Arman Financial Services Ltd (ARMANFIN) Q2 FY22 Earnings Concall Transcript

Arman Financial Services Ltd (NSE:ARMANFIN) Q2 FY22 Earnings Concall dated Nov. 17, 2021.

Corporate Participants:

Jayendra B. Patel — Vice Chairman and Managing Director

Vivek Modi — Chief Financial Officer

Alok J. Patel — Joint Managing Director

Analysts:

Manjeet Nair — Emkay Global Financial Services — Analyst

Deepak Mehta — — Analyst

Amit Mantri — 2Point2 Capital Advisors — Analyst

Samir Desai — Desai Investments — Analyst

Viswanatha Prasad — Bellwether Capital — Analyst

Balakrishnan Agasia — Axanon Investments — Analyst

Debashish Niyogi — Debashish Investments — Analyst

Minal Sabnis — Sabnis Financial — Analyst

V. Srinath — Bellwether Capital — Analyst

Manish Kumar — Hansraj Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, welcome to the Q2 FY ’22 Results Conference Call of Arman Financial Services hosted by Emkay Global Financial Services. We have with us today, Mr. Jayendra Patel, Vice Chairman and Managing Director; Mr. Alok Patel, Joint Managing Director; and Mr. Vivek Modi, Group CFO.

[Operator Instructions] Please note that this conference is being recorded.

I would now like to hand the conference over to Mr. Manjeet Nair from Emkay Global Financial Services. Thank you. And over to you, sir.

Manjeet Nair — Emkay Global Financial Services — Analyst

Hi. This is Manjeet here. Good evening, everyone. I would like to welcome the management team and thank them for this opportunity. I shall now hand over the call to the management for their opening remarks.

Over to you, gentlemen.

Jayendra B. Patel — Vice Chairman and Managing Director

Thank you, Manjeet bhai. Jayendra bhai here, Managing Director of the company. And I would like to, first of all, say food evening, everyone, and thanks for taking time out of your busy schedule to join us over this call to discuss our financial performance for the second quarter and half-year ended FY ’22.

We have issued a detailed press release and investor presentation for the quarter. And I hope all of you had a chance to review it. I will start with a brief overview of the industry and business during the last quarter and then we’ll move to our financial performance. The quarter was marked by a rebound in rural economy, along with the improving consumer sentiments and unlocking of most geographies post the second wave of COVID-19.

Our cautious approach and conviction, along with the experiences gained during the 2020 lockdowns, helped us navigate smoothly through the challenging times. With the destination programs organized by the company across locations, majority of our employees are vaccinated. This will enable smooth running of operations in future and more closer customer interaction.

As I have said in the past, our customers have a tendency to bounce back fast. This was clearly seen during the last quarter with the rise in collection and improved disbursement on the back of pickup in demand. Moreover, continued government support towards NBFCs and various relief packages for the revival of economy in the form of loan guarantee schemes. ECLGS and MSME revival schemes will surely bring big economies back on track.

I will now give a brief overview of our financial performance for the second quarter and post that touch upon liquidity disbursement and collections in more detail. Coming to the brief overview of our financial performance for the quarter. Consolidated loan book as on September 30 stands at INR908 crores, higher by 29% year-over-year. Substantial reduction in COVID-19 cases and unlocking of the economy across most geographies led to higher AUM growth. Segmented AUM for microfinance stood at INR742 crores, higher by 42% Y-on-Y and MSME stood at INR125 crores, higher by 5%, while two-wheeler stands at INR42 crores, down by 33% Y-on-Y as two-wheeler sales declined in the last one year, given the challenging economic environment. That coupled with higher repayment rates led to a run down in the portfolio.

Consolidated loan disbursement during Q2 FY ’22 stood at INR267 crores, up by 425% Y-on-Y as the COVID situation started getting normalized and even the rural economy witnessed an uptick in demand. The total MSME and two-wheeler disbursements in Q2 were INR35 crores and INR11 crores respectively, while microfinance disbursement stood at INR220 crores, higher by 469% mainly due to back in rural economy post second wave and our increasing effort with the performance of the post-COVID disbursement asset quality.

Gross total income fell down marginally by 2% Y-on-Y to INR51 crores and net total income declined by 6% year-on-year to INR31 crores. Fall in gross income mainly due to the fall in interest margins on microfinance portfolio as the yield on that portfolio is regulated by the Reserve Bank of India. Portfolio after tax increased by 220% Y-on-Y to INR4.9 crores, aided by lower provisioning requirements due to better asset quality of loans disbursed post-COVID-19 since September 2020.

Consolidated gross NPA stood at 5.6% and the net NPA stood at 1.1% for the September ’21. Loan impairment cost of the quarter reduced to INR8.7 crores. The company prudently took extra provisions of INR4.1 crores and took write-offs of INR4.6 crores. Higher provisioning coverage will help the company deal with potential asset quality risk arising on account of COVID-induced disruptions, while aggressive write-offs are aimed at reducing the NPA blend of pre-COVID doubtful assets.

Cumulative total provision stood at INR62.1 crores as on 30th of September ’21 covering 6.8% of the book AUM. The company enjoys healthy liquidity position with INR147 crores in cash and bank balance, liquid investments and undrawn CC limits. The company has repaid all its debt obligations that were due in Q2 FY ’22 with debt equity ratio of 4.05 times as on 30th September ’21 and shareholders’ equity stood at about INR194 crores as on 30th September ’21.

A&M continues to remain positive and the company continues to have access to new source of funds due to company’s robust balance sheet and prudent lending practices. The company recently received a rating upgrade of A minus from Acuite with a stable outlook, despite strong headwinds. I repeat, we are now into an A level of credit ratings, which I’m absolutely proud to announce that most of the NBFCs, most of the MFIs are not facing such a favorable build. We are lucky to have our rating upgraded from BBB minus to A minus.

So, coming to the collections. Collections in microfinance business which was impacted during Q1 FY ’22 due to second wave has recovered consistently during the Q2 FY ’22. Collections were severely impacted mainly due to COVID second wave restrictions since our collection executives were not able to visit door-to-door for recovery. However, with easing of restrictions, there is steady recovery in collections in Q2 FY ’22.

Post-COVID, disbursement took — disbursement loan book collection efficiency stands at 99%. I repeat again, post-COVID disbursements loan book collection efficiency stands at 99%, which I’m very proud of it. I must say that whatever disbursements we have made post-COVID, we are enjoying absolutely 99% recovery rate. Collections picked up as the repayment rates reached 92% in October 2021 from 89% in July 2021. Two-wheeler and MSME collections continued to be well north of 95% during October 2021.

Keeping in mind our long-term growth plans and to enhance the customer reach, we have planned expansion in our branch network from 250 branches as on September ’21 to 291 branches by March ’22. The company has already initiated recruitment process for the branch expansion. Going by our asset-light business model, the capex for the same will be minimal. We believe that we are on a strong footing looking at the buoyancy in the economy, coupled with our strong balance sheet, adequate liquidity, capital, improved credit ratings, along with stronger relationship with our lenders places us in the forefront of drive — to drive growth.

We stand guided by our long-standing commitment of reaching the most underserved sections of the society and making a difference in the lives of those who needed the most. Our focus will be on scaling up disbursement in a calibrated manner to maximize revenue growth going ahead, while keeping a closer watch on building profitability and maintaining the quality of our loan book.

Arman over the period has faced many challenges from external environment in form of regulatory challenges, demonetization and COVID. And every time, we have managed to emerge stronger. We thus feel that with the worst behind us, we are well poised to achieve a growth and harvest the benefits or fairer weather. We are optimistic about our future growth and earning potential and believe that we are well positioned and have a stronger foundation for the future, which can provide a sustainable and profitable growth for the long-term.

Finally, to conclude, I would like to express my sincere gratitude to all our stakeholders for their continued support during this very difficult times and a special note of appreciation for the company’s field staff who continue to show perseverance during the difficult times.

I now would request the operator to open the floor for the question-answer session. Thank you very much, all. Thank you.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The question comes from the line of Deepak Mehta [Phonetic], Individual Investor. Please go ahead. Deepak Mehta, your line is in mute.

Deepak Mehta — — Analyst

Hello. Good evening, sir. Thank you for the opportunity and good set of numbers. Sir, my question is around the SME segment. So, how is the traction in the recent quarter and how do we see growth in the coming years and coming quarters?

Vivek Modi — Chief Financial Officer

The disbursement has of course picked up in the last quarter compared to the previous three or four quarters. So we have a run rate of about INR15 crores of disbursement in a month. Of course, our target remains much, much larger. However, the underwriting has been kind of tightened since COVID and we have not relaxed it. Probably in the fourth quarter, if we relax, it will go up another 20%, 25%. But generally speaking, a lot of the growth for the coming quarters or year, I should say, will be through branch openings. So, a lot of — I think, as Jayendra bhai said, a lot of — we are opening some 40-odd branches in the microfinance segment in December, January and February timeframe. In about February and March also, we should be opening a lot of the MSME branches as well. So that disbursement hopefully should at least increase by 30% to 40% by Q1 of next year.

Deepak Mehta — — Analyst

Okay. Thank you, sir. And my second question is around — so a lot of companies, new companies, especially fintechs are coming in the SME segment.

Vivek Modi — Chief Financial Officer

Correct. Yeah.

Deepak Mehta — — Analyst

So, if you see, recently Paytm has also tied up with HDFC Bank. And in the long-term, in the con call of Paytm, they announced that they are willing to get into the lending business through the route of HDFC Bank. So how do you see this space out. Do we have any plan the tie-up with fintech or to launch any fintech kind of business?

Jayendra B. Patel — Vice Chairman and Managing Director

We are not — I think it’s a different product altogether. Although — I mean, I always say this that MSME is a very, very broad term. It includes loans of INR1 lakh and includes loans of INR10 crores also sometimes. It includes our urban loans and rural loans. We are servicing the completely different market segment. The customers we service are not — I mean, not the target segment of the fintechs. The fintechs are more targeting the urban kind of higher educated more formalized segment. So we don’t really look at that the emergence of the fintechs are much of a threat on our model. But as far as tie-ups or anything, I don’t see how exactly there will be synergies. But if something does come up, I’m always open to any kind of a tie-up.

Deepak Mehta — — Analyst

Thank you so much. I will get in the queue, sir.

Jayendra B. Patel — Vice Chairman and Managing Director

Right. Thank you.

Operator

Thank you. The next question is from the line of Amit Mantri from 2Point2 Capital Advisors. Please go ahead.

Amit Mantri — 2Point2 Capital Advisors — Analyst

Hello.

Jayendra B. Patel — Vice Chairman and Managing Director

Hi, Amit.

Amit Mantri — 2Point2 Capital Advisors — Analyst

Just on the credit costs, so what has been the percentage credit costs that are not incurred in the MFI and MSME business due to COVID so far?

Jayendra B. Patel — Vice Chairman and Managing Director

I mean, you mean on a static pool? You mean on the current pool?

Amit Mantri — 2Point2 Capital Advisors — Analyst

Pre-COVID, so March 2020 book basically.

Jayendra B. Patel — Vice Chairman and Managing Director

So, I think [Speech Overlap]. No, the overall write-off that you would have done, Amit, for the pre-COVID book already, which have been taken off or written-off will turn out to be about 3.5%.

Amit Mantri — 2Point2 Capital Advisors — Analyst

Correct.

Jayendra B. Patel — Vice Chairman and Managing Director

And then, we have another 6.5% of provisioning, But that is on the current loan book.

Vivek Modi — Chief Financial Officer

Amit, this includes both, the current as well as the pre-COVID book, which is part of the NPAs. So, I mean, to get to the numbers again, about 3.5% has already been written-off. The provisions that lie in terms of INR62 crores has approximately INR40 crores of NPA provisions. Now, NPAs — typically almost 70 — almost 90% of the NPAs that we have on the books are the pre-COVID book NPAs, which have become regular in terms of paying the instalments over a period of time, got a set back in November 2020. Then again, maybe the second wave again. So these people have shown the resilience but have also got the consistency on the repayment has got hampered due to various circumstances. And they continue to be on the books and they kind of are adequately provided at this point in time, if you can put it.

Amit Mantri — 2Point2 Capital Advisors — Analyst

Okay. And we have done some of restructuring. So how big is the restructured book and what is the provisions against that?

Jayendra B. Patel — Vice Chairman and Managing Director

Yeah. So restructured book compared to today’s portfolio will be very small. It will about less than 4% of the book will be…

Vivek Modi — Chief Financial Officer

No, not even 4%. Amit, the restructuring predominantly was for the microfinance book, wherein the restructuring was about INR26 crores, that is in December 2020. I would not have the exact number, but a large component of that has already been repaid or part of the NPA books and adequately provided for.

Amit Mantri — 2Point2 Capital Advisors — Analyst

Okay.

Jayendra B. Patel — Vice Chairman and Managing Director

So this was in December, Amit. So, it’s — and there was no further restructuring. So, anybody who didn’t start repayment will already be in NPA, right.

Amit Mantri — 2Point2 Capital Advisors — Analyst

So with regards to second wave, you have not done any significant restructuring, is it?

Jayendra B. Patel — Vice Chairman and Managing Director

No, there was no restructuring. There was — for the ones that we could not reach out to in the microfinance segment and those who were standard assets, so SMA is one. So those were like completely clean accounts as on March 31. We did provide moratoriums ranging from 5.2 [Phonetic], exactly. So that also limited only to the microfinance book. As far as the MSME and two-wheeler is concerned, there were no moratoriums or restructurings given to them in the second wave [Indecipherable].

Amit Mantri — 2Point2 Capital Advisors — Analyst

Okay, okay. And in the MSME book, the collections have been fairly good, consistently greater than 90%. But yet — that’s the resegment of the book where the GSTs have been rising. So can you explain that?

Jayendra B. Patel — Vice Chairman and Managing Director

So, couple of reasons. One is, what I think Vivek already said is, there was no restructuring, there was no moratorium or anything given on that book, partly because there was sufficient kind of profit and stuff available to just kind of take all of that upfront. The second reasoning also is that, if you look at the microfinance segment, there was a bit of a denominator impact where the portfolio has gone up significantly. In the MSME, there has been a little bit slower to move ups. On a percentage terms, it appears to be a little higher. We are still around pre-COVID levels when it comes to the overall portfolio.

Vivek Modi — Chief Financial Officer

The AUM of MSME vis-a-vis the March 2020, it sits at about 10% lower than March 2020. So, the denominator that way is lower.

Amit Mantri — 2Point2 Capital Advisors — Analyst

And now that you’ve started growing again and already debt to equity is 4 times. So within the next few quarters, you might touch maybe 5 times debt to equity. So, what is the plan now on raising equity for supporting this growth?

Vivek Modi — Chief Financial Officer

So, we are obviously, I think, as I keep saying, it’s no big secret. We are open to some equity kind of a dilution, given the right opportunity. Right now, we are, as you said, about 4.5 times debt to equity ratio. Basically if you work yourself forward, we are good till about INR1,200 crores worth of AUM. If you offload some of that as a DA transaction, in that case, and which that is — at this point, substantial interest to do that, maybe you can delay that a little longer. But — so in September, we had an AUM of about INR908 crores. So, we have a few quarters before we absolutely need equity. So it’s not in a rush. But, yeah, in the next three, four quarters, probably some transaction another will come along. Especially once the sentiments improve around microfinance and that new white paper that comes out, I think that will add a lot of valuation kind of support towards an equity raise.

Amit Mantri — 2Point2 Capital Advisors — Analyst

And on the — now, credit costs — provisioning has started coming down on a quarter-on-quarter basis. So, is there further provisioning required on the pre-COVID book, that was the challenge

Jayendra B. Patel — Vice Chairman and Managing Director

There will be some, but as you said, it will continue to trend down. I think the worst is behind us. Overall, the trend you will see in the coming quarters is, well, I don’t want to give out any indicators. But let us say, it will continue to go down in the coming quarters. As long as we can maintain the new book that we have created as 99% repayment, touchwood hopefully we should be able to. I don’t foresee too much. It’s not going to be zero, let me put it that way. But it will continue to tell downwards.

Amit Mantri — 2Point2 Capital Advisors — Analyst

Sure. Okay. Thanks. Thanks a lot. Good luck.

Jayendra B. Patel — Vice Chairman and Managing Director

Thanks.

Vivek Modi — Chief Financial Officer

Thanks.

Operator

Thank you. The next question is from the line of Samir Desai from Desai Investments. Please go ahead.

Samir Desai — Desai Investments — Analyst

Thank you for the opportunity. Sir, my question would be on branch banking. As you’ve mentioned that you are planning to add some 40-odd branches in March — by March ’22, so, sir, can you throw some light on the roadmap of this, like can we see some few branches coming in quarter three, can you please throw some light on this?

Jayendra B. Patel — Vice Chairman and Managing Director

Yeah. So it’s a little premature. But overall, about — approximately around 20%, we are planning to open in December. And then, about another 30-odd-percent, 30%, 30% and 20% more in January, February and March. So by March, we are hoping that all the openings will be completed. But that being said, in next week, we are having like sort of a management retreat over three days to kind of decide which areas and what areas we want to expand on. So, it’s a bit premature to give you a definite on where — how many will exactly open, what parts of India we plan to open it. 40 in basically an indicated number. But if we don’t find that much potential, it might be less than that. If we find more, it might be a few more. So let’s see.

Samir Desai — Desai Investments — Analyst

Sure. Sir, a follow-up on this. As the banking industry as a whole is looking at digital growth, where many NBFCs and banks are planning to cut down some of the strategy — some of the branches, which are not performing and more towards digitalization.

Jayendra B. Patel — Vice Chairman and Managing Director

Correct.

Samir Desai — Desai Investments — Analyst

So, sir, how will it makes sense over expanding couple of new branches. So, I just wanted to know strategy of your on this part.

Vivek Modi — Chief Financial Officer

Yeah. Branches are very light specifically, I mean, the operating cost. Largely speaking is employees, right. I mean, the branch rent and the capex that goes into a branch is not very, very high. In fact, we shut down branches or combine branches and stuff all the time.

Jayendra B. Patel — Vice Chairman and Managing Director

You are right. The new buzzword is digital, fintech, AI, machine learning, all of that stuff. Whenever — of course, we are very much technologically-driven. We continue to expand on technology. Right now, we have a project running for MSME and two-wheeler to convert it completely into a digital-driven paperless, all the other fancy terms you want to add behind that, we are going towards that. Microfinance, we had about a year-and-a-half project to convert it into mobile-based cloud-based kind of driven. But largely speaking, we are an MFI. We are a microfinance company. We are servicing customers who are not able to go digital. If they were sophisticated enough to take a loan from their mobile phone and pay their EMIs through cashless modes and all that other stuff, frankly speaking, I would be out of the business, right. I mean, I might — my job is to serve the segment who cannot do that.

And believe it or not, that is the majority of India. So, urban India is different than rural India completely. And us sitting in Bombay or in Ahmedabad or in all the metro cities, it’s largely — it’s a different world altogether. So, I don’t see that as much of a threat, as I said earlier. But, yeah, digital is obviously there, but I don’t — I mean, frankly speaking, the fintech term has become quite a bit bulge. I have studied a lot of fintechs. I mean, at most we are — the companies coming up are fintech-ish. A true fintech, I have not seen yet, at least not a successful model yet. But anyway, we’ll — I’ll hold my further comments on that.

Samir Desai — Desai Investments — Analyst

Sure sir. Thanks for well detailed answer, sir. Now coming towards provision, sir, currently just looking at our provisions, are the current provisions sufficient for a write-off in near future or are you planning to increase the provision going forward?

Jayendra B. Patel — Vice Chairman and Managing Director

So, as I answered Amit also, I think the tendency was for the provisions to be quite high for the last six-odd quarters. This quarter they have come down. I cannot exactly tell you what the future will look like, except to say case, I expect — strongly expected to trend downwards. So, provisions — but I mean, obviously I would be completely remiss if I said that we have done and dusted. And obviously it’s not going to be zero. But it will be lower and will continue to get lower as time goes by.

Samir Desai — Desai Investments — Analyst

Understood. Sir, lastly, on the industry front, as I had heard recently that you were seeing — we were eyeing that the retail loans can go bad in this cycle of NPA. So, sir, just wanted ground check from you, like you being into business, how do you see this kind of portfolios, are they doing good? The payments, repayment and all are good as of now, right?

Jayendra B. Patel — Vice Chairman and Managing Director

Well, probably a lot of people on this call will have a better answer than I do. Largely speaking, the loans that I have made post-COVID, that is when I started disbursements again in August or September of 2020, about a year ago. Those are behaving extremely well, we know. Surprisingly even better than I expected. But we were very picky, so we tightened underwriting, as I said. Only people who are absolutely clean, we gave out loans to them. So, we sacrificed disbursement in exchange of trying to build a better quality. So far it has seemed to work. I don’t know if it was overkill or not or anything, it’s early to comment. We are not facing any large issue like that. I would say that the worst is behind. The first lockdown was bad. The second lockdown was in some ways shorter, but in other ways worst than in the first lockdown because of the heavy human casualties and other sickness and all that other stuff. But I’m ready to be done and move forward. And everybody in this room is kind of ready to move forward. So, let’s hope at least that the worst is behind us.

Samir Desai — Desai Investments — Analyst

Sure, sir. Thank you for answering my questions. If I have further questions, I’ll join the queue, sir.

Jayendra B. Patel — Vice Chairman and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Viswanath from Bellwether Capital. Please go ahead.

Viswanatha Prasad — Bellwether Capital — Analyst

Hi, Alok. Just want an update on — what to understand our growth momentum of what are we looking at in the MSME space. And also want to understand if MSME is also on incremental loans post first wave at 99% collections.

Alok J. Patel — Joint Managing Director

So, the second answer is easier to answer, which is, yes, that is also behaving about the same. I think that is at 98.8%, so almost 99% in the MSME side. As far as the growth is concerned, see, I think my answer is pretty similar to what I gave in the — with the first question I got. I’m committed to grow it out. We have tightened the underwriting norms. It seem that the disbursement pickup has been a lot slower than it has been in the micro. And it’s always been the case, because it takes the right kind of customer to disburse in the MSME side, but we are planning to open some branches. We are probably going to not step back completely from the tighter underwriting, but maybe we need it halfway. And I expect the disbursements to pick up by at least 30% to 40% in the coming couple of quarters. Few branches in Rajasthan…

Jayendra B. Patel — Vice Chairman and Managing Director

Already has come up.

Alok J. Patel — Joint Managing Director

Yeah. So, a few branches in Rajasthan we have already opened as kind of a test, those are doing well. Overall, collection causes a huge amount of distraction also on the field. So, MSME, as you know, is also a door-to-door collection, so is the MFI. And I don’t know, I don’t have any better answer to give you about the growth side, except to…

Viswanatha Prasad — Bellwether Capital — Analyst

Just — on the growth side, just want to understand because you’ve tightened the norms, so rejection rates have gone up, our lead pipeline itself is not filling up because they’re not — maybe not business opportunities on the other side, because you see the disbursement trajectory in MFI has been significantly better.

Alok J. Patel — Joint Managing Director

Yeah. So it’s a combination of couple of factors. One is, the rejection rate is quite high. So, almost 70%-plus is the rejection rate. The pipeline also is kind of slower to come in. And that has to do with your branch efficiency. When they are spending a lot of time on the collection aspect, obviously the time which they can spend on generating leads becomes lower. So it’s a combination of a lot of different things. But, again, in the fourth quarter, we are going to — we manage — I don’t want to say solved, but we have managed — improving the disbursement of microfinance by quite a bit in this quarter. I think, next quarter, we’ll concentrate on the MSME side and work out on the whatever kinks that are there to — on the disbursement aspect.

Viswanatha Prasad — Bellwether Capital — Analyst

Perfect. Perfect. On the two-wheeler, the INR42 crore book, now what would be the size of the rural two-wheeler here? I’m guessing the INR11 crore disbursements are largely in the rural two-wheeler space?

Alok J. Patel — Joint Managing Director

The rural two-wheeler is almost 25%, about INR10 crores there. And in terms of the disbursements, I think that will be again in the same ratio of 75%-25%.

Viswanatha Prasad — Bellwether Capital — Analyst

Got it. And how do we see this business kind of going forward in the sense of like, are we looking to build a rural two-wheeler book over a period of time to like INR50 crores, INR60 crores. Is that an opportunity or depth of opportunity there or are we looking to kind of slowly get this division wound down over a period of time?

Alok J. Patel — Joint Managing Director

There definitely is a desire to do that. As you said, right before COVID, we kind of started it as a pilot, if you recall, grew that book. But due to whatever COVID disruptions were there, it created so many distractions for other stuff that these kinds of pilot projects were left in the sidelines. As we continue our growth and as we continue getting out of this COVID-related disruptions, I think there is room for other products also. So, hopefully we’ll be picking up the rural two-wheeler through our MSME branches and also maybe higher ticket loans on that side as well. So, my guess is that at least over the long run, you’ll see a lot of product innovation on that division.

Viswanatha Prasad — Bellwether Capital — Analyst

Perfect, perfect. Just the last one is, these branch expansions we are having, any kind of broad geographical feel you can give us in which are the states you’re looking to expand and what’s working for you?

Alok J. Patel — Joint Managing Director

So, a lot of areas in UP, we are considering Bihar as maybe another geography — certain areas of Bihar is another geography to expand. Not going to expand in Maharashtra or, largely speaking, in MP, maybe a few branches more in Haryana and Rajasthan. But again, we have a huge list of areas to consider. And I am not an expert, I think my field people are better experts. But usually, as I said, we have a management retreat where a large portion is discussing the areas of expansion and where the opportunities lie. So, once we get those, we’ll do surveys. We’ll get reports from the credit bureaus of how that behavior has been. Largely speaking, a lot of those reports will not give a true picture, because the high mark [Phonetic] reports, exactly. So, because of the COVID-related overdues and staff, it will be very difficult to kind of assess the numbers exactly. So we’ll have to use a combination of numbers and experience to kind of narrow the list down.

Viswanatha Prasad — Bellwether Capital — Analyst

Cool. Thanks, Alok. I’ll get back into the question queue. Thanks a lot.

Alok J. Patel — Joint Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Balakrishnan Agasia from Axanon Investments [Phonetic] (39:30). Please go ahead.

Balakrishnan Agasia — Axanon Investments — Analyst

Good evening, sir. Yes, as you mentioned earlier that collection efficiency of post-COVID loan book is 99%. So, I wanted to understand, this post-COVID loan book is the post first wave or post second wave?

Vivek Modi — Chief Financial Officer

Post first wave. So, starting from August 2020.

Balakrishnan Agasia — Axanon Investments — Analyst

Okay. And my second question is related to consolidated P&L, where in other costs, there is a — I mean, almost everything is same except two things, I mean credit cost and the other cost. You have increment of INR3 crores, earlier it was around INR2.5 crores and now it is INR5.5 crores. So, can you throw some light on the attributes of those increment, I mean, what does it relates to or something like that?

Vivek Modi — Chief Financial Officer

I think you’re talking about, what [Technical Issues] or…

Balakrishnan Agasia — Axanon Investments — Analyst

Quarter-on-quarter?

Alok J. Patel — Joint Managing Director

Quarter-on-quarter. So, Q2 FY ’21 provisions and write-offs were 18.6 and this quarter it is 8.7. So there is a 54% reduction. Correct? Am I looking at that?

Vivek Modi — Chief Financial Officer

No, no. I think what he is asking is, for the other expenses, which moved to INR5.5 crores from INR31 crores. So, primarily if I can address that, when you’re looking at H1 2020, there had been literally no disbursements during that six-month period. So, your credit cost, it depends on — credit bureau cost, the disbursement cost, the travel and advance kind of expenses were very low. As compared to that, FY ’22 quarter two has been largely business as usual kind of a quarter. And hence, these costs have come into play again.

Balakrishnan Agasia — Axanon Investments — Analyst

Correct.

Vivek Modi — Chief Financial Officer

So it’s directly related to the disbursement cost.

Balakrishnan Agasia — Axanon Investments — Analyst

All right. All right. Thank you so much.

Operator

Thank you. The next question is from the line of Debashish Niyogi from Debashish Investments [Phonetic]. Please go ahead.

Debashish Niyogi — Debashish Investments — Analyst

Hi, Alok.

Alok J. Patel — Joint Managing Director

Hi.

Debashish Niyogi — Debashish Investments — Analyst

Alok, your answer to the previous question of Amit, just wanted to get it right, provision is 6.8%, and already write-off cost for COVID loans has been 3.5%. So 3.5% has been written-off and 6.8% is the provision?

Alok J. Patel — Joint Managing Director

6.8% is the total provisioning. Out of that, NPA provision — we are under ECL. So under ECL, the NPA provisioning will be, what, about [Speech Overlap] INR40 crores approximately the NPA provision out of the INR62 crores in absolute numbers.

Debashish Niyogi — Debashish Investments — Analyst

Great. Okay, okay.

Alok J. Patel — Joint Managing Director

That’s where, I think, the difference will be there.

Debashish Niyogi — Debashish Investments — Analyst

Yeah, yeah. Okay. The second question, Alok, given that you are grounded, you look in the market and you know what is happening around, this 92% collection efficiency optically appears low, but when you compare other industries — other players — against other players, most of the players, we are better off, but there are some who are reporting much better than 92% collection efficiency. For example, CreditAccess Grameen is reporting 94%, 98%, the way that presentation shows. So there will be someone reporting booked higher, so historically it’s too large. So what do you think the reason for this? This is the way data around some of the players are treating NPAs [Indecipherable] has been provided for with help of collection efficiency?

Alok J. Patel — Joint Managing Director

You’re absolutely right. And that is a bit of an anomaly. A couple of things that I don’t have an exact answer. Couple of things I can add and then maybe Vivek can give his opinion as well. A, it depends on how fast you are growing. So you can have a denominator effect there; B, is your strategy is doing top — also net of loan, that might have some bit of an impact; C, you could be doing restructuring; D, there is no standardized way to calculate collection attrition fee rates. And in fact, I don’t — but particularly care for it as well. This is the first time people have started using it post-COVID. I think even in wave one, there was not a big concentration on collection efficiencies because a lot depends on the tenure of your loans and how quickly maybe they might be contractually the loan might be over but there still might be an overdue and stuff. So I don’t know. I’m not sure. I think maybe a better comparison would be looking at par numbers or NPA numbers and stuff like that, because it could be also that people once you provide for an asset, then maybe they would include it in collection efficiency as well.

Vivek, anything?

Vivek Modi — Chief Financial Officer

Largely, Alok, I think you’ve covered. Majority will be variables, that would be taken into account for calculating collection efficiency for any organization. Additionally, we’ve also seen that within the NBFC space, there have been various different methodologies for providing moratorium or restructure. So there are organizations which have moved on to only interest recoveries. So as long as the interest recovery has happened, they’ve kind of taken it as a 100% collection efficiency. Some have restructured where given moratorium March 2022, There are — and it is very much — it’s actually quite anomaly is also, I mean, I’m not going to name any competitors, but there are competitors who are reporting worst collection rates doing better than me. There are ones that are reporting better NPAs, better collection efficiencies but reporting huge losses. So, you guys will know those much better than me. I think collection efficiency can be whatever you want it to be, if you are really motivated. There is no set formula. There is no RBI formula or anything like that.

Debashish Niyogi — Debashish Investments — Analyst

And if you have to break the collection efficiency of hours between the region, is it Maharashtra still, which is bringing it now?

Alok J. Patel — Joint Managing Director

I think your voice is not clear. Say that again.

Debashish Niyogi — Debashish Investments — Analyst

What I’m saying is, Alok, if we have to break the collection efficiency between states, is this still Maharashtra because of the…

Alok J. Patel — Joint Managing Director

Yeah. Maharashtra will be the worst, correct. Maharashtra will be the worst, followed by Madhya Pradesh, followed by — which one will it be? Gujarat to a certain extent, Rajasthan has always been consistent. But Rajasthan got impacted in the second wave, that can revert back to the pre-second wave kind of collection efficiency. So ranking from worst to best would be, Maharashtra, then MP, then Eastern UP for that matter, if you can…

Debashish Niyogi — Debashish Investments — Analyst

UP is doing the best.

Alok J. Patel — Joint Managing Director

But UP, Western UP…

Vivek Modi — Chief Financial Officer

Eastern UP is worst. Then Haryana would be the best with 100% collections. But we just ranked into that.

Debashish Niyogi — Debashish Investments — Analyst

So how much is Maharashtra now? Is the trend improving? How is it now?

Alok J. Patel — Joint Managing Director

So, Maharashtra is actually the one pulling us all the way down. So it’s about 84%, otherwise every other state is much more than 90%.

Debashish Niyogi — Debashish Investments — Analyst

And did you see Maharashtra moving up in terms of as a trend?

Alok J. Patel — Joint Managing Director

It’s moving up by about couple of percentage points every month, but we are not disbursing a lot there. So, there is not a lot of new portfolio to kind of offset the bank portfolios largely the message if you can address in Maharashtra side, what happens is when we went into COVID Maharashtra was about 22% of the portfolio today it stands at 15% and in terms of disbursements account for about 10% only. So, largely the Maharashtra impact will keep on diminishing and hopefully the collection efficiency can keep on improving over a period of time. That will add to the overall rate.

Vivek Modi — Chief Financial Officer

Maharashtra has been a bit of a thorn in our fourth quarter for some time. If you could reverse time, I don’t remember who decided to go into Maharashtra, most likely it was myself, but I deserve a big kick in the back for that work.

Debashish Niyogi — Debashish Investments — Analyst

It happens. Ups and downs happens. Thank you, Alok. Thank you, Vivek. Thank you, Jayendra bhai. All the best.

Jayendra B. Patel — Vice Chairman and Managing Director

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Sumit Goenka from MP Investments. Please go ahead. Mr. Sumit Goenka, you line is in talk mode. Go ahead with your question. Mr. Goenka, please unmute your line from your side if muted.

As there is no response from the current participant, we’ll move on to the next question from the line of Minal Sabnis from Sabnis Financial. Please go ahead. Minal Sabnis, Your line is in talk mode, please go ahead with your question.

Minal Sabnis — Sabnis Financial — Analyst

Yeah, hi. Good evening. Sorry for the delay. Yeah, thanks for taking my question. I have a question around the disbursements. As seen over the last few quarters, the trend is actually improving. So, what is the current plan to expand the brand quite well? And how does the disbursement level increase with increasing number of branches? And for FY ’22, what will be the housing finance loan?

Jayendra B. Patel — Vice Chairman and Managing Director

FY ’22 closing branches will be, I think, 291. As far as the branch expansion, I think, I’ll give the same answer as I gave earlier that we are not sure exactly. We have kind of a figure in mind of about 40 branches in microfinance. In MSME, it might be more, but we have not decided that. So we’ll take it up after this planning is complete. And as far as disbursements goes. It will not add a lot see opening branches. There is a lead-time of about three to six months. So once you open up branch, it takes like about three months for it to start adding to your disbursement. Otherwise, in the initial month or two, it might be only some INR10 lakh or INR15 lakh. So, this is more planning towards FY ’23 than anything else. But this year where disbursements are improving month-on-month. I think, last month, we did about INR100-odd crores taken altogether on a consol basis. And every month, we are increasing it by about 5-odd-percent. So, I think, we are very — will be very close to INR1,000 crores, if not this month, next month from an AUM side. So, yeah, that will be kind of a big milestone for us.

Minal Sabnis — Sabnis Financial — Analyst

Great. Just a follow-up — a very broad macro type of a question. We see that the situation [Indecipherable] is already up and even on the retail side is on to increase maybe over the next few quarters. So, in the customer segment, which we are in, so do we see or foresee that we may have more disbursal rate, faster disbursal growth because of fund factor.

Jayendra B. Patel — Vice Chairman and Managing Director

Because of?

Minal Sabnis — Sabnis Financial — Analyst

Because of inflation affecting a lot of people.

Jayendra B. Patel — Vice Chairman and Managing Director

Inflation, assuming as far as the ticket sizes go?

Minal Sabnis — Sabnis Financial — Analyst

Yeah, yeah.

Jayendra B. Patel — Vice Chairman and Managing Director

I don’t expect ticket sizes to increase at least for us — for at least another nine to 12 months. So we have already increased the ticket sizes enough. We’ll take it up again and maybe the second or third quarter of next year.

Minal Sabnis — Sabnis Financial — Analyst

Okay, great. That’s all from my side. It’s always a pleasure to listening to all your answers in this call. Please keep up the great work. Thank you so much.

Jayendra B. Patel — Vice Chairman and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of V. Srinath from Bellwether Capital. Please go ahead.

V. Srinath — Bellwether Capital — Analyst

Hi, guys. Just two hygiene questions. One is, could you give the state-wise breakup of AUM, the percentages so that we can understand how that’s moving? And the second question would be, out of the INR908 crores of assets that we have, how much of that is originated post-COVID and pre-COVID so that we’d be able to segregate the good and the bad book.

Jayendra B. Patel — Vice Chairman and Managing Director

Vivek, you have the geography.

Vivek Modi — Chief Financial Officer

Yeah. Geographically, I probably might give you a segment wise answer. So, for microfinance, between Gujarat is 27%, MP will be more 24%, UP and Uttarakhand kind of add up to another 21%, 22%, Rajasthan has now grown to almost 10%. Maharashtra responded to 15%. So that kind of adds up to the entire cake and Haryana has just started. So it’s about 3% now.

In terms of two-wheeler, it’s completely Gujarat book. There is, I mean, it’s continued with centric. As far as the MSME book is concerned, about 85% is in Gujarat — 80% is in Gujarat, about 15% in MP. And the current kind of spread between Maharashtra, four branches and a couple of branches that we just started industrial.

Jayendra B. Patel — Vice Chairman and Managing Director

Got it. And the good and the bad book is the pre-enforced somewhat 60% in microfinance is in the post-COVID booked about 40%. I don’t know that the other ones on top of my head, but I will go 60% is that, but that will not match up with the collection efficiencies, because the demand of the new and old will be different than the portfolios, right, because the EMIs will be the same, but the portfolio of the newer originated loan will be higher than the older originated loan.

V. Srinath — Bellwether Capital — Analyst

Got it. That’s the run-off. Yeah. So 60% of the assets at least in MFI would be coming from post COVID disbursement?

Jayendra B. Patel — Vice Chairman and Managing Director

Correct.

V. Srinath — Bellwether Capital — Analyst

Got it. Perfect. Thanks guys. Thanks a lot.

Jayendra B. Patel — Vice Chairman and Managing Director

Thanks.

Operator

Thank you. The next question is from the line of Manish from Hansraj Capital. Please go ahead.

Manish Kumar — Hansraj Capital — Analyst

Hi. Good evening, sir. Thanks for taking my question and congrats for good set of numbers. I would like to know that are we having some digital-based strategies to reach out to new customers or any developments which we are doing in digital field?

Jayendra B. Patel — Vice Chairman and Managing Director

Yeah. So, in microfinance, we just finished the conversion, but it’s been like about a year, but that has looked about quite well. I will see there is something correct going on month to month, mini project. [Technical Issues] project going on right now converting our legacy software into a newer one. I think you can look forward to it. Probably next quarter, we’ll probably put it in the presentation of what we are trying to do. But again, LMS/LOS system, paperless with geo-tagging and — that we are trying efficiency and data decision. So, I think in that — a lot of future decisions will be based on things like what occupations and what areas and the stuff that they’re in. So it’s important to start collecting all of that data too in the future start making those, relying more on the numbers rather than your field intelligence or field people’s experience goes. So that we are doing right now. As far as reaching out to the customers via digital mode, we don’t have any thing in the works right now if there is some opportunity there. In the future, we’ll be happy to take it up, but as I keep saying, we are serving basically the rural household. They are not — we are basically serving people who are not dependent on digital or might be even illustrated in many cases. So it’s not our target segment.

Manish Kumar — Hansraj Capital — Analyst

Okay. That’s great to know, sir. That’s it by my side. Thank you.

Operator

Thank you. The next question is from the line of Deepak Mehta, Individual Investor. Please go ahead.

Deepak Mehta — — Analyst

Yeah. Thanks for the opportunity, sir. Sir, my question is around the disbursement and around the underwriting. So, post pandemic, have we changed any — have we made any changes in the underwriting? Are we prudent on the slide deck, maybe exercise that the person has taken loan from another NBFC bank and he is trying to take more loan from our company for — to repay that loan. Hope you’re getting my point, sir.

Jayendra B. Patel — Vice Chairman and Managing Director

So you are talking about Evergreen?

Vivek Modi — Chief Financial Officer

Evergreen in the sense, the loan taker want to do it. So, not the company.

Alok J. Patel — Joint Managing Director

He is asking, in order for him to pay one loan, he has borrowed from the another MFI.

Jayendra B. Patel — Vice Chairman and Managing Director

That does tend to happen. I mean, largely what happens, Mr. Mehta, is that the high mark would anyway give you the lending details from other borrowers. So if we are tending to be a third or the fourth lender, we are anyway those cases do reject. So that likely — I mean, as Alok bhai just said, yes, that would be happening in the marketplace, you cannot deny that. But the system is kind of over the years and the team is unable to kind of read such customers out to the maximum extent possible through the process itself.

Many people — see, there are no working capital loans available to these customers to begin with, so basically rolling over home loans would be the only way that they would get working capital as well. So it does, I’m sure it does tend to happen, but I don’t think it’s a large enough problem where it’s affecting our repayment rates or things like that. Of course, you will have those few bad apples. But mostly in the industry also, it’s very unlikely if somebody is going to take a loan from me and prepay another person.

Deepak Mehta — — Analyst

Once the cash goes in their account or in their pocket, that gets mixed with everything else. So, are they using some of that cash to repay their other borrowers?

Vivek Modi — Chief Financial Officer

Yeah, of course.

Jayendra B. Patel — Vice Chairman and Managing Director

We do that as well. But then again, Alok, you much draw the attention to the fact that there is a limit that’s set by the Reserve Bank of India. And till that limit, he can definitely borrow. And from that borrowing, you can take care of the another MFI as long as it doesn’t exceed his limit, which is set by the Reserve Bank.

Deepak Mehta — — Analyst

Correct. Which is, I mean, INR1.25 lakhs.

Alok J. Patel — Joint Managing Director

From all the lender on the MSA. That’s why our maximum loan ticket size in microfinance is just INR50,000. That too is very rare. That was very rare to default kind of cycle plus customer.

Jayendra B. Patel — Vice Chairman and Managing Director

Well, to add upon more complication to this answer is that this INR1.25 lakh might go away soon. With the new RBI circular to harmonize the microfinance practitioners, what they are talking about is shifting from a overall debt cap to an FOIR. So, anyway, not going into too many details, but stay tuned for that change as well.

Deepak Mehta — — Analyst

Yeah. Got it, sir. Thanks for the clarification. And my last question is around the — do you see in the near coming quarters, the cost of capital is going down for our company?

Jayendra B. Patel — Vice Chairman and Managing Director

Cost of borrowing?

Deepak Mehta — — Analyst

Yes, cost of borrowing.

Jayendra B. Patel — Vice Chairman and Managing Director

My items gone down significantly. So, I think Vivek will add more, but I don’t think it will probably continue to go down. With all the cheap funding available that RBI was pumping due to COVID, I think it is probably as cheap as it gets right now. If anything, it will remain stable or maybe go up a little higher in the short to medium-term.

Vivek Modi — Chief Financial Officer

Yeah. I think that’s about it. The cost of funding has definitely come down in the last 18 months. But I think to a large extent will bottom out because the benefits or — government was to offer has already come into play in the last 18 months. And we don’t see that going down any further from here.

Jayendra B. Patel — Vice Chairman and Managing Director

The thing is also that whatever benefit we get from cost of borrowing by RBI law, we have to pass it on to our customers. So and I mean of course that is always an endeavor to reduce the cost of borrowing rate increasing it but to a reasonable extent, we can pass it on or are forced to pass on any increases or decreases that we manage through cost of borrowing.

Deepak Mehta — — Analyst

Okay. So, I think, right now the margins should be not more than 10%, right, sir?

Jayendra B. Patel — Vice Chairman and Managing Director

That’s for microfinance.

Vivek Modi — Chief Financial Officer

That’s for microfinance or 2.75 times the average base rate of the top five PSU banks.

Deepak Mehta — — Analyst

Okay. So we can assume that the — our company has reached the optimum level of the cost of borrowings. So it should not be going below this rate, right, sir?

Jayendra B. Patel — Vice Chairman and Managing Director

I mean, in the short-term, I don’t want to say that. I don’t want to say that. I have been the inevitable always be to reduce it. And I think as we keep growing and the ratings keep increasing and all the other stuff, I think I don’t want to say that this is the lowest it will get. But given where we are today, I think it is — I think Vivek and his team have done a great job of reducing it as much as possible.

Alok J. Patel — Joint Managing Director

Additionally, as Vivek just pointed out, the rating upgrade has just happened. So rating of credit will surely help us in some or the other way as we move forward in the next couple of quarters because that’s what rating is supposed to do. And that’s what the differentiator largely is between the A and B category companies. So that should definitely help us.

Deepak Mehta — — Analyst

Yes, sir. This is why I asked this question because operating lease rating, credit rating. So, thank you for honest answer and straightforward answer. And best of luck for the coming quarters. Thank you so much.

Jayendra B. Patel — Vice Chairman and Managing Director

Thank you.

Vivek Modi — Chief Financial Officer

Thank you.

Jayendra B. Patel — Vice Chairman and Managing Director

I think last call last question probably.

Operator

Yes, sir. Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments.

Jayendra B. Patel — Vice Chairman and Managing Director

As always, we have no closing comments. Hopefully everybody had an enjoyable Diwali and a good break with family. And I guess it’s back to work for all of us. Take care. And have a great evening.

Operator

[Operator Closing Remarks]