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Home First Finance Company India Ltd
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Ladies and gentlemen, good day and welcome to the Home First Finance Company India Limited Q3 and 9 Month FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Manish Kayal, Investor Relations Head. Thank you and over to you, sir.
Thank you, Vivian. Good afternoon, everyone, I hope that all of you and your families are safe and healthy. I'm Manish Kayal and I look after Investor Relations for Home First Finance. I extend a very warm welcome to all the participants on our Q3 FY '23 financial results con call. As usual, Home First management is represented by MD and CEO, Mr. Manoj Viswanathan; and CFO, Ms. Nutan Gaba Patwari. I hope everybody had an opportunity to go through our investor deck and press release uploaded on stock exchanges and on our website yesterday. We will start this call with an opening remark by Manoj and Nutan and then we'll have a Q&A session.With this introduction, I hand over the call to Manoj.
Thank you, Manish. Good afternoon, everyone. I'm pleased to showcase the strong business momentum that we are seeing in our business. Distribution expansion is our key focus area. We now do business at 261 touch points across Tier 1, 2 and 3 markets. Physical branches stand at 102. Quarter 3 FY '23 saw the momentum continuing on disbursements. We disbursed INR780 crores in quarter 3, which is our highest till date with a growth of 11.1% on a quarter-on-quarter basis and 37% on a year-on-year basis. The AUM grew to INR6,751 crores, a growth of 35.2% year-on-year and 7.6% quarter-on-quarter. The portfolio health has improved further. 1+ DPD has reduced to 4.4% from 4.7% and 30+ DPD reduced to 3% from 3.3%. GNPA has reduced to 1.8% from 1.9%. We will now focus on some of the key drivers and metrics of the business.Coming to technology. During quarter 3 FY '23, digital adoption has further improved. Usage of the customer app for various activities has increased. 91% of our customers are registered on our app as of December compared to 87% in September. 89% of our customer queries are now coming via the app. Digitally signed agreements have reached a significant 47% of all customer loan agreements which were executed in the quarter. We continue to focus our expansion in the states of Gujarat, Maharashtra, AP, Telangana, Karnataka and Tamil Nadu. Coming to margins, the spreads are at 5.7% after 2 repricing actions of 25 basis points in quarter 2 and 50 basis points in quarter 3. Our spread guidance for the medium term remains at 5.25% along with the cost of borrowing increases. On borrowing, we continue to focus on diversifying our funding sources. We have raised INR280 crores from International Finance Corporation through a up to 7-year debt.On asset quality, all buckets continued to improve. In quarter 3, 1+ DPD reduced to 4.4% from 4.7% and 30+ DPD reduced to 3% from 3.3%. Our Gross Stage 3 GNPA as per RBI circular dated 12th November 2021 reduced to 1.8% from 1.9%. This includes INR390 million that is 0.7%, which is currently in buckets which are less than 90 DPD, but included in the NPA due to asset classification norms as per RBI notification dated 12th November 2021. Adjusted for this, the number stands at 1.1% in December. Coming to the outlook. On growth, we will continue to focus on growth through a combination of 3 strategies. Deeper expansion into Tier 2 and Tier 3 towns in existing states. We plan to reach 400 touch points in 2 years. Increase in market share in existing markets, that is the second strategy. Expansion of customer target segment through co-lending and we expect to reach the milestone of INR10,000 crores in the next 15 to 18 months.On technology, we will continue to maintain our lead on systems and technology to build moats in origination, underwriting and collections. Our technology lead will drive our industry-leading productivity metrics and profitability. Coming to funding, we have access to diversified funding sources and we will continue to build on this further. Lastly, a good team is most critical to achieve our ambitions and we will continue to invest in finding and training the right people so that we can build a team that can take the company to the next trajectory.With this, I would like to now hand over the call to Nutan to take you through the financials. Nutan, over to you.
Good afternoon, all. I will take you through our performance for quarter 3 FY '23 starting with the key highlights. On financials, we continue to stay focused on our key operating matrices with an intention to deliver mid-teen ROE in a couple of years. On [ PAT ], our net interest margin for the quarter is stable at 6.4% even in the increasing interest rate environment. Q-o-Q spreads are lower by 10 basis points. We had increased our yield by 50 basis points effective 1st December and book cost of borrowing increased by 30 basis points on a Q-o-Q basis. Our core business health is very strong. Net interest income has gone up by 50.4% on Y-o-Y basis and 8.6% on a Q-o-Q basis. We did direct assignment of INR59 crores during the quarter as a liquidity strategy. We continue to have robust demand for our portfolio of assets. We also did a co-lending transaction of INR30 crores during the quarter. OpEx to assets stands at 2.8% for the quarter.As guided earlier, we expect this ratio to remain in the range of 3% to 3.2% going ahead as we focus on expansion. Cost to income at 35.3% in Q3 decreased 210 basis points on a Q-o-Q basis. Q3 FY '23 PPOP stands at INR81.7 crores, growth of 10% on a Q-o-Q basis and 25.5% on a Y-o-Y basis. Credit cost was at 0.4% is within our expected range. Our ECL provision stands at 1% of the total principal outstanding. We continue to remain conservative with the provisions. Total provision coverage ratio stands at 53.6%. Prior to NPA reclassification as per RBI circular, PCR stands at 87.4% versus 91% in Q2 FY '23. Our profit after tax of INR59 crores grew by 8.2% on a Q-on-Q basis and 27.9% on a Y-o-Y basis. Moving to liquidity and borrowings. The company continues to have diversified and cost effective long-term financing sources. During the quarter, we raised INR280 crores from IFC via NCDs to finance affordable and green housing.We have a healthy mix of borrowing with 66% borrowings from banks, 17% from NHP refinance, 19% from assignment and 6% from NCDs. We continue to have 0 borrowings through commercial paper. Our cost of borrowing is competitive at 7.4%, increase of 30 basis points from 7.1% on a Q-o-Q basis. Our marginal cost of borrowing for Q3 FY '23 was at 8.5%. During 9 months FY '23, we have not availed any new industry borrowing. Moving to capital, our capital adequacy ratio is 49.6% with Tier 1 at 49.1%. Our December net worth stands at INR1,748 crores vis-a-vis INR1,574 crores as of March. Our quarter ROA stands at 3.8%. Our annualized ROA stands at 13.7% on Q3 numbers. Our book value share is INR199. We are also delighted to share with you that Home First is now being rated as low risk on ESG risk parameter by Morningstar Sustainalytics. Our score of 16.2 we believe is the best amongst BFSI peers. This validation by a large agency highlights Home First's focus on sustainability and superior corporate governance.With this, I open the floor for Q&A. Thank you.
[Operator Instructions] The first question is from the line of Mona Khetan from Dolat Capital.
Congratulations on a good set of numbers. So firstly on the PLR hike of 50 bps last quarter so is it fully built into the yields or yet to play out?
Mona, because we've taken the repricing as effective 1st December, the P&L benefit has come only for 1 month. So the benefit of 3 months will come only in quarter 4 so to that extent, there is some upside on this line in Q4 as well.
Sure. And if I look at the incremental yields on Slide 27, they seem to have moderated from 13.4% last quarter to 13.2%. Am I reading the numbers right or there are some typo somewhere?
The numbers are correct. So this moderation is to enable sustained growth as we have been now focused on more competitive pricing in the market. And so we will continue to maintain the wider spread that we've been doing of around 5.25%.
Okay. So incrementally it has actually moderated versus last quarter because of pricing. Okay. Got it. And how about the BT Out, if you could give some color?
BT Out has been published, it's 4.8% for Q3. It's mentioned in Slide #24.
Okay. And just finally on the direct assignment book, the book and the related income has moderated over the quarters. So anything to read into it?
So I think we've been able to generate lot of liquidity through other sources. So particularly for this quarter, we are doing the ISE transaction. We also had visibility into the CLSS subsidy that we received in December and also in January. From that perspective, we did not feel the need to do assignment. It will continue to remain a good liquidity tool. So we've guided about INR100 crores a quarter so that remains the ballpark where we want to be plus/minus INR20 crores, INR30 crores a quarter.
Okay. So if I look at the last 4 or 5 quarters also, the DA share has come down in the overall area mix. So no change as such in strategy, right? It's purely the liquidity part you're highlighting.
Absolutely.
The next question is from the line of Shreepal Doshi from Equirus.
Congrats on yet another strong quarter. My question was pertaining to the operational metrics. So if you look at the disbursements upon employee and AUM upon employee, that has seen a very like strong increase over the last say 7, 8 quarters despite adding branches and employees. So what is the comfortable disbursement upon employee sort of a metric that we are looking at? So if you look at currently, disbursement upon employee is almost INR80 lakhs and AUM upon employee is almost INR7 crore. So what is the number that we are looking at or we are comfortable with?
INR80 lakhs per quarter I guess you mean.
INR80 lakhs per employee is the disbursement number that we have average if you look at like.
For the quarter I guess you're saying, right?
For the quarter, yes.
Yeah. So I think our attempt is basically to keep improving on that number. I mean we are not working with any particular number in mind, but whatever we have, we keep working on improving it and some of it is the discovery because we are implementing a lot of digital processes. For example if you see compared to 1 year ago, 50% of our customers have migrated into e-signature process so where they can complete agreements electronically. So many such small initiatives are helping us to improve the productivity of the team. So this is a number that we are trying to keep improving over time. So we don't have any specific target number in mind.
Sir, why I'm coming on to that question is also because if you look at our employee role, it's much more comprehensive. Like they're not only responsible for sourcing, they are also responsible for collection part. So therefore, if you look at the AUM upon employee, that number is also almost INR7 crore now. So from that perspective, is there a check because in an event of say a weak economic situation or bad collections, their efforts would shift towards bringing in those collections. So from that mindset, do we have any thought process?
No. We have been through such phases during COVID when the emphasis was on collections and that is an advantage of our model because these employees are well trained on collections. We don't really need to deploy new resources or look for resources outside. We are able to quickly redeploy them on collections if there is a crisis somewhere or if there is a crisis like situation. That has been -- that's the advantage of our model. And in the absence of any COVID related shocks, it's largely business as usual and collections and the time which is spent, time is well balanced between origination and collections.
Okay. Got it. Sir, the second question was with respect to the yields for the co-lending loans that we're doing. So what is yield there?
The co-lending loans would be at typically, I mean in the context of today's market rates, they would be at 10.5% or thereabouts; 10%, 10.5%.
Okay. And just wanted to understand the yield differential for home loans and LAP that we have. So if you can give me the -- if you could provide the range for home loans and the range for...?
150 basis points to 200 basis points between home loans and LAP, the differential yields.
150 basis points to 200 basis points.
Yeah.
Okay. Got it. One last question was with respect to the NHB. So during this quarter we have not utilized any NHB lines, but how much do we have as sanction lines?
INR600 crores, Shreepal. We have also mentioned that specifically in Slide #33.
Sorry, ma'am, I missed that part.
INR600 crores is the approval that we have from NHB.
Okay. It is not yet utilized for this year.
Correct.
Okay. And just last question was with respect to the PMAY subsidy. So when was the last credit that happened and are we expecting any credits that we will receive for our customers?
We got INR80 crores of subsidy in December. We also got a slightly larger chunk in January, after which most part of it is done. So we will have another INR20 crores, INR30 crores to go and that's pretty much about it.
The next question is from the line of Mayank from InCred Capital.
Congrats on the good set of numbers. So my question is basically on the PMAY subsidy. So are you seeing any kind of lower sanctions, delay, tightening or anything there? And can the lower subsidy going forward from government can impact demand in our customer profile?
See, the subsidy program was closed as of last month itself and we have not offered subsidy to any customers who were onboarded after March. The subsidy that we are receiving now is for customers who were onboarded prior to that and who were eligible for the subsidy and which is also now almost done and I mean all the backlog has been cleared out. There is very little left to go now. So both the scheme as well as the subsidy process has kind of been concluded now and we are getting now almost 1 year of -- not 1 year, about 9 months post the closure of the subsidy where the demand has been very strong.
So basically we are not witnessing any impact demand to borrow on the subsidy?
No. I mean there is no demand impact because of the subsidy program being closed. So, yeah.
And my second question is basically on our bounce rate. So we have seen the bounce rate normalizing and last quarter you were talking about the customer shifting from cash to online payment because of which our bounce rate are impacted. So any color on that?
The trend seems to continue. I mean it has moderated slightly compared to last quarter, but we are still seeing a very large number of customers paying immediately after bouncing the payment so that remains a mystery. So now I mean we have a daily track of this so we are getting almost 5% of the payment within 3 days of bouncing. And conversations with customers are not really yielding any insights on that as to why they're bouncing and paying immediately.
[Operator Instructions] The next question is from the line of Shubhranshu Mishra from PhillipCapital.
Couple of questions. The first one is if we can give the split of employees function-wise; how many are in HO, how many in sales, how many in collections, how many in credit? The second is on the credit underwriting. Do we utilize our sourcing employees to do the underwriting as well or do we have a separate credit underwriting team and also if we deploy any sort of external valuation experts to do the valuation? That's the second. And the third would be on the collections itself. What percentage of collections are cash now versus say a year ago and what percentage are on NACH and on NACH, what is the bounce rate that we get?
Sure. So head office we have about 15% of our employees. So about 150 employees are in head office versus about 800 plus -- sorry, close to 850 employees in the branches. And as far as underwriting is concerned, we have a central team. Our underwriting model itself is a centralized model where we have a central team of about 15 to 20 employees who are underwriting every loan. The data capture and some amount of data collection and customer interaction happens at the branch level. But at the branch level, there is no authority to approve any transaction. And as far as the legal and technical checks are concerned, it's all done by service providers at each location. So we have a panel of lawyers and valuers who do the valuation and those reports are actually checked by the centralized underwriting team as well before giving the final go ahead.And the last question I think was on collections, the cash part of the collections. So cash part of collections if you see five quarters back, it used to be about 8%. Now it is about 6% as per the chart that we are publishing. So I think the trend, it has generally trended down from about 10% to about 6% currently. But even the 6% that we collect in cash is not being collected by our employees individually. These customers deposit the cash at Fino outlets, Fino Payment Bank outlets, and the payment comes to us in an electronic format. So actual physical cash collection is only about 1% currently. The ACS coverage is there for 100% of the customers, but some of them bounce the payments and that's where the cash collection comes into play.
So balance 94% are on NACH?
No, it is not like that. Actually the bounce rate is about 14% as we have published. So the 86% of the customers would have cleared their NACH payment and the 14% have bounced their NACH payment and we have to have some alternative method of collection for the 14% of the customers. So that alternative in most of the cases, it is also electronic so like through a UPI payment or through the app, et cetera. But out of that 14, about 6 of those 14 customers are also paying in cash. The balance 8 are paying electronically.
Understood. And if I could just squeeze in 1 more question. The files are they stored at a centralized location or are they stored at the branches or is there an external agency again deployed for this?
Sorry -- what central? Sorry.
The loan documents and various other documents, where are they stored? Are they stored in situ in branches or is there a centralized location or do we have a vendor for this?
They are stored in a centralized. We have an agreement with or I mean arrangement with the vaulting company. The vault the agreements; the loan agreements, the property papers and other important documents; it's vaulted directly there. So the branches actually send the documents directly to the vault and it is vaulted over there. So these vaults are actually located in the NCR region.
The next question is from the line of Raghav Garg from AMBIT Capital.
Just a couple of questions from my side. If you could highlight what kind of competitive scenario that you are looking at in south of India where your exposure has been increasing since last several quarters. Also I think you're focusing more on the row houses in that region. So specifically in that segment, can you comment what are the kind of ticket sizes that you're financing and what kind of customers are these which go for such housing? And my last question is are these loans which you give for row houses, are these generated through developer partnerships or there is some other model that you are following here?
Yes. So in South India, the origination is largely individual customers who construct their own homes. The concept of row houses is not that prevalent in the southern states. It's mostly customers building houses on their own plots. That's generally what we are [ seeing ]. As far as row houses are concerned, the model exists in places like Maharashtra and Gujarat especially in smaller towns and there the arrangement is the agreement or the partnership is with the developer who's building the row houses and the developer censors the references of customers who require these loans. So that's generally the origination model with row houses.
My questions are answered. Thanks.
The next question is from the line of Nidhesh Jain from Investec.
Firstly on the collector account. Can you share the number of active collectors for the quarter?
2,100.
Secondly on the incremental yields, the quarter-on-quarter drop in incremental yields. We have also witnessed increase in share of LAP in this quarter. So it is more strategic or it is competitive intensity that we are witnessing because of which the incremental yield has dropped?
We want to maintain competitive pressure in the market and ensure that we are gaining share so which is why we kept the rates competitive. We thought right now when the rates are expected to taper off is a good time to be more competitive in the market and gain share because the risk of actually the spreads getting compressed is lesser at this point of time because we are expecting the rates to taper off. So we thought rather than increasing the rates, let us stay competitive and gain share. I think that's the thought process behind the rates that we are maintaining in the market today.
Sure. And lastly on the LAP book, we have seen very strong growth in that portfolio I think almost doubling up over a 1-year period. So what is the strategy there and how is the asset quality trends in that LAP book?
LAP is something that we have been saying that we are comfortable with the 15% kind of number for the AUM and I think the percentage is catching up gradually. So as far as the delinquency trends are concerned, I think they are trending well which is why we're comfortable in onboarding them. So they are trending well as of now.
Sure, sir. If you share 1 DPD of LAP versus housing loan, what could be differential in that?
Broadly they would be in the same ballpark.
The next question is from the line of Jigar Jani from Nuvama Wealth.
Congratulations on a great set of results. So what are we seeing is basically that your new to credit customers have been consistently falling down at a rapid rate and also we are seeing a substantial increase in the average ticket sizes above INR15 lakhs proportion as a percentage of the [indiscernible] going up. So broadly where do you see this settling and do you think that we will eventually migrate to a more higher ticket size and competing more in the prime segment maybe 2 or 3 years down the line? And what kind of competitive pressures do you think that will place on your spreads maybe 2 or 3 years down the line? Some thoughts on that would be great.
Yes. So starting with the new to credit customers. So this is a function of actually credit activity in the market and we have been saying that every quarter this number of new customers -- customers who are new to credit keeps decreasing. But having said that, even customers who have recent credit history do not find it very easy to get a housing loan and they generally form the target segment for us. And these are customers who may have informal incomes, who are working in small companies where their income documentation is not very strong, et cetera. So while they may have a bureau score, the rest of the criteria that is required by larger lenders is not fulfilled and hence they form our target segment plus the bureau score is also again on the back of very recent loans or very small loans like consumer loans et cetera, consumer durable or two-wheeler loans. And generally lenders do not give much credibility to that bureau score you can say primary criteria for providing a housing loan to the customer.So that really does not impact our target population in terms of size of the addressable market. As far as ticket size is concerned, it's more of a secular increase because we're operating in markets which are fairly you can say affluent and well developed and industrialized markets. So Gujarat and the southern markets, Maharashtra and the southern markets; the per capita incomes are much higher than national average and we're seeing a trend of people in the affordable segment also constructing better quality homes, larger homes, et cetera, with their incomes rising up and it's more of a secular increase. The segment is the same, the target segment is actually the same, but people are preferring to spend little more on their homes and as a result of which ticket sizes are moving up. Land values are moving up as a result of which the ticket size is also moving up, et cetera. So it's more of a secular increase. I mean it is not really any conscious effort from our side to address a different population or a different target segment.
Okay. Understood. And sir, I think you were guiding for about 150 branches in the next couple of years. So what is the branch expansion plan maybe in Q4 and for the rest of FY '24 if you could guide on the branch expansion?
Branch expansion, we have about 5 to 7 branches which are kind of work in progress and which should get completed in this quarter. And kind of a similar number every quarter is what we are looking at. I mean some quarters there is a lull and there's some catch-up in the next quarter kind of a thing.
Okay. It's basically just 1 branch addition this quarter is just a oneoff and you will again come back to the run rate.
Yeah. It's just that there are few branches are in the last stages so we are just waiting for it to get completed kind of a number.
We also front-loaded the branch expansion in first half of this year where we added about 20-plus branches. So that kind of has -- most part of the job for this year has already been done.
Okay. Understood. So most of the expansion that you will see is post Q4 and FY '24, the majority one?
Yes. So Q1 you will see again or H1 next year, you will again see bulk of the additions for next year.
Sure. And the last question. On your bank borrowings, how much of this repo or MCLR or the general interest rate hikes have been factored in in your borrowing cost as in how much more do you see the cost of borrowing inching up from here? Probably the incremental cost of borrowing is 8.5%, how much more expansion do you foresee based on the current interest rate hikes that have been done till now or anything has been passed?
So on the marginal cost of borrowing, we are pretty much at the peak rate. Any further increase from here will largely depend on where the policy rates will be. On the back book or the book cost of borrowing, we are at 7.4% for the quarter. With NHB coming in in the next couple of quarters and then we should be able to manage this with 30 basis points to 40 basis points increase let's say in Q4 and maybe similar increase in Q1. So we should be able to keep it way below the marginal cost of borrowing at least next 2 quarters.
And your yield increases which is 50 bps will start reflecting from Q4 basically in your back book?
See, there is a portion which is already reflected because it was effective 1st December, but fully it will reflect in Q4.
And any plans for any incremental yield increases for rate hikes from you maybe in Q4?
We are in discussion, but that will be more a Board and an ALCO decision, which will have to take place over time. What we are focused on is maintaining the spread that we have guided, which is 5.25%.
Understood. Thanks so much for your answers and best of luck.
The next question is from the line of Pooja Ahuja from Monarch Networth Capital.
Firstly, wanted to understand why it was mentioned in the opening comments that the credit cost we have been cautious in terms of maintaining additional provisions. Just wanted to understand on a sustainable basis what is our credit cost guidance for the next maybe 2, 3 years?
30 basis points to 50 basis points is what we have been guiding.
So we maintain that.
Yes, yes.
Sure. And given the disbursement growth that we have been witnessing, are we still maintaining our AUM guidance of 30% or do we see a higher growth there?
No. We are maintaining a guidance of 30% because the aim of the team and objective of the team is to try and do better, but 30% is something that we are guiding towards.
Okay. And lastly on the bounce rates, do you think this 14% or 15% level is now the normal levels or do we see further improvement from here on? We have seen some improvement in January I think, but would it be in this 14% to 15% range?
Looking at the behavior of the customers, it looks like it can improve substantially because we have been tracking the number of customers who pay immediately after bouncing and we are seeing that almost 5% pay immediately in the immediate 3 days after bouncing. So logically, it looks like these customers can be convinced to clear their payments and reduce the bounce rate, but we are still not getting any insights on how that has to be achieved and yes, we are working on that.
The next question is from the line of Amit Jain from Axis Capital.
Sir, I had a question on the mix of salaried versus self employed. So the proportion of self employed has been steadily rising, it's close to 30% now. So is there any change in strategy or is that a conscious decision? And what is the optimal mix that you would look at in terms of salaried versus self employed?
So I think it's a function of the distribution. So historically, our distribution was more focused on larger towns where there is a larger population of salaried customers. And now with continuing expansion into smaller towns, Tier 2, Tier 3 and 4 towns; the population of self employed is larger. So there is again a very, very gradual increase in the population of self employed. Other than that, there is nothing that we are doing consciously to onboard self-employed customers specifically.
The next question is from the line of Abhijit Tibrewal from Motilal Oswal.
Again congratulations on a very good quarter. My question is more around the demand environment and let me kind of take a few seconds to explain what I'm trying to understand. At least can you speak to the larger HFCs. They have talked about some sluggishness in demand which was there in the third quarter. Obviously our disbursements were very healthy and they don't kind of suggest that. Moreover, what you also kind of suggested that incremental needs at these levels, you are kind of trying to gain market share which is also praiseworthy. But what I'm trying to understand is are you seeing -- why I'm trying to understand this is like I believe prime housing and affordable housing are very different things and should be looked upon differently. So what I'm trying to understand is because the EMIs have gone up given the higher interest rates, has the loan eligibility of the customers come down and which may kind of impact the demand going forward? How are you kind of looking at the demand environment in addition to kind of gaining market share?
Demand in the segment that we are targeting, the demand in the segment is strong and it doesn't seem to have got impacted by increase in interest rates. While in the higher ticket segment, it could have impacted because ticket size is also large and the EMI changes due to increase in interest rates are also large. In our segment we have not seen any impact on demand as such. And the customers also take a while to actually take a decision to build a house and there are many other moving parts in building a house like buying a plot, et cetera. So the interest rate is only 1 component out of their multiple decision points. So far we are not seeing any impact on demand and so demand continues to remain strong. I don't know whether that answers your question.
It does. Because what I was trying to understand is affordable housing we are continuing to see good demand and you're not seeing any impact on demand because the interest rates have gone up. I'll take it as a healthy sign. Second question that I had was for Nutan, the other 2 questions for Nutan. One is how should we think about the provisioning cover either on Stage 3 loans or with NCLD. Why I'm asking this is there are 2 pools of thought here. One are companies who say that listen, this is our ECL model and based on that what our ECL model indicates and this is the kind of provisioning cover that we want to maintain. And then there is another set of companies who think differently who say that when the going is good and when the profits are good, then maybe we should kind of build up some [ cover ] in terms of provisions. So how are we thinking about the provisioning cover?
So Abhijit, as a company we have focused on early delinquency. So you would have seen that the bounce rate is trending well, 1 DPD is down to March '20 levels. We are amongst very few companies where the 30 DPDs are 3% now. So all is going good in terms of delinquencies. What we want to really do on the ACL side is to have an extremely strong balance sheet so that my net NPA over time is manageable in terms of discussion from a financials perspective. So that's the goal. Now like you said if you're in a space where we have some room, idea is to keep the provision levels healthy and run with that. So we've been guiding 1% of ECL provision on the total principal outstanding. That's essentially the number we've been carrying for some time and as long as possible, we will want to do so. So we are not deviating from that in the medium term.
Got it. And then lastly, Nutan, I want to understand there are few HFCs who've reported -- at least the larger HFCs have reported and who kind of suggest that there is a onetime gain that they're seeing from the assigned pools of loans. So is there anything that we are seeing, how we kind of do accounting typically in an assignment transaction, they book the upfront assignment income? But now that interest rates are going up, is there a positive or a negative variance which is there from the assigned pools of loans?
So that assigned pool is mark-to-market essentially. What we're talking about needs to be done at every quarter-end and we do so. What ends up happening is that the modification amount that ends up coming is a relatively low number because there have been some assignments that have been done prior to the rate increase, which is let's say pre mid-COVID and some assignment that has been done post mid-COVID. So on a blended basis, the number doesn't remain meaningful and it goes to the other operating income line.
Got it. This is very, very useful. Thank you so much and wish both of you the very best and to the rest of the team.
The next question is from the line of Mayank from Incred Capital.
So my question is on the spreads of 5.25%, when do we expect to reach that level, is it mid-term or long term?
Mid-term.
I guess 2 to 3 years.
The spread of 5.25%?
What is the question you asked? I missed the last part of the business.
So when we do expect to reach the level of 5.25% spreads?
5.25% is we are in this interest increasing interest rate scenario, we are guiding towards a 5.25% spread. So currently it stands at 5.7%. So if interest rates increase further and they are likely to increase or there's likely to be some catch-up of the increased interest rate now for the next 2 quarters so that's why we are guiding towards 5.25%.
So by next 1 year, we can expect to reach 5.25%.
Yeah. In the next 1 year or maybe next 2, 3 quarters.
[Operator Instructions] The next question is from the line of Ravi Naredi from Naredi Investments.
Sir, my question is when we are technology driven company, why cost to income ratio rise by 2.3%, 230 basis points?
So I think last year when we spoke, we had mentioned that our costs are likely to increase in the medium term because during COVID we did not make certain investments and we are making those investments now for the next 12 to 18 months and we had guided that the cost is likely to increase. And then after that, it will again start moderating. So that is the trend that we are following.
Okay. And sir, do you find more challenge from asset side or liability side in this scenario?
So I think asset side, we went through a certain, let's say, difficult phase during COVID, but we have come out of that well. And frankly speaking, same on the liability side as well. So as of now, we are fairly comfortable on both these aspects.
Okay. And sir, when we are growing since last 45% AUM, why you are thinking growth will be 20% in future, guidance 20%?
30%, sir. We said 30%.
30% is okay. Thank you.
The next question is from the line of Nischint from Kotak.
Your borrowing cost is around 7.4% and you mentioned that your incremental cost of borrowing is somewhere close to 8.5%. If I hear that rightly, 8.5% or 8.75%. So when do you really think that your weighted average cost of funding will kind of come to the marginal rate? Is it like 2 quarters away, 4 quarters away, if you could give some color on that?
So Nischint, the marginal cost of borrowing of 8.5% does not include the benefit of NHB borrowing. As we continue to drawdown the NHB funds in Q4 and subsequently in Q1, we will get that benefit and that will start also reflecting in the book cost of borrowing. At the same time, the lagged increase of [ ancillary ] will also flow in. So in an ideal situation that NHB did not exist, this convergence would have happened, let's say, in 2 to 3 quarters from now. Because of the presence of NHB borrowing and this mix being at 20% plus, the overall cost of borrowing will remain below 8.5%. That's what we are looking at right now in our model. So we are looking...
Ex-NHB, how much would be the difference? I mean if one has to look at 7.4% ex of NHB?
Yeah. So almost I would say 50 basis points will be the benefit on the total book if you peel off the NHB borrowings.
So you're comparing 7.9% versus 8.7%, something like that?
That's right.
And as of now, there is no plan to raise lending rates on the asset side? So I mean if you don't do anything, you should kind of come to 5.25% or maybe 2 quarters or so?
If we don't do anything, yes. But some of these...
That's a call you obviously will be developing over time.
Yes, sure.
And on the ticket size, if you could kind of give some guidance. I think the ticket size seems to be inching up a little bit or you're doing more disbursements towards slightly larger tickets. So is there a trend over there or are we trying to do too much?
No, this is more of a secular trend and very gradual trend because we are operating in some of the more affluent markets, we are seeing customers are also spending more on building homes. So just related to that and we are not reading too much into it.
Because I think you also mentioned that you're going into the slightly interior or Tier 3, Tier 4 towns. Is it something kind of sort of getting to be more of an inflation all throughout or is it something that there is a mix change when you go into the smaller towns? Because maybe logically everything has been same if you go to the smallest, the ticket size would go down, but it is going up so higher. How one should read that?
Yes. But in southern markets, we are not seeing that trend. Southern markets, the ticket sizes seem to be stable or larger actually as we go into smaller towns. People seem to build larger houses in even Tier 2, Tier 3 towns. So we are not seeing that reduction in ticket size as we go more deeper. That trend is I think somewhat more common in the northern markets where the houses become smaller and the budgets are smaller in smaller towns. But in southern markets, we are not seeing that trend as a result of which, the ticket sizes are holding up or increasing slightly.
Is that something like average for an apartment size in terms of square feet or something that you track, which gives some sense in terms of a pricing return? I mean if you have any color that you can share on that.
We will have to get back on that. I think you're talking about the square foot.
Something like that, whether it is a sign of an inflation out there or is it just a sign of affluence of people buying a house?
Yes. So we have that. We don't have it off hand right now. But it's a bit of both, I think maybe it's increase in square footage as well as people using better material or more expensive material in their homes. So it's a bit of both, which is contributing to the ticket size.
The next question is from the line of Bhuvnesh Garg from Investec Capital.
I have a question on the bounce rate. So just want to understand that what kind of penalties are charged to a customer by the bank and the company in the scenario of payment bounce and what's the reaction of the customers during your conversation on this? Do they understand these charges and what's their reaction to having to pay these charges?
Mainly the charges are related to bouncing. So we take a bounce charge from the customer, which is INR500 plus GST, so a total of INR590 is what we charge from the customer if they bounce the payment. And the collection is generally on a best-effort basis so it's not collected from customers who pay immediately. If they have delayed a little bit, then we collect a bounce charge. So currently the penetration would be probably 20%, 20% of the customers will be making the bounce charge so it's not very hard and fast. Other than that, there are no other penalties as such. The penalties accumulate, I mean we don't bill the penalties to the customer. So the customer is in 30 days past due or higher bucket, then we keep accumulating the penalties. When the customer comes to settle the property or when they finally come to close the loan, that's when we charge the penalties. So that's been our process for several years now. The ideology behind it is that if the customer is ready to make an installment payment, then we would ideally like to collect that installment payment other than charge penalties from the customer.
Okay. So this INR500 is the penalty by the company, right, that you might get and then there would be some penalty charged by the bank as well, right?
Yes. The bank from which the customer has issued mandate, they will also charge something which ranges between INR50 to INR200, INR300.
Okay. And you are saying 20% of your customers who bounce, eventually they end up paying this bounce charge.
Correct. Because majority of the collection also happens electronically on the app, et cetera and we have not made it very hard and fast on the app. So if customers are paying on the app and we are avoiding any -- since we are reducing our collection effort to that extent, then we don't insist on the bounce charge.
The next question is from the line of Abhijit Tibrewal from Motilal Oswal.
One more thing I wanted to understand. Manoj, during your opening remarks, you talked about 261 touch points across Tier 1, Tier 2, Tier 3 markets. Wanted to understand, let's say, about 2 years back at the time of our IPO if I were to kind of look at our branch presence, they were predominantly urban centers, metros, peripheries of metros and urban centers. So how are we now thinking about it? These distribution touch points in addition to branches that we're adding, are these touch points coming up in Tier 2 or in Tier 3 markets? And if you have this data out of our AUM today, what proportion of the AUM is coming from Tier 2 and Tier 3 markets and how has that number changed vis-a-vis let's say 1 or 2 years back?
So broadly about 30% is coming from the Tier 3 markets and Tier 1 and Tier 2, we generally used to be present even say a couple of years ago. But Tier 3 would be a new addition or a good number of Tier 3 markets would be an addition over the last 2 years. So about 30% of our business is coming from Tier 3 markets now.
30% from Tier 3 markets.
Yeah, 30% is coming from Tier 3, markets. I mean that number would have been much lower 2 years ago.
Okay. And 30% is your disbursement mix -- proportion of your disbursement mix. Got it. And the idea going forward is that these touch points that you are adding will largely be there in Tier 2 and Tier 3 markets.
Largely yes in Tier 2 and Tier 3 markets. There may be a few pockets where some Tier 1 or Tier 2 markets are also not yet covered in some states, but largely in Tier 2, Tier 3 markets. Yes.
Also Abhijit, by virtue of the presence we've had in Tier 1 markets, we've kind of covered those markets from all angles in terms of the housing demand where it's getting generated from. So in those markets, it's about -- in the Tier 1 markets, it's about market share growth. So in some markets we'll probably be, let's say 2.5%, 3%. The idea is to take it up in those markets in combination with deepening presence in Tier 2, Tier 3 markets. So that mix will not change a lot because in the disbursal proportion, both will continue to grow. One will grow because of market share, the other will grow because of penetration.
The next question is from the line of [ Vignesh Iyer ] from Sequent Investments.
Congratulations on good set of numbers. I did miss some part of the call so apologies if it sounds repetitive. I just want to know so your disbursement is at INR780 crores in this quarter with 11% Q-o-Q. So I just wanted to understand going ahead for quarter 4 or even for FY '24, are we heading towards a 4-figure number? If you could just help us understand.
Yeah. I mean the target is to keep going and keep moving up. So I don't know whether we hit 4 figures in the next quarter or the quarter after that, but yes, that's the next milestone.
Okay. And so any ballpark numbers, I mean any like you gave something for AUM guidance. So anything on similar lines?
The aim is to keep growing at about 7%, 8%, 10% on disbursement every quarter. That's the growth that we're looking at.
The next question is from the line of Chandra from Fidelity.
Just a quick question. So when we look at the flow of Home First app, you said that on a flow...
Mr. Chandra, sorry to interrupt, sir. Your voice is very low. Could you speak closer to the handset?
Manoj, on a flow basis I think for the LAP you've [ dictated ] in the past is 15. So my assumption is that over a period of time LAP gets to 15, we do that at possibly about 200 bps higher yield. So if I had to sort of just look from the margins over a period of time 8 bps to 10 bps, you should have a tailwind to margins over a period of time from that. Secondly, as you're saying you're doing a little more business in Tier 3 towns where price sensitivity is not as much so my sense is that your ability to hold yields should be a little better. Just given these 2 factors as tailwinds to sustainability, just a little curious on the spread number which you talked about. A, is that little more temporary because right now I mean cost of funds is rising a little quick and maybe 2 years out instead of 5.25%, once the rate cycle sort of turns and in the past given you've held yields well that maybe this number could be something different?
Yes. See, we are guiding to this number because there has been sharp increase in rates. Also as far as the rates in the market are concerned, we don't want to do too many changes so which is why you're seeing our origination yield also moderating. We have kept it that way in the expectation that the rates will taper off and then start declining over a period of time. So we don't want to keep increasing the rates in the market and then after a couple of quarters, then we have to reduce it, reduce it on the back book, et cetera. So which is why we've kept this way so which is why there is a medium-term guidance of 5.25%. But you're right, we have some tailwinds and we have certain things on our side. The LAP penetration is one and the penetration of the smaller markets is another one and similarly, we are co-lending and stuff like that. So yes, we should be able to cross those numbers that we have mentioned.
Sure. So essentially this -- I mean there is a near-term obviously cost headwind and you want to effectively just keep your yields where they are. But if the cycle turns, I mean this 5.25% is not sort of the be all and end all of everything. There is...
Absolutely.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.
Thank you, everyone, for joining on the call. I hope we have been able to answer all your queries. In case you require any further details, you can contact Manish or get in touch with Orient Capital, our external Investor Relations advisors. Thank you very much.
Thank you. On behalf of Home First Finance Company India Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.