Arman Financial Services Limited (NSE: ARMANFIN) Q2 2025 Earnings Call dated Nov. 14, 2024
Corporate Participants:
Mayank Mistry — Analyst
Aalok J. Patel — Joint Managing Director
Vivek Modi — Chief Financial Officer
Analysts:
Ashlesh Sonje — Analyst
Karthik Sambhandham — Analyst
Amit Jeswani — Analyst
Pranav Gupta — Analyst
Sukriti Jiwarajka — Analyst
Amit Mantri — Analyst
Presentation:
Operator
Ladies and gentlemen, good day, and welcome to Arman Financial Services Q2 FY25 Conference Call, hosted by JM Financial. [Operator Instructions]
I now hand the conference over to Mr. Mayank Mistry from JM Financial. Thank you, and over to you, sir.
Mayank Mistry — Analyst
Thank you, Siddhant. Good afternoon, everyone, and welcome to the Q2 FY25 Earnings Conference Call of Arman Financial Services.
First of all, I would like to thank the management of Arman Financial Services for giving us the opportunity to host this call. From the management team, we have Mr. Jayendra Patel, Vice Chairman and MD; Mr. Aalok Patel, Joint MD; and Mr. Vivek Modi, Group CFO.
I would now like to hand over the call to Mr. Patel for his opening remarks, post which we can open the floor for Q&A. Thank you, and over to you, sir.
Aalok J. Patel — Joint Managing Director
Thank you, Mayank, and to JM for hosting this call. Hopefully, I’m audible to everybody, and on behalf of Arman Financial Services Limited, I extend a warm welcome to our Q2 FY25 Earnings Conference Call.
Joining me today is, of course, Mr. Vivek Modi, who is the Group CFO and also the Investor Relations team. I hope you’ve had the opportunity to review the Q2 and H1 FY25 results, the press release, and the presentation available on the stock exchanges and our website as well. I apologize, those were uploaded with a slight delay this time. So, my apologies for that.
Today, I wish to start by addressing the key developments in the industry and discuss our performance in the context of the significant challenges currently facing the microfinance industry. As you may know, the industry is experiencing a substantial rise in impairment cost. This increase is largely due to over-leveraging in the rural retail unsecured lending space, impacting both microfinance institutions and non-MFIs alike. Over-leveraging has strained borrower repayment capacities, leading to a rise in delinquencies and higher default rates.
Additionally, high attrition rates among the field staff across the industry has affected collection efficiency as turnover disrupts the consistency and effectiveness of borrower interactions, which is a crucial component for timely repayments in microfinance. In our past interactions with capital market participants, we have briefly discussed and anticipated as well an increase in the credit cost from over-leveraging, and I think this discussion was since early last year. However, the severity of these challenges have been much greater than expected, at least for me personally, and compounded by an evolving macroeconomic and regulatory environment.
Given these conditions, we have opted for a cautious growth strategy, emphasizing collections and portfolio health over expansion. This conservative approach is crucial to preserving the quality of our assets and maintaining a stable financial position and has also worked well for us in the past credit cycles.
For H1 FY25, total disbursements were INR832 crores, down from INR1,068 crores in H1 FY24. This reduction reflects our decision to prioritize asset quality and to focus on collections rather than growth. Our assets under management as of 30th September stood at INR2,465 crores, while gross non-performing assets or GNPA stood at 3.74% and net non-performing assets or NNPA stood at 0.64%. At least today, that level remains manageable in the broader industry context for us.
Our pre-provisioning operating profit for the period was INR163 crores, an increase from INR133 crores in first half of FY24. This improvement in PPOP highlights our commitment to operational efficiency and disciplined cost management despite the challenging macroeconomic environment. The impairment costs were at INR99 crores for the first half of FY25, reflecting the current risk environment’s impact on our financials. We recognize that these impairment costs are a natural consequence of the increased risk and we are taking or at least trying to take all necessary measures to manage and mitigate them.
Both the industry and Arman are actively implementing strategies, both big and small, to address these issues. The MFIN guardrails have been introduced to manage over-leveraging and we are currently in the process of also establishing an independent credit teams across all branches by the end of this fiscal year. These teams will strengthen our credit assessment processes, enhance oversight and quality control at branch level. This initiative is designed to improve our risk management capabilities and better equip us to assess and respond effectively to borrower deals.
Once again, our focus remains on quality over quantity as we navigate the current challenges in the rural environment and await the end of this down cycle. We believe that by prioritizing quality, we’ll be in a stronger position once the industry environment stabilizes.
Now, let me run through the key financial and operational numbers for the quarter and half year ended 30th September 2024. Consolidated for Arman, the gross total income for the quarter stood at INR182 crores, registering a growth of 13% year-on-year, while gross total income for first half stood at INR366 crores, registering a growth of 18% year-on-year. The net total income for the quarter stood at INR116 crores, registering a growth of 25% year-on-year, while the net total income for the first half of FY25 stood at INR235 crores, registering a growth of 32% year-on-year. Profit after tax for the quarter stood at INR15 crores, registering a deep growth of 63% year-on-year, while profit after tax for the first half stood at INR47 crores, registering a degrowth of 42% year-on-year. The lower PAT was obviously on account of higher impairment cost.
Consolidated yields for the quarter stood at 25.4%. Cost to income for the quarter stood at 33.3%. Collection efficiency for the month of September 2024 stood at 24.9%. Total borrowing stood at INR2,019 crores, which includes off balance sheet transactions, such as direct assignment, DAs, and other off balance sheet debt. As on 30th September 2024, the company has a healthy liquidity position with INR281 crores in cash and bank balances, liquid investments, and undrawn CC limits. In addition, the company has INR157 crores of undrawn sanctions from existing lenders.
Now, moving on to Arman’s standalone business, which includes our MSME, two-wheeler, and the newly formed LAP business. Assets under management stood at INR483 crores, registering a growth of 35% year-on-year. Total disbursements stood at INR206 crores in the first half, registering a growth of 35% year-on-year, while disbursements for the quarter stood at INR104 crores. The total gross — excuse me, the gross total income for the quarter stood at INR43 crores, registering a growth of 24% year-on-year, while the gross total income for the first half stood at INR86 crores, registering a 32% growth year-on-year.
Net total income for the quarter stood at INR31 crores, registering a growth of 35% year-on-year, while the net total income of the first half stood at INR64 crores, registering a 52% growth year-on-year. Profit after tax for the quarter stood at INR8 crores, registering an 11% degrowth year-on-year, while profit after tax for the first half stood at INR21 crores, registering a growth of 21% year-on-year.
Segment-wise collection efficiency for the first half stood at: MSME, which was 96.8% and two-wheeler at 96%. Gross non-performing assets for the MSME business stood at 2.54%, while the NNPA stood at 0.57%. GNPA for two-wheeler business stood at 4.79%, while the NNPA stood at 0.87%.
On the microfinance side, which is managed by Namra Finance, the wholly-owned subsidiary of Arman, assets under management stood at INR1,981 crores. Total disbursements stood at INR625 crores in the first half, while the disbursements for the quarter stood at INR269 crores. Gross total income for the quarter stood at INR138 crores, registering a growth of 9% year-on-year, while gross total income for the first half stood at INR281 crores, registering a 14% growth year-on-year. Net total income for the quarter stood at INR84 crores, registering a growth of 19% year-on-year, while the net total income for the first half stood at INR170 crores, registering a 23% growth year-on-year. Profit after tax stood at INR6 crores, registering a degrowth of 81% year-on-year, while profit after tax for the first half stood at INR25 crores, registering a degrowth of 61% year-on-year. Collection efficiency for the first half stood at 95%. GNPA stood at 4.03%, while NNPA stood at 0.65%.
Now, to conclude, we do acknowledge that the challenges encountered in the first half of FY25 have impacted our performance. However, these issues are industry-wide and not unique to Arman. The rural sector in particular has faced significant pressures from various factors, including unpredictable weather, election related uncertainties and disruptions, broader economic headwinds, all of which have contributed and affected borrower repayment capacities.
Despite these near-term challenges, we are confident in our long-term strategy, which we believe will support future growth. With a 32-year legacy, Arman is no stranger to credit cycles. We have navigated similar situations in the past and emerged stronger each time and also more resilient. Our experience and prudent management practices give us the confidence to continue our long-term path. We remain steadfast, well-capitalized, and prepared to manage these headwinds effectively. Supported by a dedicated team and a clear focus on risk mitigation, we are well-equipped to overcome current challenges and drive sustainable growth for our stakeholders.
Thank you very much, and we will now open the call for any questions.
Questions and Answers:
Operator
Thank you very much, sir. We will now begin the question-and-answer session. [Operator Instructions] Ladies and gentlemen, we will wait for a moment while the question queue assembles. Our first question is from the line of Ashlesh Sonje from Kotak Securities. Please go ahead.
Ashlesh Sonje
Hi, team, good afternoon. Sir, firstly, if I look [Speech Overlap]
Operator
Sorry to interrupt, Mr. Aslesh. Can you please be a bit louder? Your voice is not audible.
Ashlesh Sonje
Hi, can you hear me better now?
Operator
Yeah. Please go ahead.
Ashlesh Sonje
Yeah. And sir, firstly, if I look at Slide number 31, where you have presented the PAR 31 to 90 book, there is a sharp increase across the MSME and two-wheeler segments as well. So, can you talk about what is causing this increase? And you can — if you can also share the overlap between your customers across these segments with MFI?
Aalok J. Patel
What slide did you say?
Ashlesh Sonje
Slide number 31. The PAR — the PAR 31 to 90 book, which you have shared.
Vivek Modi
Yeah. So the — yes, the MSME also has seen some increase. That’s what I think.
Aalok J. Patel
No. So, I mean, our MSME book is, relatively speaking, in the same areas and are essentially one step or two steps above microfinance customers. So it wouldn’t be fair to say that this is a completely different [Speech Overlap]
Operator
Sorry to interrupt, sir. Can you please come a bit closer to the speaker? Your voice is having an echo.
Aalok J. Patel
Oh, sorry. Is this slightly better?
Operator
Yeah, yeah, sir. Please go ahead.
Aalok J. Patel
Okay. So it is not fair to say the MSME is completely different than microfinance. These customers will be one or two steps above microfinance customers. But that said, of course, MSME does have get — you pressure, but it is much better than [Technical Issues]. Now, as far as overlap is concerned, obviously, as far as our books are concerned, there is very little overlap or no overlap. Some microfinance customers do graduate to MSME, but there is no cross-sell. So, essentially, it would be one loan, one customer. So, we do not do multiple loans to the same customer. But whether — if your question is more asking how much overlap would there be between the MSME that we service and the microfinance industry, obviously, there would be some level of overlap.
Ashlesh Sonje
Understood, sir. And secondly, when it comes to implementing the MFIN guardrails, do you see all the lenders now implementing this in letter and spirit?
Aalok J. Patel
It’s hard to say. More like the disbursements have been down sharply for all industry players. And my guess is that, like us, people have increased underwriting and self preservation is a inane human instinct, and so I think everybody is following guardrails and, to be honest, going beyond the guardrails, right? So the guardrails is one thing, but I would say that you need something more than guardrails as well. I mean, guardrails will not get you all the way where you need to go.
Ashlesh Sonje
Understood. Sir, in — at least in the recent underwriting, is there — can you infer that the quality of at least the recently originated book has now improved, or is it too early to say that?
Aalok J. Patel
Too early. It’s too early. There is very little like non-starters in microfinance. So, we do get like it will be less than 1%, but instinctually, I would say that, yes, it has created an impact, but probably not as much as I would have liked. But again, it’s still early to tell as far as data is concerned.
Ashlesh Sonje
Thank you, sir. Very useful. Those are all the questions. Thanks again.
Operator
Thank you. Our next question is from the line of Karthik from Unifi Capital. Please go ahead.
Karthik Sambhandham
[Indecipherable]
Operator
Mr. Karthik, can you please be a bit louder?
Karthik Sambhandham
Is this better?
Operator
Sir, your voice is not audible. If you can switch to handset mode, that would…
Karthik Sambhandham
Is it better now?
Operator
Yeah, yeah. Please go ahead.
Karthik Sambhandham
Yeah. So I have just two questions. So, what — sir, on the regulatory front, what are we seeing as a headwind? Because post this circular from RBI directing a few NBFCs to stop disbursements, how are we taking it? Like, is the directive in terms of the interest rates or is it in terms of NIMs or what’s the RBI’s call for all the MFIs? That’s my first question.
Aalok J. Patel
So, it’s difficult for — so, I only heard part of your question. The quality of the audio is not very clear. But I got the gist of your question. I think you are asking about the — basically, the RBI circular regarding…
Karthik Sambhandham
Yeah.
Aalok J. Patel
Interest rate, other factors, and stuff like that. See, it will be very difficult for me to comment on such matters. All I have to say is that RBI is the regulator. So, if they say — if they ask us to jump, all we can say is, how high, you know? And to an extent, RBI had been issuing a lot of notice. I mean, they’re both publicly and privately had been discussing with many MFIs and other institutions about many things such as transparency and interest rates and means and other factors.
I was surprised, to be honest. Again, I don’t know the internal matters. If it was just about interest, then I was a little bit surprised this was what the outcome was, considering that, to a certain extent, the punishment has to fit the crime. And in certain of the NBFCs, I can — I know the rates were — again, it’s not fair for me to comment on this. I’m not exactly sure what is appropriate. But the rates were clearly on the higher side, whether you call that usurious or not, I don’t know. At least on the MFI side, I’m just not sure whether is ’25 usurious and ’24 not or is ’26 usurious and ’24 not. It’s very difficult to judge what is going on.
In this stage, in today’s context, obviously, we are discussing the matter at great length internally with our Board, with RBI as well. We are engaged with them as well. And whatever steps are required to protect Arman particularly and Namra particularly to any kind of regulatory risk, we are taking all measures, which we feel are prudent. So, again, I really want to specifically comment more than this.
Karthik Sambhandham
Sure. Thank you so much, sir. That was helpful. And last — my last question. So, what would be the proportion of Namra plus 4 in our current portfolio? Namra plus 4, like the customers who have [Speech Overlap]
Aalok J. Patel
I know people have been reporting this number and I’ve been seeing it as well. I’ll give you that number, because I figured somebody would ask that and we do have those numbers ready. But before we give you that number, I want to specifically give a disclaimer here that there is no standard way to report these numbers and whether this was the status of a particular customer at origination or did you do a scrub analysis from the credit bureau? Did you do it at a customer level or did you do it at the household level, for example, including both the customer and the spouse? Did you do it for MFI loans, MFI plus retail, or all loans?
Again, there is little clarity on this. So the disclaimer here is that the numbers that Vivek will just tell you right now are numbers that we had during origination at the family level for all loans. So, what that means is the customer, their spouse, whatever loans they had and whatever the outstanding of those loans added up to before the disbursements that we made, that is the status available to us. As far as scrub analysis goes, we have done it on a limited basis on a state-to-state level, but we have not done it at the household level. So I don’t think it would be very prudent for me to share those numbers with you.
But anyway — sorry. So, that said [Speech Overlap]
Vivek Modi
The household level, to answer your questions more specifically, the lenders at the time of origination at household level, I mean, was 22.8%, which is Namra plus 4 or more. And Namra plus 3 would have been about 18%.
Aalok J. Patel
And basically, if you look at the outstanding, practically, none of the customers at the household level for us had a outstanding of more than INR2 lakhs.
Vivek Modi
INR2 lakhs, yeah. That’s right.
Aalok J. Patel
So that was the underwriting that we used. I think it was less than 2% of customers who are more than INR2 lakh of outstanding. So, again, when you are looking at household numbers, that 22% might seem quite high, but you have to remember that at this house level also, there is lot of these KCC type loans and other loans that are sometimes not very, very large. So, many customers may have multiple lines, but what we were largely concentrating on was total outstanding and total EMI per head, over and above the number of loans that a customer had.
But Vivek, you want to just read out what it was for Namra alone, Namra plus 1, Namra plus 2, 3 or whatever?
Vivek Modi
So, Namra alone was 21.8%. Namra plus 1 is about 16.9%. Namra plus 2 turns out to be 19.9%. Namra plus 3, 18.6%; and Namra plus 4 or more was 22.8%. Along with that, with the outstanding, when we gave the loan, excluding our loan, the outstanding at the time of giving the loan being less than INR50,000, being 47% — yeah, INR50,000 to INR1 lakh was 25%, INR1 lakh to INR1.5 lakh was 18%, INR1 lakh up to [Phonetic] INR2 lakhs was 8%, and customers with more than INR2 lakhs outstanding when we gave out the loan was 2%.
Karthik Sambhandham
Okay, sir. Got it. Thanks a lot for this. This is very helpful. Thank you. Thank you so much.
Operator
Thank you. Our next question is from the line of Amit Jeswani from Stallion Asset. Please go ahead.
Amit Jeswani
Hi, Aalok. Aalok, how are things looking in October and November now that we finished 45 days in the quarter?
Aalok J. Patel
Well, not — I wish I could say it was good news and things are looking up, but unfortunately, that is not the case. But November has been fairly disruptive due to the Diwali festival. So, as far as availability of customers and everything is concerned, that became an issue. So, right now, obviously, it’s covering up and covering up very quickly. So that is good news at least. But yeah, I don’t think this down cycle has ended and neither can you expect it to end so quick as well, to be perfectly frank with you. But I would say, I guess, if you want to count the silver lining, you know the rate of descent is slowing down significantly. So, at least that is — it — we’ll take that win, I guess, if nothing else.
Amit Jeswani
Got it. And I was just seeing that COVID, we peaked at around 6% GNPA. What do you think would be our GNPA at time? Like, we peak — sorry, sorry, sorry, sorry. We peaked at 7.9% GNPA in March ’22. What do you think this GNPA will end this time?
Vivek Modi
Your — because your best guess. You’re seeing data [Speech Overlap]
Aalok J. Patel
So, Amit, the — there are — it’s — I understood your question. I understood your question. The problem is, COVID and this is not very, very comparable, because during COVID, you had a lot of different schemes available by RBI and finance ministry and a lot of this. First was the moratorium, so you could kind of delay recognition of GNPAs until the moratorium got over. After that, there was a restructuring available and lot of other things were available. So I’m not saying that was done maliciously or anything like that, but there were a lot of different things available during COVID.
Now, if you look at the credit cost today, we are nowhere close to what COVID cost us, for example. But — so you can take that as a silver lining to an extent, but what is different this time is COVID was like a heart attack and then like a quick recovery period, right? So, the problem this time is it’s like an extended edition. It’s a headache, not a heart attack. But it’s a bad migraine. Sorry, maybe not a very good analogy. But — so your NPAs, as long as you keep writing off assets and taking them as impairment in your P&L, it’s possible that the GNPA will — may never rise to more than what it is today also, as long as you stay on top of it and keep either providing for it or writing it off.
I don’t know, Vivek, you have anything to add to that?
Vivek Modi
So, largely — I mean, just adding to Aalok comments, one, the differentiator between COVID and today is obviously the — environmentally, during COVID, there was lot of supports that came in. In this, I think we will have to kind of internally a ring-fence as much as we can do in terms of improving the collection efficiencies and the monitoring and so on and so forth for whatever has already been disbursed and put into place much superior underwriting processes to ensure that the forward lending or the future lending is far more ring-fenced to that extent. Having said that, I think winding down to a specific number may not be a great idea at this point in time.
Amit Jeswani
Got it. So, my other question is, how does the problem solve itself just by we lending less and people getting deleveraged, or the only way to come out of a bubble is to create an even bigger bubble and basically lend more so that liquidity improves and everything becomes okay?
Aalok J. Patel
Well, Amit, you kind of hit the nail on the hammer here. The — see, one of the bigger problems which — why things are continuing to go down is the fact that lending has stopped, right? And whenever you stop credit or at least slow down credit to any economy, that is going to have worst effects. So, in effect, to prevent people from getting over-leveraged, you are also stopping credit to people who may really need it, right? And if they don’t get it, they are also defaulting. So it’s a two-edged sword.
A lot of people say that, oh, it’s evergreening, which — I don’t know. I think like evergreening term gets tossed around quite a bit and I’m not saying — I’m not denying its existence. But Arman itself, we borrow every month and beat [Phonetic] every month. Like, is that evergreening? I don’t know. Again, it’s just business for us, right, and lot of the borrowed money might be going into repaying also for us, but we are running a valid business. So, I don’t want to toss around a term like evergreening and other things, fully acknowledging that it does happen, and of course, we are aware of it that it happens as well.
But yes, I think one of the bigger problems is that credit has stopped and until the credit resumes to a meaningful level, it will be even more difficult to get out of it. And so, you are stuck in sort of a catch-22 situation. And so, ideally speaking, I would want everybody else to start disbursing and I would be conservative, but unfortunately, that’s not how the world works. So — but I don’t know. I’m not exactly sure how to answer your question except the fact that during both demonetization and COVID, lending did resume slowly, slowly, and it did get up back to what its previous levels were.
Does that answer your question? Have we lost the line?
Operator
Yeah, yeah. The line for the previous participant seems to have disconnected. We’ll move on to the next question, which is from the line of Pranav Gupta from Aionios Alpha Investment Managers. Please go ahead.
Pranav Gupta
Hello.
Aalok J. Patel
Yeah, hi.
Pranav Gupta
Yeah, hi. Hi, Aalok. Just a few questions. A lot of my questions have already been answered, but when we look at collection efficiency and you met — your collection efficiency haven’t really fallen for us when you compare 2Q over 1Q, but how are we seeing a — how are we seeing the collections in next bucket? Because that is what will give a sense to us to see — to understand as to when things are actually going to start improving. That’s the first question.
Aalok J. Patel
So, I would say things will not improve until the zero DPD bucket repayment rate goes up to at least 99% — 98.5% to 99%, which is what typically what we are used to. But even if it gets back up to 98.5%, I’m confident to say, okay, the worst is behind us and things will progress forward.
Now, as far as the other buckets are concerned, one to 30, 30 to 60, 60 to 90 and so on and so forth, honestly, I don’t have any such formula for that. One bucket — one to 30 bucket ranges anywhere from 40% to 70% on a month-to-month basis and it goes down from there. Obviously, even in write-offs and other cases, there is some level — in basis points or in small percentage terms, collection obviously keeps trickling. But the major strategy that people follow is to — to arrest the problem is to concentrate on zero DPD collection and ensure that remains pristine. Rest of it will take care of itself.
Pranav Gupta
No, absolutely. That’s the question I was asking. Are we seeing zero DPD collections improve, even though slightly, or is there still some time to go before we see an improvement?
Aalok J. Patel
No, there is time to go. There is time to go.
Pranav Gupta
Okay.
Aalok J. Patel
Listen, I think before anybody asks me this question — people have been asking me a lot offline and other times also, when I think that this will get over. And so, before anybody asks, let me first say, I’m not a guru, I’m not an expert. People have predictions. People in the stock market have predictions, which are wrong all the time. I have no idea. But that said, in my experience, once a credit cycle starts, it takes at least a year for things to start getting back on track. And so, if I say that this credit cycle started in April, which is when it really kind of started surfacing very, very quickly, that would mean that by Q4 end, we should start seeing things getting back on track or improving or getting better. Again, I have no basis or evidence to give that prediction except sort of a gut instinct maybe.
Pranav Gupta
Right. So — but just the thing that you mentioned, right, that once the credit cycle sort of kicks off again, that is when we start seeing things getting better. But say, if you look at the last 15 months, 24 months and possibly the last 12 months starting — ending April, that is where we’ve seen a huge buildup of lenders lending to multiple borrowers and the number of borrowers per lender going up, right? And if you sort of take a lot of anecdotes from multiple companies that trade in the rural sector, it doesn’t really seem like incomes have been hit in a big way. And then to see leverage go up for borrower in such a big way just indicates that most of this incremental credit has gone towards consumption rather than using for working capital or business.
Aalok J. Patel
That’s a fair assessment.
Pranav Gupta
In that case, the question arises that, does this really need the credit cycle to start going up again for these customers to start lending or is it just a pure case of most borrowers as being purely over-leveraged? I mean, lending more to these customers might not really solve the problem. That’s the thing I’m trying to understand.
Aalok J. Patel
No, I understand, and I fully agree with you. And that was along the line with my previous answer that, okay, if we stop lending, will that create an issue? And as I said, it’s a two-edged sword.
Pranav Gupta
Right.
Aalok J. Patel
There will be — I mean, we have 7 lakh customers. There will be customers who are using it for income generating and need more money and they are not getting it either from me or the industry or whoever else. And there will be others that are purely using it for consumption or evergreening or other things and they might manage finding it might not also. So it’s like it’s very hard to distinguish the genuine needs versus the non-genuine needs. And so, people like me, sitting where I am, we always err on the side of conservatism and say stop lending. Of course, I know not everybody I reject is going to be a bad customer, but that just — it is what it is, right? When I’m not able to determine whether somebody fits my risk profile or not, it is prudent of me to just simply not give the money, at least at a time like this.
Pranav Gupta
No. Absolutely. Absolutely correct, sir.
Aalok J. Patel
Go back to your earlier question about — see, what is — what started this? What started this crisis? And everybody becomes a guru in hindsight. Obviously, nobody, including myself, were predicting this. And of course, I think I’ve been talking about over-leveraging for a while, but I — as I said during my initial comments that I don’t think anybody expected things to get to this level as quickly as it did.
So, really [Indecipherable] — first of all, whenever things like this happen, there’s never one thing. I mean, there might be one big thing, which is over-leveraging, but it’s never one thing. It’s multiple things that cascade together and kind of like the whole Swiss cheese model.
Pranav Gupta
Right.
Aalok J. Patel
And so, first of all, as you or somebody else correctly said that people started more and more trickling, using money for consumption rather than — yeah, so people started using it more — maybe more for consumption, maybe more for aspirations. I think availability of those just became so easy. Four years, five years ago, the people lending to these people were just NFIs. 80% of they were MFIs. When we were a close knit group, we kind of knew, so this — when things like COVID and stuff happened, obviously, we got into some bit of trouble. But otherwise, it was fine.
Pranav Gupta
Right, right.
Aalok J. Patel
And it just seems that the world’s crazy offering loans. Even the companies who have nothing to do with loans monetize their businesses with giving out loans as a supplementary business. And so, I said this before, this is not an MFI business. Everybody who has lent money to this people are getting their hands burnt. It has — so, obviously, I mean, look at — I’m assuming, today, when you get cold call from people, how many people are trying to sell you refrigerators or air conditions? Very few. Most of the cold calls you’ll be getting will be, you need a car loan or a personal loan or whatever, right? Like, it’s just — it’s a little crazy.
So — and so, I don’t want to blame competition or anything like that, but people who had no business going into rural lending went into it very, very quickly. And so, that is one aspect, just oversupply. The second part happened — and before I say this, I want you to understand that I am not blaming RBI as a regulator. But when the deregulation happened in April 2022, where they removed pricing caps and also removed over-leveraging caps, RBI assumed that the industry was mature enough to manage these things, and that was really the right thing to do. But unfortunately, people thought that they could price away the risk of giving out more loans and that never works, according to me.
So, anyway, there are many, many other factors at play. But what I feel is that this is probably the larger issues.
Pranav Gupta
Understood, sir. Sir, just one last question. Assuming that — is it fair to assume that, given that [Speech Overlap]
Operator
Sorry to interrupt, Mr. Pranav. We request you to get back to the question queue for any follow-up. Thank you. Our next question is from the line of from Sukriti from Laburnum Capital. Please go ahead.
Sukriti Jiwarajka
Hi, Aalok. I just want to understand a little bit more about the MSME — the INR400 crore MSME book. Now, I’m looking at this. It’s typically the same ticket size or little less than what I see our peer MFIs do in their individual MFI loans. Now — but you run this, I understand, as a separate network, different branches, and there is a credit underwriting layer that you have. I’m actually a bit surprised to see the yields here, 35%, 36% when the individual MFI loans that I see are much, much lower. So I have two questions on this. And I think earlier in this call also, you did mention that this customer is a little MFI-plus customer, right? So, why is this guy coming to you when he could get a INR1 lakh individual MFI loan from, let’s say, Ujjivan at 22%? And second, on the regulatory aspect, given the yields, what is the risk of that? So, those are the two questions on MSME.
Aalok J. Patel
Typically, our interest rates in MSME are between 28% to 32%. And as far as this segment goes, this is little par for the course, because the operating cost in MSME are much, much higher than what they are in MSME. As you said, we require a separate credit, the rejection rate is very, very high. And largely, this is what the market has determined that — what the cost is giving money to these customers. So [Speech Overlap]
Vivek Modi
Additionally, it is like individual level…
Aalok J. Patel
Collection.
Vivek Modi
Doorstep collection.
Aalok J. Patel
Yeah. So it’s individual-level doorstep collections. So it’s — in a JLG group, you have to go down to the group level and collect from maybe five, six, seven customers. Here, you are — it’s individual, door-to-door collections. So that gets expensive very, very quickly. And frankly, to answer [Speech Overlap]
Sukriti Jiwarajka
I don’t understand, from your perspective, why this makes sense. And this is probably the right yield. But the question is from the customer’s perspective. Why is he, who is an MFI-plus customer, coming to you at 36% for a INR80,000 loan, when he will probably get a INR1 lakh unsecured loan at 22%, 23% without having to move through this credit underwrite?
Aalok J. Patel
No, I mean, you — this is a rabbit hole that really I don’t want to get into. I mean, eventually, it will always lead to, why does an MFI customer come to me? Why don’t they go to SBI and get a loan at 8% or 9%? I mean, there is no right answer for this except the fact that there are many other things except interest rates. We are providing doorstep customers. The customer doesn’t have to find the loan. We find the customer to give them the loan, right? So that is one aspect.
Second aspect is that I have a very, very quick turnaround and I’m very paper-friendly. I don’t ask for 30 different documents, tweak 30 knobs to get a result and stuff. So, clearly, the customer is seeing some advantage in paying a higher yield with me versus going for maybe a more complicated but a lower yield. I’ve always said this, that a customer who is extremely price-sensitive, I’ve probably lost that customer. That’s not who I’m really servicing. They’ll probably wind up going to HDFC Bank or whoever else. When I’m in the market for a car loan, I make 20 calls, because I’m in the business and even 2 basis point difference, I’ll go with that person, because for me, it’s kind of an enjoyable experience of trying to get the lowest possible rate that I can manage. But I’m not a microfinance customer or I’m not an MSME customer.
So, yeah, I [Speech Overlap]
Vivek Modi
I think, largely, if you look at it, the market is pretty huge even in that case.
Aalok J. Patel
Yeah.
Vivek Modi
And we’re talking here about INR400 crores of AUM with us. So I would probably look at your question also as an opportunity, I mean, that we could probably go into those customers as well. But having said that, most of the SFBs technically push customers with eNACHs. Now, that could be a single largest differentiator, because even today, when we try to push eNACH with the customers, it’s not as forthcoming as we would all want to believe it.
Aalok J. Patel
Yeah. I mean, until we stopped it, earlier we used to take, for MSME, PDC checks. The number of rejections we would get because people — not that they were unwilling to give it, but they just didn’t have checks. Jan Dhan doesn’t issue checkbooks. So they would have to go to the bank, apply for it, get it mailed. Then it would take 30 days, blah, blah, blah, and I would lose the customer. So it’s — I don’t think that these guys really compare interest rates or yields. They are more looking at the EMIs and…
Vivek Modi
And convenience and [Speech Overlap]
Aalok J. Patel
And the convenience and, really, like a difference between a 25% and a 30% is maybe INR80 a month. Some people don’t care about that.
Sukriti Jiwarajka
Got it, got it. And on the regulatory scrutiny at these eLeaPs [Phonetic], I know you partly answered this, as you don’t think it’s entirely used. But do you [Speech Overlap]
Aalok J. Patel
Yes. I mean, I [Technical Issues] question properly. I just heard regulatory scrutiny. Can you repeat yourself?
Sukriti Jiwarajka
No, the same, we’ve seen a little bit of crackdown on higher-yielding loans. I know you partly answered this question. But the 36% book?
Aalok J. Patel
It’s not 36%. I think that will be probably with processing fee.
Vivek Modi
It’s the processing fee.
Aalok J. Patel
And a lot of other things also put into. So it’s not really 36%. But anyway, let’s call it X percent. Please go ahead.
Vivek Modi
So, I think the other question was about regulatory risk. Now, here — line dropped?
Sukriti Jiwarajka
No, no, I’m here. I can hear you. Yes, that’s what the question.
Vivek Modi
So, on the regulatory risk, just to kind of address that, A, to a certain extent, since Arman with its entire AUM is still a base — in a base layer; and second, at least the kind of select scope inspections that we’ve gone through in the last two or three years. The rates have been similar and there have been no major changes in that. And I think that has not been specifically — being pointed out by the regulator, A. Given the overall situation, the kind of servicing that it entails in terms of doorstep recovery process and the entire evaluation mechanism and other things, that — at least at this point of time, we are kind of confident that that doesn’t seem to be a major concern from the regulator’s point of view, at least at this point of time.
Sukriti Jiwarajka
Got it. Got it. Can I ask [Speech Overlap] yeah.
Aalok J. Patel
It’s getting — honestly, it’s getting a bit difficult to kind of predict what is in the regulator’s mind at this point. And so, there is a lot of guesswork involved about what they want, what the intent is. I think the intent is quite clear: don’t charge more than you want or than you should. But like — so — but when it’s like a difference of 5%, 10%, obviously it’s easy to determine. But if it’s 1% or 2%, I don’t know if it becomes that easy. But again, I think if you look at ROAs, ROEs, NIMs and yields and other factors, and if you look at the complete picture, as long as you are able to justify it in some mechanism, given the risk which you are taking and other factors, I think RBI is largely reasonable.
The second thing, which I just want to say is that, typically speaking, RBI does not do any knee jerk and I’m not aware of the specific four companies that they have come out against in the past few weeks. But I know for a fact, before they come out with anything public, there are many months of discussions and other things that go on. Even in the case of Paytm and other things, discussions happen not over months, but over years. So I would say, RBI is largely reasonable and I would assume that if something like that, this is coming for Arman or Namra, hopefully, I should be able to see it coming and take corrective actions, whatever is necessary.
Today, I don’t — and again, don’t blame me if I turn out to be wrong. Nowadays, I’m also scared to make predictions, because it seems like I’m getting more superstitious as time goes on. But we will see. I’ll — we’ll monitor it very, very closely.
Sukriti Jiwarajka
No, no, absolutely. Listen, point well taken. Can I ask one more question?
Aalok J. Patel
Yeah, please go ahead.
Sukriti Jiwarajka
On the point about credit having stopped in the industry in this cycle, again, how much of this is companies being cautious and saying, look, my customers over-leverage in the industry as a whole after Sa-Dhan guidance and MFIN guidance? And how much of that is a definitive regulatory push that no evergreening, no netting of?
Aalok J. Patel
That’s a good question. I’m not sure how to answer that. As far as I’m concerned, I would say that, as I said earlier that, self-preservation will always trump greed, right? And so, if there was fear versus greed, most people would err on the side of fear. And that said, I would say that most of the disbursement, which is lowering in the industry, is in an interest of self-preservation and not wanting to get into something that they don’t know yet how it will evolve rather than something that RBI has been preaching about lowering unsecured lending and other factors. So — but I’m sure it’s some combination of both, but I would probably weigh the former more than the latter.
Sukriti Jiwarajka
Former as in the lender being cautious?
Aalok J. Patel
Lenders being cautious, yes. Even inquiries — you’ll be surprised, but even inquiries have gone down from the customers. Even customers are being cautious now, which is a good sign.
Sukriti Jiwarajka
Yeah, that’s very interesting. Thank you.
Operator
Thank you. We will take our last question from the day for the — from the line of Amit Mantri from 2Point2 Capital. Please go ahead.
Amit Mantri
Yeah, hi, Aalok. My question is on the provisions that we have taken and might need to take going forward. So, on the GNPA side, we seem to be adequately covered. But given that we have a large PAR book, 30 to 90 days of almost 8% in microfinance, and you mentioned that that number continues to see increase, because X-bucket collection — your collection efficiency is still low. So, how are we provisioned on this PAR book, which is non-GNPA but will probably flow through in the next few months?
Aalok J. Patel
I think the simple answer is that we are probably not [Speech Overlap] look to.
Vivek Modi
So, Amit, A, the management overlay has been kept high. The overall provision that you see there is about INR114 crores for the consol and, of which, I mean, largely about 50%-odd would turn out to be the GNPA provision and the balance kind of is towards the 30 — 31 to 90-day bucket kind of a period. So at this point of time, with the management overlay, I think we feel fairly confident that that should be a Board provisioned number. But again, if need be, there would be sufficient action that can be taken to kind of pad up [Phonetic] the provision if situations were to go further down from here. But then that’s something in the future that we have to see.
Second is, when you’re talking of the soft buckets, let’s also kind of look at how the soft performance buckets have performed historically also. There are — I mean, every challenging period may not be very similar to the past, but still in the past, be it COVID, be it de-mon earlier, we’ve seen customers, especially in the softer bucket, which is means who are overdue for one to four installments, generally have come back much faster once the kind of cycle starts to improve.
Aalok J. Patel
But — so yeah, I think, Amit, if our margins and profits allow, we’ll definitely bump up [Phonetic] that overlay as much as we can. But that does not seem — I don’t see impairment cost coming down in the next quarter or anything like that. So we’ll just have to take it in good stride.
Amit Mantri
Sure. Thank you. Thank you very much.
Operator
Thank you. Ladies and gentlemen, that was our last question for the day. I would now like to hand the conference over to Mr. Mayank Mistry for closing comments.
Mayank Mistry
Thank you all for joining the call today, and thank you to the management team of Arman Financial Services for giving us the opportunity to host the call.
Thank you, everyone.
Aalok J. Patel
Thank you, everyone.
Vivek Modi
Thank you.
Operator
[Operator Closing Remarks]