Five-Star Business Finance Ltd (NSE: FIVESTAR) Q1 2026 Earnings Call dated Jul. 29, 2025
Corporate Participants:
Unidentified Speaker
Lakshmipathy Deenadayalan, — Chairman & Managing Director
Srikanth Gopalakrishnan — Chief Financial Officer
Rangarajan Krishnan — Chief Executive Officer
Lakshmipathy Deenadayalan, — Chairman & Managing Director
Analysts:
Unidentified Participant
Ajit Kumar — Analyst
Mahrukh Adajania — Analyst
Renish Bhuva — Analyst
Nischint Chawathe — Analyst
Parag Jariwala — Analyst
Vikas Mistry — Analyst
Subhanu Bangal — Analyst
Karthik Srinivas — Analyst
Raghav Garg — Analyst
Girish Shetty — Analyst
Pranav Gupta — Analyst
Shrinjana Mittal — Analyst
Rakesh Kumar — Analyst
Divyansh Gupta — Analyst
Darshan Deora — Analyst
Aditya Das — Analyst
Presentation:
operator
It. It’s. It. Sam. It. It. It. It. Sam. It. Sam. It’s. Ladies and gentlemen, good day and welcome to the five star Business Finance Q1FY26 earnings conference call hosted by JM Financial Institutional securities Limited. As a reminder, all participant lines will be in the listen only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing Star then zero on your touchstone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Ajit Kumar from JM Financial Institutional securities Ltd. Thank you. And over to you sir.
Ajit Kumar — Analyst
Thank you, Shruti. Good morning everyone. I am ajith Kumar from JM Financial. Welcome to 1Q FY26 earnings conference call of 5 star business finance to discuss the company’s earnings. We have with us Mr. Lakshmi Patty Dinaday, Chairman and Managing Director. Mr. Rangarajan Krishnan, Joint Managing Director and CEO Mr. Srikanth Gopal Krishnan, Joint Managing Director and CFO. On behalf of JM Financial, we thank the senior management of Five Star for giving us this opportunity to host you today. I now invite Mr. Patrick for his opening remarks. With that, over to you sir.
Lakshmipathy Deenadayalan, — Chairman & Managing Director
Yeah. Thank you, Ajit. I welcome everyone for this earning call and thank everyone for taking up this call the morning with me, Ranga the CEO and Shekant the cfo, we three jointly take up this earning call. Let me not run through the numbers because I know the numbers are with you for some time. Instead of getting into the numbers, I want to take you through on the five star thought and aspect and remedies what we have been doing on this pain point. So let me start. In this financial ecosystem, the pain do not start with one and end with the same.
It affects the entire ecosystem. But the pain differs from lender to lender. One who has better underwriting and good collection infrastructure will have the least pain. Yes, from Five Star’s Q1 performance the number shows the pain. If compared with others in the segment then we will realize the stress is far lesser for us. As I said, I want to spend some time with you all on following points. What is the cause for this pain? Where is the pain coming from? What are the remedies taken? Where are the early signs of improvement coming from? And what is our outlook for financial year 2026? Let me begin with the very important question.
What is the cause for this pain? Yes, you all know it is over leveraged, highly indebted, low financial literacy in small ticket borrowers which has led to this over leverage. Last 24 to 18 months we saw high spurt in credit moving towards the segment in the form of micro finance, personal loans and credit cards. To add to this the states like Karnataka, the ordinance which was enacted early this year has added more pains to. This. Where is the pain coming from? We see the pain in small loan borrowers, to be more specific, below 3 lakh ticket size and customers from risky locations and colonies. They were the target customers of microfinance personal loan lenders. We see the more pain coming from these ticket size and these segments and these localities. Most important, what are the remedies taken by Five Star? We have slowed down our exposure to below 3 lakh loans and started to focus on 5 lakh to 10 lakh segment. But our sweet spot will remain in 3 lakh to 5 lakh segment.
Even in 3 lakh to 5 lakh segment, highly indebted customers and customers from risky locations and colonies are avoided. With respect to over leverage, we check the leverage of customers prior to sanction of our loans and we adopt conservative practices on debt burden ratio and ltv. However, the problem has cropped up with customers over leveraging themselves post taking our loans which is what has caused some level of stress. To address this we are making some changes on customer profile and underwriting side. We are focusing on better quality customers, more financially literate customers who will not overleverage themselves even during the times of high liquidity.
This also means we are focusing on higher ticket customers who have better financial understanding and historically we also see this portfolio performing much better for us. We are also avoiding certain customers profiles, certain geographical areas where we find collections problems and consequent asset quality stress. With respect to income evaluation, we are also avoiding or giving much lower weightage to customers with high proportion of agree and other seasonal incomes. Further, wherever we find multiple member of the family involved in the same self employment, we are restricting the incomes to a much lower level so that we protect our downside.
Where are the early signs of improvement coming from? The lessons learned by the lenders who have caused this pain, the uncomfortable runaway pace at which the consumer credit was given for last few quarters have stopped. The new guardrails has been put in place by mfin. This will ensure no new over leverage pain is caused in the system. Since many or almost all micro finance and personal loan lenders have written down bad loans, this is technically the over leverage. Technically the over leverage has come down to small borrowers. Hence secured lenders like us will start seeing pickup in Collections going forward.
To be more data specific, our July month collections till now comparing with April month has shown good improvement both in Q1 C1 and collection efficiency. Finally coming to our outlook for the financial year 2026 this quarter, I mean July, August, September, this quarter will see the pain to continue but will get stabilized by quarter end second half year from December and March quarter onwards we will see improvement in growth collections and leading to better asset qualities. Hence we are not revising our growth and profit guidance of 25% growth and 12 to 15% profit for the financial year 2026 which we gave last quarter.
If any out of control happens due to external factors, we will come back on this. The credit cost guidance for the full year will be in the range of 1.20 to 1.25%. To conclude, yes we admit we have slipped from our own standards but let me assure you all five Star’s secured lending product with better underwriting and good collection infrastructure, we will be the last to get hit and first to bounce back. We will bounce back quickly. Now on the second most important development which I wanted to share to you all. Yes you would have seen the exchange notification.
Ranga, our CEO is stepping down. He’s resigning from our company. He’s been with me for last 10 years. He’s been in the company for last 10 years and his remarkable track record with me taking this company from nowhere to a unicorn and from a unicorn to a listed entity. As I’ve spoken a lot about his credibility and capability for last few months he has been sharing his desire to be an entrepreneur, to take up the entrepreneur activity and being an entrepreneur myself so I felt this is not right to stop him. And finally in the month of June we both agreed and we took this to the yesterday’s board meeting and board have approved this and he will be relieved from the company’s activity from 14 August onwards.
Having said that I’m an operational guy and been operating this company and built this business model for last 22 years and we have a strong second line management team across all functions so we see no disturbance on Ranga’s exit and I’ll be taking up the entire operational work as usual. We Both were sharing it 60, 65%. I was always doing it, he was doing 3030 and we exchange states in a year or a quarter so little overlook has to come from me and we have a very strong second level management as I said earlier across business collections, credit operations in all departments.
So that will argue well for the growth of the company as usual. So with this, let me hand it over to Shrikha CFO to take you through on numbers.
Srikanth Gopalakrishnan — Chief Financial Officer
Good morning to all of you. As Mr. Patty said in his opening remarks, this has been a little bit of a muted quarter by our standards. We would have certainly liked to perform a lot better, but for reasons which are a bit beyond our control, the performance has been a bit muted, but we are very confident that we will be able to quickly turn around from where we are to come back to our earlier levels. I’ll just take a few minutes to give some update on some of the numbers for this quarter and for the year to date, which pretty much is the same.
Despite the constraints that we are seeing, the crisis that has been caused by the over leverage, we continue to invest in physical infrastructure. We have not stopped our branch opening nor have we stopped splitting the branches which have become bigger. So during this quarter, typically to a Q1 trend, we have opened about 19 branches which ended with 767 branches. As of 6-30-25 our customer base is at about close to 4.8 lakh. Consciously we slowed down on our disbursals. Because during periods of stress it is. Not prudent to be aggressive. On lending, the focus was a lot more on collections. Even from the management oversight perspective we put a lot more on collections. So the disbursements had a little bit of an impact. It was almost flat compared to the same quarter last year. Consequently, AUM growth was also a little bit muted at about 5% quarter on quarter and 20% year on year. But this is all on account of the current crisis that we are seeing. Once we turn around and get our numbers back on track, we will get back to our growth target as well, which is why we are not revising our growth guidance.
From our stated 25% level, we have ended with a portfolio of slightly short of 12,500 crores on the financial metrics consequent to the yield drop that we did on our incremental loans from November of last year and we had guided that every year you will probably see a compression in yields by about 60 to 75 basis points because we did drop our incremental yields by about 200bps. So you have seen a 20 basis points drop. In the current quarter our yields stood at around 23.5%. But the positive aspect that we have seen is in one quarter we have been able to reduce our cost of funds by about 10 basis points thanks to the repo rate cut by RBI and our ability to negotiate better with lenders.
Our incremental debt has come in at 2.59% 70 basis points lower compared to the last quarter, which is a very significant drop to be achieved in one quarter. The cost to income has inched up a little. Has inched up quite a bit primarily because of the credit cost. If you strip the credit cost away from it, I think they are largely flat, probably a percentage point up because of the increments that we will give, the effect of which will be caught up over the next three quarters. But the credit cost has been on the higher side.
It has gone up from about 0.7% to 1.3%. So we are revising our guidance a little bit to be at around 1.2% for the full year. This has resulted in an ROE of 7.24% and an ROE of about 16.57%. But we should be able to pick up these numbers as we go forward, especially on the ROE with growth coming in and leverage going up. As I said on the liquidity side. On the funding side we have made very good progress during this quarter. So we have. While the quantum rate has been a little lesser given typical seasonality of first quarter, but the cost is extremely attractive.
And also during the quarter we have had our outlook on our rating increase from stable to positive both by India Ratings and Care ratings. So hopefully that shows the trajectory of the ratings to come in the next few quarters. Overall for the quarter we had clogged a profit after tax of 266 crores which is 6% growth on a year on year basis. But compared to the last quarter it was down by 5% primarily on credit cost. We also maintain a good level of provision coverage. So if you look at the overall provision coverage on the portfolio it has gone up from 1.63% to 1.94%.
And on stage three we continue to maintain more than 50% of provisions. This also has good amount of overlay that we have built on customers where we possibly saw some kind of an over leverage stress. People who moved stages in the same quarter moved multiple buckets in the same quarter. So the number that you are seeing has a good amount of overlay. As we go forward and our asset quality gets better, hopefully we will start seeing some release of these provisions or the necessity to build incremental provisions will be a lot lesser. Our network stood at a little over 6,500 crores.
So the task before us is cut out. We have taken necessary remedial measures and we are completely focusing on what to be done to ensure that five STAR gets back to its own standards. And that is something that will keep us busy for the next one to two quarters. Hopefully we will keep meeting you as we go forward with better numbers. So we will take a pause and happy to take the questions from any of you. Thank you.
Questions and Answers:
operator
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press STAR and one on their touch tone telephone. If you wish to remove yourself from the question queue you may press Star and two participants are requested to use answers while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Mehrukha from Nuama. Please go ahead.
Mahrukh Adajania
Yeah, hi, good morning. So I have a few questions. Firstly that you know collection efficiency for the quarter is at 96.3.
So what needs to change in the macro to take it higher? Right. Because this is kind of a lagged impact from leverage. So unless things change in the macro and these are secured loans, so people do want to, you know, not have their property sold off or not having to sell their property and yet they are default. So what needs to change in the macro and is there visibility good enough visibility that that will. Right. Because I think other banks and other lenders have also pointed out to incremental stress in a few segments. So that’s my first question.
And then one lender said on their call that they are seeing incremental stress on south based mortgages because they had acquired. So you said that and you know they had possibly acquired Fincare. So is it the same overlapping segment? Usually banks don’t operate in your segment but they did an acquisition. So asking so is this like stress in the south base moderate segment or how do we view it?
Lakshmipathy Deenadayalan,
Yeah. Thank you. I’ll go one by one. First from the collections question, what you asked. See from a macro perspective I believe two things which I feel these are the green shoots from a macro perspective. One is the micro finance lenders and personal loan lenders. They have taken up the credit growth more sensibly to add it. The guardrails which have been put in place is effectively working out is what I’m hearing from the market. So I believe no fresh over leverage is being created to any customers or any families going forward. That’s the first green shoot I see.
But having said that, what will happen to the already customer who sits on high over leverage? That is where the key difference comes between a secured lender and Unsecured lender. As I said in my opening remarks you see quite a bit of write downs happening from micro finance and personal loan lenders for last three quarters. If you see five stars we have not written down any number this quarter. But when a loan is getting written down, especially unsecured loan getting written down and the collection people stop approaching the customers, the secured lenders keep approaching the lenders.
Borrowers always. So earlier if there was two three lenders focusing on collections from the customers, today it will be only the secured lenders would be focusing the collections on the same customers. Good thing to remember is that our economy is doing well and we see the cash flow is not dropped at any of the middle and lower middle class people especially who is related to real estate segment carpenters, plumbers and all. So the cash flows are there. So now the customers will start paying the EMIs to the secured lender where I said Five Star will be one among them to see the collection getting uptick.
So to add to that now we have added more collections people at the ground level. To be more specific, in last quarter alone close to 200 collection officers have been put in place wherever we see pains both at the branch level and even at the state level. So this will argue well for our outlook saying that the improvement will come from next quarters onwards on the south based. Let me not mention any of the names that what you referred to from a five stars perspective. Yes we got hit in Karnataka but that was purely based on ordinance which was put in place from Jan and it got spurted out in the March, April, May due to the local politicians, police and financially illiterate customers.
But even in Karnataka I can give you the good numbers comparing it April to July you see 3 to 4% uptick in collections metric in this month. So that gives us the confidence. Slowly these ordinance are getting resolved and the registered lenders and secured lenders for five star will be in a very good position in coming months. Other than that we see some kind of strain or stress in Andhra to be little specific but leaving that Telangana and Tamil Nadu in a very very strong wicket.
Mahrukh Adajania
Got it. And just in terms of credit costs the second quarter they stay elevated but they’ll stay similar or there’s a possibility of higher credit costs.
Srikanth Gopalakrishnan
Maurav, the possibility of higher credit costs at this point is not existent. We don’t expect the credit cost number to go up in second quarter. It will either come down marginally or probably stay where it is and then start decreasing from the second half of the year. But we don’t envisage any increase in credit cost for the second quarter.
Mahrukh Adajania
Thank you so much.
Lakshmipathy Deenadayalan,
Thank you.
operator
Thank you. Our next question is from the line of Ranesh from icici. Please go ahead.
Renish Bhuva
Yeah. Hi sir. Thank you for the opportunity. Couple of things. So one is this right. So you highlighted about. You know we’ll be moving towards 5 to 10 lakh rupees ticket size and obviously we’ll continue to focus on 3 to 5 lakh. But just wanted to understand what kind of a mean yield impact do you see due to incrementally, you know, high business spending, high ticket. I don’t know whether this will be for let’s say short term or structurally. We’ll be moving towards that ticket size. And obviously that ticket size currently, you know is highly competitive with a lot of affordable housing guys are doing their product especially in south.
So where do you see NIM yield settling with this revised strategy on the ticket side?
Lakshmipathy Deenadayalan,
Yeah. See first of all 5 to 10 lakh segment is not new for Five Star. If you break up the Five Star portfolio close to 15% of our existing customers are 5 to 10 lakhs. In fact it is little more if you take above 10 lakhs also. So this is not the new segment that we are entering into. They are already participating in a good way. What we are trying to say is the less than 3 lakh segment will be slowly run down. And to that end to the extent the 5 to 10 lakh segment will be focused, suppose the 1 to 3 lakh segment is close to 30%.
As you speak, we are intending to bring IT down to 25% in this March. That 5% incremental growth will come from 5 to 10 lakhs. But let me be very clear. Our main focus will be between 3 to 5 lakhs. That’s our sweet spot. So we are not seeing any competition in pricing in 5 to 10 lakhs. Because as you mentioned the people are most interested in about 10 lakh segment. Even average of 10 lakh segment. So I don’t think there is much competition here. We are an existing player in the segment and we will see that slowly we are inching up close to 20, 25% of our portfolio in 5 to 10 lakh segment.
Srikanth Gopalakrishnan
I just want to add a couple of points. See one is when we are talking about 5 to 10 lakhs we’ll be more closer to 5 lakhs than to 10 lakhs. So it is not like a segment where we are going to tread on the Feet of the others. It is still a segment that is not not focus by many of the players. The second, our confidence also comes from the fact that we have dropped the rates by 200 basis points. So to that extent there is more competitiveness in five star today to reach out to this segment and meet their demands.
So we really don’t see the need for any significant drop in ease to cater to the segment which will have an impact on nims. So I think with our current ease we should be able to improve this 5 to 10 lakhs. So you will not see any kind of a NIM impact.
Renish Bhuva
Got it? Got it. But if you can share a yield difference between these two, ticket size would be helpful.
Srikanth Gopalakrishnan
So Ramesh, today it is not on the basis of ticket size, it is on the basis of, you know, whether the customer has a higher credit score, whether the customer is taking the loan for business purpose which will make him qualify as a priority sector asset for a bank lending. So for that purpose we give a 1% or a 2% subsidy. Now our belief is people who are taking a higher ticket loan will be a lot more prone towards that. They may have little more registration, they may be more easier to onboard for UDM assist registration.
So inherently they will get a little better rate compared to let’s say a sub 3 lakh customer.
Renish Bhuva
Yeah, I mean that’s what the whole point is, right? As we move to risk based pricing naturally the inherent risk of this customer profile will be better than let’s say sub 1 to 3 like or 1 to 5 like it size. So bre will actually capture this, you know, risk chain and hence there will be impact of yield. But I understand and as you rightly said, as of now it is not on the ticket size and we might be offset this with the cost of borrowing benefit. Is that the fair assumption?
Srikanth Gopalakrishnan
Yes Srinish. The second is for now like Mr. Pati said, we are probably planning to push this by maybe another 5% and even if the yield differential is 1% between a priority sector and a non priority sector customer, you are not going to see that affecting the portfolio significantly. Maybe 5, 10 basis points of revenue, comfortably able to address it through the cost of inspection.
Renish Bhuva
Got it, Got it. Thank you sir. And just the last thing on this, you know, spiking practical cpd. So if you can just take us through the flow forwards, you know from a 30 to 90 plus in a normalized scenario and how do you see this flow rates behaving in current cycle in your next three to six months.
Srikanth Gopalakrishnan
That is generally the flow rates from 30 to 60, 30 to 90 plus. 30 plus to 90 plus is largely arrested. So you will probably see about, you know, historically I’m not taking the last quarter because last quarter has been a bit of an aberration. But if you generally look at it, you will probably see about 90, 95%, 90% plus stabilizing in the 31 to 60 day bucket and whatever flows in out of the 61 to 90 day bucket we see a D1C1 of somewhere between 90 to 95%. So you are probably looking at maybe 5 to 10% of nodes that will probably from a 30 plus to 90 plus.
Historically that flow rate has seen a little bit of an impact in the last quarter or maybe the last couple of quarters. But we are confident that we will be able to arrest the flows as we go forward and bring our flow rates back to historical levels.
Renish Bhuva
Got it.
Lakshmipathy Deenadayalan,
And Ranesh, to add a point here. Yes we were talking about the flows. If you see 5 stars recovery from 90 plus, it’s gone up very well. You all know that we have set up a legal recovery team. Today it is more than 100 people under advocates on roles. If you, if you, if I, if I can share the numbers. In last financial year on an average of 12 to 14 crores were recovered from NPAs. I’m talking about 90 plus accounts, 90 plus BPD accounts and written down accounts. So this year from June, From June, September, December, March, you will see that moving close to 18 to 20 crores of recover every quarter.
So you will see close to 70 to 80 crores of NPAs getting recovered. Also add even that even though there is some flow from 5% or 8% flow from 30 plus buckets to 90 plus.
Renish Bhuva
Got it. So just a last thing from a Californian side. So we have been talking about setting up or strengthening our collection team in send. So where do we stand on that front?
Rangarajan Krishnan
This is Ranga here. I just wanted to state that the collection team strengthening is clearly happening today. What we are doing is we are looking at specific pockets where there is higher collection stress which is you know the pocket of both Karnataka and in Andhra Pradesh. In both this Mr. Patty has just spelled out that we have added almost 200 collection officer. So this is more on PIN codes and branches where we are seeing more collection stretch. I think that support is being given today. Overall we have close to 2,000 collection offices. So that’s a large enough vertical for us to, for us to relook at.
In terms of where you wanted to put collection strength, I think it’s largely stable today, if at all, we see any emerging stress, pockets, specific pockets or branches, we will continue to keep adding those but otherwise largely the structure is in place.
Renish Bhuva
Got it. So this 2000 offices are only for collection. I mean there is no target for them .
Rangarajan Krishnan
Nothing. These are exclusive collection people. Today we also had a split between they handle what kind of accounts. The collection team today handles all the PPD accounts. So they only handle the arrear accounts. So there is more focus, specialized focus given by the collection team while the business team handles all the collection, I mean current accounts only. So for the difficulties that we have, this 2000 is more than adequate and they have an appropriate supervisory structure above them to be monitored. I think this entire structure was both from a division of accounts and in terms of adequacy of offices.
This got fine tuned over the last three, four months. Today we are more or less adequate. I think we should take care of. We are not seeing any new stress emerging anywhere. So wherever we saw stress, this collection team is already put in place. Hopefully this should suffice and see us through over the next couple of months.
Renish Bhuva
Got it. This is very helpful, sir. Thank you and best of luck. Thank you.
operator
Thank you. Our next question is from the line of Nishin Sawate from Kotak. Please go ahead.
Nischint Chawathe
Hi. Thanks for taking my question. You know, Karnataka is just around 6% of the business. So if you could spell out, you know, in terms of how much of the incremental stress during the quarter came from Karnataka, was it, was it anything meaningful?
Srikanth Gopalakrishnan
The NPA emissions in Karnataka did go up. There was an increase in the NPA number. But the point is, given that Karnataka is only about 5 to 6% of our portfolio, it’s not a very significant number. So the incremental addition to the NPA should have been more like 15, 20 crores from Karnataka because the proportion of portfolio is much lower there. We also saw some bit of an impact on the Andhra Pradesh portfolio, especially on the smaller ticket sizes where we did see some bit of an impact on the NBA number. And given that that’s a much larger portfolio, it’s a combination of two.
But I would say in absolute quantum, Andhra Pradesh costs a little more stress given its sizable proportion rather than a third account.
Nischint Chawathe
We had done a scrub, I think a couple of quarters back where we did highlight that the overlap with microfinance customers was not very large and the exposure to stressed customers again over there or over leveraged microfinance customers was in single digits. So I was just curious what has really changed? Have people taken loans since then or the same kind of borrowers have defaulted or do you see the borrower set who’s kind of under stress been completely different this time around.
Srikanth Gopalakrishnan
Nishan, one thing that came and we did last in December and we have actually done a scrub now. What we have seen is the overlap has actually gone up not just with micro finance but even at the overall level. What used to be about close to 15% for us in December has actually crossed 20% levels. I think we are somewhere between 25% of overleveraged customers on the book. Consequently, microfinance has also gone up. So what used to be about 30 odd percent of microfinance in some states it has gone up much higher. In some states it has gone up.
I think what we have also seen is especially in states like Andhra and Telangana where for almost one and a half decades microfinance were not there. We did see the entry of micro finance back maybe in the last year or so in and there has been a little more possibly higher quantum lending by microfinance in those states which has caused some stress in those pockets as well. But from a behavior of the over leveraged customers, we are not seeing too much of stress in the higher ticket segments like three plus flag segments. We are not seeing the over leveraged customers either defaulting with other institutions also and definitely not defaulting much with us where we are seeing the stresses in the lower ticket customers and more so in the over leveraged segment within.
Over leveraged customers within that segment.
Nischint Chawathe
Sure. And just if you could share some thoughts in terms of, you know, how the, you know, how kind of things move forward after Ranga’s exit. Obviously it’s played a very meaningful role and I think as a team you have done very well. So you know, how do you kind of plan to plug that and how do you kind of, you know, arrest any further exit of employees?
Lakshmipathy Deenadayalan,
I can, I can assure you there is no further exit of management team or employees will happen because of Ranga’s exit. Because as I said he has been with me for last 10 years and purely to take up the entrepreneur activity which I said in the opening remarks. He was discussing with me for last some time. So I thought this time I should really encourage that. So I encouraged it and at the appropriate time we spoke to the board and so we are bringing it in the June quarter. Having said that, Ranga reports to me.
So I am always the operational guy. In last 22 years of my work in 5 star. So it is one more added few states to me. But at business and collections I can name there are three strong management people. Vishnu Ram who is the coo and Satya who is the CEO. And Murli who is the head of business is already there in the system. So along with them I’ll be the fourth person to take care of business and collection alone. So with this strength you can see that there’s no nothing gets affected and business will be as usual for five star.
And as I said, other departments like Credit it. You can see from our management team there are already chiefs and deputies there. So we don’t see any issues because of this exit.
Nischint Chawathe
Got it. And just on the incremental cost of funds going back to Srikant. Do you think this 8.6, I mean it’s a very sudden drop. Do you think it is kind of a function of the mix? Is it sustainable or where do you see this going?
Srikanth Gopalakrishnan
So the thought Nishant is that will it stay at 860? We don’t think so. Because we have borrowed little lesser this quarter and we have only taken from banks. Having said that, we would want to continue the diversification and not lose the benefits that we derived in the last year when we go there. I think the cost would be a little higher. But our guess is I think it is definitely not going to go beyond the level. So 860 may be more like an 875 level for the full year. But I think we should be able to manage at 875 for the full year.
At this point I don’t really see why it should cross 875 on the incremental border.
Nischint Chawathe
Got it. Got it. And best wishes to Ranga for his future endeavors.
Rangarajan Krishnan
Thank you.
operator
Thank you. Our next question is from the line of Parag Zariwala from White Oak. Please go ahead.
Parag Jariwala
Yeah, thanks. One question is if you can just. Elaborate that in 1Q, let’s say April, how helping the connection and taken place if you can. Just to know that whether you know, the pain was moving in the period. Of FM or it was more in the month of June. That is one question. Secondly, you know, one. One question is that how are you approaching the performance currently? I mean, are you started now proper recovery in the sense that giving notices. And possessing the property or are you. Still willing to give one or two. Informant time and then you know, proceed with the harsh recovery, if you may call it. These are my two questions.
Lakshmipathy Deenadayalan,
Yeah, yeah. Paragraph. Let me go one by one. I think first from the Performance of last quarter, April, May and June, more or less all the three months were reacting a little lower comparing to our standards of collection. So there’s no much difference between April was good or June was good. All three months was not good as per our standards. But July onwards, since I shared my numbers, I mean my performance with you July looks really impressive. If this impressiveness continues in August and September, you will see much stronger stabilization in the Q2 and that will also cede us to better collections in Q3 and Q4.
As I stated earlier on the second point, DPD’s focus, when Ranga answered a question, we were very clear that now the accounts, both current customers who have no DPD and the customers who have DPD is being segregated and the customers who have no DPDs is being handled by the business team. So they are much softer customers, much easier to handle and mostly they will get the EMI’s clear by themselves. So that leads to only DPD customers. The entire DPD customers, or what we call harrier customers are handled by the entire collection team. The 2000 officers and more officers to join in this quarter along with the supervisee layer.
Now they are starting to focus only on the DPD customers from April onwards. So we have seen a good improvement in this quarter beginning onwards. So that’s where we have changed our approach. The team that was handling both the current and earlier was now being split. The current is now handled by business team who are sourcing the files and the entire areas has been handled by the collection specialist who will focus and follow up with the customers more so that your EMIs are recovered on time.
Parag Jariwala
Okay. Thank you.
operator
Thank you. Our next question is from the line of Mikas Mistri from Moonshot Ventures. Please go ahead.
Vikas Mistry
Yeah, thanks for the opportunity. Just harping on the same point of collection efficiency. Can you quantitatively define that what has been the collection efficiency in August?
Lakshmipathy Deenadayalan,
Can you come back?
Vikas Mistry
Yeah, just on collection efficiencies as you say that we scrubbed data in December. Again the overlap is higher and we continue to see collection efficiency dipping. But you what gives you so much confidence that we will not be having higher credit cost? And can you give me quantitative figures on August collection efficiency numbers?
Srikanth Gopalakrishnan
So there are three more days to go and you will have some good amount of connection efficiencies coming in the last three days. So at this point like Mr. Patil said, compared to the first month of last quarter, we are better off. But I don’t think we’ll be able to give any specific numbers at this point. After the month end we can see if we can give some information to the entire public. Let’s see. I don’t know how generally we don’t have a practice of publishing information to specific on a month end basis or on the performance of the month.
But let’s see if we can do something. But what we are seeing is the trend is definitely improving compared to the first month of last quarter. It’s looking better.
Vikas Mistry
Yeah, thanks. On this disclosure, if you could able to give. And second, is that on overleverage. So how can quantitatively define how much tightening of new loan generation we have done? Let’s suppose earlier we were giving loans to the customers which are having maybe two loans. And what is the condition right now to address this over leverage crisis? Not happen in future.
Srikanth Gopalakrishnan
Prior to the sanction of loan, we always had a very stringent underwriting mechanism. As we discussed, we take all the obligations of the customer and after knocking the obligations from the incomes, we only go for a 50% debt burden ratio. So our underwriting was quite stringent. The problem is once you have given the loan, there is no way that you can protect the customer or stop the customer from not overleveraging himself. And given the profile of our customers who are not very financially literate or savvy, when liquidity is available, they will go and over leverage themselves.
So that was the problem that we saw, which is where in his opening remarks, Mr. Patty addressed this. Today we are moving away from this profile of customers. We are getting to a little more higher quality profile of customers whose financial understanding is a lot better and who will not over leverage themselves for frivolous reasons even when liquidity is available. So the question is not about how many lenders have given to them before we sanction the loan. That was always under our watch. The problem was how many lenders gave money to that particular customer after they have sanctioned the loan.
Moving to a different profile of customers, we believe that that will get addressed. And obviously the guardians that Micro Finance have put in should also ensure that the over leverage problem does not drop up again.
Vikas Mistry
Totally.
Rangarajan Krishnan
One point to add here because if you can look at the number of. Offices that we have and the number. Of branches that we have, both have significantly gone up. But despite that, if you look at the disbursements, it’s more or less flat. That only shows you that even though the, you know, the sourcing is volume is high, we have that much more choosing in terms of whom to give and whom not to give at this point of time, which Means the rejections in credit level has gone up. So it’s a tightening right at the sourcing level in terms of at least potential customers who we think might get over leverage in the future. Those are trying to get arrested right at the sourcing stage.
Vikas Mistry
Yeah, that’s the mistake. Okay, fine. That’s all for myself.
operator
Thank you. Our next question is from the line of Subhanu Bangal from Three Head Capital. Please go ahead.
Subhanu Bangal
Hello.
operator
Yes sir, you’re audible. Please go ahead.
Subhanu Bangal
Yeah. My question on cost income this quarter. Cost income is almost significantly gone up. What is your guidance going for? Up.
Srikanth Gopalakrishnan
So like we said, the cost of income has gone up primarily because of credit costs going up.
Subhanu Bangal
Yes.
Srikanth Gopalakrishnan
So if you break up the 41%, I think it’s broadly 33% cost to income and about 8% of credit cost to income. So that 33% will be largely range bound. We should probably see somewhere around 30 to 32% of cost coming in because this quarter also has the increment impact. Right. We have not seen incomes fully coming in but the cost starts hitting from day one. The credit cost should also normalize because we have taken a good amount of provisions. So our belief the cost to income should stay somewhere around 35 to 37% at least for this year.
Subhanu Bangal
From H2.
Srikanth Gopalakrishnan
From H2. That’s right.
Subhanu Bangal
Yeah. My second question on AP, what is. Yes, AP collection efficiency is input from the June quarter. In July.
Srikanth Gopalakrishnan
for July.
Subhanu Bangal
Yeah. Yes.
Srikanth Gopalakrishnan
Shubanu, like I said, July is still not over. We still have three more days to go and there are quite a good amount of corrections that generally happen in the last three days. So at this point even AP is looking better compared to April which is the first month of last quarter. We don’t have. We will probably be able to give you the final data only after the month end is over.
Subhanu Bangal
Thank you.
operator
Thank you. Our next question is from the line of Karthik Srinivas from Unifi Mutual Fund. Please go ahead.
Karthik Srinivas
Hello. Hi. Thanks for the opportunity. I just had two questions. One on the attrition rate at the. Loan officer level, what would be the ballpark attrition date at the loan officer level and the borrower count per loan officer, has it gone up or down. After we have seen some amount of stress building up. So that’s question number one. And question number two, just taking few on the remarks that you have had on underwriting practices. I just had. See we submit. How often do we submit the loan details to civil authorities, civil or transient, so that the problem of over tumor. Is arrested. At the household level. So how often do we submit the data to them?
Srikanth Gopalakrishnan
Karthik, on your first question, we have not seen any significant spurt in attritions over the last, let’s say 3, 4/4. It is slightly on the higher side, as we have said, especially if you look at the officer level, the business and connections, this number on a quarterly basis is anywhere around 17 to 18%. Which means you’re talking about 65 to 70% of attritions happening at the offices. On an annualized basis, that number has remained the same. You will probably see half a percent move this way, that way. Most of these comes from people who have stayed with us less than one year.
So if the officers continue for more than one year, the attrition is significantly lower there. It may even drop to as low as about 20, 25%. So nothing very peculiar to what has happened in this quarter is reflecting in attrition. On your second question, today we submit data to the Bureau on a fortnightly basis, which is something that we are mandated to do. And we always are very high on compliance. So we submit the data to the bureaus on a fortnightly basis.
Karthik Srinivas
Because since MFI companies that we often. Speak to, submit order or must. So how do we ensure that at the time of or during the course of the loan, the indebtedness at the. Household level is monitored? So do we take any extra steps? I understand that once we loan it to them, we can’t do much about. It, but do we have, have we. Put in additional guardrails as to how we manage the independence at the household level on an ongoing basis? Maybe in our collection efforts?
Srikanth Gopalakrishnan
No, there is a regulatory necessity for even MFIs to submit data on a fortnightly basis. So this has come in if I remember right, maybe in the last about six months or so. So today every institution has to submit data to the Bureau on a fortnightly basis. So it is not the earlier practice of where people submit on a monthly basis. So at best you are probably taking a risk for 15 days and not beyond that.
Karthik Srinivas
Okay. Thanks.
operator
Thank you. Our next question is from the line of Raghav from Ambit Capital. Please go ahead.
Raghav Garg
Good morning. And I have three questions. So one is just a clarification question that the Fed cost guidance of 1.3%. That’s on total assets, right? Not on gross loans. Gross loans, it would be more like 1.6, 1.7.
Srikanth Gopalakrishnan
Our ratios are on total assets. Average total assets.
Raghav Garg
Understood. Secondly, see, how are you thinking about recovery because in this quarter you haven’t written off any loans like you mentioned and I look at the trend for last couple of quarters there have been some write offs and also in one of the previous calls I think you had mentioned that there was some pressure on customer cash flows. If I remember it correctly today you seem to sound a lot more positive on that aspect. So is there a customer incomes are getting better and will get better and that will help in retailers.
Lakshmipathy Deenadayalan,
Raghav, let me answer this question. I think the customers cash flows are not bettered but it is staying on where it is. My answer was always there was no dent in the cash flows. Is the cash flows are getting better? No, I’m not told that the cash flows are getting better. There’s no dent in the cash flows. The bigger problems is not on the cash flows. The bigger problems is the over leverage in the EMI capability of that family or that person is caused the confusion in the minds of the customers whom to pay, whom not to pay.
So that is where you saw all secured, all unsecured MFI getting disturbed 3 4/4 before and the pain still continues. I just saw 45 days back MFI’s results 1 gold standard MFI results which still shows 8.8% of credit cost even in the month of June. So that clearly shows the pain points in MFI still continues. So now the customers will realize and has to realize that he has to pay it promptly to the secured lenders. So now the time has come for him to differentiate between the unsecured and secured lenders which he was clubbing for last few months since the collection efforts for the unsecured guys will come down substantially because you all know that if one EMI is gone the loan has gone for unsecured.
So our collections efforts will continue even if in a DPD bucket. So that is the confidence which is showing up in July and showing up in my commentary that coming months our collections will be better than last quarter.
Raghav Garg
That I understand this is that the customer cash flows are where they were but there is also a higher percentage of say over leveraged customers or overlap with mfi. But you think that that will not result in incremental stress in the coming quarters. That at best or worst case the stress will stay at this level and probably come down in the second half. Is that how you.
Lakshmipathy Deenadayalan,
Yes Raghav.
Raghav Garg
Okay.
Lakshmipathy Deenadayalan,
Yes Raghav, that is our belief. That is what I said. What is happening in July month and what is happening from the data is what I see there is a substantial write off from these lenders. That means the customer’s technical over leverage is slowly coming down. So yens is liability to repay will only lie with the secured lenders. So 5 star being a secured lender will be first to get that EMI in a normal method what we used to get before this over leverage crisis step bent. That is our hope.
Raghav Garg
That’s very clear. Last question. When I look at the mix for this quarter say as percentage of lag maybe the disbursements which would have happened in first quarter of FY20 that number is at 7% and it has shot up versus what the recent trend was. My only question is how should one think about NPAs and a static pool of loans in a business like yours?
Srikanth Gopalakrishnan
I think this is probably not the representative quarter that you should be considering because obviously the slippages have been on the higher side. But we are very clearly guiding you that we should be able to control the slippages as we go forward. But I think on this let me better understand your data. We can connect offline. I will better understand your data and give you some sense on what kind of slippages you should probably be assuming.
Raghav Garg
Understood, that’s very clear and thanks a lot.
Lakshmipathy Deenadayalan,
Thank you.
operator
Thank you. Our next question is from the line of Girish Shetty from G Capital. Please go ahead.
Girish Shetty
Hi sir, just two questions from my side. Once you mentioned that you had a discussion with Mr. Vra as well on the on his exit since few months. So any succession plan that you time. In that time, anything you have in. Mind internal or external for the senior position. And the second question is just want to understand your model. So if I look at your loan book like when it was at 3000, 4000 cr kind of a level you had a similar number of employees like 3,000, 4,000. Now at 11,000 you have 11,000 employees obviously because you do a of lot of focus on collection. So just wanted to understand when your a reaches like a 25, 40, 50,000 kind of a level, would you be needing the same number of employees? So just wanted to understand the scalability part of the business.
Yeah, those are the two questions.
Lakshmipathy Deenadayalan,
Yeah, yeah. I’ll go one by one from the first part on Ranga. Clearly now the focus for me and the management team will be getting back the business collection and quality for our five star standards as quick as possible. So that is our first intent and that is where our entire focus is going to be. As I said in earlier question, the depth of management team in each department, especially business and collection department as I said along with me there are three management people who are heading at chief and head levels will be functioning with me for to ensure that growth collections are back on track.
That is the first and the top priority that I have taken now. Yes, the succession will be has been discussed in yesterday’s board and we will take it to the board at appropriate level, appropriate time. But I can surely tell you that next nine months the focus in my mind will be only on the operational side, not on the succession side. But maybe at the end of March I can give you a more clarity on the need and appropriate time that what Five Star needs for a CEO role. So till that point, I’ll be the complete in charge of operations.
That is what both intend to do and that is what I’m intending to do. On the second question, yes, you’re right. For some years, as the growth momentum was Kicking in for Five Star, the average employee to AUM was around 1 crore. But our historical numbers goes up to 1.2425 crores per employee. That is what we have been saying always at a steady level, maybe 30,000, 50,000 crores. You will not see the same 1 crore per employee. Maybe you will be seeing 1.25 crores per employee. And that also argues well when we are moving up the ticket size.
Girish Shetty
Okay. Okay. Thank you. Thank you, sir.
Lakshmipathy Deenadayalan,
Thank you.
operator
Thank you. Our next question is from the line of Pranav Gupta from Iones Alpha Investment Managers. Please go ahead.
Pranav Gupta
Hello.
operator
Hello, sir, you’re audible. Please go ahead.
Pranav Gupta
Good morning and thanks for the opportunity.
operator
Sir, sorry to interrupt. Your voice is a bit low.
Pranav Gupta
Can you please just give me a second?
operator
Yes, sir, sure.
Pranav Gupta
Is this better now?
operator
Yes.
Lakshmipathy Deenadayalan,
Yeah, .
Pranav Gupta
Yeah. Hi and good morning and thanks for the opportunity. So the first question is on your DPD movement and the trends that we’ve seen this quarter. You know, based on the collections that we’ve seen in July, how do you think about the D1 C1 collection efficiency and you know, flow power from zero DPD has that stabilized? We probably see another couple of quarters of further, you know, downward movement before it stabilizes. How should one think of that?
Lakshmipathy Deenadayalan,
Yes. Now I think for a. For this quarter you will see much stabilization coming into the picture. You will not see much of improvements in BPDs. But as we step into second half December and March quarter, the growth kicks in. Growth also brings in good amount of current customers to the current bucket denominator effect. And you see the collection efficiency and D1C1 are going up in December and March quarter. You will See the improvements coming from December and March this quarter. As I said in my earlier opening remarks, you will see a much stronger stabilization at the quarter end.
Pranav Gupta
Right, right. And just to follow up on this, you mentioned one could see much higher recoveries coming in from the NPA bucket. Is it safe to also assume that given, given that we’ve put in a lot more people in collections on the DPD buckets, you see pullbacks coming in from this quarter or maybe that is something that we sort of start expecting from next quarter onwards.
Lakshmipathy Deenadayalan,
See pullbacks. Currently we are not committing anything on pullbacks. Currently what we are committing is a stabilization of customers in the respective buckets. I think that is the first and foremost effort that we will put in. Of course there will be few customers who will be coming back to the better buckets. What I mentioned earlier on that good amount of recovery coming in, I was mentioning about legal recovery. That is you recover your money from the deep delinquent customers, 90 plus customers and written down customers that will see close to 70 to 80 crores getting recovered in this financial year is what I mentioned.
Pranav Gupta
No, absolutely, that’s very clear. The second question is on the OPEX bit. Obviously this quarter we saw the cost ratios inch up a little bit purely because of business being slightly on the slower side. But over a two, three year perspective, how should one think about, you know, cost to average AUM or cost to average assets incrementally?
Srikanth Gopalakrishnan
You’re talking about OPEX or credit cost?
Pranav Gupta
OpEx. OpEx, we saw that inch up a little bit purely because of slower disbursements. But on a more medium term basis, how should one think about cost to average assets?
Srikanth Gopalakrishnan
We are not changing our guidance on any of that. The only guidance we are changing is on credit cost to average assets which we used to talk about closer to 100 basis points. 75 to 100. That number we are pushing it to 1.2%. Other than that, the guidance that we gave on the OPEX, which will probably be about 5% at 5% levels, continues to hold. Good. No, no changes to our guidance on that.
Pranav Gupta
Sure, sir. Thank you so much for taking my questions and good luck for the future quarters.
Lakshmipathy Deenadayalan,
Thank you.
operator
Thank you. Our next question is from the line of Shirinjana Mittal from Ms. Capital. Please go ahead.
Shrinjana Mittal
Hi, thank you for the opportunity. Just one question. Internally we track an asset quality metric called account. So is it possible for you to share like what was that number for this quarter? This is same quarter last year, in last quarter.
Srikanth Gopalakrishnan
Now are you talking about big mortality yeah,
Shrinjana Mittal
Quick mortality. Yeah.
Srikanth Gopalakrishnan
See that number will be very small yet. See the number has gone up. So in percentage terms that number will be extremely low. But in terms of the number of accounts, yes, there has been an inch up. What used to be maybe 75 to 100 accounts has actually gone closer to 150, 160 accounts for this quarter. So this is basically whatever has turned NPI during this quarter and disbursed in the last 12 months. So that number has inched up a little bit. But I think in percentage terms if you look at will not be very, very meaningful.
Shrinjana Mittal
Yeah, got it. And this choices coming from the same set of customers which we earlier spoke about.
Srikanth Gopalakrishnan
Yes.
Shrinjana Mittal
Yeah.
operator
Okay, thanks. Thank you. Our next question is from the line of Rakesh Kumar from Valentis Advisors. Please go ahead.
Rakesh Kumar
Yeah, hi. Thanks sir. So sir, just on the over leveraging parts like you know, as a preemptive measure, like how soon do we get the, you know, understanding that the borrower whom we have lent is now over leveraged because as you said that you know, you get the civil filing is happening on a 15 days time. How soon do we get that information that the borrower is over leveraged Now.
Srikanth Gopalakrishnan
Rakesh, we can get it whenever we want because the credit bureaus today have a scrub that they can give us anytime we want. But generally doing this it has its cost implications also. So we do it at best once in quarter but there are times when we probably do it once in half a year. But in a, in a time when we are facing some level of stress, I think we can get to know of this within the next quarter.
Rakesh Kumar
Yeah, so I don’t know like you will as a practitioner you will know better that you know, should be increase the frequency of the same or not subject to the cost involvement issue. And secondly, after having known that, you know, like, you know, how soon we can, you know, wind up our positions or maybe increase the security level of the assets from the borrower.
Rangarajan Krishnan
Rakesh, that’s not possible because you know, you have given out a loan based on a specific collateral. So if the borrower happens to over leverage, especially post the loan that you have given, there are only two things that we can do.
One, I think we can try to get to know that information as soon as possible possible. Two second, we can, you know, have a close monitoring of that account and increase our collection efforts but we cannot recall the loan or we cannot increase the security cover that we have because the borrower is not giving you an additional collateral to make you more Comfortable. So that’s not a practical option. But the practical option is more how do you avoid such customers in future and how do you increase the monitoring level for this customer who has gone a little bit over levered?
Rakesh Kumar
Okay, sure. Thank you.
operator
Thank you. Our next question is from the line of Divyansh Gupta from Latent pms. Please go ahead.
Divyansh Gupta
Hi, am I audible?
operator
Yes sir, you’re audible.
Divyansh Gupta
So the first question was that see the MFI stress that was going on was something as a known factor. And we know that typically people will default on the unsecured first and then finally they will stop paying the secured loans, right? So the question is that was this, this quarter number was much worse than what we had anticipated because we would have seen all these cycles in the past, right? So we just wanted to get a sense key was it a bigger surprise than what we would have estimated? And how should we understand that how much pain is more or less? Because people are saying at least on a recognition basis it is at least Q2 should also be affected by at least for MFI players.
Lakshmipathy Deenadayalan,
So you are right that this came in bit surprise. Otherwise I would have guided in March quarter itself that this is coming up. If you see December to March our credit cost as our NPAs were only gone up 10, 15 bits which is normal, right? Only in this quarter you see the NPAs shooting up. So this was little bit of surprise to us. But when we did a study in April, May and June and found out the cause of the pain, that’s what I started my commentary saying that what is the cause of this pain, where this pain is coming from and based on that what are the remedies that pistar is taken from June, July month onwards.
So it was a surprise for us, a bit of surprise but also I’m confident because finally MFIN guardrails are put in place, personal loans and fintechs are wiped out. So this gives a confidence that no more over leverage will be created for a time being period at least to the customers of five Star. And we are also moving away from the low segment financially illiterate people. So this will all put a clear fencing that going forward our asset quality will be much better. So yes, it was a surprise, bit of surprise in the June quarter.
Divyansh Gupta
Got it. And the second question associated with let’s say the asset quality only is that X of Karnataka and Andhra Pradesh is the asset quality. Can you just provide a sense on the asset quality except Karnataka and AP and the associated question is that Karnataka I understand there was the whole Ordinance issue which caused confusion. Any reason why AP specifically has escalated with respect to asset quality?
Lakshmipathy Deenadayalan,
Yeah, I think that Srikanth get that data if he has right now. So till that I will explain about that Karnataka and Karnataka as you rightly say it’s the ordinance impact which started in Jan and which is which is slowly coming down. As we see this month we are quite 2 3% better than where we are in April month collections. So slowly I think Karnataka is bouncing back in collections. First business we are not looking to grow in Karnataka at least for next two or three months we will see how the collections trend is stabilizing there.
Based on that our business call will be taken in that state. In Andhra there is no ordinance that took place but the below 3 lakh segment was much larger there. So. And we were gone to some riskier localities, colonies and minority communities where people got confused and got impacted due to unsecured lenders not paying to unsecured lenders. So they’re showing a similar trend to a secured lenders. Hopefully this month people will realize and come back on paying their EMIs bit regularly. That is our hope. So that is where there was a stress in Andhra in last quarter.
Divyansh Gupta
Got it. And does that then mean that on an ongoing basis for future we are going to avoid these. Let’s say high risk. One question please.
Lakshmipathy Deenadayalan,
Yes, I said in the opening remarks itself we’ll be avoiding 1 to 3 lakh segment where the risk is higher at current period of time. I will not say always but at current period of time the 1 to 3 lakhs segment is is avoidable by 5 star. And we are moving that whatever dip you see in that segment will be added in 5 to 10 lakh segment.
Divyansh Gupta
Got it. And on the civil check do we do while we do we will do civil check for the people that were getting in with whom we are getting in the loan agreement with. We also do a civil check of all the family members. Is a fair assumption.
Lakshmipathy Deenadayalan,
Of course as 5 stars business model always we see we say that we lend to a family rather than to an individual. If you see five stars each agreement you will at least see three to four co applicants along with the applicant. So the entire earning family members will be taken into agreement. And for the entire people the Cibil high mark credit bureaus checks will be done.
Divyansh Gupta
Understood. And just the last question. While I’m assuming the data is getting accumulate out process is it fair to assume that given let’s say the situation of NPAs and let’s say the leadership transition Housing launches delayed or are we still looking to launch something in housing within this year?
Lakshmipathy Deenadayalan,
Nothing is getting delayed here. The planning is quite active. So let me give you some input in the next earnings call.
Divyansh Gupta
Sure.
Srikanth Gopalakrishnan
Divyash on the data. If you ask Tamil Nadu and Telangana, like I think I mentioned earlier itself, they are doing much better than the company average. Tamil Nadu’s NPA is sub 1.5% and Telangana’s NPA is at about a little over 2%. So both of these are below the, below the numbers for the company. Rest of the country is slightly worse but not unduly worried there because the proportion is small and there have been some legacy issues because of its NPA is looking a little higher. But the two big states of Tamil Nadu and Telangana are performing very well.
Divyansh Gupta
Got it. Understood. Thank you.
operator
Thank you. Our next question is from the line of Darshan Deora from Invest Group. Please go ahead.
Darshan Deora
Yeah, thank you for the opportunity. So my first question was, you know, on the LGD or the loss given default. So given the loan book is 100% secured and that too mostly with SORP, what is the company’s actual experience in terms of the loss given default?
Srikanth Gopalakrishnan
In season portfolios we typically see a loss given default of anywhere around 15 to 20%. But this is also not on account of the principle that the company loses because the loss given default computations also assumes the time value which means the accrued interest will also need to be taken into account. So primarily we lose money only on the interest component. But if you look at, I think this is the data that we used to give till about 4 quarters back on loans which were NPAs at the time of settlement, not ever NPAs, that number will even be a lot better.
But at the time of settlement also if a loan is an NPA on an average we recover somewhere around 18 to 20% of IRR on those loans. So the company has not really lost principal on any of its assets. But some bit of IRR compromise is what we end up doing.
Darshan Deora
So just to understand, if I were to look at like say the, you know, the operating history of the company or the history of the company since, since it began, the actual principal write off would be negligible.
Srikanth Gopalakrishnan
Negligible. So generally we guide for, you know, a credit loss of anywhere around 25 to 50 basis points. But that is, that is all it is.
Darshan Deora
Got it, Got it. And you know, just to understand this, you know, this distinction that you have made, you know, in terms of the officers where now the officers who are looking after origination are only looking at dpd, sorry at regular collection. And you have sort of this separate team of 2,000 people who are handling the DPD cases. This, the existing team has been segregated into these two separate teams or these 2,000 people have been taken, you know, hired. The scheme has been built up laterally by hiring people laterally from the market.
Rangarajan Krishnan
So that’s. Of this 2000, we already had a team of close to 1500,000, 600 over the last few quarters. We were only acting at the rest of it. That’s, you know, part of the ongoing efforts in terms of giving specific support on whether we see the stress pockets. But I think what is new is not the. It’s more than, you know, it’s not about the team but it’s about the segregation between the team which have happened over the last one quarter. So earlier what used to happen is we used to divide the segregation of accounts between the two teams more by vintage.
The business team used to handle accounts of less than 24 months and the collection team used to handle accounts of greater than 24 months irrespective of the buckets. But what we have put forth now is the business team will handle current accounts, current buckets and the collection fees will land in DPD bucket. So that’s the split which has happened over the last about a quarter or so. More to give emphasis on the fact that DPD customers require special efforts and special attention to ensure that they are not going forward flows and sort of arresting and getting them back on track.
Darshan Deora
Got it. Got it. By the time of going ipo, the officer was in charge of. The same officer was in charge of origination and collection. So there has been that sort of tweaking of the business model over the last four quarters.
Rangarajan Krishnan
Yeah. Correct.
Darshan Deora
Got it. Got it. Thanks. Thanks. And good luck Ranga, with your future initiatives. Thank you. Thank you. Best of luck to the team.
operator
Thank you. Our next question is from the line of Aditya Das, an individual investor. Please go ahead.
Aditya Das
Hello.
operator
Yes sir.
Aditya Das
Am I audible?
operator
Please go ahead. Yes. Audible please go ahead. Yes.
Aditya Das
So I had a longer term, bigger sister question. So I understand, you know, one or two quarters we may have increased in sandwich costs because of the issues in Katan. But over the longer term, three, five years from now, I just wanted to understand how do you see the business? What is structurally the roas or nims and roes that we expect out of this business and like what is the sustainable credit cost that we can expect on a longer term basis?
Srikanth Gopalakrishnan
Hi Aditya. So I Think, you know, whatever guidance is that we have given to you in the past and Mr. Patriarchy alluded to, this also is for the medium term. So for now, I think given the situation that we are in, it’s a little difficult for us to give you a very long term guidance. But probably for the next three years we intend to grow at a CAGR of 25% on the loan book. We will definitely see Profit growing at 15 to 18% this year may be a little muted because last year we dropped our rates which is why we were guiding for 12% to 15% for this year.
But that number will pick up over time. Roas will certainly drop because we will keep continuing to increase the leverage. So if you look at the next three year kind of a picture, we should probably be operating anywhere around a 7ish kind of an ROA. And assume if you are able to get to a 2x 2.5x kind of leverage, we should rather, I would say debt equity, maybe a 2x debt equity, which means close to a 3x kind of a leverage, we should be looking at anywhere around 18 to 20% of ROE for the next three year horizon.
The only change that we have made is our guidance on the credit cost which we used to talk about 80 to 100 basis points. We are pushing that number to about 1.2% because there could be some macro level issues that keep cropping up now and then. And for us to operate at a tight credit cost of 80 to 100 basis points, especially when we are becoming a lot bigger, we’ll probably be, let’s say at a 25,000 crore portfolio by then would mean it will be quite a bit of a stretch. So we are pushing our credit guidance to about 1.2%.
Other than that, none of the other guidance has changed. Whatever we had been giving in the past continues to hold.
Aditya Das
Good. Okay, just one additional question here. So if ideally we are moving the portfolio under 3 lakhs to somewhat like 5 to 10 lakh segment, should not the credit cost be like the credit cost guidance should ideally remain the same or come down because those segments should ideally have better quality customers even on longer term basis.
Srikanth Gopalakrishnan
We are not planning to move the whole stock there. Right. So maybe you’ll probably see 5% being moved year on year. So which can have a benefit on the credit cost. But will it be significant or material? I think we’ll probably take a look as we go forward and then maybe need to look at the guidance at a little later point of time. Today we would like to be a little more conservative on our guidance given what we have seen over the last few quarters and which is where we are guiding you for 1.2% if at all. You may probably see some positive surprises going forward.
But yeah at this point we would like to continue with our guidance of 1.2%.
Aditya Das
And just if I could squeeze in one more question again a little bigger picture. How like what do you see the opportunity size in this you know segment that you’re really catering in? So now you know if you kind of move 5, 10% of your portfolio to 5 to 10 lakhs so what is the opportunity on longer term basis that you see in this 5 to 10 lakh and 3 to 10 lakh segments and how big can our loan portfolio really be considering all of this?
Srikanth Gopalakrishnan
You would have seen in our DRHP and few other drhps that came post that where the opportunity for this segment is quite high. And this is coming from the industry report that CRISIL has been doing. We also had some IFC follow on studies on their original 2018 report. The opportunity size is very high. Some people talk about 22 trillion. You talk about, I think it’s a few lakh crores. So I don’t think the constraint is going to come in terms of the opportunity size. As we said we intend to grow at least at a CAGR of 25%.
So which means you can work out the numbers. We ended with close to 12,000 crores last year. So that means we’ll probably be at about a little over 15,000 crores for this year and from there you just have to bake in. So our intent is just because the opportunity is large we don’t want to grow in a very aggressive manner. We want to have a growth combined with the right quality of assets that we onboard which we believe at around 25% levels we should be able to achieve. So that’s what we will be targeting. The market is never going to be a constraint for this 25% growth.
Need be we can grow higher but we would like to have the quality growth.
Aditya Das
Good. Thank you so much Bhatkar.
operator
Thank you Ladies and gentlemen. This was the last question for today and I now hand the conference over to the management for closing comments. Over to you sir.
Lakshmipathy Deenadayalan,
Yes, thank you all for patiently listening and questioning us on the clarity about last quarter’s performance. Hope you have given the clarity. As I said in the opening remarks, this is one of the quarter that you see your company standard coming down little bit on growth collections and quality. This quarter will be a stabilization quarter and quarters to come. You see back get back the growth collections and resulting in good quality. So with that connecting you, on the next earning, call for the Q2 numbers. Thank you.
operator
Thank you. On behalf of JM Financial Institutional securities Limited that concludes this conference. Thank you for joining us. And you may now disconnect your lines.