Five-Star Business Finance Ltd
NSE:FIVESTAR
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Earnings Call Analysis
Q1-2025 Analysis
Five-Star Business Finance Ltd
In an impressive growth narrative, Five-Star Business Finance Limited achieved remarkable results in the latest quarter, reaching an all-time high of INR 10,344 crores in assets under management (AUM). This represents an extraordinary 36% increase year-over-year and a solid 7% growth quarter-on-quarter. The company's focus on steady and robust growth has contributed to exceptional performance in profitability as well, with profit after tax (PAT) soaring to INR 252 crores, up 37% from the same quarter last year.
Total disbursements during the quarter slightly decreased to INR 1,318 crores from INR 1,336 crores in the previous quarter, marking it nearly flat. However, this figure represents a commendable 16% increase compared to INR 1,132 crores in the June of the previous year. What stands out is the company’s ability to maintain a high-quality loan portfolio, indicated by minimal increases in non-performing assets (NPAs), which rose marginally from 1.38% in March to 1.41% in June.
Colections saw a slight dip during the quarter, with collection efficiency at 98.5% compared to 99.5% in March. The company attributes this to seasonal trends along with external factors like elections and heat waves impacting cash flows. However, the management is optimistic as collection patterns are showing early signs of recovery in the subsequent month, July.
The cost of funds remained stable at 9.6%, which the company sees as favorable considering the benefit from declining incremental costs. The return on equity (ROE) reached a new high of 18.95%, with projections suggesting it will comfortably cross 19% for the full financial year. In terms of total income, Five-Star reported INR 669 crores, a noteworthy 38% year-on-year growth, reflecting a consistent demand for its financing products.
Looking ahead, Five-Star is targeting sustainable growth in AUM and profitability, with future guidance indicating a growth rate of over 30% for the fiscal year. This includes plans for continuing branch expansion with 27 branches opened in the quarter, increasing their network to 547 branches to better serve their growing customer base.
The company is also taking strategic steps to manage its liquidity better, with a liquidity buffer of approximately INR 1,891 crores, alongside unavailed sanction lines of about INR 400 crores. Moreover, there is a shift in borrowing strategies, decreasing reliance on banks from 79% in March to 24%, which allows for more diversified funding sources with competitive pricing.
Though external pressures such as increased competition and seasonal fluctuations are evident, Five-Star has equipped itself with a robust collection strategy to mitigate risks associated with borrower repayment abilities. The management remains confident in their measured approach to handle fluctuating market conditions, emphasizing their strong operational framework.
In conclusion, Five-Star Business Finance continues to demonstrate strong foundational growth with significant milestones achieved this quarter, including a record in AUM and PAT. While the company navigates external challenges, its strategic initiatives, robust financials, and commitment to consistent growth put it in a promising position for the future. Investors can look forward to a stable trajectory backed by strong operational performance and a focus on key growth metrics.
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Ladies and gentlemen, good day, and welcome to Five-Star Business Finance Limited Q1 FY '25 Earnings Conference Call hosted by JM Financial. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sameer PC. Thank you, and over to you, sir.
Good morning, everyone, and welcome to the Five-Star Business Finance Limited's 1Q FY '25 Earnings Conference Call. First of all, I would like to thank the management of Five-Star Business Finance for giving us the opportunity to host this call.
From the management side, we have Mr. Lakshmipathy Deenadayalan, Chairman and Managing Director; Mr. Rangarajan Krishnan, Chief Executive Officer; and Mr. Srikanth Gopalakrishnan, Chief Financial Officer of the company. As always, we will have opening comments from the management, post which we will open the floor for Q&A.
With that, I would now like to hand over to Mr. Lakshmipathy Deenadayalan for his opening comments. Over to you, sir.
Yes. Thank you, Sami. Good morning. I welcome everyone for this Q1 earnings call for the financial year '24, '25. This is our 8th earnings call. You have seen us in the last 8 quarters of performance, what we say and we do and what we have delivered in the last 2 full cycles.
Before getting into the numbers of June quarter, let me give you some highlights. Generally, June quarter is a muted quarter for all lenders. For Five-Star, we have done extremely well and with the highest ever numbers in this quarter. To highlight a few, I'm happy to say that our asset under management has crossed INR 10,000 crores in June quarter. [indiscernible] being the Chairman and Managing Director of Five-Star.
When I joined 20 years back, we were at INR 10 crores. Today, when I look back and see the growth, what we have done in last 2 decades, we have reached at INR 10,000 crores. It is 1,000x in the last 20 years. Thank you for all the support that shareholders have been offering to, giving to me and the management team to run it in a steady and a stable way.
Second highlight is our profitability, which has crossed INR 252 crores in the quarter, which is our ever highest quarter of PAT accorded in the history of Five-Star. Third highlight our ROE, which is the return on equity, which is a very important metric for a shareholder, is an all-time high of 18.95% in a quarter, and we will comfortably cross 19% for the full year. So this is possible highlights what we have done in June quarter.
Let me get into the numbers. Coming from branches, we have opened 27 branches in June quarter, which keeps our total branch strength at 547 branches. Distribution -- sorry, disbursement, which are INR 1,318 crores in June quarter comparing to INR 1,336 crores in March quarter, which is almost flat. It is a good sign when a lender are able to deliver the disbursement equal to the first quarter of March, that brings a very good pickup for this full financial year.
When we compare with June of last year, we did a disbursement of INR 1,132 crores, which is 16% higher than year-on-year. That has reflected an increase in our AUM. As I said, we have crossed INR 10,000 crores. We are at INR 10,344 crores as of June end versus INR 7,583 crores in last June, registering a 36% year-on-year growth. And from March INR 9,641 crores, registering a 7% growth on Q-on-Q.
Now taking you to the collections, which is the most important part. Our collection efficiency in June was a bit lower comparing with March. That's the usual effect of June quarter. Adding to that was the election heat and the heat wave across entire countries that had an impact on the collection efficiency.
Nevertheless, it was only a small blip. We were at 99.5% in March. We are at 98.5% in June. The unique customer collection efficiency, which we normally call, collecting a view from all live customers, was almost full with March. It was at 97.8% in March versus 97.2% in June. So that shows the slowdown is very, very small.
This is reflected in crop Phase III assets, moving from 1.38% in March to 1.41% in June, a small bit increase of 3 bps, whereas, it was stable comparing with last June. It was 1.41% versus 1.41% in this June 2.
Now moving towards the cost of funds. Our cost of funds on book was 9.6% in June quarter, which was seen in March quarter as well. But the good news is the incremental cost of borrowing is coming down from 9.58% in March to 9.47% in June. So this shows the interest from a lender's perspective and the risk premium, what Five-Star was -- added to Five-Star is coming down.
The increase in AUM and the good collections has resulted in one of the good profitability for Five-Star. Our total income has gone up to INR 669 crores in June quarter comparing to INR 483 crores last June year-on-year, registering a 38% year-on-year growth. And in March, it moved up to INR 619 crores to INR 669 crores, which is a growth of 8%. Translating into good profit, as I said earlier, highest ever profit that we have made in a single quarter. We have done INR 252 crores of PAT comparing to INR 236 crores in March and INR 134 crores in June last year, reducing a 37% year-on-year growth and 7% Q-on-Q growth.
And finally, moving towards the returns, the return on assets is stable at above 8% comparing to March. And as I said, the return on equity is at all-time high at 18.95% comparing to 18.65% in March quarter. And as I commented earlier, we'll be comfortably crossing 19% less for the full year in this financial year. So with these numbers, I will hand over to Srikanth, our CFO, to deeply comment, please, on all the numbers.
Good morning to all of you. As Mr. Pathy said, this is a very, very memorable quarter for us. We crossed the INR 10,000 crores mark in our area. So this is a progress that has been built over the last many years, and it's a moment of real joy for all of us.
And so on some aspects, which Mr. Pathy has not covered. I don't want to repeat whatever he has already stated. Our active loans has gone up from about -- it has gone up to about INR 4.1 lakhs, which is a 29% growth on a year-on-year basis. This clearly shows that the growth is still led by increase in borrower base rather than increase in ticket size.
The ticket size remains almost flat at about 3.5 lakhs. Our yields continue to remain consistent at around the 24th, 24 quarters percentage. The cost of funds is at 9.65%. So the spreads are flat as compared to the previous quarter and similar to June '23 as well. There is a compression in NIMs on account of increased debt and increased leverage. The NIMs dropped to 16.72% as against 17.74% in the quarter 1 of last financial year.
Our cost to income continues to be very attractive. Inclusive of credit cost, this number was at about 34.34% for this quarter as compared to 36.6% for the June quarter of last year. Again, as we have guided in the past, we expect our cost to income to be around 35%, 36% levels on a steady-state scenario. So there is not great room available for continued reductions in the quarters to come.
This has resulted in an ROA of about 8.23% for the quarter and a return on equity of 18.95%, very close to 19%. From a borrowing perspective, we have about 42 lenders who have lend to us. One other encouraging fact in line with our bigger strategy, we have started the sources of diversification of our borrowing. Our borrowings from banks, the proportion of borrowings from banks reduced from 79% in March to about 24% as of now.
If you compare on year-on-year, it has dropped from 84% to 74%. During this quarter, we received incremental sanctions of about INR 850 crores. We availed INR 825 crores at an all-inclusive cost of 9.47%. The company continues to be conservative in terms of maintaining good liquidity buffers and the underweighted sanction lines. So we had a liquidity buffer of about INR 1,900 cores, INR 1,891 crores, and unavailed sanction line of about INR 400 crores. We will also see more non-bank capital market transactions and DFI is getting added in this quarter and the quarters to come.
We have seen on the collection efficiency, Mr. Pathy has already talked about that. But for those marginal increases, which has also impacted the current and the delinquency buckets a little bit. From a provision coverage perspective, we are still very healthy and robust. We have a Stage 3 provision coverage of 52% and then overall provision coverage of 1.3%. So we will continue to remain optimistic as well as cautious we'll maintain a good level of provision buffer to face us against any unforeseen interest.
One of the other encouraging facts during this quarter is the penetration of digital payments. If you recall, we had highlighted in the last earnings call that we will end this year at about 70% noncash and 30% cash payments. We have dealt about 53, 47 -- 57, 43 as of last quarter. But this quarter, we've actually made a very significant improvement on that. We are at about 65% of noncash payments and 35% of cash payments.
So to achieve the number of 70-30 that we had guided you seems a very, very comfortable position for us. At this point of time, we don't want to revisit our guidance, but the 70-30 is extremely achievable for us. So that is another positive that we have achieved during this quarter.
So given all of these things, we had one of the best quarters in terms of profit after tax of INR 252 crores, a growth of 37% year-on-year and 7% on a sequential quarter-on-quarter basis.
Our net worth stands at about close to INR 5,500 crores, it's at INR 5,000 crores gross. So again, we have demonstrated good performance of our profitability, quality and growth, which will continue in the quarters to come. With these opening remarks, we'll open up for any questions that any of you may have.
[Operator Instructions] The first question is from the line of Mahrukh Adajania from Nuvama Capital.
Congratulations on the results and on the INR 10,000 crore mark. I just had a couple of questions. Firstly, on your liquidity. So now do you see yourself maintaining such excess liquidity for a long period of time because I guess, the liquidity buffer has kind of increased over the last 3, 4 quarters, right, and in the level of liquidity buffer. Would that continue for some more time?
And then the other question is that does vary feedback from lenders on how heat we had impeded collections. You don't seem to be impacted in any big way. So any comments you would offer on how you could have good collections in an otherwise bad quarter?
Yes. Thank you, Mahrukh. Let me take up the second question, then Srikanth will comment for the first question. Yes, Mahrukh, it was a tough quarter for all lenders. Generally, after pulling back everything from customers in March, generally, there will be a new third quarter for June. Let it be banks or nonbanks, the trend is same.
But what happened in this June was prolonged elections and prolonged heatwave had an impact on the cash flows of the customers. Adding to it the school season. So people have to pay their kid's school fees. So there are 3 challenges for every lender. I'm not talking about Five-Star. For each and every lender at retail level, where they have 1 or 2 loans to repay, it was not easy for their customers to repay their EMA loan time. But as I said, we have a very strong collection infrastructure. At the ground level, this helps during these kind of things, and we are able to monitor this very well because we know that May and June is going through the difficult one. So we had a good strategy, collection strategy put in place in May and June that has really given a good effect.
There was a small blip, as I said in the opening remarks, from the collection efficiency. And you see DPD a small blip in each of the buckets. That will get corrected in due course of time. So I can even give you the update of July, which closed yesterday, is it gives an encouraging sign, and it is better than the June member collections. We have to wait and see how August and September turn around for Five-Star.
But just because of expected one and because of strategy put in place, our impact was a bit lesser compared to other lenders. Yes, I also saw other lenders' numbers that far as fortunate to have a liquid impact comparing to that.
So Mahrukh, on your question on the liquidity buffer that we are maintaining. Our intention is to maintain around 15% to 17% of our AUM in the form of liquidity. This is broadly the samples that even bigger NBFCs are actually following. And we would like to maintain about 15% to 17%. We are probably 1% to 2% higher than that.
But if you look at from a trajectory perspective, this summer has been coming down. We were at about 20% of our AUM that we had as liquidity in December that has actually dropped to about 18% as we speak. See, it is not a question of the fact that we want to have a higher liquidity buffer. It is also a question of the kind of sanctions that we get, what are the sanctions that can be accommodated and what are the sanctions that can be pushed out a little bit. So there is a little bit of a balancing act that we play on this.
But we will definitely ensure that we maintain about 15% to 17% liquidity, and a percentage or 2 higher will be because of specific names that we have been looking at, on-boarding. If they come in, like, for example, IFC could not have been tranched out. But we needed IFT and since we had to take the entire INR 500 crores. There are still INR 400 crores of undrawn sanctions that we have, as we speak. So it's a balancing act that we do. But about 15%, 17% is what we would like to maintain in a steady-state scenario.
The next question is from the line of Raghav Garg from AMBIT Capital.
I have a few questions. So one is on the business officer side, I see that the addition to business officers is really flat this quarter, whereas in the last several quarters, you seem to have the EBITDA. So what's the thought process here behind the addition of these offices? Is it that you hired a lot in the last 4, 5 quarters, and you want to utilize that capacity first? That's my question.
Raghav, in the last earnings call, we explained to all of you that the strategy from a branch expansion perspective is divided into 2 parts. One part is what we call as a split branch or a cluster approach. There is 1 bigger brand is getting broken. And it is from the bigger brands, we're opening another new branch.
So when this happens, there is a set of officers to get an for from an existing branch to the newly opened split branch. So this constituted about 50% of the branch openings last year. And the balance 50% is all completely branches that started from the scratch. So if you look at in the first quarter of this year, we opened about 27 branches. Again, the split is very similar. So wherein a number of new branches have been opened, with get split from an existing previously big branch. And when this happens, offices get transferred from the bigger brands to the newly opened smaller branches.
So it's not a linear addition of operators with respect to the branch openings. This is what is also giving us the leg up in terms of a little bit of lower operational costs that we didn't see reflected in our financials.
Understand that is why it's leading to a higher number of accounts being handled for employees, right? Just the segregation of branches in terms of new branches and a bit less of expansion?
Correct.
And just to clarify it further, it is not higher number of accounts given to an officer. Where an officer had a lower number of accounts, it has been adjusted in last quarter.
Okay. Sure. Understood. Understood on that part. Just out of that 27, how much of that would have been because of the cluster expansion and how much of those branches are quickly now?
Roughly, it's 50-50.
Okay. Understood. And just 1 last question on -- in terms of the number of loan accounts or loans still first, the growth is about 11%. There is quite a bit of moderation. Where do you see this number in terms of growth for FY '25 and on a sustainable basis for, say, next 3, 4 years?
Are you talking about the AUM growth?
No, I'm talking about the number of new loans disbursed in this quarter.
Number of new loans disbursed. See, the point that we are saying is that is linked to the overall disbursal quantum they're thinking at. So for example, between last year and this year, our disbursements are expected to go up by about 25% to 27%. And so a little bit of push up on the ticket size, which will come because of inflationary increases. You will probably see the number of loans growth by about 20% to 22% rather than getting to 25% [indiscernible] kind of a number. So I would say broadly anywhere around 18% to 20% is the number of loans that we keep going up on. There'll be the disbursal number on a quarter-on-quarter basis. .
So Raghav, there are 3 things for the growth to kick in for staff. The first 1 is the brand addition. I restate that even in this year, we'll be adding close to 18, 19 new branches and close to 100 split branches. So the numbers will be close to 200 branch count, whereas new branches will be 80 to 90, and the rest will be the split branches, as Ranga explained, to handle the risk better. That's the first lever.
The second lever is addition of officers that will also be done in this year. Third is the increase in ticket size. We have been doing it at 3.5. This year, it will be close to 4. So all 3, these are put together, I am confident that we'll be growing at 30% plus for the full financial year.
The next question is from the line of Renish Bhuva from ICICI Securities.
Congrats on a good set of numbers. Sir, just 2 things. One on the business growth run rate side, which has been falling since Q2, which has been now dedicated to 16% Y-o-Y. I can understand that it's seasonally. But still, we are looking at the Y-o-Y growth and not the sequential growth. And also, when I look at the disbursement per branch on a 2-quarter like basis, just to eliminate the tone branch opening. Their run rate is now fallen to INR 2.7 crores in Q1 FY '25 from the peak of INR 3 crores in FY '24. So how one should read this data? I mean, falling disbursement part branch also [indiscernible] in total rate?
Yes. Renish, let me clarify to all shareholders who are there on the call. Don't go run rate per branch for next to -- at least for 18 months. Because as Ranga said, there is a clear-cut strategy for Five-Star to make all super branches into split branches and bring the number of offices, which were close to 15 offices in a branch close to 8 offices in a branch. That addresses a lot of risk and that also spreads our read across the geographies wherever we are present.
So you have to only look at the AUM growth at least next 3 to 4 quarters. Because if you go by branch count, it will be looking like as of the business done in a branch has come down. It's not like that. For example, it's a super branch would have been 2 crores business in a month. When the super branch has been split into 2 ideal branches, the run rate still be will at 1.25, but it will be read at 1.25 per branch. So that's not the right metric. It's what I think Ranga and Srikanth can clarify on that, too. But you have to see the AUM growth on quarter-on-quarter, year-on-year where Five-Star wants to put up. That's what is the commitment that even for this financial year, there is no change in our guidance. We'll be at 30% plus growth for the full year.
For the first quarter, we have grown more than 7%, and we'll be comfortably crossing 30% for this full year. And yes, June being a seasonal one, and we have pulled out a lot of business in March month. There will be a slight drop in the June month, which will get corrected in the September, December, March months. That's how every lender will look at that annual growth.
Sir, my question is more on the disbursement growth side, right? I mean it has been running at some 40%, 50% Y-o-Y growth, then it trend to 33% in Q3 and it trend to 15% Q4 and now it's at 16%. So I can totally understand the branch metrics, which you just highlighted.
But then deceleration in business spend growth rate, how -- what explains that [indiscernible]?
Yes, Renish, disbursement slowdown is here to stay, not only for Five-Star, for every lender in this country. But you'll see the slowdown in disbursement. It's not because of the opportunity is coming down. We have to also take into account what is the regulatory thought process. And what is the regulatory commentary, which we are hearing on a day-to-day on a quarter-on-quarter basis.
So we should also be mindful of that. I said in the last quarter itself, let's invest all these setting. Let our other quality speak for ourselves. I think then the growth will be back on the same numbers what you've been referring to.
So Renish, it is also a question of a little bit of muted disbursements during COVID. So it is comparing, let's say, '22 to '23 where we disburse the number is much higher. It is not because '23 was significantly higher because '22 was loaded. And '24 saw some bit of a pent-up demand as well. So you will see some moderation happening. I think those 2 are a little for years where you had some aberrations because of the base effect.
But otherwise, like I said, the market, we are looking at a 32% kind of growth on our AUM, the dispersing growth will be more around 25% to 27% because there will be some bit of ticket size increases and we are lining for a 7-year tenor. So it won't go tandem hand-to-hand with the AUM growth. There will be about 4, 5 percentage points difference between the AUM growth and the disbursement growth.
Got it. Got it. In fact, my last question was on this repayment rate side, right? So maybe [indiscernible] thing that our behavior tenure for loans since 7 years, right? But when we look at the repayment rate hovering around 22% to 25%, which means the behavior tenure is much less, I mean, of course, prepayments, et cetera.
And when we look at last 3 quarters, can it actually turns out to be some 7% segment, which is on is upwards of 25%. So the actual tenure of your loans. Because then eventually, it will start impacting the growth if you suspend that income.
So you're right. SP1 I think 1 point that I want to correct what you said is we always say that the origination tenor is about 6 to 6.5 years, while the behavior tenor is more like 4, 4.5 years. So you are right to the extent that you will see about 20% to 23% -- 22% to 23% kind of run rate -- runoff every year, which will translate roughly to about 4.5 years of behavioral tender.
So I think that's a number that's broadly remained range bound for the last 4, 5 years. And we don't see the number significantly changing in the coming years as well. So there will be normal repayments, and there will be some level of prepayments, which has also largely remained very small between 9% to 12% on a year-on-year basis.
Got it. And sir, just last question, if I may. Sir, what is the reason for moderation and credit costs, which is, I mean, a reflection of for in Stage 2 set provision despite of the fact that collection in 1 equity is up sequentially.
So Renish, I think we have been building this credit cost over the last couple of years. And it startup has reached a stage where we are comfortable with these numbers. So if you look at the feds and LGDs, if we don't build some overlays our PDs and LGDs will result in a credit cost that will be much lower than the ECL provision that we are carrying in today.
So our thought processes, there is something that gets thrown by the model. There are specific overlay factors that we use to build the management who are less on ECL. And we are comfortable around the number that we are carrying. So it is not a question of the credit cost decreasing because we wanted to decrease it, it is a question of the model and the factors that we use or overlay, which gives us a number, and we are comfortable around that number. We -- like I said...
I just wanted to reconfirm that we have not change per LGDs, it is -- might be a little lower overlay this quarter, might have led to the sequential decline grade. Is that the fair conclusion?
PDs and LGDs are getting a little better. For example, last year, you saw the current proportion going up significantly from about 83% to 87%. So that obviously brings down the PDs. And the fact that we are able to recur well is also reflecting on a lower LTV. So there is some improvement in PDs and LGDs as we keep increasing the -- and it is also a question of using the last 5 years data, right?
So you have the earlier quarters going out and the later quarters coming in. 5 years back, our DPDs were not as good as this. So you will always see improvement in PDs and [indiscernible]. But these sort of ensures that we build some management overlays. So to get to a number that the company, the Board, the management and the auditors feel comfortably with.
The next question is from the line of Abhijit Tibrewal from Motilal Oswal.
Congratulations on, again, a good quarter and crossing that important milestone of INR 10,000 crores in [indiscernible]. Sir, first things first, I wanted to understand this very good improvement in cash proportion in collections, which has declined to 35% now. For the full year, you're still guiding for cash collections to decline to 30%. Just trying to understand what are those reports that have gone into this to kind of get here? Because like you'll recall, right, this was also something which was very widely debuted, cash proportion will be high in the past. Some time last year, this used to be as high as 60%. So just trying to understand what changes have you done. And I mean, do you now expect these things to be permanent and structured in terms of change in employee, in terms of changing customer behavior.
So over the last 2 years, I would say that we have consistently been increasing the mode in which the customer can make a payment. And most of it that we have introduced is all digital modes of payment. So we first introduced a payment app, wherein the customer can log into the app and then make a payment at any point of time. We have a tie-up with Razer Pay for this. So a customer can make an app payment or a payment to our website.
But I think the next big game changer started for us when we did the BBPs. So today, a customer can log into any of the popular BBPS apps, which is we will pay or phone pay and then make a payment to us through the UPI. And I think that's a very big game changer for us.
I think the next strategy that is that every passthrough that we give to the customer, we started printing that with a very specific QR code, wherein the customer can directly just scan the QR code and make a very specific payment to his account at the convenience of sitting on the phone. This we started from January.
And I think from May this year, we have started another big thing, which is for all fresh payments in disbursements that we made starting from the month of May, the UPA, Auto Pay sign-up is mandatory for the customer. So which means unless the UPA order pace set up prior to the disbursement, we will not make the rent Earlier, there used to be an offline process and there's a lot of translation areas between the time that we make a disbursement and actually, the match mandate getting set up. Because there could be a number of reasons like it's an inoperative account or it's an ignition mismatch, or in a many number of reasons where the customer can find excuses of not signing up for a NASH mandate post the disbursement.
But when you make that as a compulsory precondition prior to the disbursement, we have seen huge uptick on that. And today, for 100% of the cases that is happening. But it's not necessary that 100% of the customers will still make a UPA payment. But I think the effort everybody signs up. Very few number of customers may not have the moneys in the UPA account and on the time of the repayment date. They will always come back and pay through any other means or any of the digital means.
But at least the effort of the company is very clear that unless you have an UPA, unless you do an auto U.K. mandate with this trite disbursement, you will not be able to discuss. So I think these are clear structural changes that we have made it on the ground and more and more customers are adopting for it. We have guided in the beginning of the year that we will be at about 70% digital payments. And I'm fairly confident that we should cross that number comfortably.
So just to add 1 point. And from even from the customers beginning in aspect, there's a quite a good bit of change that we were able to see. We were not able to get it right 2 years before. We thought the cash still is tucking at the ground level, but a lot of change has happened in last 2 years. And when we approached whatever Ranga said in the last 24 months, that is yielding at a much faster effect rather than a slower one.
So we are very confident that except the little rural market, people still wanted to pay by cash in semi-urban and the fast-growing rural market, people adoption in digital payments are much higher and encouraging to see that our people are able to convince the customers and move towards that. So all put together, I think we are good to go with 70-ish to 30 and revisit after the March, where we can take the 70 numbers to.
Got it, sir. So effectively speaking now, I mean, from March onwards, all disbursements that we will be doing will have a free condition of a UPI auto pay?
Yes, Abhijit, from May onwards.
Yes. From May onwards, sir. Sir, second question I had was for Sense. So given, I mean, the last -- yesterday spread meeting and the fact that there are now rate cuts, which are there on the horizon. Given that we still have almost 75% of our borrowings coming from banks, you could just elaborate how have we kind of positioned ourselves on those tax side in terms of fixed to floating or for that matter, a 3-month or a 6-month in share. How are we positioned? And how can we benefit from rate cuts? That's it.
So our breakup, in fact, we had done this in our presentation, our breakup between fixed and floating today. We are at about 65% floating and 35% fixed. It went up on the [indiscernible] because of the NCD issuance that we did to ISP. So which is why the floating is at 65%. And given the fact that we are also moving slightly away from our strategy of borrowing some banks the floating will be a little lesser because the rest of the facilities typically tend to be fixed, especially on securitizations and all that.
On the floating, if we look at the breakup of this, the floating proportion, we have about 70% of that, which is linked to MCLR and about 30%, which are linked to the external benchmark rate. And even on the external benchmark rate, most of it, 75% of the EBR link facilities are linked to repo. So very clearly, if there is a benefit that is going to come through the rate cuts, we will definitely stand to benefit from -- benefit immediately from the day that the rate that starts becoming effective, at least on about 30% of our facilities.
On the balance 70% of our floating rate facilities, most of these are either a 1-year MCLR or a 6-month MCLR. So at various points of time, these benefits will come in. It will not come punch. It depends on when we have taken the facility and whether it's a 6 months or 1 year NCLR. But I would say from the day of the rate that over the course of the next 12 months, we should see a significant benefit coming on at least the 65% of our prices.
Got it, sir. And sir, last question that I had is, I mean, while I think in last earnings call, you were guiding for a credit cost of about 70 to 80 basis points for this year. A related question here is, I mean, how are we kind of looking at the provision coverage ratio in Stage 2, Stage 3? I mean likely to maintain at similar levels? Or there is a thought process that given that collections are improving, cash collections are coming down, noncash improving. Is there an idea to kind of bring down the provision that are going ahead? Maybe not just a couple of quarters, but maybe 1 over the next 1 or 2 years.
So I'll give you the first point on the credit cost guidance, the guidance stands at around 70 to 80 basis points. this quarter, we are reflecting about 61 basis points. It also has a proportion of write-offs. So broadly about 30 basis points. We have written off about INR 7 crores of loan book.
So roughly, the 60 basis points spread into 30 and 30, which is incremental provision of about INR 7-odd crores and about INR 9 crores and about the balance coming in some write-offs. See, we will continue to do some technical write for tax purposes as well and given that the regulations permit the technical write-off. So at this point, we are not changing the guidance on the credit cost. We'll continue to be at about 70 to 80 basis points for the foreseeable future.
In terms of the provision coverage, we are comfortable holding this number at this point of time. Our general combo is about 50% provision coverage on Stage 3 assets and the overall provision coverage of 1.5% to 1.6%. We are at about 1.63%. I don't think you will see any significant benefits to come in the short-term future in terms of lease of provision. But if we have seen significant improvement in the portfolio, if you have seen the factors, which were used for building overlays are not really coming out in reality, then we may have to relook at both the margin as well as the overlay, which may probably bring down the provision.
But at this point of time, we are not giving you a guidance for any better mind or release of our provisions. We continue to be broadly at where we are. And given that the P&L has the ability to absorb the provisions that we are creating, why is we refrained from creating some buffer in good days, which can take care of us in the remedy. So I don't think we are going to be aggressive in our provisions will be a lot more conservative.
The next question is from the line of Viral Shah from IIFL Capital.
First of all, congratulations on the milestone. Actually, I have a few questions. One just from the perspective of quarter. Was there any one-off in the other income? Because we saw a sharp increase on a sequential basis.
So where you are looking at the nonoperating income line?
Correct.
So see, this will be other costs like storage costs and the fees that we get for the storage parts and all that. So while you are seeing INR 5 million to INR 1.4 million number, this is not a very material number. So it will broadly be the storage fees that we collect from the customers for slowing their documents, which is typically offended. .
Got it. And Srikanth, while you are at on your previous comment with regards -- while I understand, of course, the eventual LGDs especially on Stage 3 are not to the extent of what PCR have. But I believe there is a soft regulatory hedge also to believe maintain 50% PCR. Would that be right? .
We would have probably guided you otherwise, but we are guiding 50% today because there is an expectation that we also see because our SDGs are much lower on a very big [indiscernible] of our lending book, our LTV will be probably more closer to about 10% to 12% number.
So even at 50% is a part hedged estimate. But you are right, yes, there is some bit of a regulatory expectation in terms of maintaining a good cover on the Page 3 assets, which is why we are guiding the market for us [indiscernible].
Got it. And my next question is for Mr. Pathy and Ranga. So in this quarter, we have seen that the markets and especially for the MFI borrowers collection efficiencies as well as the asset quality has kind of worsened. In that environment, I understand for us also it was lower to the extent of what we have seen have you seen some bit of prioritization amongst the borrowers to say, repay the secured holster they have their house as a mortgage versus other views that they would have.
Viral, you're absolutely right. That's the underwriting model that at Five-Star took 22 years back. Our underwriting is not for good times. Our underwriting is only for the bad times. So that's why in the last 22 years, Five-Star is able to survive all big falls where bigger banks and NBFCs were not able to survive.
So you're right, in terms of cash flow deterioration in our family because Five-Star takes the family income and put all the family numbers as part of the agreement. There will be a choice of customer whom to pay. So generally, he tends to pay the mortgage loans. That's what you see in HFC and mega lenders like Five-Star are not affected when there is a bit of cash flow again happening not permanently and just for a few months because of the heatwave, elections and school fees, what I said.
Yes, this is a trend that you will see always, and that will not change in the middle class there for our country.
Got it. And lastly, in terms of the yields we have, right? Again, over here, also, there has been a regulatory nudge for not just MFI lenders, but small ticket lenders that basically, there is -- should be some moderation in that. And we have been talking about taking rate cuts. Any bids on that? And how are you thinking about it going into FY '25?
Viral, let me be very clear, be crystal clear that there is no discussion between Five-Star and regulators on the pricing trend, right? I think regulators have seen us for the last 5 years and not a discussion they had or we had with them on the pricing side. It's a market driven, and it's underwriting risk that what the company has that fixes the -- both fixes the pricing.
So there is no point on even discussing about that, whether regulator has any concern or not, regulator has absolutely no concern from Pia's perspective. So let me be very clear and tester clear about that. And yes, we have been saying to the market that we'll be passing on our benefits, what we got from the banking side. We were waiting for the rate cut to happen across the world and especially in our country, that we are not seeing.
But you will see Five-Star cutting a bit of a rate in this financial year. I can say to you, it will be around 50 to 75 bps of the rate. What benefit that we got from the bank for the last 2 years, we are happy to say that we'll be passing on to the customer in the due course. But all new customers who are getting logging in Five-Star from now to March. So that's the approach that was Five-Star has been taken, and we have been vocal on this. We have been telling from the first con call, ever since that we met you that we will be passing on a good rate cut for our customers once the risk at announcement is there in our country, but it has taken some time, but we want to go first.
So you'll see a rate cut of 50 to 75 bps in the next 9 months to go.
The next question is from the line of Chandrasekhar Sridhar from Fidelity International.
A few questions. Maybe just on the business growth. Tamilnadu is now down to about 20% per annum. Can you just take us through what's happening in Tamilnadu? I mean, the bulk of the delta is actually coming from Andhra and Telangana. So any particular change. I mean, I can see there is a competitor NBFC, which has also started off in a fairly large way, in this space, a larger NBFC. Just thoughts around that, whether it's [indiscernible] and that's their home market, whether it affects competitive positioning over there.
And NPE is basically a market also where we had gotten a foothold, but it's sort of growing with where the company is growing at. Is there any particular challenges which we face out? That's question one. Second, 2 questions for Srikanth. One, I think there was an expectation that the cost of funds would go up marginally because you're diversifying into NCDs and you had to need to pay up a little more because you're not getting your tenure. It's not going up. So just maybe take us through what's there?
And then lastly, we have now crossed INR 10,000 crores. Will we be having conversations with rating agencies around the ratings upgrade and what is any potential implications on the cost of borrowing?
I'll take the first question. I'll ask Srikanth to comments to second, and I'll also comment on the third. Chandra, for the first question, I'll take it at Samira, and Ranga will talk about A&P.
Nothing has happened in coming out with Sandra. We are going as usual in Tamilnadu. I'm just recollecting what I said in last call or last 2 calls, Tamilnadu's growth was not catching up with the growth of Andhra and Telangana. They are extremely growing very well. From a [indiscernible] perspective, quality of fine perspective, supervision team perspective, all are sitting very well in a combined Andra, what we call as Andra and Calimone put together. So that level coming out was not able to such. That's the only thing that what we saw coming on those as a share coming down for Five-Star.
But I have told that this year, you'll see Tamilnadu and Karnataka. I think I've also been saying to the market that Carter story is very good for a where we had a bit of slip in Bogdan post-COVID and it was getting corrected and now they are 1 of the best-performing states for Five-Star. So Tamilnadu and Karnataka will catch up this year with Andra and Telengana. So that's the short story. That's where the confidence comes in that we'll be delivering a 35-plus growth in south very comfortably. So I will hand it over to Ranga on an E&P perspective.
Just to -- is there no competitive intensity being higher impacting in any way?
Chandra, can you come again?
Yes, just a competitive intensity has gone up?
Chandra, I will not say only in Tamil Nadu, across all states, you see many companies jumping into small business loans especially after seeing Five-Star success. For 8 quarters, we have been watching us closely, both from a quality as well as profitability perspective. Yes, people are jumping in to do a bit here and there. That has -- that's the nature of the good business. That doesn't have any big impact in Tamilnadu. As I said, Tamilnadu team is not able to catch up the Andra and Telengana speed with this year put in place and I've met all Camino guys last month. I'm very confident this year, Tamilnadu will a good rise comparing to themselves, what they were in last year. .
Chandra, with respect to Central India, I think the challenges are a little bit different. The first thing is in Central India, our ticket size is almost 40% lower than the ticket size that we see in South. So despite that, if we are able to maintain the proportion of the overall AUM in Central India, it in fact means that the productivities are higher, but the ticket sales are lower.
On a standalone basis, if you look at MP or [indiscernible] each of this is growing at about 50% CAGR last year when the company grew at about 35%, 36% CAGR. But that said, I think we are very clear, and we are investing more in Central India. You will start to see the proportion of Central India is slowly going up from here. It is not going to happen in hurry. We don't want it to happen in a hurry because these are newer markets, you have to be extremely calibrated with what they have to do. But 100%, we are very clear that the markets will go up, and there are enough investments that are happening on the ground.
Even this quarter, out of the 27 branches that we have opened, 14 branches are put between Maharashtra, Mathipajesh and in other Central Indian geographies. So we are very clear and keenly watching and investing in these states, and the proportion will go.
Chandra, now on your question on the cost of funds expectation to go up. First of all, thank you for asking this question because we don't want any of you guys to think that every quarter, we are going to keep dropping our incremental rates. At some point, it definitely has to go up. So See, the reason it has not gone up during this quarter is a couple of conversations that we have been having with capital markets, especially on mutual funds where the rates tend to be higher, it has not completely materialized.
Like I said, most of those transactions are expected to happen either in this quarter, which is 2 in Q3. So you will definitely see a jump up in the cost of funds in the next quarter. So given that this did not happen last quarter you probably saw the rate going down from 98 to 99 or so. But definitely, the number will inch up once we have capital market transactions coming in.
So that is in terms of the cost of funds expectation on the incremental borrowing. See, on the rating discussions, this is something that we have crossed, INR 10,000 crores. It's a very important landmark for us for the rating agencies. But our rating, the earliest rating agency that gave us the upgrade, gave it to us in December of 2022, so which is like 1.5 years now.
So 1.5 years is a little shorter time for us to push for a rating upgrade given that it has also been 2 years of good growth. And in fact, [indiscernible], they're not even -- they're about 1 year. The rating is about a year old and 15 months old with Care and ICRA, respectively.
But having said, we are having very strong conversations with them. We are demonstrating using our numbers, why we should probably come out a higher -- 1 notch higher rating than where we are today. But realistically, I would probably think the best case, if I have to put my neck out and say, is probably end of this calendar year and end of this year are the more reasonable and the logical case would be if we are able to go to the March results, March '25 results, I would say it has a very high probability of getting converted.
But I would probably think it's at least 2 to 3 quarters away.
And maybe just last one, if I could just squeeze in. Can you remind me right now the share of which is in -- for personal purposes versus business purposes [indiscernible].
Sorry, Chandra, can you [indiscernible]?
In business used in the business versus for nonbusiness purposes.
Broadly about 65-35.
The next question is from the line of Nischint Chawathe from Kotak Institutional Equities.
So this is on the interest rate of around 50, 75 basis points. So from when are we really affecting it? And I believe this is again only for new loans.
Yes, Nischint. In fact, I think we will probably be introducing this as early as this month, which is the month of August. So some time during this month is what we are looking at. And yes, this will be an incremental loan. So you will not see the yields dropping by 50, 75 basis points. You'll probably see it dropping by 1/3 of the 50, 75 basis points because it takes time to impact the portfolio.
And is there a particular line or a thought cost is in place for next year or something in terms of saying that you would want to sort of take it down every year by a couple of basis points and sort of move up the quality curve? .
Nischint, not really. Let me recollect what I've been saying to the market. We got 150 to 200 bps of rate benefit from the banks. Those -- out of that, at least 50% we wanted to pass it down to the customer. That's the bad. It's not of what is the means that we are holding and what is the pricing that we are lending. That's not the point. The point is we came to the market for a long time. We were waiting for the rate cut to happen in our country in last September itself, that didn't happen. So we wanted to move further and give the benefit what we got from the banks to the customers. So it only depends upon the banks benefit what we got to transfer to the customers.
So next year, we can't give a commentary right now without knowing what is the benefit that we are going to get from the banks. This is only for this financial year.
The next question is from the line of Ajit Kumar from Nomura.
Congratulations for the milestone. Most of my questions have been answered. Just 1 or 2 quick questions. First, following up on your ECL methodology. Just wanted to know how many years of data do you factor in the model? And has it changed in recent time? And also at what frequency do you revise or reassess your model assumptions? .
So we follow as per the NDA guidelines. I think it's 5 years data which we use. So it's the last 5 years data. So every year, the previous year's data goes down. Every quarter, the previous quarter's data goes down and the newer quarter comes in, which is as per the accounting standards.
Typically, we really look at this model once in 3 years.
Okay. Okay. Sure. And one last question, happening on this incremental cost of fund, which has gone down sequentially. From which stream of funding this decline is coming, is it majority from bank funding where pricing has come of or from bond market borrowings?
So we have not done much on market borrowings during this quarter. So which is why you're not seeing this cost of funds going up. So largely banks are willing to lend to us at lower rates even the ISP funding that we got was at lower rates. So I think it's broadly a number that's coming from DFIs and banks, which has contributed to the lower rate.
I think once we get to the capital market participants in the mutual funds or the others, these costs will probably look like more around 960, 965 rather than 948.
The next question is from the line of Kunal Garg from IIFL Securities.
Congratulations for the good set of number. So my question is primarily in the -- you mentioned that there are a few states where you see the downward trajectory in the business, right? So many other specific states, where you see the stress in the coming months, in the coming quarters?
Kunal, can you come back? We didn't say there is any stress in any state in our commentary. What is that you are saying?
Sir, you mentioned that there was some business down in the TN and Karnataka, right, compared to the [indiscernible].
No, what I said was the catch-up by Tamilnadu was not equal to the catch-up of Andra and Dilma now. That Telangana and andra catch-up speed was much higher than Tamilnadu was what I'm referring. And there was no any issue or a problem in llk[indiscernible] state. And I was commenting given the commentary saying that in this year, Tamilnadu will catch up much better than what they were doing last year.
There was no stress or any strain in Tamilnadu or Karnataka.
So the business growth will be continued in this Tamilnadu and Kanataka as per the previous year, right?
Yes. Very much so, it will be very stronger this year.
Okay. Okay. And sir, my second question is, have you given any drop up loans this quarter?
So Kunal, we generally do top of loans. But top of loans is a very, very small proportion of our disbursals. So I don't know, in the last few quarters that we the taking. Our top of loans are more like about 4%, 5%, that's what we give.
In fact, if you look at the overall book, the top up received borrowers or close their loan and come back for another loan, all put together will be more like 8% to 10%. So that's not a big source of disbursals for Five-Star or a business line for Five-Star. Our business line primarily used to go into unpenetrated and underpenetrated market and get fresh forwards from the informal to formal ecosystem.
Okay. And sir, my third question is you mentioned that from May onwards, you have made mandatory for UP or Bright. So this whether you -- is this completion is 100% [indiscernible] or still, there are some pockets where you are giving some relaxation?
So it's near to 100%. So they can either choose for a UPI autopay or they can choose for a NASH, online NASH. These mandates have to be set up prior to the disbursement. So we always had this condition, but the earlier condition was it was it can also be done post the disbursement because some of this was Offline, and offline takes a lot more time for us.
Now what changed from the month of May is that you have to do an online registration, which means the mandated setup in favor of Five-Star prior to the disbursement. And this is near to 0 there always be quarter basis, but almost 100%.
The next question is from the line of Rohan from FycomFamily Office.
I have 2 quick questions. So if you look at the SME LAP segment, that has been a high-growth area for also some of the smaller peers. However, with a smaller average ticket timing. So in that smaller ticket size, does that interest you? And what is the risk versus reward dynamics here?
And the minimum average ticket size that you would take on?
See, Rohan, Five-Star ventured into secured business loans to the informal segment of this country 22 years back. We clearly understood what was the risk and what is the reward that we'll be getting when you venture into this kind of profile of customers. This is what is getting reflected in last 22 years.
Yes, you have a risk and you have a good reward for that. How does you balance that is what differentiates yourself good lender. Yes, 100% of our loans are secured. As Srikanth said, close to 60% goes through the business in due and balance 40% goes to the housing construction and personal needs of these customers.
The risk is, yes, these customers have a bit of vulnerable cash flows. And when they get into more unsecured borrowing in the market, that tends to go to a little more vulnerable. But as I said in last one of the questions, when a choice has been given to these customers during the downturn, whom to pay, they very clearly pay to a mortgage lender. Let it be a housing finance company or mortgage lenders by their choice is always to us. That's what it reflects during COVID 1, COVID 2 or the first quarter collection efficiency, what Five-Star was able to do is a benchmark of HFC is what they have done in this country.
So this is a trend. This is a risk that you have to go through. And having done very successfully, yes, there are a lot of followers of Five-Star who intend to get into this segment. But if they don't enter the risk, if they don't see the cycles before pressing the growth, there will be a serious dent for their asset quality, and that will slow down the growth going forward. And Five-Star has learned it very well, and we have been a learner for the first 10 years and then the growers for next 10 years of our life, that's how we do it.
All right. Got it, sir. And can you also explain on your borrowing strategy. What's the rationale for moving away from a modeling?
Sir, Rohan, the rationale is a little simple. Today, there are a lot of banks who are willing to lend to Five-Star. Given our asset quality, given our growth and profitability, they see this as a very attractive institution that they can lend to. But I'm sure you would also be aware that there has been some pointers from RBA telling that the institution would also -- NBFC should look at diversifying their borrowing, get a little more into the capital market and all that.
And when we become a AA entity, we are also mandated by SEBI to onboard incrementally 25% of our borrowings from capital markets. So given all of the thought process, we have now taken a very conscious call that we will get into the capital market. We will be fully prepared for any eventualities that may come or will be prepared when we get -- become a AA entity.
So some of these are in response to external factors that we are doing. But if we had to borrow from the banks, I think there are enough more banks which are ready today. But having said that, it's always good to have diversification in any of your streams, which is the strategy we are following.
The next question is from the line of Rajiv Mehta from BS Securities.
Congrats from numbers. Sir, you've spoken about July collection trends being better than June. So is it better in -- across buckets? I mean, is it better in regular bucket as well as in the delinquent bucket of 30, 60, 60, 90 as well when compared to June?
I have just seen it last night. I have not gone detailed to it. But overall, our performance comparing to June was better. It should be better across states, across buckets. There's not been any significant difference between overall as well as the bucket-wise.
Rajiv, we can connect off-line to in to connect offline, so he'll give more data when we have it.
Yes, yes. And sir, just second forward 1 comment that you made that typically, in a stressed situation, the household prioritizes prepaying you versus their unsecured loans. But generally, do we -- so first is the categorization of those loans will be current with us. But so in the current portfolio, do we have -- what proportion of our customers would have a default on the unsecured lines that are current with us? Do we track them differently?
No, Rajiv, we don't track our customers. We track them before lending a loan in a detailed way. We take at least a minimum of 2 credit bureaus, high mark and civil, before lending.
But after lending, we don't track them from a credit bureau perspective, we track them based on the DPDs and what should the company do when it falls down the DPD, what are the measures that you have to take, that is pretty much in place. It's not that current accounts or 1 DPD customers are being tracked from a number of loans that they have taken. And we don't have any control, and we can't stop this unlike until the other lenders are more clearer that once you see a bigger loan taken by the customer, generally, we should avoid lending to those customers.
If that discipline is not there with other unsecured lenders, we can't do anything on that.
At one point here. See, when we have taken this at points of time. I think what Mr. Pathy is trying to say is that we don't do this on a regular basis, like every quarter, we don't do a bureau scrub to see where other customers are, vis-a-vis, with us. But I think when you have taken it at points of time and we have done it quite a few times in the past, especially during stress time. So if we have done it during demon, we've done it during COVID 1 and COVID 2. At that point of time, the behavior is very clear in terms of priority of repayments. And that what gives us the confidence that, yes, when it comes to site customers are forced to make a choice between repayment of the secured loan versus an unsecured loan, we always tend to choose secured loans, especially if it's an mostly important asset to the family.
Clear, sir. And just 1 observation. When I look at AUM branch here, then the Tier 6 branch growth has been very significant in the last 12, 15 months. So incrementally, these branch, Tier 6 branches have been contributing 60%, 70% of the new growth, fresh growth. How should we read this?
So the branch split that is happening. So we were anywhere strong between Tier 4, Tier 5 and Tier 6 earlier also. Now when the brand split is happening, so more and more branches in Tier 5 and Tier 6 are getting split because these are good pockets for us where the branches have grown to a reasonable size.
So earlier, if you had 1 branch, now we are having 2 branches in Tier 6. I think that's what explains the contribution of Tier 5, Tier 6 towards this AUM proportion. But I think if you look at it overall from an AUM perspective, yes, leave a number of branches. We are anyway strongly biased towards 4, 5 and 6 years.
And when you speak about branch there areas by location, that it is on by brand size?
It is by location. It is better actual population, yes, population where the branch is located.
The next question is from the line of Shubhranshu Mishra from PhilipCapital.
Two questions. The first 1 is around the disbursements. Given the fact that we have this churn of almost 22%, 25%, which was discussed earlier on the call, what percentage of our disbursement is to existing customers each year? What percentage is to new customers, that's first.
Second is around the leverage of the customer, whether they are existing or new. How often do we check on the leverage? How many other trade lines do these customers have? I do understand that a lot of them are new to [indiscernible], but do they have any other informal credit or any other unsecured credit? There's been a lot of proliferation of fintechs who are doing a lot of unsecured lending. And of course, that's also come down. But then have you done these checks more recently? And what are our obervations?
So Shubhranshu, like we said, most of the disbursements happened to the newer customers only. So maybe about 8% to 10% of the disbursements will be happening to our existing customers, either through top-ups or additional loans or fresh facilities after they closed their old loans. So about 90% of our disbursals happen to newer customers from the brand side.
In terms of the leverage check that we do, we definitely do it at the time of underwriting, where we ensure that we try and get all the formal data through the credit bureau reports whatever possibly informal data through neighborhood and trade checks. But beyond that, we don't have a process of checking this data on a periodic basis.
Because even if we check it, it's more an economic data that we will have. I think Mr. Pathy just answered the last question. where we said, even if the customer is taking a loan, the day after, he has taken a loan from us, what is it they do end, it should be up to the other lender to ensure that they stay -- they are very clear that this guy has already leveraged himself at Five-Star.
Now for us to take the data and do the scrap, like I said, it's an economic exercise and we could get into. But we don't have any periodicity at which we keep taking this data and try and see what is the leverage of our customers. We ensure that by taking a property, by making all the family members as applicants and co-applicants the loan, the customer will give priority to us even in the most difficult time. So that is something that we do rather than doing a scrub data, and I don't know what we can do beyond that.
If I can sneak just 1 last question. The quantum of disbursement FY '24 is almost as much as the disbursement that would be in the previous 2 years. Do we expect some degree of seizing impact and then impacting the red cost going forward because of the feeling impact of this because there's a much bigger number. It's almost as big as the FY '22 and '23 numbers.
See, this is again a problem for the FY '22 number having been impacted by COVID. So FY '21 and '22 are years that probably needs to be kept out of our comparison. But if you look at prior to FY '20, when we have been growing much faster or post FY '22, where we have been showing a good proportion of growth, we don't really see any kind of a seasoning impact to come in. Obviously, there will be some impact.
But we are also going to keep adding new customers, new loans. So it sort of balance each other. So we don't really see any impacts on the credit costs coming in because of fresh disbursements becoming muted and the seasoning impact coming through. So it will largely offset each other.
The next question is from the line of Sonal from Crescent Capital.
This is Sonal. Am I audible?
Yes.
Yes. Sir, I wanted to understand the maturity profile of any particular loan, we save the time that the loan has been on your books because you mentioned that typically, it's a 7-year-old loan, that's the duration of the loan. So how do you see the NPA panning out in 1 year, 2 year, 3 year, 4 years? If you could just give a bit of color around that, that would be great.
So on a static pool, our analysts shows especially the later portfolio, the last 3, 4 years, when we have implemented B1, C1 completely, there is a drop in the probability of default, which means the number of customers who are turning NPAs has reduced.
So on this, typically, what we see, there is some level of speaking that happens around the 3, 4 years timeline. This used to be about 2.5, 3 years earlier, but that has got pushed because of the collection efforts. So 3, 3.5 years, there is a seasoning that happens. It [indiscernible] to about 2% to 2.5% on a static pool basis. It sort of stabilize it, but it's also important that from an LGD, we don't lose any of them. Because in most of these cases, while the customer might have slipped into NPA, might stay as NPA. There is empirical evidence to prove that when we settled the loan, we actually clears all the news.
So our will come [indiscernible]. But just to answer your question, yes, around 3, 3.5 years, there is a little bit of teasing around 2%, 2.5% of strategic for NPA stabilizes, and then we are able to recur almost 99% of the -- on the principle that it has been a principle at the NPA.
Got it. Second question, which is, I think we in to write-offs, which you're talking about. Just take maybe last 10 years and maybe last 5 years and bigger cap. Like do you share those out of how much write-offs have you done what percentage of book because percentage numbers are a little misleading. But as you mentioned, that is it okay to say that 1% of all the books who are maturing over 3, 5 years. Typically, that's the write-up on the book. How do you understand that?
1% is a very high number. Generally, our experience has shown that our write-off tends to be somewhere around 25 to 30 basis points of our opening book. If you look at the last 5 years, we would probably have return of somewhat close to INR 60 crores to INR 70 crores of loan. So that's the overall number.
But broadly, on a year-on-year basis, the technical write-off works to about 25 to 30 basis points.
Got it. And the actual write-offs would be lower than the [indiscernible]?
Actual losses will be.
Yes, yes. Yes. Full a secured loan. It's only a time gap that it takes for Five-Star to recover the write-off from the legal course. So the credit loss, which is ultimate loss that we suffered, maybe around 15 to 20 bps.
Understand. Understand that. And the last question from my side. You were talking about giving top-up loans and top up loans, follow-up loans, whatever you call it, as up to 8% to 10% of the books as a prudent measure, these top of loans are typically given to customers. Once they finish a particular life cycle also now or they are given while the current loan is also outside. Just trying to understand the process there also.
Yes. So top of low is not an automatic program within Five-Star. The customer has to apply for a top of loan. And he can apply for a top-up loan after a minimum of 2 years of seasoning with co. So when he applies for a note, it's a fresh evaluation, credit does the entire revaluation of the loan, they will check the repayment, they will check if there is any improvement or decrease in its loan in its overall income or in the valuation of the property.
And then finally, take a call on what is the loan amount that needs to be given. When the loan is given, when the [indiscernible] of loan is given the customer has to be a 0 DPD customer. So if the customer's track record is factory for whatever reason, it does not get sanctioned a loan with Five-Star. When we do a loan, we will make sure that both the loans run panel in the system.
Because if you -- if the proceeds of the new loan, if you had to close the whole loan, the history of the whole loan goes away. So we don't do that. We know both the loans to run pattern, which means loan 1 runs to its original tenure. Maybe let's say he took a loan for 7 years. He updates for a loan at the end of 3 years in this example. The original loan will run for another 4 years, while the new loan gets sanctioned at this point of time, which will run for 7 years from this period to the next 7 years.
Any deterioration in any of these 2 loans will result in an automatic degradation on the asset quality of the loan. So it's not about old loan being extinguished or the new loans being given separately, both those loans will play to determine what is the asset quality for the particular customer.
The next question is from the line of Wes from [indiscernible].
Congratulations on a good set of number. My question is about borrowing mix. As you mentioned that you are going towards capital market. So what kind of the percentage you would see in terms of banks versus the capital market? And if you move towards capital market, what kind of the benefits should continue?
So Vijay, I think in a steady state, this is not immediately, but maybe over the next 2 to 3 years, we are probably looking at banks to be at about 50% and balance coming in from capital market securitization, BFIs and all that.
See, from a benefit perspective, like I said, we can do 100% from banks today. There are different more banks willing to lend to us. But expectation of diversification, what are the sources that are available for you. Certain sources can be untapped. Certain sources can be a little more. Like if a bank takes an exposure today, they'll wait for 12 months to take a fresh exposure, but that may not be the case with capital markets.
So it is a question of maintaining the balance between availability of funds and cost of funds. So in a steady state, we expect it to be 50-50. So banks will always be relatively cheaper as compared to capital market transactions. So we'll play the rate with the bank, but capital markets can give you good quantum and can be faster than processing renewals. So all of those things will be taken when we look at the borrowing mix.
The next question is from the line of Arren from [indiscernible].
I think this question has been answered, but I would like to get a bit more color on this, especially on the terms of asset quality. Obviously, the MFI players have signed off some pockets of stress or risks coming up in different regions of the country. And obviously, like our customer behavior repayment behavior is much better in terms of as well as repayment behavior because it's a [indiscernible]. But are you using any pockets of risk, either in terms of regions or in terms of any economic activity, sir?
[indiscernible], what you read from the voice of [indiscernible] also read that, it is true. I'm not denying it. I never denied it. Only during this pocket of stress, how does the customer differentiates himself from a secured loan to an unsecured loan. That's what my commentary was. And this again proven in this quarter, when unsecured guys facing the pressure, secured loans guys like HFCs and not get vendors like Five-Star, we didn't see any pressure, big pressure at the. And we'll be bouncing back in the month of -- in the quarter of September, whereas unsecured lenders will take a little bit more time to bounce back.
So that was a heat in election we can weather. And as I said, seasonal expense of school season in the month of June, all put together would have affected the minds of the customer. Generally, if a customer minds get affected, they show it in an unsecured loan. That's my 20 years experience. So they will not show it in the secured loans.
So having said that, I never denied that our customers don't have not seen any slowdown in the cash flows. They have seen the cash flow slowdown, no doubt about that, because of the 2 factors what I said. But they will bounce back in the quarter of September and going forward. So we'll be very comfortable going forward.
The next question is from the line of Danesh from Insight.
First of all, congratulations on a very good set of numbers. I joined a few minutes late, maybe you have answered this previously, but just for my I just wanted to know like how your employee addition program has been in this quarter because I just see the number has been pretty flat quarter-on-quarter. So how do we see for this year and going forward? That's my first question.
Dinesh, yes, you're right. The number of branches have gone up. The number of offers are almost flat. This is what the commentary what we have been saying in the last 2 quarters, that the fleet brands, the branch approaches work under way. So that's why you see a number of branches more, but no big operation cost is getting added here.
And just to recollect you, Dinesh, whether you have been tracking Paisa for last 4, 6 quarters, I don't know. We used to have a full-fledged collection vertical during the quarter of -- I mean, during the months of COVID. That helps Five-Star to have a good asset quality. And slowly and steadily, we are moving the good numbers of collection team to convert into business. So that is also being done side by side.
So both put together, after our commentary, as for our guidance, what growth that we intend to do in this quarter. Accordingly, the addition of free serves has been done.
Okay. That sounds good. But can we expect at least the previous trend, which we have seen in the past, would that continue in forth? Maybe 1 -- because once you add more number of branch split branches, obviously, you would need some extra manpower there, right, to get more loans and disbursement?
Yes. Yes. So 2 things will come into play. -- tina.neis when a collection officer gets into business, more number of 5 gets logged in and more disbursement will happen. That will be that will be done.
But I'm saying it will be slow and steady. We are not in a hurry to convert everyone. We are converting wherever we see a good traction in collection so that collection people move in the business. That's point #1. Point #2, as I said in earlier question, 70 to 90 new branches will be formed in new locations, mostly in South and good numbers in rest of the country. Those number of offices will be a clear addition to Highstar in this financial year.
Okay. Sounds great. But will that lead to any increase in operating expenses? Or we would expect the OpEx as a percentage of AUM to remain fairly flat going forward?
Our cost to income, which is a clear metric of measuring what is the cost that you incur for the income, what you get, is at 34-point something in this quarter. We will remain at 35%. That's the guidance what we have been given to the market, and there will not be any increase or decrease in this number.
The next question is from is from the line of [indiscernible] from Citi Group.
Yes. So I joined in late, not sure if that was answered. But if you look at the AUM intake, maybe that's now getting more skewed towards the lower bucket in terms of 1 to 2 years. So is it more in terms of incrementally, we have changed the tenor or this is more in terms of the repayments, which are happening and what the proportion is left on the AUM that is showing that kind of an intake because the dispersal growth run rate is also relatively low, yes.
So Kunal, I think the answer is in the last statement that you made. It is primarily because of the incremental disbursals that we are doing. There is a little bit of the runoff impact, which is there. Like we said, while we onboard the loans for 6 to 7 years tenure at the time of origination. The typical behavior is at about 4, 4.5 years.
So a loan which typically, would have been given, let us say, in 2019 or so, should have it been repaid by now at a portfolio level. There will be loans, obviously. But at the portfolio level, it will be -- it will not be a very significant percentage. And with the newer loans, especially the last couple of years, the growth has also been good. So with the newer loans getting added, you will probably see the proportion of newer vintage loans being higher. But having said that, I did answer a question earlier in terms of our experience from a static pool perspective, where we have seen very good traction on the newer vintage loans given our focus on G11 the collection efficiency.
So it is not like we are probably going to see losses that we probably saw, let me say, on a portfolio, which was 4 years back. The newer vintages are coming in with much lower property of default, much lower largely in default. So even the newer pools, the static pools on the lower vintages will not cross 2%, 2.5% NPAs in a peak scenario, which we are expecting it to be around 3, 3.5 years.
Yes. But in terms of contracts or that is something which we are not still continue?
We have not.
Yes. Okay. SP1 And looking at that in terms of the borrowing. So maybe on the ALM and that is a clear maybe 10 percentage point decline in the tenor. So are we realigning the borrowing profile towards the lower tenor bucket? And just maybe as you explained, there was some benefit, which has come through in terms of the borrowing cost, which you will tend to pass it on in terms of the lending rate. But maybe shifting the skew on the borrowing towards the lower time or would it further help in terms of the overall cost.
Kunal, it may help on the overall cost. I think we are very clear that we want to be at a match scale. We don't want to carry a merchant from dispatch. So given that our behavioral tenors are around 4, 4.5 years, even our borrowings are more like 4 to 5 years on an average. While there are few entities, which give 7 years in all, but generally are 4, 4.5 years.
And we are not very much down to the shorter tenor. So we will ensure that we borrow similar tenor. So we are not looking at too much of cost benefit to come in because of coding for lower tenants and allowing any kind of a mismatch on the ALM to be there. So we will continue to borrow around 4 as average teller, which is the behavioral care on the asset side.
Sure. SP1 And lastly, you indicated that maybe running the table tax again will be more of an echoic exercise, but given what has been here in terms of customer overleveraging, would we take some initiative this time because it's been heard across the industry would we still wait for in terms of R1 to 30, 31 to 60 delinquency just to ensure that, okay, whether it's reflecting in there and then take the action because I think that is the is building up. So would we think maybe at least in terms of giving some maybe [indiscernible] over there.
Kunal, we can do this exercise. But I don't know practically, can we -- with the information that, let's say, an ex borrower has taken more money Will you have the ability to grow and control the borrower? That's the question. You may have acknowledge. But I think if you are concerned in the borrower with this information, the borrower will say, yes, I have taken this loan. But as long as I repay your loan, what's your problem?
I think if such a question is directly asked, there is no answer. So we do keep monitoring this at pocket, where we are expecting some stress to happen, but in 100% of the top of cases, our retail in cases where at the regional level, we are potentially seeing some stress, we can definitely do this and make some policy leverages if need be.
The next question is from the line of Pranav Gupta from Alfa Investment Advisors.
Congratulations on couple of questions. First, you're talking about expansion that for your would sort of content column or so because we've seen....
Mr. Gupta, your voice is not clear.
Is it better now?
A little. I hope you're using the handset.
Yes, that's what I'm using. I'll just speak my question. What I was trying to understand is this branch expansion strategy that we have for this year, almost 50% of which will come from splitting off large branches. Is this something that -- is this trend sort of going to continue for the next 3, 4 years? Or is this something that we just see in the near term, post which we will start opening newer branches rather than splitting a larger part of our branches, is the first question.
Yes. Yes, Pranav, I think it all depends upon the number of super branches and bigger branches what we have in Five-Star. It's close to 200 to 225 branches. If I'm not right, those are the bits that we are intend to make it a ID branch. ID is a very clear technology where we find that ideal branch will run through for the next 3 years without any risk into it. It's not the entire 500 branches will move towards. It's only the bigger branches. I think it will be completed in a 12-month period. So we have already started it maybe in next 9 to 12 month period, this exercise will be perfectly done.
So that's the commentary that I can give now. In case maybe 6 months later, I can raise what has happened in that.
Understood. Understood. So the second question is on Tamilnadu. So you mentioned that Tamilnadu not able to catch up in terms of growth over the last year. But you're confident that this year, it will sort of catch up. But if you look at last year, are there any specific issuance that we saw for the state, maybe attrition that is something that a couple of other players in that geography mentioned or maybe some overleveraging of customers in certain pockets. Is there something that we can point towards for last year? Or could you help us understand that better?
Look, Parana, nothing new. That's what I was seeing. Because I said I met each and every number of [indiscernible] last month and previous months, too. So it's a gentle phenomenon that Tamilnadu is one of the best-performing states for any lenders. So you see every bank and NBFCs having their presence in Tamilnadu. So it's nothing new that has happened anything in Tamilnadu.
Andra, Telengana, maybe we are very good in Andhra and Telengana, so those 2 states are catching up rightly good. So Tamilnadu was not able to match that speed. That's what I meant. There was no lesser speed in Tamilnadu. If you compare Tamilnadu with Tamilnadu on a yearly basis, there's nothing lesser in what they have been doing.
While comparing with other 2 states, their catch-up was slower is what I mentioned. And that difference of catch-up will be narrowed in this year. That's -- I'm very confident from Tamilnadu's prospect.
Understood. And sir, just 1 clarification. You mentioned that for the digital push of payments through digital methods, we saw mandated UPI or auto pay. In case of customers, EMI bounce is because of lack of balance or any other reason on the UPI payment mandate. Do we charge any fees? Or is that something that we don't do at all?
We do charge a pound charge for any PA or a NASH mandate, which gets bounced. And the charges will be same?
It's the same amount is the same, which are INR 500 per ounce, and it is the same for any mandate which gets founded.
The next question is from the line of Sanjay Chawla from [indiscernible] Investment Managers.
A couple of questions. Can you indicate what is the target leverage ratio? Currently, it is rather low at 2.3x. And the second question, which is a related question is what combination of dividend policy, ROE and AUM growth, you expect that would take you to your target leverage and by then?
Okay. I've been said several times, let me repeat it. At a steady state, steady state means 2, 3 years down the line, we intend to be somewhere close to 3 points on site to 4x leverage. I'm talking about leverage from perspective, not debt to equity. Debt to equity means it will be 2.5 to 3 debt to equity and leverage of 3.75 to 4. That's why ideally, Five-Star wants to fit into it. So that will take another 2.5 to 3.5 years from now to reach that stance.
While doing so, our spreads will be close to 12% to 13% and NIMs will be close to 14%, 14.5% or 15%, and that usually translates to ROA of close to 7% and ROE, which will go beyond 20%. That's where we guide the market in the steady state. And we are very clearly right on the trajectory, what we have been talking to the market and we are very confident of reaching it ahead of time itself, but let me not take it up in this point of time. It will be next 2.5 to 3.5 years, where we will reach this leverage, ROA and ROE.
From a dividend perspective, I think we also gave the last answer for 1 gentleman who asked me in last earnings call, you will hear good news very soon. Let me repeat the same to all the [indiscernible] shareholders, you will hear a very good very soon.
So you're obviously indicating a 20% plus ROE business and getting to that leverage in 3, 4 years, let's say. My question is what kind of -- an AUM growth, you're probably looking at 25% CAGR. Am I correct on that?
We are looking at 30% CAGR growth for the next 2 to 3 years.
Right. So that lead you -- I mean you will have to pay a substantial dividend to actually get to that leverage ratio in 3, 4 years? I mean maybe 40%, 50% payout on your profit. Is that something which combination you're looking at to get to your target leverage?
Right now, we are not looking at dividend payout from a leverage perspective. So it's a Board's call that Board will take a right call. If the leverage is a little lower also, but nothing to worry, our ROE guidance, what I've said that 20% plus, we will reach very comfortably.
The next question is from the line of Hemant Patel, [indiscernible] Capital.
Just noticed that when I look at it from an AUM to branch tier, your proportion of semi-urban allocation, which is Tier 5 and Tier 6, I mean, has increased from 58% 2 years back to around 70%. It seems like there is an inclination towards a lot more on the semi-open side. I just wanted to understand what's driving this internation Second, when I look at it from an RBI classification of rural, which is 10,000 below pop, right? Just wanted to understand what proportion of this caters to that segment of that market. Is there a white space? Is there something that you would look at going as you expand your book?
Yes. Hemant, the tiers what we have indicated is our own classification. Tier 3, we got a 20 lakh less population. And Tier 7, we call as 25,000-plus population. That's our internal metric, nothing to refer to the commonality what other lenders do. Maybe we will align going forward with what terminology that other people refer to.
But even the Tier 1 there, we are now starting our presence. It has a 25,000 plus population in that region. So we can into a [indiscernible] population at all. We don't want to get into that kind of rural market as of now because there are plenty and plenty of available spaces for us to move the customers from informal to formal. So Tier 5, Tier 6, Tier 7, these 3 will be the driving force for Fiesta at least for next 24 months is what I think.
Just 1 more question. Tier 7, what proportion that would be of the overall layer?
So Tier 7, we have just started, I said, even that is around 20,000 plus population. So predominant, our presence will be a Tier 5 and Tier 6. Tier 7 is just started.
Tier 3 to Tier 6 will be the major. 95-plus percentage of our book will be from Tier 3 to Tier 6.
Yes. But I just was pointing this question towards the inter nation to move more towards it. I mean, is it because you feel that the competitive intensity is more, if I were to put it in urban areas versus the semi-urban areas where you are actually heading towards a lot more in terms of granular [indiscernible]?
Yes, slowly, the penetration has happened -- it will be happening in Tier 1, Tier 2, Tier 3 cities. So if you see Tier 3 cities also, we are not very fond of. So once you not fond of Tier 3 cities, ultimately, what we are seeing where the files are coming from, where the customers are coming from, it's clearly towards Tier 5, Tier 6. So that's where we will be moving towards.
And we want to keep ourself closer to the customer. There is no need of keeping our brands in Tier 3 and sourcing a file from a smaller location in Tier 5 and Tier 6. Better, we keep our branch in Tier 5, Tier 6 locations and call those branches as Tier 5, Tier 6 locations. So that's the thought process that we are currently in progress.
The next question is from the line of Dinesh from [indiscernible].
My question is very simple question. What's the total number of diluted shares outstanding we have right now as of Q1? And what's the ESOP plan we have for the next few quarters?
Dinesh, can you repeat the first one?
The total number of diluted shares outstanding as of this quarter?
So total is about INR 29.5 crores.
Okay. And what's the ESOP plan for the next few quarters? Like do we have any major SBCs?
So we had approved an ESOP plan about a few months back, Dinesh. So that will be given. So right now, we have enough -- both in the older plants and the newer 1 that got approved a few months back. So we will use that to incentivize our people. If there is a need at a later point of time, we will -- the Board will deliberate and then will come to the shareholders. But nothing on that right now.
Right. And nothing more share dilution right apart from this, what we have already planned for, right? Is that just [indiscernible]?
What is the number SP1 INR 29.5 crores is taking into account all the dilution. So nothing on the ESOP right now.
Okay. And my last question is on Maharashtra. I -- we don't see Masabingsuch a big capital intensive and growing economy almost to the words of being INR 1 trillion now in the next few years. Why are you expanding so aggressively in Maharashtra?
So Mahrashtra, you will see it expanding very clearly this year. We were taking a little bit of a pause in Maharashtra because of cowatissues. But I think the last 2 years, Maharashtra has performed very well for us. This year is an expansion year for Maharashtra. You will maybe see is putting a good number of branches. It is definitely heading from the [indiscernible] will become a key market for us.
Yes. And your loan to loan on average we give that will remain in March, right? Or will you go on a more conservative basis, okay, we start with a lower and then increase. Like how do you thinking about it?
No. So far, I think across all the states, we don't have a differentiated strategy from a product perspective. At origination, the end across all the states we range anywhere between 40%, 50%, depending on the merits of the case. So MS is no different from that perspective.
Ladies and gentlemen, due to time constraint, that was the last question. I now hand over the conference to [indiscernible] for closing comments.
Thank you very much, everyone, for joining this call today. Thank you to the management of Five-Star Business Finance for giving the opportunity. Thank you.
Yes. Thank you, Samir, for taking us through. And I'm thanking you all the shareholders for these wonderful questions. Any question outside, please feel free to connect us directly so we can give you the clarity. With this, we will end up this Q1 earnings call. Thank you.
On behalf of JM Financial, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.