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IndoStar Capital Finance Ltd
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Good day, ladies and gentlemen, and a very warm welcome to the IndoStar Capital Finance Q3 FY '22 Earnings Conference Call hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhijit Tibrewal from Motilal Oswal Financial Services Limited. Thank you, and over to you, sir.
Thanks, Ali. Good morning, everyone. We have with us today the senior leadership team from IndoStar Capital Finance to discuss their Q3 FY '22 performance and the strategic direction of the company. We are obviously at the end of the current season and today seems like a busy day for all of us. So without much delay, let me hand over the mic to Mr. Salil Bawa, who is heading the Investor Relations, to quickly introduce the management to us, post which we will have the opening remarks from the management followed by an interactive Q&A. Thank you. Over to you, Salil.
Thank you, Abhijit. Good morning, everyone. Thank you for joining us on the Q3 FY '22 results conference call of IndoStar Capital Finance Limited. Today, we have with us Mr. Deep Jaggi, CEO, IndoStar Capital Finance Limited; Mr. Jayant Gunjal from Treasury; Ms. Benaifer Palsetia, CHRO and Head CSR; Ms. Kaumudi Biyani, Head, Finance; Mr. Mohit Mairal, Chief Risk Officer; and Mr. Amit Kothari, Chief Technology Officer. Before we begin, I would like to state that some of the statements in today's discussion may be forward-looking in nature and may involve certain risks and uncertainties. A detailed statement in this regard is available on the results document shared with you earlier. During the discussions, we'll be referring to the Q3 FY '22 investor presentation, uploaded to the exchanges and on the company's website. With that, I would like to now invite Mr. Deep Jaggi to begin the briefing of the call.
Thank you, Salil. So good morning to all. Thanks to all the participants for taking out time to join the quarter 3 '22 earnings call. Hope all of you are safe and fine. Before we discuss the quarter 3 '22 numbers, I would like to just set the context for our introduction today morning. As you all know that IndoStar is managing the transition for the past few years, moving from a corporate lending business to a granular retail business. When I joined in the month of November 2020 as a part of well-thought succession plan, the management and the team -- the management team and the promoters had finalized a 5-year business strategic and growth plan. Despite COVID and all the micro headwinds over the past 12 months, I believe we are well on track for the 5-year plan. I do truly believe in a massive growth potential for IndoStar platform, which can be seen in the quarter retail disbursements. I'm happy to inform you that today, as on 31st of December, our retail book is about 82% of the overall AUM. And we are on course to becoming a pure retail -- 100% retail finance company. I'll just take a few points which I would like to highlight. IndoStar is committed to become a pure retail finance company, which is clearly can be seen from the percentages that we have, that 82% of the book is retail and 18% is corporate. Now coming to the profitable growth and the 5-year plan. You can see the quarter-wise numbers. Quarter 1, we -- the numbers were about INR 560 crores of disbursements. Quarter 2, it was INR 1,129 crores of disbursement. Quarter 3, it is INR 1,450 crores. I can just also highlight, for the first time in the month of December, we have touched a disbursement of INR 500 crores which seems to be likely a base for us now from here on. And from here on, we can just grow from these numbers. I also mentioned in the month of January when I was elevated as the CEO, the number of branches that we are expanding. So we had targeted 400 branches by -- till the month of March. Today, as on 31st of December, we already have 343 branches. We are focusing on 2 critical products that we have, one is the commercial vehicles and the second is the affordable housing. Now the commercial vehicles from 208 branches, we are at 318. And also in affordable housing from 65 branches, now we are at 87 branches. We also had adopted a hub-and-spoke model where we -- in the next 4 years or 5 years, we have -- we are planning 1,000 branches. And these 1,000 branches will be controlled by 200 hubs. What we have done in the first year, which is going on till March 2022, we have got our presence in all 200 hubs, which are required until 2025. So we have already made our pan-India presence. And now in the next couple of years or 3 years, we will be adding just spokes which helps us in a way that we already have our underwriting setup there, the business setup, we have relationships with the manufacturers and the customers. It is just extending those parts. It is not an easy task from going -- adding from 400 branches to 1,000 branches. Now coming to the collection part, I will first take the collection part. So we have added approximately -- we have got a big number in terms of new book. So what we have done is we have got a separate collection center. Now collection center is a regular calling to the customers to arrest the new losses or new flows, so with which we have -- approximately 90% of our book is in Stage 1 in the fresh disbursement that we have done. Besides that, we have also added about more than 100 people manpower only for collections. Wherever there is a flow in the old book, we have got now about approximately 300 people to collect in the old book plus 30 plus numbers. Our NIM has been continuously improving. When I come to the used business, especially in the commercial vehicle, in the commercial vehicle disbursement that we have done, 80% of business is coming from used business. Now let me -- so overall, the weighted rate there is close to about 16.5% to 17%, which is a very, very healthy weighted IRR as the scale is going up. In especially the commercial vehicle space, our overall weighted IRR of the book will be much, much better within the next couple of quarters. Our NIMs have started improving as our weighted rates are going up. To improve the productivity, we have also brought in our Chief Technology Officer, Mr. Amit Kothari, who has a purely background of fintech. He will be complete -- he is already working on our app which is a Go Digit app. We have an app, which we have developed with help of KPMG, and we are at a pilot stage. Besides this, what we're also doing is we are also investing in the automation. We are improving the productivity overall, so that the costs come down. We also see a revival in the commercial vehicle cycle. As the new vehicle sale is less, it is going to impact and there will be a good growth in the used space. And then you see a huge business space, there are 2 prime players in this particular space, one is Shriram and second is Chola. We see a good opportunity in the retail space which is from 3 vehicles to 10 vehicles. That is the space we have been focusing on. And then when we talk about 3 vehicles, our -- we will be having the minimal losses because all of them have got tracks. They have a repayment history. We also have a check on the CIBIL. So that the people who are defaulter should not be entering into our book. Now I come to the affordable housing. We have recently recapitalized our affordable housing companies, and we continue to make it as fully independent. Here again, we will benefit from small scale, which helps us to grow faster, a very, very large opportunity for us. We established the processes and a fantastic team. I'm also glad to inform you that we have appointed Mr. Ravi Narayan as a Non-Executive Independent Chairman in the IndoStar Home Finance. Ravi superannuated from ICICI Bank, at that time was leading the retail, secured assets business for the bank. He has more than 35 years of expertise across various functions of retail banking, auto finance and extensive experience in housing finance. He will be responsible for mentoring and guiding IndoStar Home Finance into creating a value for the stakeholders. So we -- in terms of cutting costs, we have got -- we have earlier announced that we will be getting into the smart branches. We continue to do that. We will be developing the branches at a lower cost, so that the CapEx impact is less. We have also shifted our product lines because of the COVID impact. We don't have further exposures in the bus segment because that is a segment where you have issued earlier days due to the COVID. So we are completely a company which is retail, and it will be on the used business. We have also started focusing on used cars. In the coming year, we will also have a separate vertical to focus used car business, which is, again, a profitable business at high IRR. We are also going into a co-lending. As you are aware that we also have a tie-up with ICICI Bank for the new vehicles which we don't park in our book and we park it on the ICICI book. Now we are going one level down. We are having a tie-up with the small NBFCs where the capital is the issue and they have penetration in Tier 3, Tier 4 cities where we are not present. So we have already tied up with one of the companies. It has got about 24 branches in South India, which will -- and we will add a few more. This will help us in further penetration and strengthen our base into the core business of used vehicles. That is what is the overall strategy that we have. In terms of COVID, we are just going through and COVID 3 is completely at the end. We are not seeing any impact. The impact seems to be minimal on this part. We don't see any issues. And as we don't foresee anything, any COVID forthcoming as of now, we see our economy growing in a much, much faster pace, and overall the external environment should stabilize, which should help us in adding more people, more productivity. That will be our overall plan. Stage 3, if you see our numbers, Stage 3 is down. In the new book, Stage 1, it's close to about 90% besides the COVID 2 and COVID 3, we've been maintaining these numbers in the new book, which clearly means that we are building up a robust book, which is going to be helping the organization's portfolio and bottom line in future -- in coming quarters. NIM, I've already mentioned, it has started improving, and we see further going up. Cost of funds has been stabilized and it is going down as the market today is -- we are getting at a better rate due to our quality of portfolio. We said this is -- okay, I just left one point, which is the liquidity. We are actually...
From a liquidity perspective, I'd like to highlight that we are highly liquid. And as per the company's strategy, we intend to keep around 2 to 3 months of liquidity and our liquid cash and the signature fund for our future growth as possible. This is where we probably open the call for any further questions.
So we are happy to answer your questions from here on.
[Operator Instructions] First question is from the line of Niteen Dharmawat from Aurum Capital.
A couple of questions that I have. First of all, can you give us the NPA numbers for this quarter versus last quarter and versus last year?
So if you -- there are a couple of things. One is the Stage 3 numbers. There is a decline in the Stage 3 overall. It has come down to 4.2%, right? So it is at 4.2%. Now coming to the GNPA number. There has been a slight change in the RBI norm due to which, as of now, we have closed about 7.2%. But if you see stage by movement, which is as we follow Ind AS, we are on the decline.
Okay. My second question is related with the housing sector. And you mentioned that you want to enter into -- more aggressively in affordable housing. I see that the operations revenue has come down in this quarter year-on-year basis from INR 6,000 lakhs to INR 3,700 lakhs. So that is one point. Second is, how could you compete against the public sector banks, the likes of public sector banks where the cost of capital is much lower? So how do you plan to do that in this segment, especially?
So thank you, Niteen. So I'll divide these questions in a couple of things. One, I will request Ms. Kaumudi to answer who handles the finance. The second question is on the -- where we are going to compete. We are into completely a different line. We are not competing with public sector banks. We are into self-construction, which is at 13.5% to 14% which is rural. We are not competing with public sector banks. Second?
Niteen, with respect to the housing finance income, there is a one-off adjustment which has been done based on our discussions with Deloitte from an accounting adjustment relating to assignment income, because of which you are seeing a decline in the revenue from operations. But excluding this one-off, there has been growth in our revenue from operations business considering the increase which has happened in the housing finance disbursements.
The next question is from the line of Pankaj Prasoon from HNI Investor.
Can you hear me?
Yes, sir.
Sir, the only question from my side. Just every quarter-on-quarter, we are seeing this credit cost is coming, provisioning is coming. Last con call also, I think there [indiscernible] that now then no more credit costs will come. So my question is that is it over? Or is it still -- is it pending? If it is there, why don't we write-off one go and do not give so every quarter?
Thank you, Prashant. Overall, if you see our numbers, we have a very, very high capital adequacy. We are at about 35% against regulatory requirement of 15%. And COVID 3 in December and January is still -- it is just over. The impact is very, very minimal. We don't see those problems coming on. This credit cost that you see, it's a regular review in the internal policy, and we have adopted a conservative provisioning policy as our customers are just coming out of the regular forbearance. Stage 3, there has been no movement. Let me also share with you, we don't expect losses because of this credit provisioning. We should recover this. We don't see any loss into that. And to strengthen further, we have added our call center for collections, and we have also added the collection team to support the field and business team. We don't see any losses in this.
Okay. So my question is, sir, that I -- suppose this December quarter is over, March, can we see those kind of, again, provisioning?
We don't expect anything on that.
Okay. So my next question will be on the used tractor finance because what kind of market size do you -- have you assessed? And what kind of market size is there? And what kind of market share we will get? And who are the competitors in that segment?
See when you talk about used tractor business, if you talk about a pan India player, there is no pan India player today. And the tractors are sold on the exchange market. The players who are working on this particular market is maybe AU Finance, SK Finance. And they are also working in a particular segment or a particular state. So we see this niche coming up that there is nobody to address this market pan India. So we want -- as we have a setup, which is a 400-plus branches already, we do not expect that anything which anybody is not doing, we will be able to deliver that. That is what is our question. And we expect the market is somewhere about INR 800 crores to INR 1,000 crores.
For us?
No, it's the size of the market.
Just INR 800 crores to INR 1,000 crores, that's all?
Yes, because the ticket price is on a half life. And it operates at 24%, 25%. That's a very, very high yield market at 24%, 25% market.
So I think last con call, we had discussed that around 70,000 crores tractors being sold every year. So my understanding was that we -- this used sector market must be bigger than that.
See, it is just an estimate that I'm telling you. The market could be bigger because there is no organized player in this particular market.
Exactly my precise point was that only.
So we will be getting -- we have a target in our mind what kind of disbursement we are looking, and we are sure that we can deliver that. Once we pace the waters of this particular segment, then we will really assess where do you want to get into this particular segment? And how much volume do you expect? Because it's not an easy market, and it is a very, very unorganized market. The cost of acquisition can be higher. You have a concentration of tractors, in particular 7 or 8 states. But there are Eastern -- like Eastern India is growing much faster than anybody. So there are no organized players who are financing this particular business. So we expect ourselves to address the pan India market for used tractor. That's the plan.
I completely agree with you that Eastern market and Northeastern market, there is a big scope for the used tractor sale, so that's right. So sir, are we on with our earnings guidance that in 5 years, we want to cross beyond INR 60,000 crore book?
So Prashant, I have mentioned this. We are on track for our 5-year plans. We don't see any deviation as on date. That is the reason that we have added branches. And in the next year also, we will be adding more branches.
So sir, currently, how many branches as on -- right now, we are speaking about how many branches are there?
So as on 31st December, we are -- we have 343 branches.
And as on date, sir?
So we plan to have 400 branches by March.
Okay. And sir, because December is already out and January is over, so December we had done roughly INR 500 crores of disbursement, which is the highest, so January number is better than December?
Sir, let's not talk about December as of now -- sorry, January as of now. So as I just mentioned, we have currently [indiscernible] to a particular number. So I'll not be able to comment on my January number, please.
No issues, sir, because of the regulatory requirement, no issues. So I would like to take your time in person to speak more over the business model and all. So just I will request Salil also to get me as soon as possible, sir.
Any time, you can be in touch with Mr. Salil, and we are happy to have a meeting on the same.
The next question is from the line of Sumit Bhalotia from MK Ventures.
Sir, I have a couple of questions. First is on the asset quality. So you mentioned the GNPA number. It would be helpful if you can provide the entire breakup of what was the exact impact of the recent RBI regulation, gross as well as NPA as of now, as of December quarter and also movement in Stage 2 book.
So Kaumudi, can you please take this question?
See from an asset quality perspective, we would like to highlight that we, being an NBFC, are currently on Ind AS regime. So our financial statements are being prepared under Ind AS. We are reporting our numbers at Stage 1, Stage 2, Stage 3. Coming back to the RBI Circular of 12th of November, that's more of a regulatory requirement in terms of reporting of an NPA number, but it does not impact our financial statement reporting of Stage 2. So we continue to state that our Stage 3 level has better off as compared to the previous quarter. Currently, we are at 4.3% of Stage 3 books. From a regulatory reporting perspective, we will actually do our reporting to RBI on the NPA as per the requirement of RBI for the requirement.
Yes. So question is because we have not done any additional provisioning because of the RBI impact. And they clearly form 4.2%, 4.3% but in the stage 3, you have around 7.2% is what you mentioned as per RBI, right? So accordingly, our net NPA would have gone up from 2.3% to whatever number, that's the number I am asking, what is the net NPA as per RBI? And do you need to make any additional provisioning in the March quarter from a regulatory perspective?
Yes. So basically, from a provisioning perspective, we would like to highlight that our ECL provision is significantly higher as compared to the RBI provisioning. When you're looking at the assets where we see that there is an increase in credit risk, we have already classified them into Stage 2 and created a provision as far as Stage 2 requirements. So there's no specific impact, which we anticipate from the RBI circular on our ECL provisioning loans.
Okay. And movement of Stage 2 book on a quarterly basis?
Yes, on a quarterly basis, our Stage 2 book was around 21% as of September. And as of December, there is a marginal increase to around 27%.
Okay. So 27% Stage 2 book?
So Sumit, this is more towards -- it is not the movement of the book. It is more towards the internal policy review we have done. And it is a conservative approach on the policy. And I have already mentioned, we don't expect any losses in this particular aspect.
Okay. So if it is RBI book, RBI impact is added in Stage 2?
We can give you the details. Sumit, Salil can provide you all the details that are required.
Another question is on the cost aspect. So we've been -- as guided, you've been expanding our branch presence and you're on track to achieve 400 this year and a similar number you'll be expanding next year. You mentioned that going forward from next year, the focus will be more on the hub model -- the spoke model. So majority of the half you have already started. So how would -- on the cost trend, how would that cost to income change, say, in the next 4 to 8 quarters? If you can give some visibility on that part, that will be helpful.
So Sumit, if you see our overall productivity, we are now averaging at about INR 1.1 crore average business from each branch. And each person is coming to about INR 35 lakhs, INR 40 lakhs. That's what I said that we have already added cost of the branches -- for 200 branches we've already done. And from here on, we see a declining trend in our CapEx, and we also see overall costs coming down in terms of when you're talking about cost to income. As you know, the book is also growing. If you see what has happened till date is that on one side, we have been building up a good book in terms of retail book. And the other side, there has been slippages in the inorganic book and the corporate book. So while the product mix has changed, the overall mix has changed, but the impact on the book is not being shown. Next year, we don't see any runoff of corporate book much. We don't see anything coming from the inorganic book which is just left is about INR 500 crores as on 31st of December. Whatever we are going to build up and we are going to build up from quarter 4 numbers, you can see quarter 3 and quarter 4 numbers, the significant increase will be there in the book next year. When the significant increase is there and your CapEx is less, I'm sure overall the cost of income will come down.
Right. So logically, that is what I was just confirming. So given that whatever expansion that we have done this year, benefit of most of the recent branches will start accruing from next year. So ideally, there should be a reasonable improvement in cost to income. The only thing that I wanted to confirm was whether the [indiscernible] expansion that you'll do in branch business, whether the cost will offset this improvement -- on a net basis, whether we will see a cost to income coming down on a quarterly basis going forward?
Yes, it will come down. You will see a significant drop in cost to income.
The next question is from the line of Harsh Shah from Dimensional Securities.
Sir, if I look at your yields in the SME side, it has come off drastically from around 15-odd percent to 11%. So any -- can you help explain that?
Sorry, come again?
The SME finance book. If I look at the -- it has come off quite a bit. It is now -- for Q3, it was at around 11.5%. This used to be around 13%, 13.5%.
See, as of now, we are not focusing on the book, which is SME book, and there was one portion which was of the PL, which is personal loan, which we were doing. That has been discontinued to stabilize the portfolio. Once we have -- we are reworking on our policies. And definitely, it can be brought up. We are well aware of the things what we are in this part. It is more to have a control. If you see my book in SME, it has not grown. If we are just stabilizing the book, if you see the first time in the last 4 months, our Stage 1 has started improving. We see a significant improvement. And we will be also -- today, we are working on improving our portfolio. We expect the Stage 1 to go in excess of 70-plus percent. We are also changing and reviewing our policies in SME, and I can assure you that next year the focus will be there back on the SME book as well. And we will improve our yields in that part.
Okay. Because if I look at the credit cost, you haven't provided much in that book for this quarter. I would assume that there wasn't any interest write-back or anything of that sort?
Book is stabilized. There are no losses. Whatever has to be provided, it is already taken care.
There weren't additional slippages as well, right?
Normal, whatever is there, it is very, very traditional, normal. There's nothing much.
Okay, okay. And sir, when we talk about the yields in our CV book, you expect the yields to increase going forward. So now when we are moving from 1 and 2 vehicle owners to maybe larger fleet operators from 3 to 10, shouldn't that lead to fall in the yield rather than increase because they are moving towards more secured and more matured lenders -- borrowers?
Harsh, if you see the commercial vehicle business, the biggest impact, which has come in the weighted rate, it's primarily that we had earlier exposure of 35% in HCV new. The CV new comes at a rate of about 12%, 12.5%, whereas the used business is coming at 16.5%, 17%. The moment you are cutting HCV new business, you are reducing your risk as for us in the retail segment. Second is that overall weighted rate of the book will go up because the percentage of used business is improving, significantly improved in the percentage book. The new going down, risk going down, rates going down -- rates are improving because of the percentage product mix change in our overall portfolio.
Okay. Understood. And when we talk about the growth in affordable housing and CV segment. So we hear almost all the NBFCs guiding very, very high growth, about 25%, 30%. So my question is where are we expecting this growth to come? Because everyone is trying to gain market share, shouldn't that add pressure to the yields? And also, I mean, how can you -- I mean, from where will this growth of 25%, 30% come for next, say, 4, 5 years that we are guiding?
So Harsh, first, if you see what we have done is -- when you talk about used vehicle finance business, there are 2 significant players which are there and they are stabilized. They are -- one is the Shriram and second is the Chola. There is no third significant player in this particular market. And we have also made our presence in the untapped markets, which are like East. And I'll just give you a number. It was 0 in the month of December 2020. Now the contribution is about 12%. So we have added these new branches that is helping us. Similarly, we had only 7% to 8% business coming from the northern market. Now this is coming to about 30% of the total disbursement decision. So in first phase, that is what I said. We have created hubs. So we are present -- we have made our presence in all these markets. The next phase will be get into spokes, which are Tier 3, Tier 4 markets. The moment you get into these particular markets, that will help us to grow.
No, I understand you have the micro strategy. But when I look at the macro part, over the next 5 years, we expect the CV industry firstly to grow by maybe 10-odd percent, the affordable housing industry maybe grow -- maybe it will grow by 12% to 14%. But when we say growth of 25%, 30% CAGR, are we going to take shares from the unorganized sector or from the banks? Or how will that growth be? The alpha that we are talking of 15%, 20%, from where will that come?
So if you actually see the numbers vis-à-vis 2019/'20, the heavy commercial vehicle numbers are still down. New heavy commercial vehicles are still down. And I don't expect those numbers coming back up to year 2023. Whereas the market -- overall industry is improving, everybody is predicting a good GDP growth next year as well. So that means the industry is going to move. When the new vehicles are being added, less than year 2019, 2020, there is going to be a substantial growth in this particular segment. That's part number one. Part number 2 is that government has also put a cap on the life of the vehicle, which is 15 years now. Every year, you will see 50,000, 60,000 vehicles going out of the roads because those has to be replaced. So I see a much bigger shift in retail market in the used market -- in the used vehicles whereas the strategy customers will be buying new vehicles more because that -- sometimes that's the requirement of some of the manufacturers like, oil companies will ask, okay, the life of the vehicle should not be older than 5 years or 6 years. So those vehicles will start coming in the retail used market. That is what we expect. And that is what is actually helping us to grow in this particular market.
Okay. And just one last question. So you mentioned that our Stage 2 assets has been an increase. And even on the RBI side, our GNPA has increased on the reporting side. Could you say that we are adequately provided? And number, so would you expect the Stage 2 assets to trend down going forward? And where do you expect it to stabilize?
So I have mentioned about as far as the GNPA as the RBI concerned, it is across -- its accounting. It's more to do with accounting because that's a change which the government has done, the RBI has done. And this GNPA is -- has gone over -- gone -- there is an increase across NBFC, it's not with us. But when you talk about the provisioning, which is a Stage 3, now Stage 3 for us, there is a decline. I don't see anything which has impacted. So if you talk about a 90 plus of Stage 3, we are having a better health than last quarter. We don't see an issue. And in terms of provisioning, I have already answered that question.
And Stage 2, so it is currently 27% where you expect it to stabilize to...
We don't expect any -- so whatever the additional is there, we don't expect any losses in that particular portfolio.
The next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund.
Sir, my first question is on the overall CV strategy. In terms of -- you mentioned Shriram and Chola. Do you -- are you in kind of the same customer segment as they, in that sense that it's just that -- why is it expanding and they're getting more business from, let's say, unorganized players? But is there any qualitative difference in the customer set between any of these -- between you three?
So what I -- Vivek, so what I expect is here, if you see -- if you understand the Chola portfolio or a Shriram portfolio, Shriram is more into first-time buyers, first-time users. They don't focus on the retail customers much. Their bigger portfolio will be at the lower base of the customers, which is 1 vehicle owners or 2 vehicle owners. Now when you come to Chola, Chola portfolio will be primarily -- if you see the breakup of Chola, Chola is much bigger into the light commercial vehicle, new. They have an equal participation in used. Whereas what we are talking about is a 75%, 80% of our business coming to used, which is from a 3-vehicle to 12 vehicles. So [indiscernible] that we expect to address, and that is what we are getting.
Okay. So intuitively, would it be right to say that your asset quality trend should be better than, let's say, Shriram's over a period of time because they're bigger customers and more...
Yes. So the new book which we have developed in the last 13, 14 months, your Stage 1 is close to about 90%.
Okay, sir. That's good. Secondly, you had mentioned about fintech. Would fintech be addressing cost or customer acquisition? Because as far as you understand, CV is still a touch in the field kind of business, right?
So I would request Mr. Amit to answer this question.
So as a part of our fintech strategy, we are doing a lot of optimization in the way how we conduct our business. We are bringing in new applications. We are optimizing the way how we work. We are reworking some of our processes. And the biggest bet that we have today is in terms of automation. So a lot of work will be through machines, a lot of work will be through process improvements and through new digital channels that will be rolling out in the near future, which will start bringing down the overall cost of how we do our business.
Sir, is this aimed at the housing finance business or in the SME business? Or is it aimed at -- I'm not getting a clear sense of exactly where it is aimed at, so if you could help with that.
Sure, sure. So for us, we are looking at the entire company. We're looking at all the portfolios that we are running today. Some of the provisions or some of the mechanisms that we are using are being piloted on different programs with different objectives. And depending on the success that we achieved on either implementing several kind of bots or several automation projects or several of these initiatives where we start leveraging more of IndoStar kind of technologies, we'll start rolling them out across the different businesses and different product lines, too.
Okay. Excellent. Sorry, one last question. This is regarding the Stage 2, this is 27%, would you -- is the collection efficiency in this portfolio good in the sense you had experience with stable or trend downwards, which means you're confident about collections. So -- and you also talked about the management review where you changed it. So what was the big change that caused it to move up from 21% to 27%?
So Vivek, there are certain internal -- we keep engaging our portfolio. This is the old book where we have taken an internal policy revision. That is what it is there. That is not...
It's coming from a lot from the old book, sir?
Yes. Yes. So that's what I said, Stage 1 for new book is 90%.
Okay. So -- but the collection efficiency, are you expecting that it will be stable or...
So the collection efficiency at EMI to EMI is about 95% average in all the products, but all categories.
That's very good. Sorry, if I can just squeeze in one more question, last question. In your presentation, you said that the corporate book will go off in 4 to 6 quarters. Is there any chunky loan that can get repaid in the interim that we see -- where you will see a drastic dip from the current numbers?
See that will depend on people who have invested and where we have taken loan from us. Today, it will be very difficult, somebody who's going to take a dip, it's not right for me. But today, what we are seeing today is that it's a regular outflow by paying the EMIs. That is what we are predicting. We are not predicting if somebody is going to close this business -- close his loan and shifting it to somebody else. That's what -- it's not easy for us to predict today. If it happens, we'll be happy to do that.
The next question is from the line of Sharaj Singh from Laburnum Capital.
Sir, regarding the affordable housing space. So what I understand is when you're saying rural, what level are we doing rural? Is it like the block level, taluka or what exactly do we mean by rural here?
So we're talking about Tier 2, Tier 3 cities. You have a huge announcement coming from Prime Minister Awas Yojana. And that is a particular segment that we are talking about.
Okay. And then in the opening remarks you had mentioned you're looking to partner with smaller NBFCs to expand the rural reach. Could you explain this? What are we doing here exactly?
So there are certain NBFCs. In the small NBFC, which have got penetration, which is more unorganized or they are the companies which are present in the lower segment. Like they will be into the small commercial vehicle funding in those particular aspects. So we are looking at some good partners which will be on the loss pool basis, loss sharing, FLDG, and -- which is not going to impact our portfolio, but it can give us a good income. That's what we are looking at.
Sir, I mean what is the basic arrangement you're looking at? Is it like a co-lending or assignment-based arrangement?
That's going to be co-lending primarily. It's going to be sharing. So it's a 20-80 as we have tied with somebody, it's 20-80 and FLDG loss will be at their book, not at us.
And this will be for which sector or across the portfolio?
Primarily used commercial vehicles.
[Operator Instructions] The next question is from the line of Sumit Bhalotia from MK Ventures.
Sir, what is the size of this new -- you mentioned that Stage 1 is 90% in the new book which has added already I think from last quarter [indiscernible]. So how do to get an entire EMI of INR 90 crores to INR 100 crores, what will be the split?
Sorry, can you repeat the question?
You mentioned the new book asset quality is far superior than the older book and you have around 90% in Stage 1. I'm just trying to understand that what is the quantum of this new book, which has been generated since the new management took over. What is the quantum of the loan book for which we have been calculating this Stage 1?
Sumit, I will have to actually get into more details. I can definitely share with you on the mail what is the quantum of that particular volume. But let me share with you that today is the commercial vehicle, approximately 65% of our book is new, 35% is old.
Okay. Okay. That's helpful. Second is this restructured book that we have around 7%, is this completely part of Stage 2 or some part of it is in Stage 1 also?
Yes. No, no. So all the cases which are restructured will be Stage 2. None is Stage 1. Even if it is a -- they are paying on time, it is Stage 2.
Sir, I'm just trying to understand why there is -- on a quarterly basis, why there's such steep increase in stage 2 when we are seeing improvement in asset quality across the worldwide where there is this thing -- such a sharp increase? Any specific reason?
So that's what I said, Sumit, so it's more of a policy rather than anything else. And I've also mentioned that we don't expect any losses in this particular book -- provisioning.
But we have not increased our provisioning also, right? Despite of this movement from 21%, 22% to 27%, we have not increased our provisioning in -- for this?
Provisioning is only as for the Stage 2, not anything else. It's not...
Yes, sorry, what about the regulatory requirement is there...
Yes, that's a regulation.
Okay. And for the slippage in corporate book that we see of around INR 19 crores, what -- can you give some color on that? And is there any pending set in the corporate book, which is -- which can come in the next few quarters?
Kaumudi, can you please take up this question?
Yes. So there are 2 phases which basis a DPD movement has slipped into Stage 3, but we don't expect any further deterioration in this particular growth.
See, Sumit, as far as the corporate book is cut, we have the provisioning and we have actually provided a lot. We don't expect any losses in this particular more than what we have provided for.
Okay. And we will -- I think you gave a guidance of around 10%, 12% of the book will be corporate by year-end. So we would still be seeing some rundown in this book in the next quarter?
Yes. It's a regular -- so when they're -- it's completely the EMI, which is being paid. That is what we are looking at. If you see the overall, like, last 2, 3 quarters, there has been a substantial decrease. We are not going for any fresh disbursement rather than wherever we have committed as per the old battle going on. But there's no additional customer which is being added for corporate. It is 100% retail, which is happening.
Okay. Within retail, we share our internal targets on the composition of the retail book in a '23/'24 in terms of CV, semi-finance and housing?
So Sumit, I think it will not be right for me to -- you're talking about 2023, '24?
Yes, as in going forward, what is the internal target of maintaining that product mix in terms of CV and SME and affordable housing?
So I think it will not be right for me to immediately take this question, but we can take it offline.
Okay. Sure. Lastly, on this cost of funds. What kind of improvement are we expecting in terms of trade rating and cost of fund going forward? Because ultimately, as you've mentioned that it will be helpful for the affordable housing segment also. So we have seen a reasonable improvement in the last, say, 4 to 6 quarters. Going forward, if you can share your view on that, please?
So we do expect further -- if you have already seen, there is a -- the cost is already coming down. And we expect the same trend to continue. We don't expect anything which is going to change overall. And we'll be working with the rating agencies once our portfolio is there. So we'll be working for improvement. Once we have our improvement of our rating, definitely it will be helpful. We will be -- we are working on that particular aspect as well.
The next question is from the line of Rikesh Parikh from Barclays.
Sir, can you just throw some light on. So we will be expanding our branches were rapidly as for our pilot plant. Over the next 1 year, how many branches we are looking to add from our 343 currently?
So Rikesh, we will be -- March, we will be -- should be ending close to about 380 to 400 branches. That is what we expect. There could be -- we are targeting 400, there could be a blip, maybe 10 branches here and there. We do expect to add another 150 to 200 branches next year.
Okay. Second, coming to our cost-to-income ratio, which has been -- we have been able to maintain around 59% stable as such. With this increase in branches, do we see that we will be maintaining around this level? Or there is a chance that we can dip from 59% over the next 1 to 2 years?
So Rikesh, what has happened is that we have lost a couple of months initially due to COVID 2, because of which we added the cost and we could not start the business because of the COVID 2 wave. But the way our numbers are increasing, the way volumes have increased quarter-on-quarter, definitely the cost-to-income ratio will come down. That is what we anticipate.
Okay. And can you throw more light on our tie-ups we have done with a small NBFC in south. So what kind of arrangement we have with that NBFC in the co-lending space?
So it's more to do with -- it's a 20-80 kind of tie-ups, 20% capital from that side and 80% from our side. And the loss of anything cases which are beyond 90 days will be taken over by them, so we don't expect any loss in that particular time.
Okay. Beyond 90 days will be borne by the originator?
Yes.
Okay. And last on the -- our fintech app. Basically, means, are we looking to come anything on the digital end or it will be more of an operational efficiency and around those levels?
Amit can take at this.
Sure. So we have an all encompassing of fintech value proposition that we will be bringing in today. We are not just looking at automation initiatives, but we are also looking at rolling out new solutions, digitizing our entire lending process from start to finish, touching all the different stakeholders, including in-house, including the agency that you work with. So it will be a completely thought-out, well-laid digital end-to-end journey that we'll be rolling out on our platforms.
Okay. So if I understand that we will be rolling out new products once this fintech app is rolled out, right?
Yes. So some of our existing applications will be upgraded. Some new applications will make its way into our IT landscape. And there will be an immense value addition for our customers from an experience standpoint and including our stakeholders with whom we work outside the company as well.
And what will be the time line for this rollout? Or when we are looking at this rollout?
Some of the rollouts will start as early as next quarter. And then there are -- there's a long road map that we planned for incremental upgrades and new additions to our IT landscape. So we'll start seeing some of them rolling out next quarter onwards.
The next question is from the line of Harsh from Reliance General Insurance.
Sir, just one question from my end. So what is the expected credit cost we are expecting from FY '23?
So it will be very difficult to comment today. So I think once we make our budgets, then only we'll be able to answer this question. But definitely, we are looking at a negative trend. It will be coming down.
The next question is from the line of Abhijit Tibrewal from Motilal Oswal Financial Services.
Sir, my first question is for Kaumudi. Can you just help us understand that the credit costs that we have taken in the P&L during the quarter, where have they been parked? Please kind of correct me if I'm wrong, but I mean, the broader understanding is whatever credit costs that we take in the P&L., broadly it either goes into your ECL provisions or it could be in the form of write-offs. When we look at the ECL provisions that you have reported, they have actually declined on a Q-o-Q basis. So where has this credit cost that you've taken in the P&L gone?
Abhijit, the credit cost as per the normal accounting norms, has been taken into the impairment line. So the credit cost consists of 2 elements, as you have rightly mentioned, it's the expected credit loss provision and the write-offs. And from both the fronts for this particular quarter, we've got a write-off, which is normal as technical write-off of around INR 7 crores, which is taken in this quarter. And the incremental credit cost which you see is nothing really -- it's relating to the ECL provision created on our books.
Okay. And what is this impairment reserve that you talked about?
No. We -- no, there's no impairment reserve. Impairment reserve is more of a terminology which we use in case our provisions are lower than the regulatory requirement, which is RBI. But what I meant is it's flopped into the line of impairment of financial instruments as per the accounting requirement.
Okay. And this you said is including the INR 7 crores of technical write-off that you took during the quarter?
That's right.
All right. My second question is for Mr. Deep Jaggi. Sir, just wanted to understand, I mean, what -- I mean, and maybe kind of I'm asking the same question in a different way. And what's going to change structurally on the business side? I mean, can you please help us kind of articulate on the changes that we have done on the underwriting side should now give us confidence that the stress that we have seen in the past in your organic book from the book which you acquired from IFL will not repeat kind of as we move along.
Yes, Abhijit, so first of all, we have actually reviewed our organic book when I joined this organization. And we had seen a couple of things. One was how the external factors which have impacted -- the completely bus segment had a problem. Then we also were going through the -- where the commercial vehicle industry was going through the negative cycle. When it goes through the negative cycle, your freight rates are down. In the March, your GDP was down. When your GDP is down, trade rates are down and your manufacturing is down. So the first impact will come on the commercial vehicle. So we have cut down -- let me also share with you the numbers. Our overall exposure in organic book for HCV new was close to about 35%, which has come down to 1% -- 1.5%. That's the change -- that's the shift we have done, Second, we are focusing on a product which is depreciated, and we have a higher weighted IRR. We are focusing on the products like used cars, we are focusing on light commercial vehicles. Now how it makes a difference? When you talk about a light commercial vehicle, be it COVID or COVID 2, or COVID 3 or maybe even COVID 4, the internal consumption of this country will not go down. We will continue to take -- consume whatever we consume. So the light commercial vehicles, primarily in the small commercial vehicles are directly linked to internal Indian consumption rather than the industry. So we are focusing on the products which are more towards the consumption of this country rather than focusing on the industrial products. So tomorrow, if any of the car manufacturers or any of the white goods manufacturer or even the buses contracts or schools get impacted, the new book will not have an impact. So these are the -- so we have just sliced down the segment like the hospitality segment. The moment you have a COVID 3, which has come -- you have airlines cutting their flights, hospitals and the hotels going down. So anything which was impacting these particular segments, so we have not taken exposure in these particular segments. So it helps us -- and it is now -- the portfolio is linked to the internal consumption of this country rather than having exposure on all across commercial vehicles. That is the change we have done.
Right. And lastly, I mean while this was maybe in terms of your product selection in terms of your underwriting, if you could just briefly also tell us, what are the changes that you have done on the collection side?
So I already mentioned, we -- first, we have brought down a call center for collection. So that is helping us to -- in case there is any bouncing in the new portfolio, there is a proper follow-up and that's a soft collection. So we have to arrest the fresh close. That is what we have done. Second, earlier, we were not 1 year back or 1.5 years back, we were not having a separate collection team. Today, we have approximately 300 more people just to arrest the collection. So first is arrest of portfolio at collection call center. Second is, if there is a flow, there has to be a follow-up collection team, and that is what we have brought in.
Great, sir. And sir, if I might ask, and I understand a few participants in the call have already asked this. But in terms of guidance, be it a medium-term or long-term guidance, what is it that we are guiding for? I mean anything in terms of the book growth that you have in mind or the kind of leverage that you want to build on your balance sheet in terms of the NIMs, OpEx ROAs, ROEs that you would aspire for? Anything around this? I mean do you kind of want to share anything or...
So Abhijit, if you actually see our numbers, if you see our numbers quarter-on-quarter, there has been a significant increase. And let me also share with you why we are talking. We're going to add about 200 FOLs between Feb and March. So we are adding people. We are adding branches. When we are adding people and adding branches, the numbers where we are definitely looking at a growth from here. We will be sharing with you the numbers what we have delivered. And I can assure you the overall disbursements, we have reached a level of INR 500 crores in the month of December. We are looking forward for larger numbers from this particular platform where we have achieved.
We will take the last question from the line of Sharaj Singh from Laburnum Capital.
Can you tell me the total provisioning on the books and break it into the ECL and the overlay provision?
Kaumudi, can you please take care of the question?
Yes. So the total ECL provision on our loan book is around INR 600 crores. And we do not have anything specific as a management overlay provision because we have allocated it across to our portfolios and everything is driven through the ECL model now. Would you like to know product-wise provisions also?
What would be the provisional restructured book and the RBI provisioning requirement?
So on our restructured book, we are holding around -- 16% of our provision is on our restructured book. And we are basically carrying it as per our RBI provisioning requirements. So it's either Stage 2 or the RBI defined 10%, whichever is higher.
No, I was asking the provisional requirement on the entire book based on the RBI requirements.
On the restructured book, the RBI requirement is 10%.
So on the entire book, how much provisions do we need to? So we are carrying INR 600 crores of ECL provisions. How much is the RBI-mandated provisions that you need to require?
Okay. So the RBI provisioning requirement against this particular entire is only around INR 200 crores, but we are carrying INR 600 crores as per our ECL model.
And if you could give the segmental breakup of these provisions.
Yes. So on the corporate book, out of the INR 600 crores on corporate book, we are carrying around INR 150 crores. On SME, we are carrying INR 84 crores. On our CD book, it is around INR 350 crores. And on our housing finance portfolio, around INR 18 crores.
Thank you. I now hand the conference over to Mr. Abhijit Tibrewal for closing comments.
Yes. Thank you. And I mean, I would kind of take this opportunity to thank the team at IndoStar for giving us this opportunity to host the call today. And thank you all for being very patient of this.
Thank you. Ladies and gentlemen...
Thank you, everyone.
Thank you. Ladies and gentlemen, on behalf of Motilal Oswal Financial Services Limited, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.