Aavas Financiers Ltd

NSE:AAVAS

Earnings Call Analysis

Aavas Financials Reports Strong Growth Amid Market Challenges

In Q2 FY '25, Aavas Financials achieved a 20% year-on-year increase in AUM, reaching INR 184 billion, and a net profit of INR 1.48 billion, up 22%. Despite environmental challenges affecting disbursements, the company disbursed INR 12.94 billion and anticipates stronger performance in the second half, guided by a 20% AUM growth for the year. Technology upgrades have improved operational efficiency, reducing the OpEx to asset ratio to 3.18%. Credit quality remains robust, with 1+DPD at 3.97% and a credit cost of 11 bps, below 25 bps guidance. Aavas aims for a net worth of INR 40.48 billion, emphasizing risk-adjusted returns.

Strong Growth in Assets Under Management

Aavas Financials has reported a robust year-on-year growth of 20% in Assets Under Management (AUM), reaching INR 184 billion. This growth is complemented by a decrease in 1+ day past due rates, which stood at a commendable 3.97%, ensuring the quality of the portfolio remains high. The company also achieved a net profit of INR 1.48 billion for Q2 FY '25, marking a 22% increase compared to the previous year.

Disbursement Trends and Future Confidence

In Q2 FY '25, Aavas disbursed INR 12.94 billion, leading to a total disbursement of INR 25.05 billion in the first half of the fiscal year, demonstrating an 8% year-over-year growth. Despite challenges posed by extended monsoons and a shutdown in certain parts, Aavas is optimistic about recovering disbursement levels in the upcoming months, supported by a trend of 22% growth noted in September and October disbursements. This suggests a rebound as traditional strong performance periods approach.

Strategic Branch Expansions and Technological Advancements

The company opened 5 new branches in H1 FY '25, including its first in Tamil Nadu, aiming to deepen its market presence. Technological upgrades are a central part of Aavas's strategy, with new systems like Oracle and Salesforce integrated to enhance operations and customer service, thereby improving efficiency and potentially leading to better disbursement outcomes.

Operational Cost Efficiency Gains

Aavas reported improvements in operating expenses, with the OpEx to asset ratio declining by 40 basis points from 3.65% to 3.25% over the year. The company aims to further reduce this to under 3% in the near future, driven by rigorous cost optimization efforts and technology integration, enhancing operating leverage gradually.

Asset Quality Remains Exceptional

The asset quality metrics remain solid, with gross NPA reported at 1.08% and strong collection practices keeping delinquencies low. The company maintains a credit cost guidance of below 25 basis points, alongside aspirations to keep ECL provisioning well-capitalized, targeting to manage any unexpected credit risks effectively.

Ambitious Growth Targets

Looking ahead, Aavas is maintaining its guidance for the current fiscal year, aiming for over 20% growth in AUM. The company aspires to achieve a significant milestone of INR 1 trillion in AUM by 2023, reflecting its ambitious growth trajectory and commitment to scaling operations in the affordable housing segment.

Market Positioning in Competitive Regions

Despite facing intense competition, especially in Tamil Nadu, Aavas is positioning itself strategically by leveraging its unique product offerings. The focus on self-constructed homes and backing loans with sound risk management principles reflects its calculated approach to navigating competitive pressures while retaining its market share.

Future Financial Outlook and Sustainability

The management expressed confidence in sustainable growth driven by strategic investments in technology, an expanding customer base, and maintaining an efficient operating model. The company expects to enhance its NIM and spread, guided by ongoing efforts to adjust its lending rates and costs of funds effectively as economic conditions allow.

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Aavas Financial's Limited Q2 FY '25 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 date of this call. These statements are not the guarantees of future performance, involve risks and uncertainties that are difficult to predict. [Operator Instructions]. Please note that this conference call is being recorded.

I now hand the conference over to Mr. Rakesh Shinde, Head of Investor Relations at Aavas Financial Limited. Thank you, and over to you, sir.

[Rakesh Shinde, executive]

Thank you. Good evening, everyone. I extend a very warm welcome to all participants. Thank you for participating in the earnings call to discuss the performance of our company for Q2 and H1 FY '25. The results and the presentation are available on the stock exchanges as well as on our company website. And I hope everyone had a chance to look at it.

With me today, I have an entire management team of Aavas, including Mr. Sachinder Bhinder, MD & CEO; Ghanshyam Rawat, CFO; Ashutosh Atre, CRO; Selvin Uthaman, Chief Business Officer; Surendra Sihag, Chief Collection Officer; Ripudaman, Chief Credit Officer; Jijy Oommen, Chief Technology Officer; Anshul Bhargava, Chief People Officer; Rajaram Balasubramaniam, Chief Strategy Officer and Head of Analytics.

We will start this call with an opening remarks by our MD and CEO, Sachinder Bhinder; followed by CFO, Ghanshyam Rawat; and CRO, Ashutosh Atre. After that, we will start with the Q&A session.

With this introduction, I hand over the call to Sachinder. Over to you, Sachinder.

[Sachinderpalsingh Bhinder, executive]

Thank you, Rakesh, and good evening, everyone. I'm delighted to welcome you all to our Q2 FY '25 earnings call, and thank you for joining the call on the late evening. Hope everyone has a wonderful Diwali.

Let me now take you through the key highlights of our performance in Q2 FY '25. We delivered a growth of [ 20% ] Y-o-Y in AUM reaching 184 billion along with the stated growth, we ensure best-in-class quality with 1+DPD below [ 4% ] at 3.97% and GNP of 1.08. Our net profit for quarter 2 FY '25 stands at INR [ 1.48 ] billion, registering a growth of 22 percentage Y-o-Y.

In terms of business update, in quarter 2 FY '25, we disbursed INR 12.94 billion, whereas in H1 FY '25, we have disbursed INR 25.05 billion, resulting a growth of around 8% Y-o-Y in H1 FY '25. In Q2 FY '25, we achieved another mile store in our [indiscernible] journey by going live with the lower management system or [indiscernible]. The onetime elements shutdown, coupled with an extended monsoon and service parts of the country have affected building and construction activity, both of which resulted in lower fresh disbursement and car disbursement. Is one of the fundamental reasons for the new trade disbursement in quarter 2 FY '25.

However, we are confident of covering up on the disbursement in the second half of the financial year which is typically a strong period for us. We have already seen green shoots with September and October cumulative disbursement growth of 22 percentage Y-o-Y. Our focus is to underwrite quality business with risk-adjusted returns. Our incremental business yield has gone up by 25 bps across products. We've opened 5 new branches during H1 '25, 4 branches in our existing states to deepen our reach and 1 branch in new state of Tamil Nadu. We've seen a robust log-in led by a diversified omnichannel lead generation funnel, including digital [indiscernible] common service centers, e-Mitra, RRO and Mitra resulting in a better disbursement growth and building a healthy business pipeline for the coming months.

Let me tell you update on the terms of technology updates. We've implemented bank level system with robust regulatory compliance, our loan management system, Oracle [ Flex ] has gone live across branches and is stabilized. Our new lead management system built in sales force has successfully gone live across branches. This will allow us to integrate seamlessly with the aggregated channels. A fully integrated system, leading to a better visibility, entertaining collaboration and seamless customer service will also play out in the coming months. Technology is playing a key role in the transformation and [ tax ] improvement. A lot of [indiscernible] tax has proved to 8 days in quarter 2 FY '25.

In terms of financial performance for the quarter and half year, our net profit in H1 FY '25 grew by 18% Y-o-Y to INR [ 2.2 ] below, led by growth in net interest income, coupled with sharp improvement in operating leverage. Our consistent efforts to optimize costs has resulted in a marketable improvement in OpEx to asset ratio by 40 bps from 3.65 in H1 FY '24 to 3.25 in H1 FY '25. We continue with our guidance of improving cost to asset ratio by 20 to 30 bps over the years. Our asset quality continues to be [indiscernible] with 1+DPD of less than 4% [indiscernible] as of September 2024, our GNP stood at [ 1.08 ] percentage in H1 FY '25. And our credit costs improved further to 11 bps in quarter 2 FY '25 from 20 days in quarter 1 FY '25. We continue to guide 1+DPD of less than 5 percentage a GLA of less than 1.5 percentage and a credit cost of below 25 bps.

We have competed to a strong growth trajectory and a focus on quality business growth and cost optimization will continue to drive our success. I'm confident that with our dedicated team and strategic initiatives we achieve our goals and deliver our value to our stakeholders. Thank you for your continued support and trust in Aavas.

I now hand over the line to our CFO, Ghanshyam Rawat to discuss the financials in details. Over to you, Ghanshyam.

[Ghanshyam Rawat, executive]

Thank you, Sachinder. Good evening, everyone, and have a warm welcome to our earning call. First, to update on [indiscernible] side, in terms of liability, we have one of the best well-diversified liability franchise. We have always been innovative in exploring new avenue for sourcing. And I'm happy to share that we have successfully raised [ NCD ] amounting to INR 6.3 billion from IFC in October month. This is the largest debt fund raised by the company till date. This achievement will enable us to channel these funds towards affordable housing and green individual homes, reinforcing our unerring commitment to sustainable and inclusive development.

We are unique [ SFC ] where our tenure of liability is higher than the tenure of assets. We continued to borrow editiously and raising around INR 25.7 billion at 8.42% in H1 FY '25. Total outstanding borrowings as of 30 September, 2024 stood at INR 161 billion. Overall borrowing mix as of 30 September 2024 is [ 50% ] from term loan, 25% from assignment and co-lending, 18% on National Housing Bank and 6% from the supermarket.

[indiscernible] support continues to remain extremely strong as our [indiscernible]. There is access to diversified and cost-effective long-term financing from visit lenders. We maintain strong relationships with development managed institutions to meet long-term business growth. We have progress on core lending [indiscernible] with the [ PS ] Bank. As of 30 September 2024, we maintained sufficient liquidity in the form of getting cat equivalents and underwent [indiscernible] limit of INR 15.1 billion and documented unavailed sanction limit of INR [ 4.65 ] billion.

In terms of spread, out of [indiscernible] 2024 an average borrowing cost of 8.15% against an average portfolio yield of 14.04% resulted in a spread of 4.89%. This is a sequential drop in the spread by 11 basis points on account of increase in cost of funds by 7 basis points October quarter, coupled with the yield compression of 4 basis points quarter-over-quarter. However, we are passing on the cost of fund increased by raising our [ BPL ] by 25 basis points with effect from October month which will result in improvement in the yields and recouping spread in coming months. We have 30% of our liability linked to external benchmark, which will allow us faster repricing of liability in case of rate cut scenario.

Our margin [indiscernible] percentage of total assets during Q2 FY '25 stood at [ 7.7% ]. Our NIM in absolute terms has increased by 8% year-on-year in quarter 2 FY '25. In terms of cost, our OpEx to asset ratio improved at 29 basis point to 3.18% in Q2 FY '25 versus 3.47% in Q2 FY '24. However, there are still some one-off item was reversal the 10 basis points year on improvement in Q2 FY '25. We are committed to gradually bringing down OpEx ratio by below 3%. Credit cost during the quarter stood at 11 basis points in Q2 FY '25 versus 18 basis points in Q2 FY '24, and 20 basis points in Q1 FY '25.

In terms of other parameters, ROA has been has seen an improvement of 18 basis points year-on-year to 3.49% and ROE improvement by 77 basis points year-on-year to [ 14.8% ] in Q2 FY '25. We are well capitalized with a net worth of INR 40.48 billion and [ car ] at [indiscernible]. Total number of live accounts stood at almost [ 29,000 ] positing into 15% year-on-year growth. Input count remained flat year-on-year at INR 5,761 as of 30 September [indiscernible].

Now I would like to hand over the line to our CRO, Mr. Ashutosh Atre, to discuss asset quality.

[Ashutosh Atre, executive]

Good evening, everyone. I am pleased to share the key portfolio risk parameters with you, asset quality and provisioning. Aavas is strongly positioned to continue delivering industry-leading asset quality. Our asset quality remains within the guided range with 1 day past due below 5% at 3.97% in Q2 FY '25. And gross stage-3 and net stage-3 under 1.5% stood at 1.08% and [ 0.78% ] respectively.

In terms of geography, average 1+DPD and GNP in our vintage states remain well below 4% and 1.1%, respectively, whereas other emerging states, 1+DPD and GNP remained well below 3.3% and 1%, respectively. Similarly, in terms of ticket size of more than INR 15 lakhs, 1+DPD and GNP remained well below 4% and 0.8%. Whereas in case of ticket size less than [ INR 15 ] lakh, 1+DPD and GNP remains below 4.5% and 1.25%, respectively. Our total ECL provisioning including that for COVID-19 impact as well as Resolution Framework 2.0 stood at INR 946.1 million as of 30th of September 2024.

With this, I open the door for Q&A. Thank you.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Renish from ICICI.

[Renish Bhuva, analyst]

Congrats on a good set of numbers. Sir, just two things from my side. One on the spread. For the first time, spread fell below 5%, and it is due to the combination [indiscernible] still continue to moderate and cost of funds continue to rise. And this is despite our range bound assessment of around INR 1,200 crores to INR 1,300 crores from [indiscernible]. So sir, what is happening on the asset deal side [indiscernible]? On cost of borrowing, we all can understand the [indiscernible] are still elevated and banks are looking to pass on but we just need to understand what is happening on the asset side, specifically because disbursement is also rebound?

[Sachinderpalsingh Bhinder, executive]

Thanks, Renish. From a perspective of as you are rightly articulated on the cost of funds, I think there is an increase. I think if you look at the last 2 years, our disbursement yields compare on -- compared to the [indiscernible] had been lower than the overall. So in order to cover up that, we are trying to push that, but it is taking a lag time. But our endeavor compared to the last H1 to the current H1, we've increased the [indiscernible] yield by 25 percentage. But since I have an AUM lag of the last couple of years, which was lower than my [indiscernible] yields lower than my AML, it is taking time to really cover up or as I said, our endeavor continues to increase the disbursement yield.

And that typical focus, as we've been speaking across, is the focus on the lower ticket size where we have risk adjusted returns and cell construction individual houses. So that's where we have had it. Our endeavor with that will continue to be in the range of around 4.8 percentage if the rate cuts don't happen, the 4.8% to 5% in that [indiscernible] at the state of time as we speak.

[Renish Bhuva, analyst]

Okay. So 4.8% to 5%, let's say, good in FY '25 or slightly near term?

[Sachinderpalsingh Bhinder, executive]

Yes, FY '25 for the current one. And as we see the trades picking up, the cost of funds actually coming down, we see the trajectory actually moving up actually. So there's a conscious effort, as I've been talking about on every call that efforts to really increase the disbursement yield on a quarter-on-quarter basis, and we've seen the green shoots and is taking time for us to really cover, but our endeavor is to see that over quarters.

[Renish Bhuva, analyst]

Got it. Would you like to share the [indiscernible] yield number, I think given the blended deal at 13% and back to despite 30% life book. So just wanted to get a sense whether internally how you guys think about it with 30% large book delay 13%.

[Sachinderpalsingh Bhinder, executive]

So Renish from that perspective, currently, it is lower by around 30 bps as we speak. And as you would really look at it, the previous year, it was 55 bps [indiscernible].

[Renish Bhuva, analyst]

No worry. I didn't understand [indiscernible].

[Sachinderpalsingh Bhinder, executive]

The current yield [indiscernible], the current disbursement yield of the H1 is 30 bps lower than the AUM. The previous year, it was 50 bps lower.

[Renish Bhuva, analyst]

Got it. Got it. Sir, secondly, again, now on the growth side, right, let's say, in Q1, we were sort of guiding at '21 to '23 kind of a growth rate given the muted first half and if [indiscernible] rate to achieve the, let's say, the desired growth, these numbers are out to be some INR 4,000-odd crores in second half? So naturally, which means we'll miss the guidance. So keeping in mind that scenario, what you guys are [indiscernible] growth for FY '25 and maybe in '26?

[Sachinderpalsingh Bhinder, executive]

So the Renish, as I did that September and October put together, we had a 22% Y-o-Y growth. As to convention remains strong for us. So we continue our guidance for the current year of about 20 percentage plus.

[Operator]

Thank you. Our next question is from the line of Shweta from Elara.

[Shweta Daptardar, analyst]

Congratulations on a good quarter. So I have a couple of questions. One is on the product category. So if I look year-on-year basis, LAP has declined [indiscernible] so has MSME grown sharply. So is this by demand design or increased regulatory oversight on LAPs [indiscernible]. My second question is [indiscernible] Tamil Nadu. So if you look at Tamil Nadu geography, so there is pretty intense competition out there. You have active and solar and many payers, especially on the LAP front. So how distinctly as will be positioning itself versus the intense commutative intensity there? And just one data keeping question. What is the rate differentiators between LAP SMSE versus home loans and your BT out?

[Sachinderpalsingh Bhinder, executive]

Yes. So I think -- thanks, Shweta. Your 3 questions. The first question is about SMSE. I think we are a unique [indiscernible] unique [ HSC ], which does -- because we have been conversely underwriting self-employed on profession. We were able to write [indiscernible]. This is micro MSME, which is backed by self-occupied residential properties. The best part about that is that this is actually helps us to do a value addition to the working capital requirements or the self-employed bond professional.

So it is going to finally an economic benefit use for that, and we do it with a [ Mata ] which is helpful for us. And this hopefully really helps us for the securitization feel because it qualifies as a priority cycle ending for the banks. And this has been the last 4 to 5 years kind of our focus area for the franchise, that's one.

Secondly, your question on Tamil Nadu, if you look at the state, we've opened [ Hosur ]. So in line with our continuous geographic expansion strategy, we look at immediate once the geographies which we are operating. Karnataka, we've been operating for last 4 years, also happens to be one of the influx for us to understand Karnataka, Tamil Nadu, [ Telangana ] [indiscernible] side. So I think from that perspective, it's just a starting point for understanding and going into those regions.

On the kind of competition there, I think we're uniquely poised in the segments which we serve in unserved and the [indiscernible] and partially bank. Classic case is Karnataka, where we do continue to see a good amount of growth, and that gives us good amount of confidence to really stay across in the southern state because of the kind of availability of the unique SMSE base and self-construction individual houses. So that is where our focus is.

[indiscernible] line with contiguous geographic expansion strategy, and this helps us to navigate in the southern region, which is there. And if you look at [ 372 ] branches across 14 states or 14 states Tamil Nadu, we've not been present in South, so that will help us in the coming months to grow. That is the second part of the question.

On the yield side, the differential between HL and the [ non-MSR ] portion is around 200 to 250 bps, that's [indiscernible] differential between the housing loan and nonhousing loan portfolio. Hope that answer...

[Shweta Daptardar, analyst]

BT number?

[Sachinderpalsingh Bhinder, executive]

Yes, the -- sorry the fourth question of the BT out. BT out we are on a inbound of 5.2 percentage. And I think the BT out retention model with us really works across analytics and integrated model, which awards have generated over a period of time on predicting the BT out really helps us to hold the customers as a part of retention. And since it is a -- what I would really say is direct source business. It also really helps us to hold the customers back into our foray. So there's a transitioning of movement of customers is restricted. So we currently are at 5.2 percentage annualized.

[Shweta Daptardar, analyst]

That's helpful, sir. Thank you so much.

[Operator]

Our next question is from the line of Abhijit Tibrewal from Motilal Oswal.

[Abhijit Tibrewal, analyst]

If you can again kind of laboring on the spread compression that you've seen this is partly explained in the [indiscernible] question. But just trying to understand, our earlier long-term guidance used to be spreads of 5% for this year, we guided of 4.8% to 5%. Now I mean, with or declining interest rate cycle ahead, I mean, although transitory, but I mean the spread could be further pressure going ahead. Plus, if you recall, sometime in March, we had taken a retail PLR increase of 25 basis points. So if you look at [indiscernible] that has not really kind of translated into a more portfolio yields from that level, our reviews are actually down. So now if we are going to take another 25 basis points increase in retail PLR. I mean what is the confidence that we have with the regards to this kind of translating into improvement in portfolio is something I wanted to understand.

[Sachinderpalsingh Bhinder, executive]

I think Abhijit, I'll answer the first question and the last [ DSR ] really talk about the cost of funds perspective. I think as we -- as I told earlier, if you look at our disbursement yields versus the EMV, which -- that was last couple of years drag even with the increased [ RPR ], we've not been able to cover up that. There's a conscious effort to really put that across by increasing the disbursement deal. So that you would rightly appreciate, it takes its own time.

Secondly, on the [ RPR ] increase, 35 percentage of our book continues to be on the fixed rate. So the translation is only impacted by a little bit flat. And again, as I said, that last few years has been more on lower disbursement deal, that is impacting. The second part is will very important. If you look at the trajectory of was over the last couple of years, the cost of funds in last 2 years and I have done some we talk about the cost of fund trajectory and why is that impacted from a level of 4.5 or 4.6, [ 5.86% ] were there [indiscernible]. I think the cost of fund is one sector, which is one of the factors which led to the spread compression. But as I said that even at 4.89%, we continue to guide on 5 percentage plus/minus [ 20% ] for the current year. On the cost of fund [indiscernible] talk about the one. And in case the rate cut impact happens, the 30 percentage of the liabilities, which are on are base. We see a cost of fund decrease and resulting in the increase in the spread over to your expansion.

[Ghanshyam Rawat, executive]

More or less now post of borrowing is stabilizing at this level basically. [indiscernible] money, which has came at a 6-month [ MIS ] plus 148 basis points, which is a sub 8% in our cost of borrowing. So it's more or less cost of boring getting stabilized. And in the site, I certainly mentioned [indiscernible] in last 2 quarters we have seen a continued basis, 25 basis point improvement versus the last year basically. Another 25%, 25 basis points, we are making efforts in the coming quarters. So that will lead to almost new business [indiscernible]? So what are drag we have seen in the last couple of quarters that will get minimized in the coming quarters basically.

So both these 2 items, we will have -- we will reach a recoup closer to back to 5% stretch. And obviously, we are expecting now maybe it's difficult to predict anything, but whenever rate downward start, so it will have a positive impact on spend side, which we have seen in earlier years also.

[Abhijit Tibrewal, analyst]

Got it. Just one follow-up question to that. So I'm just thinking now, please correct me if I'm wrong, [indiscernible] 5.2% annualized is indeed very good. I mean in the last 1 year or so, given that our disbursement engine has not fired as what we would have liked, given that we are retaining customers and which is why [indiscernible] offsetting in lower BT outs. Is that also one of the reasons why -- I mean our yields have been under pressure. I'm just kind of trying to understand when we look at you at our size and scale, and compared with a whole host of smaller HFCs today, we've not seen that yield pressure for them. Is it about your size and scale, which is a little bit of a problem? Or how should we interpret that?

[Sachinderpalsingh Bhinder, executive]

So I'll address the question in 2 parts. First part on the segment thing, second part of the [indiscernible] the model, which is there. I think from a perspective of the total at 5.2 percentage there is definitely a yield compression, which comes to at around 15 bps on an annualized basis. As we speak on H1, we have about INR 400 crores worth of retention the entire staff actually. So I think there is a yield compression [indiscernible] to hold that.

On the second part of it, how was has really navigated that at that stage and how do we maintain that? And I'll have [indiscernible] talk about or the tech piece on which we actually help us to retain the customer, presenting the parter are [indiscernible] really model play important [indiscernible].

[Ghanshyam Rawat, executive]

Abhijit it is all really important to retain your performing customers basically. And we always made long back our predictive model that has helped us in our journey despite in affordable housing piece where a lot of customers come first time to us basically and we [indiscernible] always maintained less than 6% in last year, I think so many years basically.

And I want to add only one more thing here about Sachinder, if we retain our customers, obviously, we retain only performing customers basically. And even if we reduce some rate of those customers. But in the year 1 itself, we record the fee amount, which is equivalent to take care of a 1-year loss basically. So it's a difficult situation for us because we also brought down our cost of borrowing when we lend it to those customer. Customer used to be in double digit basically. Now we are cross-working [indiscernible] came down to 8% basically. So it always returned to that customer a good strategy for us basically. And we are not losing much out of those retaining those customers.

And one more data point, I think also customer goal now, we also do assessment of those customers basically how they're performing in the market. You will surprise to keep those performance -- those customers are much poor than what we have customers inside our company basically. So that shows that our model is performing very well for us.

[Operator]

Thank you. [Operator Instructions] Our next question is from the line of Kushan Parikh from Morgan Stanley.

[Kushan Parikh, analyst]

I actually have two questions. One is around the operating cost. Basically, we've seen a [indiscernible] improvement in this quarter and obviously, guide for 20% to 30% improvement in OpEx to assets. Just wanted to -- I mean, if you could elaborate how have we driven this improvement on a quarter-on-quarter basis, especially on the employee expense side, which has had -- I mean, had a sequential drop as well in [indiscernible]. And how should we think about OpEx going forward in context of the [indiscernible] in the 2Q improvement that you have seen? Should I also point my second question?

[Sachinderpalsingh Bhinder, executive]

Sorry? Yes, yes, yes.

[Kushan Parikh, analyst]

Sure. So the second question is around the credit cost. So we guide for less than 25 bps credit cost over a longer period of time. Last 2, 3 quarters, we've had a couple of quarters with lower credit cost around 11-odd bps. Just wanted to understand obviously, this would be the outcome of the CRA margin. Are we seeing better asset quality outcomes than what we had modeled in the ECL and hence, the provisioning requirement is reducing? Or is there an overlay component that was present earlier and which is not there now being I wanted to understand the reasons for the -- and the [indiscernible] credit cost? On the how sustainable that is going forward?

[Sachinderpalsingh Bhinder, executive]

So I'll answer the first question. Second question, I'll have [indiscernible]. The operating leverage really pumping in on OpEx to our situation, you've seen a sequential reduction on H1 by 40 bps. That's around 3.25 percentage compared to the previous year 3.65 percentage. If you look at last 3 years, our employee strength has been constant actually at the same level. So I think that is where the 1 which really kicks in.

Secondly, having invested in the technology, we are seeing now the green shoot has earlier guided in our conference calls and quarterly calls, we said that we'll start seeing the green shoots really coming across from the tech implementation. So the operating leverage has started really kicking in. And as we go in the quarters ahead, we expect really to what our guided range bound of coming to below 3 percentage.

So again, on this, we really look at it very granularly on the cost reduction if you adjust by the [indiscernible] reversal, we continue to stand at [indiscernible]. So one is we remove the [indiscernible] reversal because which is onetime kind of thing. But the rest of them has really kicked in because of the operating drivers really coming across from the way we actually manage our staff. And where it has really played an important role. And we will continue to do that in the coming parts. So as we guided that I think a couple of quarters, we will be sure about that this is sustainable, this is consistent, and we continue our endeavor as a team to really build that part. Our digital initiatives or initiatives on digital collections or initiative on digital sourcing and after the system is going live, we'll have reduced cost of accretion, reduce cost of collections, which really would really kick in, in the coming times.

On the second part of the credit cost being [indiscernible], I'll have [indiscernible] really talk about in detail.

[Kushan Parikh, analyst]

Before we move to that, just one question. If you could quantify the soft cost reversal that we had this quarter?

[Ghanshyam Rawat, executive]

Yes. So as I said, the normal case scenario, we were at 3.25. If the resort cost if I don't include that, I would have been [indiscernible] we would have been at 2.37.

As you know, Aavas always is a credit conscious company since beginning. So we have invested in underwriting, technical, legal, [indiscernible]. On top of that, we are one of the best collection team in the company basically. The top of that -- we always believe that our cost of credit cost will not be more than 20 basis points. If you've seen them from COVID, from [indiscernible] time, from where all approve the time, we are not more than 20 basis points.

Yes, after the COVID everything, I think [indiscernible], the quality would improve quarter-over-quarter. We consistently maintaining [indiscernible] part you less than 5%, NPA is around 1%. All this goes into model and as for the ECL model, our cost is where we are today basically. It is continuously will be maintained less than [ 120 ] basis points. Right now, we are just between [ 11 to 12 ] basis points.

[Sachinderpalsingh Bhinder, executive]

And just to add on to what fundamental principle, the DNA of the company is a sound risk management principle, which is risk-adjusted returns. The sound underwriting principles laid across on the framework of putting across self-constructed individual houses to be funded, where it is occupied where the LTVs are there. So the end usage is also there. So I think a couple of factors which have been there, which become the bedrock of really building a strong fundamental franchise, which works on risk -- sound risk management principles, a sound understanding of risk objective difference. Now coupled with the digital initiatives, the tech initiative, which will really help the part as we've crossed the 2.5 lakh plus of customer base.

And secondly, adding a reportedly an understanding of how we've underwrite over the last 12, 13 years, as we speak, about 4 lakh plus of customers, I think it sound across based on very, very understanding at a macro and a micro level or what to underwrite and what to let it go. So I think as we traverse the journey, the [indiscernible] are very clear, the gardens are good enough that we don't ship but not strike enough that we don't have to generate. So I think from the perspective, we would continue to traverse a path, it is risk-consereturn, risk-managed control and sound underwriting practices coupled with the digital and new age AI basin, which will help on our kind of cost, which we've been traversing.

[Operator]

Our next question is from the line of Raghav Garg from AMBIT Capital.

[Raghav Garg, analyst]

Sir, you mentioned about 22% reimbursement growth for September and October, is that right? And is that the number that you expect to sort of deliver in the second half? Or will it be higher?

[Sachinderpalsingh Bhinder, executive]

Raghav as I spoke that September and October cumulative -- September -- September and October in cumulative, we are at 22 percentage of disbursement growth as we speak. We've guided that for the current year, on an AUM basis, we would be 20 percentage plus. Conventionally H2 has been stronger for [indiscernible]. And as we laid out, I think 2 principal factors for an elongated long monsoons in the regions which we work in the western and the northern parts of India because we are cell construction final company, which fund is cell-connected ones, that's one.

Secondly, a part of regulatory change the disbursements, I think cord cumulative put together. And the third is an [ MMS ] shutdown because in the month of October [indiscernible], I think resulted in this, but we are confident with what we've seen in September and October. We continue to guide with a 20 percentage plus for current year, the AUM growth, and we are confident of traversing the journey for the current year.

[Raghav Garg, analyst]

And sir, how many employees did you have in this quarter, I heard you said that your employee count has been flat.

[Sachinderpalsingh Bhinder, executive]

[ 576 ] is exit employee count and Raghav been there across for the last [indiscernible] if I were to really put across. So there is no hard growth about 30 to 40 absolute employees over a period of last 1 year. I think this is aided by -- you see our operating levels really coming across. So I do dampen saying that kind of increase in the AUM, increase in the number of accounts. We hardly had any additional the collections where the digital initiatives or digital collections, more touch connections, which are there, which really helped us to really be doing a such kind of stuff that is there.

I think the second leverage which we really like to kick in after the [indiscernible] the more origination system. The lead management system really going live, we'll start seeing that really suctifying into the finally operational efficiency really kicking in.

[Raghav Garg, analyst]

Sir, what's the off-roll count as of September?

[Sachinderpalsingh Bhinder, executive]

The 2 -- the total account is [indiscernible].

[Raghav Garg, analyst]

That's on the [indiscernible], right? I'm asking off-roll because that's something that?

[Ghanshyam Rawat, executive]

It's around 1,800 employees.

[Raghav Garg, analyst]

Okay. 1,800 off employees. And another question. See, when I look at your intangibles [indiscernible] right, they're at about INR 47 crores, INR 48 crores, that has increased by about INR 5.5 crores in last 6 months. I just wanted to understand this number is up 13% [indiscernible]. What is the nature of this expense?

[Sachinderpalsingh Bhinder, executive]

Can you come back again. I think we lost your connection we heard [indiscernible] What was that? Can you repeat the question please.

[Raghav Garg, analyst]

[indiscernible] intangibles on your balance sheet and they are up about 13% YTD. The standard about INR 47 crores, INR 48 crores, one of the other affordable HFCs have such a number. I just wanted to understand what kind of expense is this, which is being capitalized. Where exactly are you spending? Or where exactly have you spent this money [indiscernible]?

[Ghanshyam Rawat, executive]

Yes. In last 2 quarters, and in this quarter, you mentioned that we are doing attack transformations LOS, LMS, EVL and on the data where our segment transformation along with the management solution basically. Some of them has gone live, which got capitalized. Some of them are just gone live, but the [indiscernible] is the own. That early toward IT spend, which we have invested for IT collation basically.

[Raghav Garg, analyst]

What I understand from the always [indiscernible] investments that the affordable HFCs do -- what I understand is that it is mostly subscription base, right? I mean you pay a subscription fee to your technology partner, which is salesforce or someone other. And therefore, given that, shouldn't it be expensed through the P&L.

[Ghanshyam Rawat, executive]

No, no, [indiscernible]. When projects get implemented till the project go live implementation partner expenses, but they always do with you plan, you develop your model for you and then made [indiscernible], takes almost 1 month time basically to make program or double the [indiscernible] allow us. Yes, once it has gone live, then it a subscription model basically. Like salesforce is now a subscription model because it has gone live [indiscernible] have capitalized their [indiscernible], which we invested in the sales force on origination system basically.

Similarly, LMS now is going live. Their [indiscernible], then it will go on a subscription model from [indiscernible] onwards basically.

[Raghav Garg, analyst]

Understood. Yes. Sure, sir, that.

[Ghanshyam Rawat, executive]

All CapEx we are doing around -- put together what we already capitalized and which is in the pipeline will be around INR 60 crores [indiscernible] to be capitalized in the IT projects. which will be amortized in the next 7 years.

[Raghav Garg, analyst]

Understood. Sir, I have one more question. Can I ask?

[Ghanshyam Rawat, executive]

[indiscernible]

[Raghav Garg, analyst]

Sir, your repayment rates have increased in this quarter, but I heard you saying that the BT rate is still at 5.2%, which is same as Q1. So why is it that the payment rates have increased in this quarter?

[Ghanshyam Rawat, executive]

No, I think it is a steady state. We don't see any spike, any change in the overall rate BT out is in the range of 1.2%, 1.25% [indiscernible] every quarter. So in first half, we have seen already 5% and put together on a full year basis, it will be around 17% to 18% and we will have 3 components. One component will be 5% to 6% BT out. BT out and around 6% customer pay out of its own pocket as a monthly [indiscernible] generally customer pay out of whenever the [indiscernible] money, they can back to me, part payment also. Until now, we are around 16%, which is almost 2% better than what we forecast in our annual assumptions basically.

[Raghav Garg, analyst]

Understood, sir. That's very helpful.

[Ghanshyam Rawat, executive]

[indiscernible] but we take 18% on an overall basis.

[Sachinderpalsingh Bhinder, executive]

So we are at around 16% [indiscernible].

[Operator]

Our next question is from the line of [ Yash ] from Citigroup.

[Unknown Analyst]

Just wanted to get your thoughts on incremental asset quality in the month of October, how is the collection move. And also, sir, while the 1+DPD continues to be below the guided range has seen some increase of 30 bps. And so any thoughts there?

[Sachinderpalsingh Bhinder, executive]

So I think if you look at -- as we spoke, I think you had an extended rain fall. You had an extended [indiscernible], you had Diwali, which has came up. There's a festival next season. I think there was some part of it was the -- but as we speak, on the month of October, we were on 3.97. We were at around 3.8 to 4. So there is a sequential decline on month on basis. So we have recruited what was being left out. And this was like an elongated period of time, which is -- so we continue our guidance of less than 5 percentage. But as we speak from a 3.97, we are already at October of 3.84.

[Unknown Analyst]

Got it. And just to follow up on that. Was there any like discreetly increase in the less than 1.5 million segment or it was broadly stable increase across the good.

[Sachinderpalsingh Bhinder, executive]

It was broadly stable. There's nothing, anything which is incrementally or differential, which would really give any difference as far as our understanding and our number is really sure. We track, I think we will really appreciate track it on a sequential absolute basis, actually, so to say, and across the product segment. So we have not seen anything. I think we've been cautiously optimistic in the approach of our underwriting perspective, really to build on the quality which we deliver. And as earlier said, we continue to guide at a 5 percentage plus 1+DPD.

[Operator]

Our next question is from the line of Shreepal Doshi from Equirus.

[Shreepal Doshi, analyst]

My question was on -- on liability side, any fresh sanctions from the NHB front incrementally?

[Sachinderpalsingh Bhinder, executive]

Yes, we already applied to National Housing Bank for this limit because any NHB limit once we publish our results and upload to [indiscernible] and the [ NPA ] website. So it's in their process basically.

[Shreepal Doshi, analyst]

So for this year, we are able to receive [indiscernible].

[Sachinderpalsingh Bhinder, executive]

Currently refinance limit yet to be sanctioned by there.

[Shreepal Doshi, analyst]

Okay. Okay. Got it. And then just on the asset quality front, I mean if you look at the mortgage segment, where the NPA increase has been pretty sharp, like in the last, say, 4, 5 quarters. So anything that you could sort of explain why is it so?

[Sachinderpalsingh Bhinder, executive]

You see, we know on [indiscernible] goes towards a [indiscernible] employed. And secondly, we see that it is return basically also we make out of that to book basically. This book is already -- we have given a loan almost 250 to 300 basis point at a higher rate of interest. But ultimate note, we are not seeing in last couple of years basically, recovery pattern is the same, whether it is a home loan or this is non-home loan basically.

In both the cases, security is the residential self-provided housing property basically. So yes, NPA is more, but ultimately loss is similar. Similar in both class in both the assets basically. Second thing is access is also now reach a mature because we started in 4, 5 years back, basically. Now this asset is a beach maturity level now basically. Home loan is a large [indiscernible] book. We have [indiscernible] the metric basically. So -- but we are confident we don't see any sort of risk around the NPA, NPA numbers on both the products, whether it is home loan or non-home loan.

[Shreepal Doshi, analyst]

Got it, sir. Sir, just last question is squeezing. In terms of product mix, will the book mix remain at where it is? Or will there be some change in the mix?

[Sachinderpalsingh Bhinder, executive]

It is almost at optimum level. It will remain in the same range, maybe 3% to 5% year-on-year, but it will be more or less in the same range.

[Shreepal Doshi, analyst]

Given the RBA norms for NBFC, HFC, I think the 75%, we are already, right, in terms of housing loans.

[Sachinderpalsingh Bhinder, executive]

I think we are fully compliant as far as NHB and regulated loans on the home loan and non-home loan component. And we don't see any change. We don't see any change to be done at our end.

[Operator]

Our next question is from the line of Mona Khetan from Dolat Capital.

[Mona Khetan, analyst]

As a question on the OpEx front. You mentioned about the store cost reverse which has lowered the cost to assets over the last 2 quarters. So is this one-off will be accounted for or we will see some more benefits from each of cost reversal coming in, in the subsequent quarters instead.

[Sachinderpalsingh Bhinder, executive]

No. [ ESOP ] cost reversal happened in the only in quarter 2. Overall savings, we see on H1 to H1 level is 40 basis points. Even if we exclude this so also, then we will have 30 basis going better OpEx improvement on H1 to H1. Is it not accounting of what has left out what is it to provide it. It remains accounted for worth of time basically, every quarter, reassessment of long-term incentive plan happens. And on that basis, whatever is a level in the is been taken in the books of accounts. Because ultimately, it's a non-car item. Well appreciate.

[Mona Khetan, analyst]

Got it. So for this fiscal, is it fair to say that the improvement in OpEx assets will be higher than what you have certain guidance for of 20 to 25 bps given the 30 bps improvement, even ex of the [indiscernible] impact?

[Sachinderpalsingh Bhinder, executive]

We -- I think in the beginning of the year, we guided a 25 to 30 basis point annual saving after the time transformation for a couple of years until we reach a [ 3% ] OpEx level. Full year guidance, almost we have achieved in the H1 and our -- as a management differs are there to maintain this and by the year-end.

[Operator]

Thank you. Ladies and gentlemen, that was our last question for today. I would now like to hand the conference over to Mr. Sachinder Bhinder, MD and CEO of Aavas Financials Limited, for closing comments.

[Sachinderpalsingh Bhinder, executive]

Thanks. As we conclude today's earnings call, I want to express my heartfelt gratitude to each one of you. For the participation and engagement the dedication of our team, the trust of our shareholders and the loyalty of customers has been instrumental in our grow. We aspire to reach a milestone of 1 trillion in assets under management by 2023 and broaden our horizon as a [indiscernible] India clear.

I express my deepest gratitude to all our regulators and stakeholders whose constant faith and support have been [indiscernible]. We remain optimistic about the future and are confident that our strategic initiatives will continue to drive sustainable growth and create shareholder value. If you have any further questions, or require additional information, please feel free to reach out to Mr. Rakesh Shinde, our Head of Investor Relations. Thank you, and have a wonderful year ahead. God bless. Thank you.

[Ghanshyam Rawat, executive]

Thank you, everyone.

[Operator]

Thank you. On behalf of our Aavas Financials Limited, we conclude this conference. Thank you for joining us, and you may now disconnect your lines.