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Aavas Financiers Ltd
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Ladies and gentlemen, good day, and welcome to the Aavas Financiers Limited Q3 and 9 months 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 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, everyone. Thank you for participating on the earning call to discuss the performance of our company for quarter 3 and 9 months for FY '22. With me, I have Mr. Ghanshyam Rawat, CFO; Himanshu Agrawal, Investor Relationship; and other senior member of management team; and SGA, our IR advisers. 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 revised from AA-minus stable to AA-minus positive by ICRA. I take this opportunity to thank all our stakeholders for their continued trust and support. During the quarter, the country witnessed the third wave of COVID starting from December. While the infection rate was quite high, but thankfully, the symptoms were milder as compared to prior waves. Stops on mobility and economic activities were largely restricted to weekend and night curfews. Consequently, the impact on business and collections was relatively very low. For quarter 3 FY 2022, we disbursed INR 951 crores registering a 24% year-on-year growth. As end of January, on YTD basis, we have already crossed the full year disbursement of FY '21. Having said that, we continue to adopt a cautious approach on growth and give a higher trust to maintaining pristine asset quality and sustaining operating metrics. During the earnings call of Q2 FY '22, we had mentioned that with regard to 1+DPD, we hope to reach the March 2021 level of 6.37% by March 2022. With our continued effort, we had improved 1+DPD notably from 8.88% in September 2021 to 6.45% in December 2021. And this has further reduced to around 6.25% in January 2022. Similarly, our exposure to 90+DPD assets has come down from 0.96% in September 2021 to 0.83% in December 2021. But we have also categorized 0.89% of portfolio, which is up to 90 DPD as GNPA following RBI's notification dated 12th November 2021 to harmonize IRACP norms across all lending institutions. As a result, total gross Stage 3 stood at 1.72% in December 2021, which got reduced by 20 basis points in January 2022 further. 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 very warm welcome to our earning call. During the year, company borrowed an incremental amount of INR 26,790 million at 5.91%. As of December '21, our average cost of borrowing stood at 7.03% on outstanding amount of INR 92,206 million. During the quarter, our long-term credit rating outlook was revised by ICRA from AA-minus/stable to AA-minus/positive, while CARE continued to maintain long-term credit rating, AA-minus with positive outlook. Despite the highest 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 as well as net worth on Slide #32 and 34 of our presentation. Key parameters. As on December -- 31st December 2021, total number of live accounts stood at 141,311 that is 19% year-on-year growth. Total number of branches was 298, 35 new branches added in the last 12 months. Employee count of 4,758, 34% year-on-year growth. Assets under management grew 20% year-on-year to INR 10,612 crore as on December 31, 2021. Product-wise breakup, home loan 71.6%, other mortgage loan 28.4%. Occupational breakup, salaried 39.7%, self-employed 60.3%. Disbursement increased by 24% year-on-year to INR 9,509 million for quarter 3 FY '22 and by 41% year-on-year to INR 23,150 million for 9 months FY '22. As on December 30, average borrowing cost 7.03% against our average portfolio yield of 12.79% resulted in a spread of 5.76%.Further borrowing, access to diversified and cost-effective long-term financing, a strong relationship with our development institutions. Overall borrowing mix as on December 31, 2021, is 38.4% long-term loans, 23.6% from assignment and securitization, 22.8% from National Housing Bank, 15.2% from various debt capital market instruments. Assets quality. 1 day past due stood at 6.45%, gross Stage 3 stood at 1.72%, net Stage 2 stood at 1.33% as on December 31, 2021. Gross Stage 3 of 1.72% include up to 90 days DPD assets, which had been categorized as GNPA following RBI notification dated 12th November 2021.During the financial year, resolution plan has been implemented for certain borrower account as per RBI Resolution Framework 2.0 dated 5th May 2021. Such accounts with an outstanding amount of INR 1,501 million as on 31st December 2021 have been classified as Stage 2 and provided as per regulatory and Ind-AS provision. Provisions. Total provisions for COVID-19 impact include that Resolution Framework 2.0 stood at INR 305.8 million as on 31st December 2021. Total ECL provision, including that of COVID-19 impacted stood at INR 793.4 million as on December 31, 2021.Liquidity of the company is INR 25,430 million as of December 31, 2021, cash and cash equivalent of INR 13,120 million, unavailed cash credit limit INR 1,140 million, documented unavailed sanction from National Housing Bank of INR 7,500 million, documented unavailed sanction from other banks, INR 3,570 million. Profitability. PAT increased by 19% year-on-year to INR 2,413 million for 9 months FY '22 as per Ind-As accounting. As per IGAAP, PAT registered year-on-year growth 17% to INR 2,334 million for 9 months FY '22. ROA was 3.37% and ROE was 12.70% for 9 months of FY '22. ROA was 3.58% and ROE 13.62% for recent quarters, that is quarter 3 FY '22. As on December 31, 2021, we are very well capitalized with a net worth of INR 26,655 million. Our book value per share stood at INR 337.7. Now with this, I open the floor for Q&A.
[Operator Instructions] We have the first question from the line of Abhijit Tibrewal from Motilal Oswal.
So Sushilji, seen your results and I think congratulations to you and your team for exhibiting such a sharp improvement in the 1+DPD number, which in my opinion suggests that the collections have been strong and that over the next 2 or 3 quarters, we should hopefully be able to reach that 1+DPD of 5%. Also I think that the organic improvement in asset quality, which you kind of saw during this quarter, was impacted, obviously, by the RBI NPA circular and to that extent, you have also conservatively made provisions on those loans as well. And which is why, Sushilji, today, I do not want to ask any questions to you on how you did during Q3 or how do you look at Q4? I have 2 questions today, and they are more structural in nature. My first question is on disbursements and OpEx, and they are, in a way, interconnected. So when I look at your disbursements, I get a little curious as to what is leading to these levels of disbursement. And I say this because having known you and interacted with you for a few years now, I believe that you've had this distribution and operational capacity to do these levels of disbursements even 2 years back. So sir, if you could just explain the underlying reason for this? Is it because the demand on the ground is not as good? Or is it because the demand is there, but maybe you are not comfortable with the quality of customers? Or is it because of your consistent approach that you have talked about in the past and that we should read it as the disbursement lull before the storm, and I use it in a positive way. And sir, the other interconnected question that I had was on the OpEx. When the disbursements or the business volumes do not quite keep pace with the OpEx, should we read it as that maybe you are significantly adding capacity either in your stand-alone entity or in your subsidiary, which is Aavas Finserv in terms of growing out your strategy for the newer states or branch expansions and that this augmented capacity can potentially lead to significant improvement in your business volumes in the years to come?
Yes. Abhijit, if you will see for 9 months, we have disbursement growth of 40%. And I think that is in line with what we always say that we want to be consistent. We are increasing our capacity, and that is also in line with what we are putting OpEx around it. First of all, OpEx, last year to this year, has 2 significant meanings. Last year, because of COVID impact and everything, the appraisals and salary hike were limited, which in this year because of limited parameter that has significantly increased. And we always say that our 35% of OpEx are directly linked to disbursements. So when disbursements has hiked 40%, I think OpEx are in line with that. But ATA -- OpEx to ATA, yes, because of 1 or 2 months COVID impacted, I think that will be in line. But despite that I think ROI and other metrics are maintained. Secondly, I think disbursement growth is in line with what we see as a consistent player. Right now, I think like the last 2 months, we are almost INR 375-plus crores per month. So if we will take next 12 months also from this run rate also, this is a disbursement growth we can anticipate, which is in line with our story of 20% to 25% growth year-on-year in the business. So I think growth-wise, yes, COVID Phase 1, COVID Phase 2, COVID Phase 3, we are seeing -- we were more particular about our asset quality, with I am seeing now that it is in control the way we look at it. And further this quarter will help us further improve it. So now we can accelerate our growth on disbursement AUM side a little bit, but we don't want to go over goals. We will be a consistent player for a bit of time. And OpEx, it's normal, like we open 30 to 40 branches every year. This year also, we are in the same trajectory. It is the last 12 months to 12 months, 35 branches. And right now, we are around 300 branches and another 14, 15 branches will be opened this quarter. So we'll be in line of our consistent play around it. Yes, as the situation will normalize, we will again be showing 25 to 40 basis point OpEx decrease year-on-year in near term.
Sure. Sushilji, the last question that I had was, if you could help us understand that why your reported spreads over the last 3 quarters seem to suggest that they have been stable. We see a significant volatility in the computed spreads. So while I understand that you are using daily average and we have a limitation of using only quarterly average. If you can give us some comfort around the pricing environment. Whether there is any significant pricing pressure from the competition. Or because your customers who have a very good repayment track record are very amazing poaching targets for the -- for your composition. And maybe lastly if you can share what recent discussions have you been having with your credit rating agencies, and when would they be comfortable in giving you your next credit rating upgrade?
No. So, Abhijit, if you will see, we're consistent in our approach of maintaining a spread, and this is -- 5% is ideal spread for our business. And I think that we are maintaining for more than 40 quarters now. We said that during the COVID, our spread has increased to 5.75% plus level, out of which 25 basis points we have already shifted to our customers in the first 2 quarters of this year. And hopefully, if COVID situation improves, we will continue our trajectory of 5% spread and whatever excess spread, we will shift it to our customer base because that will help us being transparent organization, and it helps us in scaling up our business also.I don't know how you calculate, but spreads are always maintained. NIM has increased because, say, earlier out of total balance sheet size, the cash available in the balance sheet was high. Now, as per available balance sheet size and cash, the cash proportion has reduced. So income-generating assets have got encouraged because of which NIM has increased in the business.
So I mean, essentially in the industry summed up, there is really no significant pricing pressure for the -- from your competition or in other words, you're not having to kind of give maybe lower interest rates to your customers just because they are being poached by the competition?
So, Abhijit, it's a journey for us. 2011, we used to borrow at 12%. And now Ghanshyam just told that this year, we have borrowed at 5.9% in the year. So if we want to continue our spread journey, I think it gives us a strength in the balance sheet that we can source both the side of the customer. We will not leave our customer base where we have created the niches. But at the same time, we can enter into a zone where we can have more Category A customers, more solid customers, and we can take some part of the customer profile, which we were not able to do because of pricing earlier. So I think, right now, we are able to maintain our prices, but at the same time, cost is getting reduced. So above 5% spread, we'll shift it to our customer base as per our practice in the past.
Okay. And sir, lastly, if you could comment on my last question. What discussions are you having on your credit rating agencies and when would they be comfortable in giving you your next upgrade?
So Abhijit, we can't comment on regulatory framework working. Our job is to do consistent performance and regulators and stakeholders have their right to assess us, and at the right time when they feel comfortable, they can increase our rating.
We have the next question from the line of Aditya Jain from Citigroup.
Sushilji, just to talk about the impact that you've conservatively taken a much higher GS 3 in this quarter. So the impact of that we've seen one in provisions. So is there also a material impact of that in the interest income? And if you could quantify what is -- how much is that reversal which has happened in this quarter?
So I think INR 16 crores additional provisioning we have done on this and around INR 5 crore interest reversals, so around INR 20 crores, INR 21 crores impact on this quarter balance sheet.
Got it, sir. And for -- during 4Q, so until January and in February, March, what would you expect in terms of recovery from these higher -- the GS3A portfolio? Are you already seeing some traction decline in it?
So Aditya, this has come like a boon for us because there was [indiscernible] portfolio of around 2%, which used to be 65 to 90 days to pay one installment. With this, guideline coming on 14th November and all working in first 45 days, this has reduced from around 2% to 0.89%. And I have told. In January, again, overall portfolio has further improved by 20 basis points. So from 1.7% to around 1.5% range is already achieved and even on 1+ 6.45% to 6.25%. So I think we will try our level best and best of our efforts to give better performance on collections in this quarter. It's also like we have done in Q3 -- our Q4 guideline we achieved in Q3 itself on colorations. So I can't predict future numbers, but I think we will continue doing the better job on that side.
Got it, sir. And just last thing, the LCR. Is it -- the reported number, is it being carried at the 60% requirement? Or are we carrying higher? And if it is higher, then do we have any plan of reducing it?
We have substantially higher LCR and -- because we have around INR 1,300 crore fixed deposit and other investment in the G-sec, so I think we are far above than what is the regulatory requirement.
We have the next question from the line of Prakhar Agarwal from Edelweiss.
Sir, 3 questions. First, to start with in terms of your gross Phase 3 and the rise that we are seeing in that. How are you seeing the Phase 3 provisions moving into because if we just look at last year or so that number has dropped from 29% to 23%, 24% now? Given the fact that now the pool might be even more stickier, how do you think what level of provision cover you will be comfortable with?
So Prakhar, Ghanshyamji is replying.
Prakhar, Stage 3, if you see Stage 3 and 3 these are 2 components, we published in our results. And 3a also, we made almost a similar provision what we have made for 3b. So combinedly, we any Stage 3 is adequately provided for in the balance sheet. We don't see any extra provisions, any sort of terminal loss will be higher than what we have provided -- what we already provided as a provision.
Sir, the question is more from a strategic perspective. Do you think that 23%, 24% is somewhere you will be comfortable with? Or you'll again take this to 29%, 30% over a period of time?
I think 23%, 24% is good number.
Prakhar, again, I will say here, this is a 6 monthly process, which as per Ind-AS guidelines, auditors and management team do the review of the data. And accordingly, they come to a formula, which is sufficient for the balance sheet. I think last review happened in September, and there this number was static. Again, in March, they will review. But as per management view, I think we are better -- on the better side of this number.
Got it. Just again on this, the second part, and this is more of a data keeping. If you could just highlight if I was 82 basis points of gross Stage 3 that you said apart from RBI regulations, what would have been home loan and other mortgage loans for Stage 3? Just for a comparison sake if I were to look at -- compare it to the last quarter?
So you are saying HL and other side?
Yes.
Just give me 1 sec. Stage 3b housing loan 0.84, loan optimum 0.79.
Got it. Got it. Just one last question. Have you utilized any COVID provisions this quarter? So we were carrying some chunk around INR 340 million, INR 350-odd million last quarter given what we have seen between restructured and COVID provision. So while there has been a rise in restructured the provision that we made, but it seems to have utilized COVID related provision. Is that a fair estimate?
Yes, Prakhar. So accounts which got normalized or foreclosed, on that we have released the provision. Rest, provisios is still in the balance sheet.
And when do we see -- when we tend to utilize this extra buffer? Any thought process around this?
No. So I think we will review the situation every quarter. And as the things will get normalized and as far auditors and management. But normally, we do it either if an account is 18 months in normal situation at Stage 1 or if the account is foreclosed, then we release the provision.
Okay. Just one last data question if I may squeeze in. What was the assignment income this quarter subsequent to last quarter? That number, assignment income?
Yes. Assignment income for this quarter is INR 45 crore versus last quarter INR 33 crore.
Got it.
Side by side, if you refer our detailed sheet, we give the detailed information of reversal of earlier assignment transactions also. So in this quarter, INR 21 crore got reversal of early transactions versus last quarter, INR 18 crores.
Okay. So INR 18 crores versus INR 21 crores and INR 33 crores versus INR 45 crores.
INR 33 crores versus INR 45 crores. Right. And net-net INR 15 crores versus INR 20 crores. INR 15 crores versus INR 25 crores.
And last year, Q3 was also INR 40.5 crores.
Got it. Got it.
Yes, refer our sheet and presentation, we have published in detail.
We have the next question from the line of Karthik Chellappa from Buena Vista Fund Management.
Three questions from my side. What will it take or what signals are you waiting for to accelerate disbursements on the home loan segment? For the last 2 quarters, that segment has been seeing a sub-20% disbursement growth, whereas the non-mortgage segment has been seeing very strong. So what are the signals that you're looking for to accelerate your disbursement growth in mortgages?
Yes. So like, Karthik, we always say overall, which is we attempt for 75-25. And I think this quarter, hopefully, we should be around 72% to 28% kind of numbers. And home loan segment, yes, we will start pushing more. But as you know, we have more business on self-concession side, where disbursement happens in 5 stages. So when we are doing this business also, this will have impact in the next 5 to 6 months. So the business on that side is also, on a [indiscernible] basis, it's good. But [indiscernible] tranche-based disbursement. So earlier businesses tranches already got reduced. So now whatever new business we are booking, the disbursement is happening on tranches with some effect on that part and some effect on, yes, new business, which will be -- so we will be around 72% to 28% or 70-30 this quarter itself.
Okay. Got it. And sir, second question what was the like-to-like average increments that you have provided to your field staff? The context in which I ask this question is the 37% to 39% OpEx growth that we have seen for the last 2 quarters seem to be slightly on the higher side relative to trends. And if you're going to be adding only like 30 to 40 branches, which is like a 10% to 12% increase in branch count, what is the kind of OpEx growth that we should build in at least for the next 1 to 2 years?
Yes. So Karthik, as we always said that 35% to 40% of our OpEx are disbursement linked. And if we'll compare from last year to this year, our disbursement has grown, 9 months basis, 40%. So the variable costs have increased in that proportion. But if you will see [Foreign Language] manpower cost has increased from INR 57 crores to INR 60 crores. That is not much growth. But like in COVID time, the discretionary expenses on advertisement side, traveling [indiscernible] and those side of the expenses [indiscernible]. Now since we want to have that 25% kind of growth, the headcount has also increased, which may have not increased last year. And anyway, 35 branches year-on-year opening will have some cost impact. But to your account, INR 57 crores to INR 60 crores on manpower is that variable expenses, as we always say that will increase in proportion of business increase and advertisement and other expenses I've told you, which was on hold last year, is now under normal path. But again, the way I explained on the first question because we have reinvested for the business capacity, which I have said that last 2 months' number are always anyway INR 375 crore plus disbursement numbers. So these numbers will anyway -- within the next 2 quarters, you will see 25 to 30 basis point reduction anyway. And we continued for that trajectory again for 2 to 3 years from here on.
Got it. Last question is the 0.89% of NPA, that we are still adding because of the circular...
This is the operator, I'm sorry to interrupt. Mr. Chellappa, your audio is breaking. Could you fix the line, sir?
Sure. Is this any better now?
Yes, it is.
Sir, my last question is the 0.89% of NPA that we have actually seen because of the RBI circular, under the old Ind-As format, how much of this 0.89% would be in Stage 2 and how much would be in Stage 1?
So mostly, it is Stage 2. So [indiscernible] top totaled INR 76 crores, INR 4 crore in 1 to 30 DPD, around INR 12 crores in 31 to 60 DPD and INR 60 crores in 61 to 90 DPD.
We have the next question from the line of Shreepal Doshi from Equirus.
So firstly, a data keeping question. What will be the number for asset held for sale in the balance sheet? I think that number as on '21 was close to INR 22 crores on the gross level. So what would that number be for 9 months?
INR 20.4 crores.
So we've seen some resolution happening there, and therefore, the number has come off?
You can see the NPA number going down. This will have both the side of impact.
Right, right, right. Sir, but this is not part of our Stage 1, 2, 3, right?
Yes.
Yes.
In this bracket, I think INR 2 crores, INR 3 crore is getting added every month, and more than that is getting revolved. So mostly, you will see this number stick with around 2 years around the same number.
Got it. Right, right. And sir, the second question was with respect to the branch expansion. So in the last -- say, from FY '19 onwards, we have added close to 90 branches, of which close to 50% to 55% is in newer states like UP, Karnataka, Haryana, Punjab. So is it also having an influence on our loan book mix changing with respect to non-HL share increasing and also salaried customer share increasing?
So 2 things. One is, salaried, yes, and HL, no. Because new states, we do less non-HL business. But salaried, yes, in the new states, we do more secure business initially. For understanding the HL business, it takes 2 to 3 years' time.
Got it. Got it. So broadly, that is having some influence in the mix sort of changing on the salaried.
I told last time also we started journey with 12% and now borrowing at 5.9%. So that pricing also, there will be some mix change because we will be able to attract more salaried customers in our bouquet.
Got it. All right. So one last question was with respect to our sourcing strategy. So while we have been one of those HFCs who is having 100% sourcing through our own employees, but are we exploring other revenues for lead generation? Because we had an application, which was something like Aavas Mitra app, and we were building that digital sourcing infrastructure also. So are we looking at exploring -- or having a diversified sourcing platform for us? Or we will continue to have a...
We will continue our journey on piloting on alternate channels. Right now, this has become 6% to 7% of total business. We intend to take it to 15% in next 2 to 3 years.
And that will be driven by some incentives?
So in this Aavas Mitra profile, we have very less incentives, more on the learning mode and relationship and business generation for both sides. And digital mode, we don't do any incentives. It's digital and marketing initiatives where we're getting lots of leads from websites, Facebook, social media and other digital mode where we can access our customer base [indiscernible] existing customer base [indiscernible]. Now we have almost 40,000-plus customers downloaded on our loan app from where they can directly refer the customer to us.
Mr. Doshi, do you have any more questions? Sir, there's no response from this participant line. We'll move to the next question. The next question is from the line of Bharat Shah from ASK Investment Managers.
[Foreign Language] First of all, on a more longer-term basis, just wanted to revisit our ROA 3, starting with kind of a spread in NIM, including our fee income, et cetera, expenses, credit costs, pretax and ROE. If we can just draw the schematic ROA 3?
Yes, sir. So sir, we always have kept that on a fixed time leverage basis. We will be able to give 2.5% kind of ROA on sustained basis. 2.5% ROA, gross it up by tax, then you can assume around 50 basis points for credit cost, then operating cost will be on a long-term sustainable basis, it will be around 2%, 2.5%. And then the spread plus. So you can see NIM around it.So right now, this is like 8.6% of NIM and then around 3.34% of OpEx. Our credit cost is somewhere around -- credit cost is around 0.5%. Yes, 46 basis points. So we see, sir, as we will scale up, our spread will go down. As the end result when we came for the IPO the last 3, 4 years, we said that this 5% spread can go down up to 4%. But because of market conditions and outsourcing, we were able to maintain that spread. OpEx-wise, last 2 years, we were consistently going down because of this COVID, and investment in new business lines. We want to scale up our business capacity of [ INR 2,000 ] crores per month for next 4, 5 years kind of scenario.And 1 or 2-month COVID impacted in [ 12 years ] balance sheet it is showing our OpEx by 30 basis points up. But I am sure that we will continue our journey of 25, 30 basis point going down year-on-year basis. So on a steady-state basis, you will see around 2.5%, 2.6% consistent ROA with 6 to 7x leverage book in our balance sheet.
Which since we are talking of a sustainable NIM of about 7.5%?
NIM by calculation, I need to do, yes, but maybe yes, right.
Yes. Because our ROE at about 2.5% to 2.6% will mean [ green ticks ] margin will be 3.5% to the credit cost, and OpEx of 2.5%. So that makes it around 6.5% to 7%?
Yes, sir. Yes, sir. Consistently, we can deliver that number.
NIM of 6% and up to 7%?
Yes, sir. And is coming down to 4%, 4.25%, which is right now 5.76%.
Sorry, come again on that?
No, which means that is spread coming down from 5.76% to around 2% less.
Yes, which is sharp assumption, but this is something on a more longer-term basis sustainable while actual picture for...?
I have kept from initial time that we can sustainably give 2.5% ROA on 6, 7x leverage book consistently for the next 5 to 6 years.
So which mean that actual deliverable numbers will be better than this because what we are assuming on ROE and what we have achieved...?
I mean they can go far to say ROE is somewhere around 15%. And 14% ROE have been in for a year ago quarter. [Foreign Language] in near term our balance sheet is already in that position.
It should be more? That is because of extra liquidity that you have, but in a normalized balance sheet at some stage...?
[Foreign Language] NIM is increasing for us despite the spread is maintained because liquidity was the total balance sheet size it is coming down.
Sure. And when you say leverage of 6% to 7%...?
[Foreign Language] cash is around INR 1,300 crores. So income generating asset is getting increased, which is the way we explained the thing.
[Foreign Language] That I normalize in my calculation when you for that excess liquidity. Is this normatively it is part of the leverage in order to work out the normative ROE. So that's fine. Sushil Ji, degrade when you say 6 to 7x, that means INR 1 of net worth and INR 6 to INR 7 of the leverage, right? That means INR 7 to INR 8 total capital?
Yes. I say loan book divided by capital.
So that means leverage of 6 to 7x is actually 5 to 6x leverage?
[Foreign Language]. Yes. sir.
So it's not leverage 6 to 7x it's 5 to 6x. Okay. And again will visiting that okay its part for the length of time we've been talking about OpEx deduction so which it takes in -- not in evidence in the numbers. But I am glad you are building the business by trading branches by building teams. So that we are well prepared. Currently, our OpEx in terms to saying to be ahead of the revenue proliferation. If work stage operating leverage will kick in, in both time frames [Technical Difficulty]
Sir, sorry to interrupt. Can you hear us?
Yes. I can.
Sir, we missed part of your question. Could you repeat you next question once again.
Sir, you are not audible.
1 moment, I will just check this participants in 1 moment. Participants, please stay connected while we reconnect this participant.
[indiscernible] currently, our OpEx intensity seems to be ahead of the revenue [indiscernible]. At what stage operating leverage will kick in, in what time frame?
Really sorry to interrupt. Can you hear us?
Yes, I can.
Sir, we missed a part of your question. Could you repeat your next question again. [Technical Difficulty]
Hello?
Yes.
Yes.
So I want to think that OpEx and operating leverage is not played out as probably we believe it will. At what stage revenue expansion will start overtaking expenditure expansion. What kind of a time frame do you think it will start happening?
So, Bharat, if we will exclude this year because we have given increment in all those which are pending. And like last year, because of variable nature of expenses, we have reduced in to the tune of disbursement. You will see, other than that, we were able to reduce our OpEx year-on-year versus 30 to 40 basis points year-on-year. And so increase in revenue versus the increase in expense, I think next 12 to 18 months, we will be in that line. So that operating leverage will start showing in that time frame in the balance sheet.
In 12 to 18 months' time?
Yes.
From that phase onwards, we'll start seeing probably that 25%, 30% OpEx drop?
No. I think 30 to 40 basis point, yes, but on the [indiscernible] side, on absolute number size, yes, that will be there. So if business will increase 25%, OpEx will not be growing in that line.
Sure. And while your 1+DPD numbers have improved, I was stick still with supplies given our conservative kind of a treatment. With the RBI revised loans over the NPA recognition went up sharply. I was a bit surprised by that.
So, sir, normally, if you will see if we say that our 1 plus is 15.5%. So NPA numbers was around 1%. And then the middle layer, which is 30 to 90, which was around 2%, 2.5%, and 1 to 30 was around 2%, 2.5%. So that 2.25%, 61 to 90 bucket, has -- because of this, because we have started initiating surface at that stage, that has significantly come down, but that number was always like that only. The 60 plus number in the balance sheet was always around 2 plus 1 so around 3% and when it used to be 4% 1-plus, that number used to be 1.75. Because some portion of customers always give 1 installment every month, but 2 installments which they have missed in the past, it takes 6 to 9 months, but because of COVID situation that remain outstanding and they continue paying 1 installment every month.
Okay. But credit cost sustainable, 0.5% is realistic, right?
Sir, I think at this, yes, this is realistic. But I will tell you, this cost has 3 components attached to it. One, we are carrying around INR 10 crores to INR 11 crores of COVID-19 impact, around INR 15 crore, INR 16 crore of restructuring impact, and then this new RBI guideline INR 16 crores kind of impact. So it actually it's [ INR 10 crore plus INR 20 crore, plus INR 15 crore ] so around 30-plus, so out of INR 80 crores of ECL provision INR 45 crore provisioning is on account of [indiscernible]. So our balance sheet is well provisioned for next 18 to 24 months in advance.
Okay. One last question. Pure buffer provision is on 31st December on account of [indiscernible]. Is how much, meaning all the ECL provisions are taken care of any other mandated write-offs have all carried out. In addition to the pure buffer provision management over how much?
Sir, like, I will say [ COVID ] provisioning processing is that. And then on this RBI guideline, provisioning also, we have done equivalent to 90 days. We have not taken a view that this is less provision. So we have provided full provision on this balance sheet also. So normal terms, it Stage 2 provisioning for around 10%. There, we have provisions [ 22% ] on that also.
Buffer provision, additional, contingency provision, which has nothing to do with any asset or anything clearly as a prudent management to overlay we are caring?
So that is around INR 10 crores.
We have the next question from the line of Dhaval Gada from DSP.
So actually, sir, I wanted to sort of probe a little bit more on the OpEx part. So actually, I was looking at the first 9-month data for FY '22 and comparing it with the first 9 months of FY '20. And whichever metric, be it cost-to-income, cost-to-asset, even if you look at employee cost-to-disbursement, across metric, there is hardly any improvement per se. So just I wanted to understand a little bit more around how you think about OpEx? And why are we not able to see the benefit come through? So if you could be a little bit more big in terms of the...
You are talking about FY '20 or FY '21?
FY 2020, pre-COVID versus 9 months and versus that the first 9 months of FY '20. So from that perspective, not much improvement is visible.
So, Dhaval, that will not be there because as I've told you, first is there is impact of business because we are dividing it by business. So current year also, first month and now 15 days, so 1.5 months business got impacted because of COVID. And if we will add that kind of business, all the ratios will be better.Second is because last year of COVID, we have not increased the manpower, which now we have increased by 1,000-plus people, keeping in mind future growth and the kind of consistency we want to maintain.And third point is, I will say that in business proportion, we have 35% to 40% of the cost, which is in line with our business kind of growth. This year, I think that, that growth is already there at 40%, so that cost has also increased. But yes, on [indiscernible] basis because last year, business got impacted by 3 months and this year, business got impacted by 1.5 months. Because of that INR 400 crores, INR 500 crores, AUM is less. So this number is looking like this.
And, Sushil Ji, in terms of the cost structure, is there any material change in the last 2 years in terms of the branch-led cost or any fixed cost structure, any major change that one needs to be aware?
No, no change in that side. Mostly, as I mentioned, around 35% of our costs are variable costs, which is inching up in tune of disbursement growth and around 65% or across our [ major cost ].
Understood. And just one, your other point, which I wanted to understand is on sourcing. I mean I understand that bulk of our sourcing, almost 65%, 70% comes from referrals. So basically, this cost linked to disbursement, what -- how exactly one can think about? I mean, because if I understand right, we don't incentivize our employees on disbursement, it's on number of customers, if I remember, right? So just -- I mean, if you could explain how one should think about the 35%, 40%, like what's the...?
No. Our sales cost around 40% cost is attributable to variable side in terms of disbursement. So though we get customer reference, but sales can get incentive on disbursement as well a number of files, both sides.
Understood. And in terms of sourcing, apart from referral, could you share like the -- you've said the data around alternate channel. So if you remember, like we had made those investments around the telecalling, the digital sourcing. So how big are those businesses like how much they account for sourcing now? And in terms of DSA also, we were piloting. So how big is the DSA part, if you could just...?
DSA part will be around 1% or less. And these other channels, I have told you 6% to 7%.
All put together?
Yes.
Okay, okay. Yes. And the last data point is on rejection rate. Is there any material change compared to earlier trend or broadly similar?
No, broadly similar. We are sourcing somewhere around INR 1,500 crore and disbursing now around INR 375 crores to INR 400 crores a month.
We have the next question from the line of Pooja Ahuja from Monarch Networth Capital Limited.
Am I audible?
Yes, yes.
Yes. Sir, firstly, I wanted to understand we have increased investment in our subsidiary this quarter. So what are our plans in terms of the business here? Do we intend to sort of...?
Pooja, when earlier we have applied, there was a limit of INR 2 crores net on fund and NBFC. And later on when we reapplied for that license, now the minimum capital requirement is INR 10 crore. So to meet that requirement, we have transferred our funds.
Okay. All right. Okay. Okay, sure. And sir, I wanted to understand how much was the write-off, if at all, adding in this quarter?
Total 9 months, I think, is 1.9%, but I will tell you about this quarter. Pooja, we will come back to you. But for 9 months, 1.9%.
Okay. Okay. Sure, sir. And lastly, I wanted to understand, so you had earlier in the last quarter mentioned that we'll be adding about 30, 35 branches. And so far in this financial year, we've added about 18 branches. So the branch addition is likely to come in the next quarter?
No. Pooja, you will see 12 months to 12 months. We have added 35 branches. And every year, we open around 15 to 20 branches in last quarter. So we are on track. We will be around [ 340 to 350 ] branches this year itself. So around 34 to 35 branches, adding this year also.Pooja, I think negligible around no write-offs this quarter.
Pooja, does that answer all your questions?
Yes, yes.
Ladies and gentlemen, that was the last question. I would like to hand the floor back to Mr. Sushil Agarwal for closing comments. Please go ahead, sir.
Thank you all for attending the call. We valued your suggestions and remarks. We will continue our endeavor to give consistent business metrics and more better asset quality on our book. For any further information, we request you to get in touch with Himanshu in our Investor Relationship team or IR adviser. They would be happy to help you. Thank you all. Thank you for participating, and thank you very much.
Thank you, members of the management. Ladies and gentlemen, on behalf of Aavas Financials Limited, we conclude this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.