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IndoStar Capital Finance Ltd
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Ladies and gentlemen, good day, and welcome to Q4 FY '21 Earnings Conference Call of IndoStar Capital Finance Limited, 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. Alpesh Mehta from Motilal Oswal Financial Services. Thank you, and over to you, sir.
Thank you, Margaret. Good morning, everyone, and welcome to the 4Q FY '21 performance conference call of IndoStar Capital Finance Limited. Today, we have with us Mr. R. Sridhar, Executive Vice Chairman and CEO; Mr. Amol Joshi, CFO; Mr. Deep Jaggi, Chief Business Officer; Ms. Jaya Janardanan, Chief Operating Officer; and Mr. Salil Bawa, Head, Investor Relations. And now without much ado, I hand it over to Mr. Sridhar for opening comments. And post it, we will have a Q&A. Thanks, and over to you, sir.
Thanks, Alpesh. Good morning to everyone. Before I proceed on with my preliminary comments, I would like to thank all of you for joining our Q4 FY '21 earnings call. Also, I would like to wish all of you health, and I'm confident that all of you are staying safe. I would like to start from the FY '21, which had been the most challenging year for the sector. So as far as IndoStar is concerned, we have done a few landmark decisions during this year. The first one is we brought in a global bulge bracket investor, Brookfield, as our investor in May 2020 during the pandemic. So Brookfield came in with INR 1,225 crores of primary capital and did open offer, ended up with around 56% of equity of the company. So this has strengthened the capital adequacy of the company, took it to about 35%, helped us in shoring our liquidity, strong ALM. So Brookfield's partnership has strengthened this company. And with the arrival of Brookfield, we have also done a few decisions, very important decisions. The first one is we prepared a 5-year aspirational business plan commencing from FY '22 to FY '26, which we have already started implementing. So in this 5-year aspirational plan, we have articulated our aspiration to build the retail business of CV, SME as well as affordable home finance.While we have an aspiration to build a large retail business, we have also taken a bold decision to wind down gradually the Corporate Lending business. All of you are aware that IndoStar started off with the Corporate Lending business, which are the real estate and non-real estate. We had about INR 4,500 crores of book, which was making INR 400 crores of profit before tax. But after IL&FS fiasco, the corporates faced a lot of problem, and the real estate industry became like this. So we took a decision to gradually wind down, and INR 4,500 crores has now become INR 1,900 crores.And while we are growing the retail book, we are slowly winding down this. And we are confident that at present, as we are at 22% corporate and 78% retail, by March '22, we are hoping that the corporate book component in the overall AUM will come down below 10%. So this is another decision which we have taken. The third important decision we have taken, looking into the affordable home finance business, which had been a 100% subsidiary of the company, we have generated about INR 1,000 crores of AUM in this business with good profitability and exceptional asset quality. The management team has stand out this business very well. And now we have come to a situation where we felt that we should capitalize this subsidiary and then grow this business fast. So we are making this affordable housing finance independent. And the Business Head, Shreejit Menon, who did the exceptional work, has been recently made Deputy CEO, and he will spearhead this operation in the next few years and take this company large. The fourth major decision we have taken is we have strengthened the CV financing team, and we have brought in Ravi Kumar, Business Head from Chola. We are talking about 20 years in this company. He has recently joined in April as Business Head. We have also brought in another person from Chola and Aditya Birla. This is Arvind Uppal, who just joined a few days back as our National Collection Head. And all of you are aware, we have made this announcement in the earlier call also. We have also brought in Deep Jaggi as our Chief Business Officer from HDB. So all these people have fairly large, long experience of more than 2 decades in very reputed companies, which had a large exposure in the CV financing business. So in the CV financing business in our retail, we have a very big aspiration to build the [ estimating ] financing business, which has excellent potential and good profitability. So we have strengthened this team. And the fifth one which we have done is that in the lockdown and work-from-home scenario, everyone has invested lot of time and energy in the digitization initiative because going forward, digitization will become a very, very critical factor in growth of retail business. And we brought in KPMG as our partner to help us in this, and we are nearing completion. And yesterday, in our Board meeting, our Chief Operating Officer has made a presentation comparing our digitization initiatives with other peers. And we are satisfied that it will be one of the best in the NBFC industry.So these initiatives have helped the company strengthen capital and also put us in a well-prepared mode to take advantage of the potential in the retail business to make this company create a lot of value to all the stakeholders. Having said that, we have also taken a setback of the COVID 2 wave, which had come. The COVID 1, we started in March 2020 with the moratorium of 6 months. So from this financial year FY '21, beginning in April, in the last 15 months, about 7 months have been under lockdown against 50%. And balance 50% have been, partially, we have been going to office and coming down, but there were constraints in meeting customers and all of it.So we actually focused on collection and asset quality. In the first 7 months, we have gradually improved our collections. In October 2020, we reached 100%. And after that, in November, we started disbursements. And in the 5 months between November and March, we actually lent about INR 1,000 crores. And in Q4, we have done more than INR 800 crores, which pre-COVID levels. So we reached it. But unfortunately, in April, we are faced with the COVID 2, so disbursements have come down. But still, I feel that we should do around INR 500 crores of disbursements in this quarter. Naturally, the moratorium, subsequently restructuring and then the second COVID wave have had an impact on the collection performance of the company. Our customers who have always been on earn-and-pay mode, we have been catering to mostly middle and lower segments of customers in both CV as well as in the affordable housing finance, particularly in the CV, which is cyclical, it has had a big impact.As a company which had acquired a portfolio from another NBFC, which had a large component of heavy commercial vehicles, passenger commercial vehicles catering to the fleet owner segment, our asset quality also had an impact. But the Board as well as the shareholders and management adopted a very, very conservative approach in taking aggressive COVID provisions in both the years in March '20 as well as in March '21. And also we have taken in both years to accelerate that technical write-off. So today, we have ring-fenced our balance sheet and with the INR 400 crores of management overlay. So it has been a very conservative approach. If there is no third wave, I feel that we have adequate provisions to protect the balance sheet. And I'm also confident that there will be no more write-offs or credit cost which may be required. So we have reported from April 2020 to May '21 the collection performance. Even though the collection performance has been steadily going up and, in many months, we have achieved a more than 100%, but these are all total collections. So when it comes to billing to billing, there have been movements of buckets that has been flow forward. So temporarily, the 90 plus, the Stage 3 assets, our Stage 2 assets have gone up. And in April and May also, our collection performance have been more than 90%. But still, there could be some movements. So we are addressing all these. And as a strategy, we are building a separate collection vertical. We have brought in a Collection Head and separate collection vertical. And in the CV business, there are companies which have a practice of asking the sourcing team to collect, and there are companies which have been successful in creating a separate collection vertical. So as a person who had worked in this industry for more than 3 decades, I also feel that it is necessary to build a separate collection vertical, and I ensure very good asset quality on a very sustained basis. As we have a very aspirational business plan for the next 5 years, we felt as a strategy to build a separate collection vertical. So with this separate collection vertical, we are confident that we will be able to enhance our asset quality once the pandemic subsides. And in the Q2 from July, we will be able to start our normal businesses. We are hoping that the impact of the COVID 2 is slowly coming down and things are opening up, except a few states and a few cities. So we are hoping that post Q1, which will also be very, very difficult and challenging quarter. But from Q2, we will be increasing our disbursements, and we have a huge aspiration. And you are aware about the potential in the used vehicle financing and profitability. So if we have 3 good quarters and if our total assets go up, it would be fantastic for the company to report good numbers. And the experience of the company from November to May, whatever disbursements we have done, which I said earlier, that's more than INR 1,000 crores, the quality of that book is fantastic. We have 94% of our -- this book is in the current bucket even during the COVID 2 pandemic. So we are very, very confident with the capital and the strategic initiatives which we have done of rolling down our corporate business, growing the retail business, making the affordable housing independent, digitization, smart branches and conservative provisioning and write-off policy, strengthening the balance sheet. IndoStar is in a very, very strong position as of now to take advantage of the potential which will be unfolding once the COVID impact -- COVID 2 impact subsides.So as I had qualified earlier, if there is no COVID 3 wave threat, we should be on our way to build a very good profitable and high-quality NBFC in the country. The business of SME as well as the new vehicles, as we have articulated earlier, as a strategy, we will be putting this in the off-balance sheet to make more profit. In this regard, we have earlier had a partnership with ICICI Bank for CV business. We have renewed this partnership with very, very attractive commercials. And even the new vehicle and the SME business, which is lower yielding compared to used vehicles, will also become profitable. So with these preliminary comments, I would like to leave the forum for your questions and answers. And we, the total management team, is available on the call, and we would be happy to answer your specific questions. Thank you very much.
[Operator Instructions] The first question is from the line of Harsh Patel from Alpha Alternatives.
My question is related to the housing finance business -- the affordable housing finance business. Sir, as every top -- the top 3 players are focusing on the retail book. Sir, I wanted to know your thoughts on the competition. What area are you targeting as an [ outskirt ]? What states are you targeting the yields on the affordable housing loans and the return on equity on this loan?
Yes. See, we have built the INR 1,000 crores book in the last 2.5, 3 years, which, as I said, is good profit and very good quality. So encouraged by the kind of performance which had been done by our team. So now the Board is thinking of making it independent, capitalizing and grow faster because of the opportunity. So you know that the government has made it very clear that they want housing for all. So the Tier 3, Tier 4, Tier 5 small cities, small towns, there is a lot of opportunity for self-construction houses. So we are focusing on not more than 10 lakh ticket size, mostly self-construction where our team feels that extraordinary potential is there with low competition. So with the kind of expansion which the CV business is going to make, even though we will be making a separate infrastructure -- branch infrastructure for affordable housing because they are independent companies, to start with, it will exploit the presence of the CV and then move to its own independent. So this is where we are going to focus there. Profitability will also be high. There is a huge potential also for growth.
Okay. So what are the yields on these loans, if you can?
See, today, we are getting a blended yield of around 14%. So yield is a component of supply and demand as well as competition. So our team is slightly quality-oriented. So I think we should be at 14%. And with the lower interest rate scenario, we should have a comfortable net interest margin in this business.
But sir, do you see any competition from the top 3 players?
Well, you see, competition will be there in every business. But potentially, it's very high. For example, if you take CV, there is Sundaram Finance, there is Chola and Shriram Transport. But still, we are coming in. We will also make a market, and then we will take market share. The sector is growing. The segment is potential. So there is always space for newcomers. So even in the affordable housing finance, we will gain market share from existing players as well as in the potential which is unfolding in this space.
So can you share your thoughts on growth if you're talking about the growth is there? So what's kind of...
See, base is low today. So our growth percentage would be very high. So...
For FY '22?
Yes. So -- but this business is very granular. It's less than INR 10 lakhs. It's not like your normal home loan business which is, even in Bombay City, a house can be INR 40 crores, INR 50 crores now, but we are catering too. So there will be a large number of loans. But the assets under management, even the biggest company in the country has got about INR 10,000 crores only. So that is the way, but it's a new business. So it will take some more time for people to have bigger AUMs. So we are INR 1,000 crores. So if you go to more than INR 5,000 crores in the next 3, 4 years, it will be fantastic.
Okay. And my second question is you're talking about strengthening the CV business you were talking about. And some of the people who have joined have joined from great companies in this space. Sir, what makes them join your company?
See, everyone is looking for aspirational growth in their career. It's not that the company they have worked is not good. Everyone...
No, no. Is this...
Yes, everyone is looking for an opportunity to grow in their careers. So they all have come to create some value. Like Deep has been a fantastic leader, and there are many people who have followed him from their company and have joined us. So he has created fantastic regional business heads in North and East region. So he has been a leader and he is going to create fantastic value in this. Similarly, we have a very good, very fantastic resource, Ravi Kumar, who has worked 20 years in Chola in used vehicle financing business. He has joined us because Ravi Kumar wants to be a CEO of an NBFC in the next 10 years. So that is what drives. It's not for money. There is always an aspiration, aspirational career growth, people have come. So they all feel that this is an institutionally-owned and professionally managed company. And I am looked at as a promoter of this company by the new executives who are joining. So they're all comfortable to come and work in this kind of institution. So they -- we are all going to, as a management team, supported by the sponsors, we are going to create a very good NBFC with high growth and high profit, high quality, which will create huge value for the stakeholders.
[Operator Instructions] The next question is from the line of Jainis Chheda from Dimensional Securities.
Sir, I had a question regarding your yield -- the spread that you are making because in your presentation on the corporate -- on the slide, consolidated profit and loss statement, the spread mentioned is 0.8%. So I just wanted a clarity on the spreads that the company is earning.
No, that will be some accounting. See, what I'm saying is used CVs are 17% to 18%. So with that 35% capital, it should be a large NIM business debt. And then new vehicles will be lower, SMEs will be lower, but these are all off-balance sheet. So our NIMs are going to be very high in the beginning. And as and when the capital gets consumed, it will come down. So we are confident with the very benign interest regime and the gaps in funding in the used vehicle segment, we should be comfortably at 8% net interest margin in this business.
8% on a steady basis, right?
Yes, that is what I believe, yes.
Okay. And what will be your cost of OpEx to AUM on a steady-state basis?
See, operating expenses today is very high because the AUM is a problem for us. In the last 3 years, 1 year, we have been hit by liquidity because of the IL&FS. After that, 1 year, we have been hit by the pandemic. So even though we had capital, we had everything, we couldn't grow and we have also been reducing our corporate book gradually. So if you look at in the last 2 years, our assets under management has come down by more than INR 3,000 crores. So that is why our ratios are looking a little bit skewed. But if you look at our March '22, where we are confident of adding another INR 3,000 crores, INR 4,000 crores of book, ratios will look fantastic.
So steady-state basis, what is the OpEx AUM that you are factoring in on a normalized basis?
No, see, in a -- yes, in the retail business, the best companies were at 25%, and some companies will be at 30%. So we should be slowly bringing it down in the next 2, 3 to 5 years below 30%.
Okay. And with regards to your AUM growth, what is your ambition to reach like, say, by 2025?
See, this is a question I have addressed in Shriram Transport also. When people are asking me when we were 5,000, I was hesitant to tell a big number. So I said that we will grow 3x, 4x, 15,000, 20,000, but I ended up at 50,000. I'm talking about in the earlier company. So today, I'm not putting any number, but the potential is so large in both the business. So we should be growing very fast, and all our problems are behind us. We would be aiming for a large growth of at least 7 to 8x in the next 5 years from the current base.
Okay. And one last question on the shareholding front. Any plans to bring down the promoter holding to below 75%?
That is a regulatory requirement which the shareholders are working, and they have to do something that will happen. But what is going to -- what they are going to do, which we are not aware of still.
The next question is from the line of Kunal Khudania from Mirae Asset.
So sir, my question is specifically on the CV book, like the credit costs have been pretty much high. So is most of the pain coming in from the book which you have acquired or how that book specifically is behaving as such?
You are right, CV had multiple challenges. One is it's an asset which is cyclical and also directly linked to the economy. So we had a very sluggish GDP growth. We had a very sluggish industrial production. And on top of it, the down cycle of CV, sluggish new vehicle sales, sentiment down, fuel prices are up, you can put any number of challenges which the industry has faced apart from the pandemic. So the acquired book had fleet owners, buses and heavy commercial vehicles, higher component. So these are all some of the assets, including the tippers which are infra-related, mining-related, have been facing the brunt. So that is where our challenge is, and we are addressing it.So today, there is moratorium restructuring, and we have -- we can do multiple things, but we have kept it under control. Our collection performance has been fantastic. But as I had earlier said, roll forwards will be there, and there is pressure on the NPL, and we have been able to keep it under control. And I'm confident that after Q1, when the Q2 thing subside, we should be able to bring back many things and roll backwards Stage 3 to Stage 2, Stage 2 to Stage 1, with all the planning. That is why we are strengthening the collection vertical. And the other one is the new book which we are adding is of exceptional quality. So when the denominator goes up by another 3,000 crores, 4,000 crores in the next 3 quarters, with exceptional quality, the whole number will look different.
So sir, out of this INR 297-odd crores, how much will be the write-off amount and how much will be the provision?
Amol, can you take this question?
Sure. So of the INR 290 crores that you see in the -- can you hear me?
Yes, yes.
Okay. So we are carrying a provision of INR 168 crores against the INR 290 crores of Stage 3 assets that we have. We have increased the provision cover across all our assets, considering the people that were taken moratorium earlier plus the second wave takeup. So I think from a provision coverage ratio, we are competitively placed against the Stage 3 cover that we are carrying.
Okay. And if I could just ask the last question. If you could comment on the Stage 2 numbers across the segments?
So Stage 2, nothing much has changed between December and March. We are around 24%, 24.5% of Stage 2 versus the overall book. This clearly includes the restructured part of our portfolio, which by default have been conservative in terms of provisioning and also classifying any restructuring at Stage 2, so when is that increased number is visible.
Okay. Okay. So if I heard right, in case we don't have any third wave of COVID, there won't be any requirement of any further sharp increase in the provision or the credit cost, that's right?
You're right.
[Operator Instructions] The next question is from the line of Deepak Poddar from Sapphire Capital.
Sir, just wanted to understand on the credit cost. Now you mentioned that if there is no third wave or no sharp increase in the provision requirement, so do we expect that this year, our credit cost should normalize what we have been doing maybe pre-COVID levels here?
See, as we have told you that we have been conservative making some technical write-off as well as in provisioning. So we are carrying extra management to our May considering the environment. So if after Q1 -- Q1 is a challenging period. After Q1, if the situation normalizes, things become normal and there is no COVID third wave, which again becomes a lockdown scenario, I think the provision coverage is enough for us. There will be no new provision required, except to the extent that the new book created, again, you will have to take some provision. Beyond that, I don't think there will be any fresh credit cost requirement of the existing portfolio.
The next question is from the line of [ Abhijit Tibrewal ] from Motilal Oswal.
So I mean, at least my view is that unless there's a sharp deterioration in the COVID situation of the country, I mean, we should see a strong rebound in the economy in the remaining 9 months of the current fiscal year and the next fiscal year as well. I think -- which is I feel that my question is more strategic and slightly longer term in nature. I mean these COVID-rated disruptions aside, I mean, where do you aspirationally see IndoStar over a, let's say, a 3- to 5-year horizon?I understand that you didn't want to kind of put out any guidance on where would -- where will we be on the AUM side. But I mean other than these 3 retail product segments, do you plan to enter any new product segments? What is the steady-state, let's say, NIMs or credit cost that we aspire for? And what kind of steady-state return ratios like ROA or ROE could this translate into?
See, we have articulated our aspiration to be in the CV financing business in the parent company, so which we are going to grow big. So we are also expanding geography, products definitely in that business. So apart from our focus on used CVs, the new CVs, we will be doing it in partnership with ICICI Bank. We are also bringing in passenger commercial vehicles plus construction equipment, then we are going to look at farm equipments like tractors. So we are adding 3 more products to this, plus there could be many more which will be commercially used assets, which we will bring in. And in this, the potential is so large. You have NBFCs which are largest in the country in this space. So with the scrappage policy coming in, but for the pandemic, it would have already been implemented. But I'm confident that once the pandemic subsides, this will be implemented by the government. So there is going to be a huge replacement demand which is going to come. So there is a big opportunity for growing this used vehicle financing business where there are very few players, so the interest rates are quite attractive. So that is where our aspiration is there. And I cannot put any number to where we would go from here because the potential is INR 100,000 crores to INR 125,000 crores only because of the replacement business arising out of scrappage policy. Plus the normal demand of application change, ownership change, which has been -- which have been happening on a day-to-day basis, so the potential is in lakhs of crores. So even if we take 20%, 30% of this over next 5 years, there's enormous opportunity we have in this business to grow.Apart from that, agriculture or infrastructure where construction equipment and movement of people where buses or other commercial vehicles, passenger is there. So that is one area we are going to do. The independent company, affordable housing will grow that book similarly, but that won't be as big as the commercial vehicle. And the SME as well as the new vehicles, we will do off-balance sheet.So in terms of return ratios, we would like to be north of 3% and would like to leverage around 5x, which is 20% to capital adequacy. And with the off-balance sheet strategy, we can do another 1x, 1.5x leverage. So if we can achieve a 3% ROE over a period of time, we can be in the band of 15% to 20% in terms of return on equity. That's our aspiration.
Sure, sir, and that is very helpful. And sir, now that we have navigated the IL&FS crisis and the economic or the CV down cycle that we saw just prior to COVID, and even in the current COVID mayhem, I mean I'm sure that there's been some learnings for all of us, I mean how do you plan to further improve your collections framework? In which of your, I mean, let's say, 3 retail product segments do you feel there is a need to tighten the underwriting? And what plans are there to do that?
Yes. Yes, I would request my colleague, Deep Jaggi, to take this question.
So there's going to be a 2-way approach. What we have done is we have changed our product mix stronger. Generally with the down cycle, what happens is there is an impact which comes on the heavy commercial yield. So we have come down our exposure in the heavy commercial yield. As mentioned by Mr. Sridhar, we will be expanding our product boxes. We will be going towards the high-yield products, which are used cars, which are tractors, used tractors, the light commercial vehicles, along with the used heavy commercial vehicle. So there has to be a strategic shift, which we have planned. And accordingly, we have made changes in our credit underwriting policies, which is in line to increase our focus into these particular segments. That's our approach. I hope I am able to answer your question.
Yes, sir. And the last question that I had was it's -- I mean you talked about some of the digital initiatives that you are taking, and you're also working with KPMG there. What are -- I mean, if you would kind of want to -- if you can elaborate some of these digital initiatives that you are taking to further strengthen your collections infrastructure?
Yes. My colleague, Jaya, I request her to briefly answer your question.
Thank you. So when we speak about the KPMG partnership, they are actually helping us to digitize the entire origination piece from the customer to the disbursement. So the impact piece then flows from a manual process to a digital flow. And this is being done both for the affordable housing as well as for the CV business. So the project is underway, and we go live on the housing piece within the month of August, and we go live on the CV business in the month of November. So that makes our turnaround time reduce drastically within -- from the current state to the -- to maybe within 2 to 3 -- 2 days is what we are looking at in both of those pieces. And that means that overall will help us to enable the increase in the numbers that we are looking at. Thank you. I hope that clears the question.
Yes. And wish you the very best for the coming fiscal year.
Thank you.
The next question is from the line of Amol Patil from IDFC First Bank.
My first question is April and May collection efficiency is quite high. I can see that 140%, 120% in spite of second round of lockdowns. So I would like to know how this is achieved. I mean what was the strategy which was adopted by the company?
So when the going gets tough, the tough get going, Amol. What we have learned from COVID 1 is different from COVID 2. So this is not a billing to billing collection, it's billing to total collection. So this -- yes, this consists of even overdues and all that which have been collected. That is why showing more than 100%.
Yes. But industry standard is below 100%. That is the reason I asked this question.
No, no, some people will see, ours is also below 100% if you look at billing to billing. It will be 80%, 85%. So how they reported, what they reported, I don't know, but this is total collection. Billing to billing will be definitely below 90%.
Okay. And I see a high cash and cash equivalents maintained by the company. So what is the optimum size that you are looking forward for FY '22 on cash and cash equivalents side?
Amol, would you like to take it?
Sure. Amol, thank you for the question. We internally clearly have a benchmark, which we maintain with 15% of networks will also be -- always be carried in cash and highly liquid instruments. For this particular purpose, considering we have a AA- entity, we are in constant touch with our credit rating agencies and get inputs from as to what makes them comfortable. And you're all aware that we are very aspirational for our growth, and we want to eventually look at a credit rating upgrade. So with that background, we work with them very closely to ensure that we have adequate liquidity at all points of time. So eventually, this will settle in, in a range of around INR 1,100 crores to INR 1,200 crores in that range over a period of time.
Okay. One more question. CV business is still not breakeven. So what is the AUM size, if other things being equal, we can say that CV business will break even?
See, the breakeven today, what you see is because of the credit cost. Normally, you can see the breakeven. In the earlier we had, branch cost was higher. So it took about 18 months for us to break even a branch, a new branch. But now after Deep Jaggi has come, he has brought in a concept of -- new concept of smart branch. And along with the digitization initiative, we are going to bring small-sized, very low-cost branches. With the digitization, it is possible. And we will bring down the breakeven from 18 months to 8 to 9 months. So that helps us in increasing the penetration and building the branch infrastructure quickly. So today, our business shows a loss because of the provisions which we have taken.
Okay. And there is some disbursement in Q3 FY '21 for corporate loans. Can you give some explanation on this?
Amol?
Yes. So Amol, as you are aware that while we are winding down the book, there are certain sanction limits but still undisbursed. And we want to support our customers because we stand by the traditions we have taken earlier. So all these will be only those trickle-down effects where we are disbursing only towards committed line.
Okay. Okay. And NIMs are falling. I mean Q4 NIMs have come down, although I see that the -- for companies like IndoStar, the borrowing rates have gone down substantially. So any explanation around that?
So typically, Q4, which is when the full year audit takes place, also leads to certain adjustments, and some of the interest reversals which we have taken are in Q4. So you will find that overall yield on loans itself versus Q3, you will find out. But that's more of an accounting -- all the new book that we are building are according to the yields as per the products, which are not compromised at all.
Any reductions on yield on the interest rates on product side overall?
No. And Sridhar will elaborate the new book that we're building. There's a specific yield target as well because it's going to be a highly focused used CV book that we are building, which has far higher yields than the other pieces of CV business.
Okay. One more question, last question. Asset quality had improved in Q3 -- Q2, Q3 last year. So -- and then we had another round of lockdown. So do we expect similar kind of a bounce back in the next 2 quarters coming?
Definitely. Q1 is a challenge, but we would like to maintain we are putting a lot of effort to maintain at March level. And then in Q2 and Q3 and Q4, we will make a lot of effort. And if the environment is conducive, we should be rolling backwards from Stage 3 to Stage 2, Stage 2 to Stage 1, a significant portion of our portfolio.
The next question is from the line of Dipanjan Ghosh from Kotak Securities.
So 3 questions on my side. One is, could you provide the number for write-offs during the quarter and annual? The second is, sir, what is the type of overall provision that you're holding on the book, including Stage 1, Stage 2, Stage 3? And the third is if you can shed some color on the type of accounts or products you have restructured in the vehicle and SME piece?
Yes. Amol?
Sure. Dipanjan, thank you for those questions. So in terms of write-offs that you see, one is, clearly, you're aware that we are working very actively to ensure that the corporate book sell down and [ acceptance ] peacefully. In that respect, we have done a particular deal where we have marked down one asset to buy INR 58 crores, which is what you see in Q4. Plus, we had done certain technical write-offs in the retail book as well, predominantly CV. And that's the number. So the INR 76 crores, that is the CV write-off, plus around INR 62 crores in the corporate book, of which a part is towards that NPA that we had resolved in Q4. You'll find that our -- there's 0 NPA in the corporate book going forward. So those are the write-offs we have done. To answer your question on provisions that we hold, we have ensured that we have sort of a buffer built for any other eventualities, especially the COVID phase 2, and that's what Sridhar alluded to that Q1 is still a challenge and any upcoming COVID 3 wave, if it comes at all. So overall provision we carry is INR 800 crores against a book of INR 8,000 crores. So that's a very healthy 10% percentage that we are carrying. We are carrying INR 186 crores against the Stage 3 NPA. That's a PCR of 64% only. So the balance provision that you see is against the Stage 1, Stage 2 book.
Sure. And the last question on the type of accounts or products that you have restructured in the vehicle finance and the SME book?
Yes. So you will see that government, the restructuring is the CV, then SME and a very negligible portion in the affordable home finance business. So between CV and SME restructuring, one is the RBI guidelines are very clear as to what kind of customers qualify. They have to be standard at a certain day, and then only we can feed them up for restructuring.So we have worked closely with our customers, and we give them various options which suits that particular customer. Those options for restructuring ensure that there's no sacrifice that we have to do in terms of the IRR that we eventually get from the customer. We might give them a holiday for a certain sort of time frame so that the business bounces back. We can give them a stepped-up EMI saying that after 8 months, it will go back to normal. Or we'll even look at interest rate reduction for a short period of time and then we transfer. We ensure that the idea of this strategy is to allow the customers to bounce back. And also, we will want to grow as this business grows with them. So that's the kind of restructuring that we undertake.
Okay. I was more -- I think I was more asking from the point of view of -- in the type of -- let's say, within the second finance, will it be more in the -- similar to the hospitality sector or the CVs or maybe the -- some of the big cars, some of the vehicle class. So more from the asset class I was asking, if that's what...
Yes. Sorry, Dipanjan, so I'll give you more in a different way. So you are right. So within the CV business, the most affected has been the customers who have been part of the tourism industry or having heavy commercial vehicles who learn a longer sort of routes across India. So those 2 have clearly been impacted. So we have supported them. We have certain segments which are passenger cars or school buses, a small portion, but that segment needed some support.
The next question is from the line of Jainis Chheda from Dimensional Securities.
Just one question. What is the [ PAR ] 30, 60, 90 book on a segmental basis and on the overall book basis?
So Amol?
Yes, Sridhar. You have around Stage 2 of around 25%. Our GNPA, as you have seen, is only 4.4%. So the balance is the Stage 1 book. Within that, CV is a bit higher of around 32% of Stage 2. And then Stage 3 is around 8%, as we have given in the investor deck as well. The balance is Stage 1. SME, we don't see a major concern in terms of the staging. Just to highlight again, Stage 2 includes any restructured book that we do because even if we restructure the Stage 1 asset just to ensure that the customers' requirements are met, we might default, carry a higher provision and move their assets to Stage 2 for better monitoring.
So on the overall book basis, what will be the breakup? Like 32% is CV Stage 2, right?
Yes. So on an overall portfolio that we carry, 25% -- 24.5% is Stage 2, 4.4% is Stage 3.
The next question is from the line of Rikesh Parikh from Barclays.
Sir, can you throw some light on the kind of credit cost we have taken in the CV finance business, so where exactly, whether it was from our acquired book or we have taken a major or overall of the book and taken a provision?
See, this is -- credit cost is coming from both the books, but it's still slightly higher in acquired book because of the composition of customer and the composition of the vehicles, so which is going through a stress in this environment. So there is a provision in our organic book also. So it's a combination of both.
Okay. Second question is, sir, going forward, how we should be looking at -- assuming that Q1 will be challenging as such, we understand. But in terms of credit cost, where we should be doing or we can be guiding as such going forward, as such, in the overall book and CV finance in specific?
See, if you look at our asset growth, as I had mentioned, if there is no COVID 3 and COVID 2 subsides, things become normal, so in the 3 quarters, if we can put together INR 3,000 crores of AUM without any further credit cost, then we should be doing very well in this year because the ratios will look different. There is no extra stock cost, we should be making profit. So every number, including our ROA, ROE, our cost to income, the NPL, everything will look good.
Yes. Just -- I mean, broadly, can you tell us what could be the cost we can look at as such on a normal scenario basis, as such?
See, we are today, as Amol said, at 4.5%. That will come down if we increase the denominator. In percentage, it will come down. But as an added-up provision in P&L, for a new incremental book which I'm building, I have to definitely make provision. It will also be in Stage 1 and 2 so that I have to make. Apart from that, if there is no Stage 3 in the new book, overall Stage 3 book GNPA optically will come down because the denominator is going up. And because the new assets have been put, cost to income will come down. Profitability will go up because I'm adding income, I'm adding assets. Without any further cost with the digitization and spot branches, the cost coming down, our unit economics should look very good.
Sure. And sir, just last one question, I will -- if I can squeeze in. Sir, with -- I understand we are having now a renewed focus with housing finance. So going forward, how the book is shaping up in terms of CV, SME and housing finance?
Yes. Housing finance is going to be an independent company. Don't mix it with IndoStar Capital. Now IndoStar Home Finance is a separate company. So we will capitalize it. We have put a CEO. We will grow that business. It is 100% held by IndoStar. But still, accounting-wise, we will be consolidating. But operationally, it will be independent. So like our [ other and ours ], we will grow this business. That is one. In the parent company, we have articulated that it will be a used CV business, used tractors, used passenger commercial vehicle, construction equipment. New CVs will be off-balance sheet. SME will be mostly off-balance sheet. That's the model we will build. So we are hoping for a 8% minimum NIM, a 3% ROE and ROA. And eventually, if we leverage and use the capital and grow, we should be in the bracket of 15% to 20%. That's our aspiration.
Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to Mr. R. Sridhar for closing comments.
Thank you to all the participants. Your enthusiastic participation and active interaction with us, we are thankful to you. As I had mentioned that we have done the right things at the right time even in the most challenging period of COVID 1 and 2. As I had articulated, IndoStar is now well positioned with capital, with the liquidity, with strong ALM products and the team to create one of the best NBFCs in the country, to create a lot of value to stakeholders. All our problems and challenges, I hope, are behind. So we are going to march towards the next 5 years of aspiration plan with a lot of confidence. So I, along with my colleagues, thank you for your active participation and wish you all a very healthy, safe, COVID-free situation for you and your family. Thank you very much.
Thank you. On behalf of Motilal Oswal Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.