP book which was having a higher yield [indiscernible] 7.4%, spread was around 8% plus. Last year, when we done assignment of [ INR 155 ] crore around in the last year H1, which was purely home loan book where spread was at 5%. So you see a similar quantum was put in H1 but income [ wise ] much higher.
Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Sushil Agarwal for closing comments. Thank you, and over to you, sir.
Yes. So thank you all for attending the call. To summarize, at Aavas, we aim to be one of the key enablers in broadening and deepening of credit facilities for unserved and underserved customers in the semi-urban and rural areas. Further, we will continue to make investments in digital initiatives and distribution as that will further improve the operational efficiency and enable us to serve our customers even better.Thank you so much for your time. For any further information, we request you to get in touch with Himanshu in our Investor Relations team or SGA, our IR Advisor. And they would be happy to help you. From entire family of Aavas here, we are wishing you a very, very happy Diwali and a prosperous new year. Thank you very much.
Thank you very much. Ladies and gentlemen, on behalf of Aavas Financiers Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.