Five-Star Business Finance Ltd (FIVESTAR) Q3 FY23 Earnings Concall Transcript

Five-Star Business Finance Ltd (NSE:FIVESTAR) Q3 FY23 Earnings Concall dated Jan. 30, 2023.

Corporate Participants:

Lakshmipathy Deenadayalan — Chairman and Managing Director

Srikanth Gopalakrishnan — Chief Financial Officer

Rangarajan Krishnan — Chief Executive Officer

Analysts:

Mahrukh Adajania — Nuvama Wealth Management Limited — Analyst

Pranav Tendolkar — Rare Enterprises — Analyst

Rahul Bhangadia — Lucky Investment Managers — Analyst

Jeetu Panjabi — EM Capital Advisors — Analyst

Unidentified Participant — — Analyst

Janesh Shah — Individual Investor — Analyst

Arjun Bagga — Baroda BNP Paribas — Analyst

Shubhranshu Mishra — PhillipCapital — Analyst

Chintan Shah — ICICI Securities — Analyst

Piran Engineer — CLSA — Analyst

Saptarshee Chatterjee — Centrum PMS — Analyst

Varship Shah — Envision Capital — Analyst

Khushboo Rai — Moneycontrol — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Q3 FY ’23 Earnings Conference Call of Five-Star Business Finance. [Operator Instructions]

I now hand the conference over to Ms. Mahrukh Adajania. Thank you. And over to you, ma’am.

Mahrukh Adajania — Nuvama Wealth Management Limited — Analyst

Yeah, hi. Good morning, everyone. I welcome you all to the earnings call of Five-Star Business Finance. We have with us the top management team of Five Star represented by CMD, Mr. Lakshmipathy Deenadayalan; CEO, Mr. Rangarajan Krishnan; CFO, Mr. Srikanth Gopalakrishnan.

With this brief introduction, I hand over the floor to the management team of Five Star. They’ll start with their brief overview on results, after which, we will move on to Q&A. Over to you.

Lakshmipathy Deenadayalan — Chairman and Managing Director

Yeah. Thank you, Mahrukh. Good morning, all. This is the second conference call of Five Star. Thank you for the people joining in.

To start with a very positive note, last time I said that Q2 was one of the best quarters for Five Star. So this quarter I may rate it is better than the best. We will take you through on that logic. Before that, I just wanted to spend a minute to the new participant in this conference call, a few points on Five Star. As you all know, Five Star is playing a very — into a niche segment, which is less crowded, we are lending to single or small shopkeepers, self-employeds and cash-salaried segments for last 20 years.

And why we are saying that is being a less crowded, these people don’t have a formal documentary proof to show their credit history. So you have to build your own assessment capability on assessing their cash flows, integrities and put your collection model, which can suit their earn-and-pay cycle. So we’ve been doing it very successfully, that’s been evidenced by our quality of assets and profitability for last many, many years.

Now taking you through the performance of Q3. First, let me take you through on the loan portfolio, which has — which has seen a strong growth, we have moved from INR4,767 crores to INR6,242 crores year-on-year, registering a growth of 31%, and on Q-on-Q, we have moved from INR5,732 crores to INR6,242 crores with one of the best Q-on-Q growth of 9%.

Moving to the disbursement, we have moved from INR426 crores to INR910 crores comparing year-on-year with 114% growth, and comparing with Q-on-Q, we have moved from INR802 crores to INR910 crores with a healthy disbursement of — growth of 13%, which has been led by increase in number of branches. As I said last time, we are adding good number of branches, comparing to last December to now, we have added close to 89 branches and comparing to last quarter, we have added 17 branches. So as of now, the total branches stands at 369 branches for Five Star.

Now taking you to the very important point, which is the asset quality of Five Star, let me start with 90-plus and come to the NPA. So 90-plus has been flat comparing to last quarter with — at 1.16%, but the terminology NPA has been changed, which is in line with RBI’s circular dated 12th November 2021, which got implemented from 1st October 2022 stands at 1.45%.

The difference between 1.16% of 90-plus and NPA of 1.45% is 0.29%, which is INR18.10 crores of loans has been categorized as NPA, even though it is less than 90 DPD as per the new circular, which has — which got kicked in from 1st October 2022. Then moving to the liability, I’m happy to register, we have raised more than INR1,000 crores in a single quarter, which is the first-of-its-kind in Five Star. So we are building our strength not only from assets, we’re also building our strength in liabilities. Few more data. Our incremental cost of borrowing has moved from 8.5% last year to 8.7% this year with a increase of 20 bps, even though repo rate has moved from 4% to 6.25% with a increase of 225 bps. So that shows the comfort in which lenders on — have on Five Star being a good capitalized capital Company and quality and profitability standing by.

And cost of borrowing on the book has come down from 10.5% in last year to 10.35% now. So as I said in last quarter also, there is no need of increase of lending rates to our borrowers that doesn’t — will occur in quarters to come. Finally, on the profitability, we have moved from INR118 crores of PAT to INR151 crores of PAT, registering a 28% growth in year-on-year and from INR144 crores to INR151 crores Q-on-Q, registering a growth of 5%. Finally on rating, I’m happy to announce our rating has moved from A-plus to AA-minus, India Rating has assigned a AA-minus rating to Five Star.

So with this, let me hand over the session to Srikanth, our CFO, to take you through more. Thank you.

Srikanth Gopalakrishnan — Chief Financial Officer

So very good morning to all of you. I’ll just quickly touch upon few aspects and then hand over for any Q&A. See from a numbers perspective as in the previous quarters, I think our growth has been both branch-led as well as customer-led with very minimal increase in ticket sizes. So we have had our total active loan base moving from INR2.5 lakhs in September to about INR2.7 lakhs today. And on a year-on-year basis, this represented a growth of 24% from about INR2.15 lakhs. Branch count continues to be robust.

We have added 89 branches during the last one year and about 17 branches during the quarter, and the branch count stands at 369 branches as of December. The growth in AUM has been at about 31% year-on-year and 9% quarter-on-quarter. We ended the — ended December quarter with INR6,242 crores of loan book. For the nine months ended December 31, 2022, our average yield on the portfolio was at about 24.11% and average cost of funds at around 10.35%. This has resulted in a spread of 13.76% as against a spread of 13.49% during the nine months of financial year 2022.

NIM, again, is at a very healthy number of about 18.55% for the quarter, primarily due to lower leverage, but a large part of it has also been on the back of lower funding costs. Year-to-date, the NIM has improved to 17.91%. Our cost-to-income stands at a very healthy number of about 35.56% for the first nine months as compared to 35.62% for the nine months ended December 2021. This has resulted in a return on assets of 8.64% year-to-date and a return on equity of 14.66%. So that’s it from the numbers perspective. From a borrowings perspective, I think we have a very healthy borrowing profile with about 50 lenders lending to us. The bank lending proportion has been going up. That tends to be the very sticky proportion of the overall borrowings for us. So banks contribute about 56% of our debt and we have diversified our borrowings across non-convertible debentures, market-linked debentures, we have done securitization transactions and also issued ECBs.

As Mr. Pathy said, during the quarter, I think we raised over INR1,050 crores of incremental debt at an all-in cost of about 9.1%. What you see on the presentation, an all-in of 9% — 8.7% for the nine months is only the coupon. Last quarter, if you look at it, it was 8.7% of all-in cost. So that did go up by 40 basis points. But what is important to note that while the cost of funds has gone up by about 40 basis points as compared to the previous quarter, we are still borrowing a very good quantum of debt at optimal cost. And as compared to the Q4 of last year, our borrowing cost has actually gone up by about 42 basis points despite the fact that RBI has raised the repo rate by about 225 basis points. So clearly Five Star is seen as an attractive lending institution by the borrowings — by the borrowers.

As Mr. Pathy said, India Ratings has given us a rating of AA-minus during this quarter, so which is very clearly something that stands a testimony to the strength of the Company. We are hoping that the other rating agencies will also follow during this period. On the balance sheet, liquidity remains robust at over INR1,000 crores without taking any of the pipeline sanctions. So we are expecting that this will tide us in a very good manner over the next two quarters. What all this has actually done is bring down our overall borrowing cost on the book as well from about 10.56% last year to about 10.35% for the nine months ended December.

And for the quarter, it’s at 10.26%. So there is — very counter-intuitively, Five Star has seen a reduction in borrowing cost despite the adverse interest environment over there. On the collections, again, the — we have spoken about the business momentum. The collections have also been very robust, not just during this quarter, but over the last about six quarters or so. We have been clocking a collection efficiency of over 98% in the last six quarters with four quarters showing over 100% collection efficiency. Even the 30-plus number, which you are seeing at about 13.5% – 13.7% last quarter has actually dropped down to closer to 12.1% as we speak as of December 2022.

One important development, I think Mr. Pathy touched upon this is the upgradation norms that got implemented from 1st October. Just to refresh everyone’s memory, RBI came out with the circular on November 12, 2021 and then followed up with another circular on February 15, 2022, where these upgradation norms were deferred to 1st October. So basically what this means is any loan that crosses 90 DPD at any day during the quarter can only be brought back to standard asset only if they clear all the overdues. So given our profile of earn-and-pay customers, there are always going to be some customers who may not be able to pay on the due date but they will clear before the month end.

So our Stage 3 assets or NPA that we have aligned to the revised norms stands at 1.45%, but out of this 1.45%, 1.16% represents assets that are over 90 days past due as on December 31, 2022. 0.29% predominantly is sitting in the bucket of 61 days to 90 days and 31 days to 60 days. However, since these customers crossed 90 DPD at some point of time during the quarter, they have not regularized their account to zero DPD, which is why they will also have to be classified as NPA. But if you would recall we had guided even last quarter that this number, the dichotomy between Stage 3 assets and NPA would be around 75 basis points to 100 basis points, for this quarter, it’s only at about 29 basis points. We continue to hold a very robust provision both on the overall book as well as on the Stage 3 assets.

On the Stage 3 assets, our provision has been almost flat compared to previous quarter. Currently, we hold about 44.78% provision on the Stage 3 assets and 1.66 provision — 1.66 percentage provision on the overall AUM. With the effects of COVID having almost receded completely and we are seeing very good traction across the various portfolio buckets, the overall provision coverage on the AUM will gradually start normalizing in the coming quarters and that’s something that you will keep seeing it.

On the restructured book, what was — we restructured 1.83% of our assets during the second wave of COVID. Currently, the restructured book as a proportion of overall AUM stands at 1% at INR62 crores, and even on this book, we maintain a very healthy provision coverage of about 48.61%. It’s also good to note that there is a good performance that we’re seeing on the restructured book, about 91% of the restructured book continues to be in the standard category. If you would recall, it’s been five quarters since the restructuring ended. So even after five quarters, we have about 91% of the book staying in the less than 90-day bucket.

Profit for the quarter, as Mr. Pathy had outlined, is about INR150 crores, representing a 28% year-on-year growth. For the nine-month, we had clocked a profit after-tax of INR435 crores, representing an increase of 29% year-on-year. We had a net worth of INR4,165 crores as of December 2022. So this quarter has — the Company has continued to show a very robust growth, profitability and quality, and we are very confident and remain well poised to continue the momentum in Q4 as well. Typically, Q4 tends to be the best quarter for us as for any other NBFC. So we are very confident of showing good results for that quarter as well.

So with this note, we will take a pause here and we’ll open out for any questions that any of you may have. Thank you very much.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Pranav from Rare Enterprises. Please go ahead.

Pranav Tendolkar — Rare Enterprises — Analyst

Hi, sir. Thanks a lot, and congrats on a great set of numbers. Sir, have you shared anywhere SMA-1, SMA-2 data in the presentation?

Srikanth Gopalakrishnan — Chief Financial Officer

So, Pranav, we have given you the numbers of 30-plus and 90-plus. So 30-plus consists of both SMA-2 and SMA-3. So 30-plus stands at 12.1%. And if you remove 1.45% out of that, which will be about 10.55% or 10.6%. So that’s the — that’s one data that we have. We also have on the slide, the subsequent slide, the bucket-wise portfolio breakup. So SMA-1, which is 1-day [Phonetic] to 30-day [Phonetic] stands at about a little over 7%, 31-day [Phonetic] to 60-day [Phonetic], which is SMA-2 stands at 5.42%, 61-day [Phonetic] to 90-day [Phonetic] stands at 5.23% and NPA stands at 1.45%. So this is on Slide 26.

Pranav Tendolkar — Rare Enterprises — Analyst

Right. Sir, so this data if you track it for, say, before COVID and during COVID, how has this data improved? Any trend that you can give for any one of these data points, for example, say 1 — 30 DPD to 60 DPD? Any trend that you can draw and highlight?

Rangarajan Krishnan — Chief Executive Officer

Yeah, Pranav, let me take it up. Srikanth will come out with the numbers. See, Pranav, I think pre-COVID, pre-COVID, our numbers have to be compared with pre-COVID with now, because you know these customers are earn-and-pay customers, so you can’t expect them to be in the current stage till the tenure gets closed. So we have to track them when is that first arrear hits the customers and the subsequent months how the customers pays the arrears is the trend that what we will be — we have to see it.

So if you just compare this with other lenders who are lending to prime customers, this may be a little higher, but we know that because that is why I said this is less crowded market, when you want to lend to these customers, you have to be very clear about their earn pattern and their paying pattern for a long, long time. We have a pattern for last 20 years. If you see our pre-COVID, our best current bucket was around 82%. Now it stays at 80.87%, which is 81%, it has moved substantially from last December from 67%. So I think very confidently, next quarter we will break our best-ever current at Five Star, that’s what the trend has been showing at Five Star. So I think Srikanth has numbers. I think I’ll leave it to Srikanth.

Srikanth Gopalakrishnan — Chief Financial Officer

Yeah. So, Pranav, I think we are broadly in line with our best numbers that we have seen pre-COVID. Like Mr. Pathy said, current is about — we were at 82%, we are at 81% currently. In fact, on the 1-day to 30-day bucket, we are actually better off as compared to 8%, 1-day to 30-day, we are at about 7% today, 31-day to 60-day, broadly in line, we were at about close to 4.5%, then we are at about 5.4% now, and 61-day to 90-day, we were at about 4%, because this — there will be something that the NPA also will be showing a little higher number. So we were at 4% and we are currently at about 5%.

So there is a 1% difference in the 31-day to 60-day and 61-day to 90-day bucket as compared to the best numbers that we clocked pre-COVID, but things are definitely coming down. As you will see even in the presentation between December ’21, September ’22 and December ’22, not just in terms of percentages across the various buckets, you will see the absolute quantum also dropping. So we are very confident that this number will show better improvement in the March and the subsequent quarters to come.

Pranav Tendolkar — Rare Enterprises — Analyst

Right, sir, right. Sir, last question from my side, I’ll come back in the queue. Sir, the 369 branches that we have, what is per year typically we will increase?

Rangarajan Krishnan — Chief Executive Officer

So, Pranav, the normal opening rate of opening of branches is about 50 branches to 60 branches per year. That has been our pre-COVID track record in terms of number of new branches that we get to open per year. This year has been a little higher, in the last one year, as Mr. Pathy had put it, we had opened about 89 branches. The rate is higher because the last two years because of COVID were muted in terms of branch openings. So there is some pent-up demand that is getting absorbed this year, but I think we will get back to normalcy of about 50 branches to 60 branches per year going forward.

Pranav Tendolkar — Rare Enterprises — Analyst

Right. Thank you, sir.

Operator

Thank you. The next question is from the line of Rahul Bhangadia from Lucky Investment Managers. Please go ahead.

Rahul Bhangadia — Lucky Investment Managers — Analyst

Thank you for taking my question, sir. Two questions, one, if you could give us an indication or guidance on your credit cost going ahead because this quarter is a really low number, what are we — what should we expect going ahead on a medium-term basis?

Srikanth Gopalakrishnan — Chief Financial Officer

Yeah. So see if you look at during the quarter of December ’21, we had a credit cost of about a little over — close to 100 basis points, about 94 basis points, because that was also the time post first wave, second wave, we were consciously building more of provisions, that has started normalizing. So our belief — while this quarter looks at about 27 basis points or so, our belief is that this number will be anywhere around the 1% levels one we have the — once we have the steady state scenario. So what it used to be pre-COVID around 1% or so is where we think the credit cost should start stabilizing in a steady state scenario.

Rahul Bhangadia — Lucky Investment Managers — Analyst

Okay.

Lakshmipathy Deenadayalan — Chairman and Managing Director

Rahul, just to add a point, from a guidance perspective, I think, see, we are extremely performing very well. Let me take the inputs from the earlier question, where COVID hit most of the sectors in our country but we were able to manage one of the best asset quality, even though the DPD performance was little down, that DPD performance is now picking up. That’s what last question we clarified. We’ll be beating all the numbers of previous best DPDs at Five Star in next quarter. But having said that, as a guidance of credit cost, I think we will be happy to give you at 1% to 1.5% at a longer go, having the performance is really good, but I want to be more cautious, so to give a guidance of 1% to 1.5% in the long run.

Rahul Bhangadia — Lucky Investment Managers — Analyst

Okay. Sir, second question was, what is the general repayment period that happens here, two and a half years to three years, and has that number changed over the last four years, five years?

Srikanth Gopalakrishnan — Chief Financial Officer

So it’s not two and a half years to three years, Rahul, it’s more like four years, four and a half years. See, our origination tenure is up to seven years. In fact, almost 85% of our loans get sanctioned for a seven-year tenure. Adjusted for prepayments, what we see is that this number is around four years to four and a half years. It has sort of largely stayed around that level in the last few years. So we are not seeing it significantly increasing or significantly constricting.

Rahul Bhangadia — Lucky Investment Managers — Analyst

Okay. So the reason that I asked this question was, if you look at the — in your presentation from — you have given data from FY ’15 to FY ’22, if you look at the loan disbursements and then the growth in the AUM, broadly the three-year — two and a half year to three-year number that comes out, so that’s why I asked the question?

Srikanth Gopalakrishnan — Chief Financial Officer

So a lot of loans whatever gets booked in the initial part of the year, you will see the repayments, rest of it you may not see. So typically, it’s — what we see is about 2.5% of run-off every month. So 2% to 2.5%, so 2% at 24% for the year works to about a little over four years, four and a half years.

Rahul Bhangadia — Lucky Investment Managers — Analyst

Great, sir. Thank you. I’ll come back. Thank you.

Operator

Thank you. The next question is from the line of Jeetu Panjabi from EM Capital Advisors. Please go ahead.

Jeetu Panjabi — EM Capital Advisors — Analyst

Yeah, hi. Hi, Pathy and Ranga. So two — just one bigger question is, what are the trends you’re seeing on the ground which would translate into growth? Are you seeing an opportunity to expand much faster and grow the book faster? Are you in the mode where you need to be a little more cautious? And what do you — and I also saw on media, there was a comment which talk about a 20%, 25% growth, does that look doable in the next four quarters to six quarters as well?

Lakshmipathy Deenadayalan — Chairman and Managing Director

Let me start, I’ll ask Ranga to even add. See, we have — we will always be very cautious. We will not be dynamic when we handle these customers, as I said, single shop owners, self-employed and cash-salaried customers, which is very hard to break. So we’ll be always cautious, that’s our philosophy. At the ground level, we see tremendous opportunity. As I’ve been saying to everyone and everyone knows that, this is a segment of customers who have not been — their credit was not been met by formal lenders years and decades for now.

But Five Star took a call in 2002 and went behind them and successfully have done in last 20 years. So we are very optimistic from this opportunity perspective. These are the things that will drive our growth. See first, we were at INR3.5 lakhs average ticket size, which has come down to INR2.5 lakhs during COVID consciously and now we are slowly picking back. So we are at INR3 lakhs average ticket size as of December, that will move towards INR3.5 lakhs, that’s the first point that we wanted to reach because we were lending at INR3.5 lakhs average ticket size pre-COVID.

Second growth, as Ranga said, we’ll be opening close to 50 branches, 60 branches, which used to be 40 branches, 50 branches pre-COVID. So we’ll be doing it at 50 branches to 60 branches year-on-year. So that will give us the next leg of growth. And we are happy to say we keep adding number of officers even at the existing branches, which is performing phenomenally well. So with these three levers growth and tremendous opportunity at ground, but our mind always puts us in very conscious mode, definitely, we can deliver the growth what you referred to a interview which I gave a few days back.

Jeetu Panjabi — EM Capital Advisors — Analyst

Okay, thanks. But, okay, so I hear you talking both about the structural opportunity that you’ve seen long-term, which is being played out, and second also the three levers that you’re seeing being used to expand the book. But are you seeing just the underlying economic environment enough to step up a gear or are you still going to stay in the same gear you were earlier? Sorry for belaboring the point, but I just thought I wanted a little bit of color on the underlying environment.

Rangarajan Krishnan — Chief Executive Officer

So, Jeetu, the underlying environment has clearly sort of picked up from the COVID lows. We used to take about on an average six months to breakeven when we open a new branch, we are getting back to that now. Like Mr. Pathy put it, large part of our growth even historically has been driven by how much we want to grow rather than mindlessly sort of opening a set of branches that we are not able to digest well and keep up the culture both in terms of repayment and in terms of the culture of credit that we have built painstakingly over the last about 20 years.

So while technically what you say is right, which is the opportunity is quite large and we may be in a position to open even 100 branches per year, but I think we are still in a mode where we want to make sure that what has been built over the years cannot get compromised for any reason. So which means we will continue to build slowly and steadily about 50 branches to 60 branches per year.

The other nuance that sort of works well in this segment is that every state is very different, every state has a culture, every — just like every customer has a culture, every state has a culture. So it’s not easy to randomly go in the new states and start opening up branches. If you look at throughout this year, bulk of the branches that we’ve opened in the last 12 months, 89 branches we have opened, bulk of the branches are in states where we already have a very, very significant and a strong presence.

So we are consolidating our positions in the core states of South, while at the same time sort of opening state branches, experimental branches in the Central Indian state. This cautiousness is something that we will always carry forward as a culture of Five Star. But I think the growth numbers that you’ve mentioned and that we have guided in the past are imminently sort of meetable even with this cautiousness as a approach from our side.

Jeetu Panjabi — EM Capital Advisors — Analyst

Okay, fantastic, fantastic. Thank you so much, and good wishes on the journey.

Operator

Thank you. The next question is from the line of Sagar [Phonetic] from Anand Rathi. Please go ahead.

Unidentified Participant — — Analyst

Hello. Yeah, hi, good morning, sir. I just wanted a little bit color on the client base you have in comparison to the South-based banks like Karur Vysya, South Indian Bank, etc.? And also if they are repaid, overview on the repaying? Thank you.

Lakshmipathy Deenadayalan — Chairman and Managing Director

The client base, how they are different as compared to, let’s say, the banks of Karur Vysya, South Indian Bank.

Rangarajan Krishnan — Chief Executive Officer

Yeah, so, Sagar, our clients are largely, I would segment them into three categories, the first segment are people who are single shop owners. This forms the bulk of whom we serve. So these are people either by themselves or through their family members, they provide some kind of a service. It could be anything that a common man needs for every day. So it could be a Kirana shop, provisions, flower vendors, fruit vendors, eateries, pharmacies, repair shops, saloons. So the classic service segment is what we target. This forms about 60% of our customer base.

35% of our customers are self-employed individuals, these are Category B and Category C self-employed individuals, not even doctors and engineers, but more in the category of plumbers, painters, masons, that’s the category that we significantly serve, and the last 15% are employed. So these are — they are largely cash salaried, who are employed in the informal segment. So people who work in shops, factories as casual laborers, people who are wage earners, so that forms about 15% of the people. So across these categories, in general, the common trends are while they have income, but they don’t have documentary proof to prove their income significantly.

It’s more of kacha bills and what papers that they maintain for running their business. So the idea and the challenge here is how do you assess cash flows in the absence of documentary proofs of income, and that is where we specialized in. If you were to take a look at our Bank, I think the segment is at least two, three notches above this, while they also could be doing businesses, small businesses, but it could be something far higher than a single shop owner that you will see on an average, when you walk down the street on a marketplace. So these people a bank targets, maybe doing the single shop, but it could be a supermarket. So our — there could be people who are doing a much higher skilled job. So while everything is MSME, while everything is small ticket loans, but I think the color and segment of what different people target is very different in the market.

Lakshmipathy Deenadayalan — Chairman and Managing Director

And to add what Ranga said on few notches, it’s clearly you can differentiate between the average ticket size what Five Star specialized versus the banks which you mentioned which are doing predominant business in lending to MSME in South India, our average ticket size is INR3 lakhs, right? I think I don’t know any bank lends to a individual client for a INR3 lakh loan for a seven-year tenure. So their ticket size maybe in the north of INR10 lakhs or INR15 lakhs. So lending to a shopkeeper can be a common terminology, but within the shopkeeper, the average ticket size where Five Star specialized is between INR3 lakhs to INR5 lakhs.

Unidentified Participant — — Analyst

Okay, thank you, sir.

Operator

Thank you. The next question is from the line of Janesh Shah, an Individual Investor. Please go ahead.

Janesh Shah — Individual Investor — Analyst

Yeah, good morning, sir. Am I audible, sir?

Lakshmipathy Deenadayalan — Chairman and Managing Director

Yes.

Operator

You’re sounding a little low. Can you speak a little louder?

Janesh Shah — Individual Investor — Analyst

Yeah. Sir, just — so a few things, just wanted to understand about the business attributes. One is — so few of the observations which I have had is that we have 100% collection doing in-house. That’s one part. Second is the leverage on the balance sheet has been low. And the third important aspect is the technology — use of technology. How these three things are differentiating Company from the rest of the players in the market? And if you can just understand where — I mean, how the differentiation is more stickier to us as compared to the other players? And going ahead like what kind of trend will you see within like resulting out of this three unique things which you have, if you can just throw some light on that, sir?

Rangarajan Krishnan — Chief Executive Officer

So, thank you, Janesh. So I’ll just take up all the three aspects one by one. The first is 100% in-house collections, this has been the core of what we have always put up within Five Star. And not only 100% in-house collections, we also have this norm that the person who originates the business is responsible for collections. So this is a key differentiation between us versus many other players in the market.

We fundamentally believe that if a person understands the pain of collections, he is going to be a lot more responsible when he is sourcing a business. So even while we have set up a collection vertical within Five Star over the last about one and a half years or so, but it’s a conscious decision for the collection vertical only to handle customers, which are above 24 months bucket. So 24 months of tenure, not bucket, 24 months of tenure.

So which means for the first 24 months since origination, whatever bucket the customer is going to be, whether it is a current bucket or a arrear bucket or even an NPA bucket, the account does not get transferred into a collections vertical. So the person who has originated has to handle that loan. This is something that is core to what we have built, and we don’t have any intention of changing this even over the medium to long-term. So we will continue to have 100% full-time employees who are handling collections. The other early call that we have taken at Five Star is that there are three core verticals, the first is sourcing, the second is underwriting and the third is collections.

These three define who a lender is, and across the three verticals, we will not have anything which is outsourced. So we will not have DSA again to our sourcing loans. We will not have some third-party agencies who are helping us underwrite the loans or get into a particular format or we will not have anybody else who is collecting our loans. Across all the three verticals which is fundamental to a lender, we will continue to manage 100% with full-time employees of Five Star.

On the second part which is on leverage, you must understand that we are a standalone NBFC. We are not backed by large — we are not backed by parental houses. It was started by an individual. We have painstakingly come to this point over about 38 years so far. And as you will see that this sector is not smooth, this sector will have its ups and downs. So unless you are really well-capitalized, you cannot press the pedal of acceleration and growth over the medium to long-term period.

So one of the early calls that we had taken is that we will — when we started inviting private capital because the marquee names which has backed up right from 2014 to 2020, we will ensure that good quality capital is coming in from these investors who will stay with us for the long-term, because unless you have the capital comfort, you are not going to be in a position to improve your rating, you’re not going to be in a position to get high-quality professionals to join your firm, you can’t get bankers to take comfort on a standalone NBFC and sort of extend their lending lines.

It’s also going to be very difficult when suddenly banks are going to start being very cautious because of a sectoral impact, you can’t just be on and off into the market. So I think capital comfort was absolutely required during a high growth phase, and that’s the reason we built significant buffers of capital over the 2014 to 2020 period. But as we see, you will obviously recall that when we came out with an IPO, it was complete OFS. We didn’t want to raise a single rupee of capital from public because we believe we have reached a point where we are significantly and adequately capital-sufficient at this point of time and we have the comfort of very high accruals.

So for the first nine months of this financial year, we already are at about INR434 crores of PAT and we have not paid any dividends. So the entire thing is going to be sort of reaped back into the business. So this is going to continue for the foreseeable future, where we are going to have strong accruals, it’s a profitable model and we have significant capital comfort. So any investor with us at this point of time is going to enjoy the upside in terms of profitable growth without dilution, and that has been — we will increase leverage, but it will be organically increased over a period of time. Just to increase leverage, we are not going to accelerate the pace beyond the rate of comfort that we are good with.

The last part is on tech. Obviously, every business has to have tech angle at this point of time and we continue to significantly invest into tech. But you must sort of understand the customer segment that we are targeting is not the usual customer segment that comes in the mainstream media or news when you sort of compare other fintechs or NBFCs who are targeting the segment. Bulk of our branches are between Tier 3 and Tier 6, well over 90% of our branches are between Tier 3 and Tier 6. And obviously, I had explained the customer profile of people that we target.

So these people are not even Category 1 adopters of technology. So their ability to understanding of technology is very different from the average sort of mindshare that you get when you speak of tech in a business. So we are cautious about what works for this segment, how that has to be implemented within the Five Star without sort of diluting our focus or making people uncomfortable with sort of trusting technology where it is not needed. We will tread a fine line here. But that said, I think we are making sort of fairly significant investments, especially over the last two years, three years into technology and that will continue to provide a guidance over the next few years to come.

Janesh Shah — Individual Investor — Analyst

Yeah. Just follow up on these two. One is you mentioned about the leverage maybe turning a little better. Is there a threshold which you have defined for that? And second, when we’re talking about the cost-to-income, when we’re more like — the reason why I’m asking about the use of technology more from a cost perspective, how much it can push down the cost and what would be the — like when you leverage, I can see you’ve built the building blocks, you’ve added the branches, you’ve added the people, you’re investing in technologies, but the cost-to-income ratio remaining at a much, I mean, sustainable level more close to like between 30%, 35%.

But where do we see going ahead when you will see the — like — as you said like when the business starts scaling up over next two years, three years, where do we see the cost-to-income ratio also moving towards or is there going to be a more reinvestment which is going to happen over next two years, three years for this business, which will be in linear to the growth in the business? That’s what I wanted to understand. Thanks.

Srikanth Gopalakrishnan — Chief Financial Officer

See, from a leverage perspective historically, I think we have been comfortable around three times to four times of leverage, which means three times of debt equity, which is something people, even the debt providers, the credit rating agencies are all comfortable with and you don’t have too much of pressure to start building up the capital. So our belief is that over the next about three years or so, our leverage should be at about two times to three times, which will push up the ROE.

See, from a — you should also look at today, the net interest margins are inflated to some extent because of lower leverage. So while the spreads are at a very healthy level and we will continue to remain at the 12% to 13% kind of spreads, you will definitely see some kind of a drop in the net interest margins because of leverage going up. So what is currently at about 17.5%, 18%, will probably drop to about 14%, 15% in a steady state scenario. So there will be a compression in the return on assets on account of this, but then given the leverage kicking in and the return on assets at a steady state being around 6% or so with about three times to four times of leverage, we should be looking at 20% to 22% of return on equity in a steady state scenario. So you will definitely see these numbers panning out over the next three-plus years.

From a cost-to-income perspective, we are probably — given the segment that we’re operating in where it is a little bit more intensive on the manual side, while we will definitely leverage technology, we have built a very strong senior management team, so you don’t need to invest a lot more on the management side, but then you will also need to keep putting feet on street, there are always going to be efforts both on underwriting and collections that will have to expand. So we don’t see too much of ability on the cost-to-income to drop.

But where we have the abilities as the assets keep increasing, what currently you are seeing an opex to AUM of about 6%, 6.25% for the year, should definitely in a steady state scenario come to about 5.5% or so, 5.5% to 6% is what we think is a steady state scenario opex to AUM. But cost-to-income could broadly range around 34%, 35% even in a steady state scenario. But with the incomes going up, that pushes up your ROA and with leverage and debt equity going up, that pushes up your ROE.

Lakshmipathy Deenadayalan — Chairman and Managing Director

Janesh, being a important question, let me also reiterate, see, I think our cost-to-income ratio is one of the best in this industry to the price that what we lend to the market, right? Even at this quarter, we’re at 38%, if you knock down one-time expense that we shared with our employees due to our successful IPO, it will be around 35% to 36%. So that will be one of the best cost-to-income ratio to the segment or to the IRRs what we lend. That’s point number one.

So the game plan will be shifting our ROA towards ROE. Today, if you see ROA is around north of 8% because of low leverage. As Srikanth said, the leverage is going to kick in, that’s the focus that what we have planned for. As a data point, we have raised more than INR1,050 crores in a single quarter, that shows the ability of leveraging ourselves. So even at a leverage of one times to two times currently, our return on equity is at around 14.67%, close to 15%, that will move towards 20%, 22% as the leverage kicks in.

So don’t expect a big drop in cost-to-income ratio. As I said, we are one of the best in the market if you compare with the IRRs what we lend for. And yes, we are fully loaded on management, fully loaded on technology, and there’ll be some slight drop in opex as a percentage of AUM what Srikanth said, but the focus will be moving towards a healthy return on equity to the shareholders.

Operator

Thank you. The next question is from the line of Chandra [Phonetic] from Fidelity. Please go ahead.

Unidentified Participant — — Analyst

Hi, very good morning, Mr. Pathy, Srikanth and Ranga. I had a few questions. One, can you just share the Stage 2 assets, which is maybe two-year or three-year vintage at this point in time? Reason being just trying to understand some of your customer segments obviously can’t roll back two payments at one point in time and would have been originated during somewhere around the lockdown period. So just trying to understand just by vintage, the Stage 2?

Srikanth Gopalakrishnan — Chief Financial Officer

Chandra, just give us a few minutes. I think you can proceed with your questions, we will get you the data shortly.

Unidentified Participant — — Analyst

Sure. Second is just what is the number of collection officers which we have right now? And how should we fundamentally think of the pure collection officers over a period of time on a per branch level? My understanding was that you have maybe about 1,200 with about INR20,000 a month, which is about INR30 crores odd annualized. So just how should we think of just pure collection officers on a per branch level on a steady state basis? That’s one.

Second is, just your target spreads, how do you think of it over a period of time? You did say it was 12% to 13%, your incremental cost of borrowing is still lower than the average cost of borrowing, one, and the customers are not as sensitive to yields you said in the past. So given that the average cost of borrowing, the incremental is still lower than the average.

How should we just think over the medium and over the longer-term? Then the other question is that, see, we have about 270,000 odd live cases, 360 branches, maybe about 730-odd per branch. How do we think from a risk management perspective, just concentration in certain regions like do we, for example, if you work by a PIN code, for example, we don’t do more than 20 cases or 30 cases in a PIN code, how should we think of risk management? And the very last question is, what is your attrition at the branch officer level and how many of them have you shared stock with? Thank you.

Rangarajan Krishnan — Chief Executive Officer

Chandra, I’ll just take a few questions while Srikanth is gathering the data. Firstly, we have about a little over 1,000 officers, collections officers that we have at this point of time. There are two points that I would like to clarify here. We have within collection officers at this point of time, we have two types of collection officers. One is what we call as the collection vertical itself, which means they don’t do anything apart from collections, they’re just doing collections and it’s a separate vertical, where they have a manager, they have a supervisor, they even have a State Head, who is only looking at collections.

At this point of time, there are two states which have a collection vertical, which is Tamil Nadu and Telangana. For the rest of the states, at this point of time, we have a collection support, which means they are collection officers only, but they don’t have a vertical, which means they don’t have a separate supervisor who is dedicated to collections, they are officers who will support the branch in collections. They will do only collections but they are officers who are supporting the branch in collections.

But across these two, let me not confuse you with more nuances between the two. But at this point of time, across these two, we have about 1,000 officers, and the way to think about it is that each officer on an average can handle about 125 accounts. So that’s the metric that we have. So whatever is the number of accounts that we have over the 24-month vintage, that divided by 125 accounts is the metric that we will adopt in terms of number of collections officers that we will have. So it’s linear.

But when we first moved a set of accounts to collections, you will see the spur, but if you look at over the steady state, every quarter, whatever is a new set of accounts which is moving towards the collection vertical, we will have those many number of officers at the collection level. Second, on the risk management framework. So we are very clear that we have two types of branches. We have a normal branch and we have a super branch. At this point of time, we have normal branch of a little over 210 branches and super branches of about 160 branches.

Super branch is a branch which has a vintage of more than two years. They are very good in collections. They are good in business. They have created a presence for themselves in the locations in which they operate. We then graduate the branch to become a super branch. Once it becomes a super branch, that’s the first touch point in terms of how do we start managing risk. We address risk at multiple levels once a branch starts becoming super branch, which means we don’t want to be dependent on a single branch manager because that’s where the first risk starts.

So what we do is that the super branches in essence, it will have two branch managers and it will also have one senior branch manager, who is handling the two branch managers. So it will have about 10 officers, it will have two branch managers and one senior branch manager. So at a officer level, there are redundancies which are built that somebody resigns, it’s not going to suffer either from a collections perspective because there are 10 officers. At a branch manager level, there are redundancies and at a SBM level, even if one of the branch managers were to go between the three of them, which is one SBM and two assistant branch managers will easily be able to support whatever happens at a branch level.

So this is from a people perspective how do we manage risk. Second, if, let’s say, the branch becomes a super branch and the number of accounts which are handled by the branch increases, we will keep adding officers to that branch. We will not put enormous pressure on the existing set of officers only to handle all the accounts from a collections perspective and also generate incremental business.

The thumb rule that we have is that if a officer is doing business and collections, on an average, he can handle about 100 accounts. So the moment it crosses a per officer level of 100 accounts, we will start adding more and more officers as per the need in the branch. So we have branches, which have more than 12, 13 officers at this point of time. We also have branches where we have lesser number of officers given the accounts.

The third way we manage risk is that if a branch becomes too big because they have done extremely good business, let’s say they have 2,000 accounts, we don’t want to just keep building on the same branch for any reason. So what we will do is that we will open nearby branches because we believe that there is a lot of good potential in that area. So we’ll open a branch, which is like 20 kilometers, 25 kilometers away, not just open a branch, but we will transfer a set of accounts from this existing branch to the new branch. So as the branch gets opened, on day one, they will have about, let’s say 500 accounts, 600 accounts, which are getting transferred to them, which reduces the risk at the single branch location level.

So there are multiple touch points that we do from a risk management perspective right at the branch level, and, of course, there are layers much above the branch, the number of supervisors that we will handle. Three years back, we used to have about 20 supervisors, at this point of time, we have 87 supervisors. So,on an average, each supervisor doesn’t handle more than five branches. So they are there for the first need of a branch, whether be it collection, be it business, be it recruitment. So we will continue to promote people internally. Most of the supervisors are people who are groomed internally and they take on responsibilities because they are very good.

Most of the supervisors will have a vintage of more than five years with Five Star. So we will continue to add supervisors as necessary in each of these metrics. So across business collections, supervisory layers and credit, the risk management is sort of embedded into the ways the business scales up and overall taken up to the next level. At a attrition level, I’ll just add that point, if you take attrition at a officer level in a branch, it’s about 29% — 28%, 29% overall, largely in line with the industry. If you had to split it most of this 28%, 29% will be for people who are with Five Star for less than a year. Somebody who is above — more than a year generally tends to stay with Five Star for a longer period.

The reason could be that when people joined from other NBFCs, they have to fit right with the culture, the thought of doing business and collections together. So for various reasons, the attrition at that level maybe a little higher, but it’s in line with the industry. But if you have to go one level higher, which is the people who really matter in the branch and who are controlling the branch, which is what is the attrition at a BM and above level will be roughly at about 9% to 10%.

Srikanth Gopalakrishnan — Chief Financial Officer

Chandra, getting back to the two questions that you asked, one is the vintage-wise Stage 2 and the target spreads that we are looking at. See, vintage-wise Stage 2, about 98% of the accounts which are in Stage 2 are two years and more. So we have only 2% of Stage 2 customers, which are 30-plus, 30-day [Phonetic] to 90-day [Phonetic], who are in Stage 2, who have been in the Company for a less than two-year vintage. So typically, Stage 2 comes in only after 24 months or so. So 98% are over 24 months. See, in terms of the target spreads, yes, today, our spreads are higher and we are sort of guiding you for a 12% to 13% kind of a spread. This is something we updated even in the last call.

See, if it was a normalized scenario, I think some of the benefits that we have obtained on the reduced cost of funds, we would have passed on to the customers. Because at the end of the day, we also want to be a responsible lender despite the fact that this segment may not be extremely price sensitive, but any benefit that we get at least a good portion of that we’d want to pass on to our borrowers. So in a normal scenario, we would’ve passed on some of these benefits, but today we don’t know exactly where this entire interest rate cycle is going to sort of peak out or end. So we are being on a little bit of a wait-and-watch kind of a scenario.

Once we realize that the interest rate scenario has peaked, I think we will definitely pass on some of the benefits to the incremental loans, which will gradually bring down the spreads to about 12% to 13%. So while it’s about 13.7% today, we should expect to see about 75 basis points to 100 basis points dropping, once — and that will be gradual because it’s — ours is fixed rate portfolio, we can’t reprice the existing book, but on the incremental loans, the boarding rate will be lower. So to that extent, it will start slowly gradually pulling the spread down to 12% to 13% levels.

Unidentified Participant — — Analyst

Sure. So your Stage 2, for example, right now is actually where it was in, say, 2019 approximately there. So is it — I mean, obviously during this period, you have added customers who have fallen back on their payments, one or two payments and not been able to repay both those payments at the same time, which is why some of them maybe residing in Stage 2. Is it fair to assume that once they get flushed out eventually from the system and complete their dues that your actual Stage 2 maybe lower than where it was say in 2019 level? Is that possible?

Srikanth Gopalakrishnan — Chief Financial Officer

See, Chandra, I think the guidance that we would probably try and give you is, our Stage 2 should be more like about — while it is about — it’s roughly maybe about 10.5% to 10.6% as we speak, even in a steady state, I think this number will be more like 8% to 9%. If we are expecting people significantly roll back or significantly not fall into buckets or fall into buckets and then come back to Stage 1 and all, it’s not going to be the case. Our belief is that our one-plus number will be more like 15%, 16% in a steady state scenario. Currently it’s almost at about 19%.

Maybe we will see another two percentage points, three percentage points bettering here. And it should trickle down from there, we should see a Stage 2, which is a 30-plus, including the 90-plus number of about 10%. And if you assume a 1.5% to 2% kind of a NPA number, 1.5% more like 90-plus, we should be seeing a Stage 2 number of anywhere around 8% to 8.5%. So while there will — there will be some improvement that will keep coming through, but I think even in a steady state, this number is expected to be at around 8% or so.

Unidentified Participant — — Analyst

Sure. Sorry, and I didn’t get the answer. Just how many of the branch managers have stock in the Company?

Lakshmipathy Deenadayalan — Chairman and Managing Director

Yeah. So we have given stock options to all the senior branch managers and above. So it’s not at a branch manager level. So every senior branch manager, supervisor and anybody above that, totally about 360 employees of Five Star have stock options.

Unidentified Participant — — Analyst

Great. Thank you very much. All the best.

Operator

Thank you. The next question is from the line of Arjun Bagga from Baroda BNP Paribas. Please go ahead.

Arjun Bagga — Baroda BNP Paribas — Analyst

Yeah. Hi, ma’am, thank you. Thank you, sir, for this opportunity. Good morning. Sir, just wanted to get one, some color on the restructured book, like I understand it is at 1% currently. So if I were to just understand how has this moved over the last two quarters, three quarters, what have been the kind of slippages there and what has been the repayment?

Srikanth Gopalakrishnan — Chief Financial Officer

So, Arjun, I think number one, in the history of Five Star, I think we have done only one restructuring, which is during COVID 2, where we restructured about INR83 crores of assets, and even this restructuring, we gave them a moratorium for six months between April 2021 and September 2021. So, what you’re seeing today, which is 1%, which is at INR62 crores. So that is a rundown of INR21 crores that has already happened, INR62 crores is the book, which is — which is live as on date.

And like I said, 91% of these customers are in standard category. About 9% are customers, who are in the 90-plus category. See, the difference in the collection efficiency between this as well as a normal account, yes, there is a difference. In fact if you look at the 61-day DPD of this portfolio, it will be on the higher side, not even comparable to what we are seeing — what we’re seeing on the normal book. But what is also heartening to note that it is not that a large portion of this is actually slipping to 90-plus. We are only seeing about 8%, 10%, which is slipping to 90-plus and staying at 8%, 10% on a quarter-on-quarter basis. If you recall, even last,quarter when we gave you the numbers, while it was 1.16% of the overall book, the restructured portfolio, even then we had 91% standard.

So we are seeing about 9%, 10%, who is in the 90-plus category. And like how we sort of guided you even in the past, we expect that about 20% or so of this book is going to sort of — 20%, 25% of this book is going to sort of be at 90-plus or eventually, there will be some level of credit cost that we have to absorb on this book. But towards this what we have also been consciously doing is building a very robust provision coverage. As I highlighted, we are at about close to 50% provision coverage on the restructured book. So even if there is an eventual credit cost of about 20%, 25% that we will have to absorb on this book, we are more than adequately covered and there will be — we don’t expect any incremental impact on to the P&L.

Arjun Bagga — Baroda BNP Paribas — Analyst

Sure, sir. This is really helpful. Another question on the asset quality. So I understand, during this quarter, we took the regulatory change of classifying, let’s say 90% — 90 DPD assets also as the GNPAs, which I understand most of the peers like — or close competitors like Aavas or Aptus had done like last year itself when the circular came out for the first time. So any specific reasons that this was not done in the last quarter Q2 when we first reported the results? And second is, did I understand it correctly that the number, which stood at around 29 bps during this quarter, maybe — that maybe as between 75 bps to 100 bps, if my understanding is correct?

Srikanth Gopalakrishnan — Chief Financial Officer

Yeah, Arjun, so, two things. First, why did we not implement earlier? The answer is, see RBI came out with the circular on November 12, 2021, and the deferral of upgradation norm was given on February 15, 2022 post the declaration of results of most of — all the equity participants. We had taken a very conscious call, at that point of time, we were not required to disclose the December results being only a deck-listed entity. And we had also said, given the way that the circular was floated out there, there was no time given for institutions to sort of prepare and given our borrower profile, people who have been paying with a few days delay here and there, but we are regularizing the account before the month end. We needed that time to sort of educate our internal system, educate our staff.

Thankfully, RBI gave that on February 15. So we had the time to sort of educate them and that is where you’re seeing the results of 1.45%, which is only 29 basis points difference. So why did we not come in September quarter? There was no need for us to come in September quarter because the upgradation norms are kicking in only from 1st October. So any customer who slips into 90-plus from 1st October but does not come back to zero DPD is what is needed to be reported as NPA and which is why we are doing it in this quarter. So one is, there was no need for us to report in the September quarter, the circular is effective 1st October, and we have disclosed from this quarter.

Your second point is correct, your assumption. What you’re seeing as 29 basis points currently, that’s the impact of one quarter. There will be some buildup that you will keep seeing in every quarter, but we believe that, that number over a steady state should not be more than about 75 basis points to 100 basis points of difference between actual 90-plus and what is being reported as NPA.

Arjun Bagga — Baroda BNP Paribas — Analyst

Thank you, sir. Thank you. That’s helpful. Just one last question from my side. So I understand that the incremental cost of funds for us during the quarter has I think gone up by some 60 bps, 70 bps, still the portfolio cost of funds continues to go down, I think that is down some 15 bps, 20 bps on a quarter-on-quarter basis. Just to understand this, sir, is there some changes or renegotiations from our side on the existing lines as well or is it just that the repayments are coming at — sorry, the newer borrowing that we are doing that is coming at a lower compared to portfolio level borrowings cost?

Srikanth Gopalakrishnan — Chief Financial Officer

So it is the second part, Arjun, the replacement cost is coming lower than the original cost of the debt, which is getting replaced, which is why mathematically, you’re seeing the numbers going down. So it’s technically our book was running at 10.5%, now firstly, I would like to correct you, during this quarter, this number went up by about 50 basis points as compared to the previous quarter.

Arjun Bagga — Baroda BNP Paribas — Analyst

Okay.

Srikanth Gopalakrishnan — Chief Financial Officer

So we are at — we are borrowing at an all-in cost and when I mean all-in, I’m including all ancillary costs like processing fees and other borrowing costs. So that is at about 9.12%. But given that the book was running at 10.5% and the replacement happening at 9.1%, mathematically the 10.5% is coming down to 10.35% for the nine months and 10.26% for the quarter.

Arjun Bagga — Baroda BNP Paribas — Analyst

Sure, sir, sure. Thank you, sir. That answers my questions. Thank you. Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Shubhranshu Mishra from PhillipCapital. Please go ahead.

Shubhranshu Mishra — PhillipCapital — Analyst

Hi, good morning. Thank you for this opportunity. A couple of questions. The first one is, given the fact that the lend out to the guys who are in the unorganized segment or slightly below prime. Are there any development financial institutions subscribing to our bonds? If yes, what would be the quantum, whether domestic or any foreign development institutions who will subscribe to our bonds or have given us any line of credit? That’s the first one. Second is, any kind of negative covenants we have on the bonds? That’s the second. And if you can split the AUM into ticket size as for proportion? So what proportion of the AUM would be less than INR1 lakh, INR1 lakh to INR3 lakhs would be what proportion, INR3 lakhs to INR5 lakhs and INR5 lakhs plus? Thank you so much.

Srikanth Gopalakrishnan — Chief Financial Officer

Yeah. So, Shubhranshu, I think the first question on the DFI lending, yes, we have taken border monies from DFIs, both domestic as well as international. Domestic institutions like SIDBI have lent to us in the past, while currently, we don’t have a line, but we are in talks with SIDBI to sort of get a fresh line. On the international side, we have had monies that we have raised from institutions like Responsibility in the past. The ECB that we are currently carrying on the book is given by the Swedish Developmental Sovereign Fund, Swedfund.

So developmental institutions are lending monies to us, but unfortunately, given hedging cost and given the withholding tax, there is some level of increase in terms of borrowing monies from foreign institutions, foreign developmental institutions, which is why you don’t see a big proportion of monies that we have borrowed from them. But we will continue to evaluate to see what best we can do in terms of borrowing from — borrowings from the DFIs. In terms of the — next question.

Rangarajan Krishnan — Chief Executive Officer

On ticket size. So on the ticket size — yeah…

Shubhranshu Mishra — PhillipCapital — Analyst

No, the second question was on negative covenants on bonds, if we are — any kind of bond market making exercise, do the market makers ask for any kind of negative covenants, whether verbal or written either?

Srikanth Gopalakrishnan — Chief Financial Officer

So nothing specific, Shubhranshu, in terms of the negative covenants. These are typical covenants, where we are expected to maintain certain financial ratios, we’re expected to inform them about changes in Board, changes in management and all that. So you don’t really see any major negative covenants that we have agreed to as part of any of the lending agreements, not just on the DFI side but across the various borrowings that we have done.

Rangarajan Krishnan — Chief Executive Officer

Shubhranshu, on the ticket size, up to INR3 lakhs or up to INR5 lakhs is the core bucket, 98% — sorry, 88% of our loans are up to INR5 lakhs. If I had to further split it up to INR3 lakhs will be about 48% and INR3 lakhs to INR5 lakhs will be about 40%. Within the INR5 lakhs to INR10 lakhs…

Shubhranshu Mishra — PhillipCapital — Analyst

Up to INR3 lakhs, what was the number, sir?

Srikanth Gopalakrishnan — Chief Financial Officer

46% of our book is up to INR3 lakhs, 43% is between INR3 lakhs and INR5 lakhs. So that’s 89%. About 10% of the book is between INR5 lakhs and INR10 lakhs, and we just have 1% of the book, which is more than INR10 lakhs.

Shubhranshu Mishra — PhillipCapital — Analyst

Thank you. This was very helpful. Best of luck.

Operator

Thank you. The next question is from the line of Chintan Shah from ICICI Securities. Please go ahead.

Chintan Shah — ICICI Securities — Analyst

Hello. Yeah. Congratulations on strong set of numbers. Just one question on the coverage ratio. So on the Stage 3 coverage — Stage 1 loan, our coverage has come down to roughly 27 bps, which was like 32 bps a quarter — two quarters ago and 37 bps in the past quarter. And similarly, coverage on Stage 2 has also come down a little. And so — as the management has guided for credit cost in the range of 100 bps to 150 bps for the next year, so what could be the — any ballpark numbers, any target on the coverage ratio, Stage 1 and Stage 2?

Srikanth Gopalakrishnan — Chief Financial Officer

So, Chintan, I think historically, while last quarter, we did have a little bit of overlays even on Stage 1 assets, more on potential IRAC, those customers who could have become IRAC DPD, historically, we have seen Stage 1 being at about 30 basis points or so, 25 basis points to 30 basis points even pre-COVID. So I think the guidance that we give you is Stage 1 will continue to be at about 25 basis points to 30 basis points. On the Stage 2, again, it was a little higher, especially in December quarter or the quarters earlier than that primarily because a lot of the 61 DPD to 90 DPD loans, which had the potential of becoming NPA under the revised RBI regime were given higher provisions. That’s why December ’21, you’re seeing an 8.3% of Stage 2 coverage.

But that’s been gradually coming down, September, it was at about 7.5% and we are at 7.25% as we speak. Again, this is broadly at a steady state right now. We should operate anywhere around 6.5% to 7% of Stage 2 provision coverage. Stage 3 is at 45% currently. We will, again, over here, there is a little bit of overlays that we have built it, but we would probably think this number will be anywhere around 35% to 40%, 42% in a steady state scenario.

Lakshmipathy Deenadayalan — Chairman and Managing Director

Chantan, just to — sorry…

Srikanth Gopalakrishnan — Chief Financial Officer

Chintan.

Lakshmipathy Deenadayalan — Chairman and Managing Director

Chintan, just to reiterate what we said on the credit cost guidance. So we have said overall credit cost guidance of 1% to 1.5%, and so on behalf of that, we have a overall provision as a ECL as 1.66%. See, well — we are well over about — well over than our guidance. As the guidance comes down, I think overall provisions as a part of ECL may also come down.

Chintan Shah — ICICI Securities — Analyst

Okay, okay. So, sir, you mean that 1% to 1.5% is provisions or total ECL provisions as a percentage of assets that would be around 1.5%. Is that understanding correct?

Srikanth Gopalakrishnan — Chief Financial Officer

Sorry, Chintan, please, can you repeat it?

Chintan Shah — ICICI Securities — Analyst

Yeah, I think for Q3, we have 1.66% [Phonetic], which is ECL provisions as a percentage of total assets at 1.66%, So that number or would be around 1.5%, is that correct?

Srikanth Gopalakrishnan — Chief Financial Officer

No, no, no. No, no, no. No, Chintan. See, this 1.66%, like I said, it will start normalizing. Just to give you a sense pre-COVID, this number used to be about 80 basis points to 90 basis points…

Chintan Shah — ICICI Securities — Analyst

Okay, yeah, yeah, yeah, that I understand. Yeah. Sorry.

Srikanth Gopalakrishnan — Chief Financial Officer

Yeah. So what we are saying is 1% to 1.5% is the credit cost hit that will come on to the P&L, both in the form of write-offs and as incremental provisions that we’ll build. The — what comes on to the ECL as a percentage of AUM will, I think gradually start dropping. At this point of time, we are not able to — we don’t want to give a long-term guidance, we just want to see how things pan out, but it will start normalizing from 1.66%, which is a little bit on the higher side, especially with COVID effects receding and our bucket showing a much better performance as compared to what we saw in the last couple of years.

Chintan Shah — ICICI Securities — Analyst

Sure. This is very helpful. And just one last point on the lending rate hike. I suppose we would have not taken any lending rate hikes since the RBI repo rate hike from May, and do we also see any need for it in the coming quarters, even if there is a, for example, 25 basis points or 50 basis points hike from current levels?

Srikanth Gopalakrishnan — Chief Financial Officer

No, at this point of time, like we said, our spreads very ironically has only been going up.

Chintan Shah — ICICI Securities — Analyst

Yeah, yeah.

Srikanth Gopalakrishnan — Chief Financial Officer

So there is clearly no intent on the side of the Company to increase the lending rates to the borrowers. Once we see the peak of the interest rate cycle and our spreads continuing to remain robust as they are today, we will probably look at passing on some of the benefits that we’ve derived on the borrowing cost to the borrowers. So you’ll actually see a incremental lending rate coming down by whatever proportion that’s available in the form of benefit that we can pass to the borrowers. So nothing on the anvil for lending rate increase.

Chintan Shah — ICICI Securities — Analyst

Sure. Sir, just one follow-up on this. So in terms of our competitors, their lending rates would be relatively similar to our lending rate or — on the higher end or on the lower end?

Lakshmipathy Deenadayalan — Chairman and Managing Director

So for this product, Chintan, it will be similar.

Chintan Shah — ICICI Securities — Analyst

Okay. It will be — in case if we pass on the lending rates to the borrowers, then we will be at a relatively lower rate than our peers in case they don’t pass on?

Lakshmipathy Deenadayalan — Chairman and Managing Director

Yes.

Chintan Shah — ICICI Securities — Analyst

Sure, sure. This is very helpful. Thank you. That’s it from my side. Thank you, and all the very best.

Lakshmipathy Deenadayalan — Chairman and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Piran Engineer from CLSA. Please go ahead.

Piran Engineer — CLSA — Analyst

Yeah, hi, congrats on the quarter. I just have a follow-up question to one of the earlier participant’s question, what is the difference between collection vertical and collection support?

Lakshmipathy Deenadayalan — Chairman and Managing Director

Collection vertical is when — right from the officer level till the State Head level, we have a separate person, who is responsible only for collections. So you have an Officer, Collections, Manager, Collections, Senior Manager, Collections, Supervisor, Collections, State Head, Collections. So this is what we define as a collection vertical. In a collection support, the support ends at the branch level. So you have an officer, collections, but you have a branch manager who does both business and collections and from there above, it’s the joint responsibility. So you have a supervisor who does both business and collections, you have a State Head, who is doing both business and collections. Historically, Five Star always had that approach.

And now when we decided to move towards the collection vertical, we don’t want to disrupt this arrangement across all the states because it takes time to set up the collection vertical and you have to do it carefully. So we are doing it in phases. We’ve done it for the first two states, big states, and we will be doing it in phases over the next three quarters to four quarters across the other states.

Piran Engineer — CLSA — Analyst

So is that a collection branch manager in the collection support function, he reports to the senior branch manager, is that right and not to like an area collection manager?

Lakshmipathy Deenadayalan — Chairman and Managing Director

Correct. You’re right. Yeah.

Piran Engineer — CLSA — Analyst

Got it. Okay, that was it. Thank you.

Operator

Thank you. The next question is from the line of Saptarshee Chatterjee from Centrum PMS. Please go ahead.

Saptarshee Chatterjee — Centrum PMS — Analyst

Good morning, sir. Thank you for the opportunity. My question is on the collection interventions that we do preferably more on the 30-day DPD plus buckets, like what all the interventions that we do that helps us to bring down the GNPA to close to around 1% [Phonetic] level?

Lakshmipathy Deenadayalan — Chairman and Managing Director

So, Saptarshee, usually the first 30 days, it rests with the branch. So the branch teams along with a branch manager, they will assess if at all there is a delay from the customer as to why there is a delay, they will want to assess if the reason is genuine because most of our customers are earn-and-pay customers. It could be for a genuine reason that the customer has not paid in a particular month, maybe on the due date, but if he sort of regularizes before the end of month, it is okay. And the branch manager and officers responsible for that role, they will take a call on what necessary steps needs to be taken. But I think the moment it crosses 30 days, the supervisors, I had mentioned earlier in the call that we have about 87 supervisors at this point of time, the supervisors also get into an active role into this.

So anything which is about 30 days, especially within the 31 days to 60 days, the supervisors will ensure that — they are more senior people, so they will also take a call on whether the branch manager is assessing the situation rightly. Is it a problematic customer, is it a willful defaulter or if it’s a genuine case, where you can give a little more time and the customer will come back to regularization. So that part happens within the 31 days to 60 days where the supervisor, if necessary, he will even go and personally visit these customers or maybe we’ll follow up with — on phone with these customers, we will go for calls along with the branch managers, all this interventions happens within the 31-day to 60-day number.

So given that a senior person is involved, we will see significant fall right at this bucket. But anything that crosses the 60-day bucket and moves into the bucket 3, which is 61-day to 90-day, not just the supervisor, even the head office is involved, the legal teams are involved, we will be sending centralized notices to the customer asking him to explain the reason, maybe a loan recall notice will be sent, we will send some advisory or cautionary notices to the customer in terms of what happens at the time of a default.

This alongside the head office supervisors, we also have senior people at the head office which includes, Chief Business Officer, the Chief Operating Officer, Deputy Chief Business Officer, I think all these people, we will also be involved in terms of following up directly with the supervisors and the branch manager alongside taking a call on, where necessary legal action is required. All that put together gives us good results in terms of arresting any further flows beyond the 90 days and thus we’re able to get very good numbers at the — even if somebody who has slipped into the bucket 3 doesn’t automatically go into an NPA, we will be able to arrest significant promotion, 95%, 96% of the proportion in the same bucket and not allow for a forward flow.

Saptarshee Chatterjee — Centrum PMS — Analyst

Understood, sir. Very helpful. And on the like number of employees you have around 6,000, close to 7,000 employees. Can you please give some breakup of like you have already told about 1,000 collection officers, but what kind — number of business officers, number of branch managers, number of underwriting people, legal people, IT people, if you can give some breakup of this employee details?

Rangarajan Krishnan — Chief Executive Officer

Yeah, so roughly, within the business and collections, if you add all of them together, we have a 4,850 officers — 4,850 people, and this forms about 70% of our overall customer — overall employee base. We have almost 600 people in credit, this is about 8.5%. We have about 700 people in operations, that’s about 10% of our overall workforce. We also have people in — who act as cashiers in branches, that’s about close to 500, that’s about another 7%.

We have legal teams internally, this includes both people who give opinions and who crosscheck opinions and also people who are involved in recovery efforts, we have 80 people, full-time lawyers within Five Star. So that’s about another 1% roughly. The rest is head office and management. So totally put together, we have 6,933 employees as of December.

Saptarshee Chatterjee — Centrum PMS — Analyst

Great, sir. Thank you. And last question is in terms of your branch structure, can you give some breakup of your branch opex, let’s say for a branch of more than five years of vintage like what kind of opex in terms of rent and salaries that go into?

Srikanth Gopalakrishnan — Chief Financial Officer

Today, when we set up a branch, we have — we put five officers, one branch manager, one cashier, one field credit person and one operations officer. So that’s a total of nine people. Typically, what we see as a salary for — salary, both fixed and variable for a field officer is about INR20,000 to INR25,000. So that’s like a INR1 lakh to INR1.25 lakhs.

You have a branch manager, who’ll be getting anywhere around INR40,000 to INR50,000. So that’s INR1.75 lakhs. Each of the other people on a broad basis, the credit, operational support and cashier, the average salary will be about INR20,000. So, you’re talking about INR1.75 lakhs for the business and collections and another about INR75,000 for the other staff. So that’s INR2.5 lakhs on the personnel cost.

Plus, these are all very notional branches here. So you will probably have about another INR10,000 of electricity cost and various other opex expenses. So it should not cross more than INR3 lakhs for a normal branch when we start. Depending on the increase in the number of officers, the assistant branch, the multiple branch managers and the senior branch manager for the super branches, the INR3 lakhs may go anywhere all the way up to INR6 lakhs to INR7 lakhs.

Saptarshee Chatterjee — Centrum PMS — Analyst

Understood. Sir, can I squeeze in just one last question?

Srikanth Gopalakrishnan — Chief Financial Officer

Yeah.

Saptarshee Chatterjee — Centrum PMS — Analyst

Yeah. So in terms of number of loan accounts, I think you have close to around 2.7 lakh loan accounts. Do you have any number in mind in terms of target addressable market like what kind of numbers you can reach in your existing states after which you have to break into other states?

Rangarajan Krishnan — Chief Executive Officer

Yeah, see, roughly today just about 7% of our portfolio comes from non-South, 93% of the portfolio is within South. I had explained the philosophy that we have consistently followed. It’s difficult or we want to be cautious when it comes to expansion in newer geographies and states, while we will put branches but it’s going to be at a very measured pace as compared to penetration within the existing spates that we have. So the bulk of expansion that we envisage in the next two years to three years, at least 80% to 85% of the expansion will happen within the Southern states.

That said, we will anyway be putting our branches in India, and we also have intentions to enter into one or two neighborhood states from where we are already present in Central India. But these will be more measured, but in terms of AUM impact, it will take another 24 months to 36 months for these states to really matter and come to a reasonable level. The first two years to three years, we’ll be cautiously expanding in the newer geographies, bulk will come in from the existing regions.

Srikanth Gopalakrishnan — Chief Financial Officer

So, Saptarshee, just to add, I think while we don’t have a state-wise breakup of the target addressable market, one of the studies that we had put in, in our prospectus, which was done by CRISIL was the target addressable market across the country. And this is exactly the profile of borrowers that we are catering to, where people have a property, they are in the service-oriented businesses, they don’t have lending from formal institutions is INR22 trillion, that’s like INR22 lakh crores.

And institutions like us all put together would not even have scratched the surface a bit. So I think in terms of the market opportunity, it is very high, And a lot of this market opportunity is also sort of concentrated in states like South India, like Tamil Nadu, Andhra, Telangana, Rajasthan, Madhya Pradesh, Maharashtra and all that. So it’s a very huge market out there in terms of opportunity.

Saptarshee Chatterjee — Centrum PMS — Analyst

Understood, sir. Very, very helpful. Thank you so much.

Operator

Thank you. The next question is from the line of Chandra from Fidelity. Please go ahead.

Unidentified Participant — — Analyst

Hi, sorry. Just a follow up, obviously, the last couple of years as you’re adding this collection vertical has seen the employee expense number going up pretty significantly. I would think that some of this would be basically just filling up this entire function and hereon, it’s a function of case growth. So is it just reasonable to assume that once you get to — I was looking at like your case numbers like a couple of years back and it seems that you need to — I think once you hit 1,200 or 1,300 is where you would sort of — beyond which you sort of grow with the increase in the number of cases. So just trying to understand just directionally how should we start thinking of employee opex after you get to your target?

Lakshmipathy Deenadayalan — Chairman and Managing Director

Yeah. Chandra, I think it was one of your follow-up — earlier question, what is the guidance going forward. See, for last — first 20 years from 2002 to 2022, we didn’t have any collection vertical, neither collection support. As Ranga said the officer who sources the file has to be the in-charge person for collection too [Phonetic], that worked very well. But during COVID 1 and COVID 2, you — if you see the, recall the presentations, our DPDs were a little lower because of the customers got impacted on the cash flows, not in a big way from 90-plus, but if you see our current and 30-plus, it has a bit spiked up.

To give a immediate effect to it, we thought we will incorporate two things, one is the collection support and a collection vertical. So having said that, we don’t want to give at the day one of a file getting disbursed, we wanted after 24 months of tenure getting completed. As Ranga said, putting a vertical in a state is not a easy joke, it’s not a cakewalk, you have to be very, very careful, selecting the people, giving those accounts to their hands and see how it works. So that is where Tamil Nadu got implemented and Telangana subsequently got implemented, whereas the rest of the states we started with a collection support.

Collection support is much easier to put in a branch, suppose if a branch has 1,000 accounts, we can give one branch manager and two officers to start with, and as the number of accounts goes up, the number of officers can be increased. So this is the thought process. But having seen this in last four quarters, five quarters, if you see — recollect, our numbers are bettering quarter-on-quarter. In fact, next quarter numbers would be further better than what we see.

But now we are thinking that, yes, on a guidance basis, a branch if it matures beyond 24 months, we will give a collection support or a vertical will be three to four people in that branch. So it will not be as big number as you see now because it’s the time of correcting your DPDs, putting things back in order, we have invested a lot in that. But this team, I’m very confident we can handle more and more accounts that flows into 24 months tenure. So going forward, I think number of people handling collections will be moderated going forward.

Unidentified Participant — — Analyst

Understood, very clear. Thank you very much.

Operator

Thank you. The next question is from the line of Pranav from Rare Enterprises. Please go ahead.

Lakshmipathy Deenadayalan — Chairman and Managing Director

We can go to the next question.

Operator

As there is no response, we’ll move to the next question, which is from the line of Varship Shah from Envision Capital. Please go ahead.

Varship Shah — Envision Capital — Analyst

Yes, sir. Thank you for taking my question. So our loans are fully collateralized. Could you give some color on the kind of the collateral that we collect and LTV from the states?

Rangarajan Krishnan — Chief Executive Officer

So, Varship, bulk of the collateral that we take is a self-occupied residential property and we don’t take kacha houses. So these are all pucca houses backed by a clear document. So we’ll take two legal opinions on this document, one external, one internal, and we’ll also go and register our mortgage with the State Government Registration Authority. So you can very clearly see Five Star ownership of mortgage across each of these properties that we do.

So 95% is SORP, the balance 5% may be about commercial properties, which are shops owned by the borrowers, which gets mortgaged to us. The origination LTVs will be about largely between 40% to 50% is the origination LTV. The portfolio LTV as of Q3 will be about 37%.

Varship Shah — Envision Capital — Analyst

Okay. And who would be our primary customers, I would say, primary competitors, would it be fintechs or unorganized money lenders, and if you could just throw some details on that, some information?

Rangarajan Krishnan — Chief Executive Officer

So primary competitors are money lenders across each of the markets that we serve. Like I covered earlier, we are largely between Tier 3 and Tier 6 now. So primary focus across the segments is disrupting the money lending segment, that is where most of these people have been financed so far.

When they see an organized lender, especially a company with a track record of more than 35 years registered with RBI and having a good brand name coming there. We see a lot of people naturally preferring us over an unorganized money lender for better practices, for easier loan process and for the safety of the documents that they sort of give it to us as a part of the mortgage. This apart, of course, there are several other people who are also targeting this segment, few other NBFCs, few other small finance banks, but I would say that as compared with most other players, we are very significantly focused only on this segment because it’s a small business loan segment and we have no other product and no other diversions beyond this.

Varship Shah — Envision Capital — Analyst

All right. Thank you for taking my questions.

Operator

Thank you. The next question is from the line of Khushboo Rai from Moneycontrol. Please go ahead.

Khushboo Rai — Moneycontrol — Analyst

Yes, good morning, sir, and congratulation on the good sets of number. Just one question, sir, what do you think regarding the sustainability of the margins? The margins have been in the range of around 15% to 18% over the last couple of years. So what are the reasons and how sustainable is this level?

Srikanth Gopalakrishnan — Chief Financial Officer

So, Khushboo, I think we already gave you a sort of guidance. See, our margins are a little higher because of lower leverage that we have. So the more portfolio gets funded by debt, there will be compression in the margins. What we look at more closely is the spread because that reflects the ability of the Company to raise debt at the optimal cost. So the margins is actually a function of leverage thereafter.

So our belief is that in a steady state scenario, we should be operating at a spread of 12% to 13% and a margin of 14% to 15% as we go forward. So there will be a constriction of about 2% to 2.5% in the margins over the next few years. But then given that the leverage will increase, you will also see this translating into a higher return on equity to the shareholders.

Khushboo Rai — Moneycontrol — Analyst

Okay. Thank you, sir.

Operator

Thank you.

Lakshmipathy Deenadayalan — Chairman and Managing Director

So with this, we’ll — with this, we’ll complete this.

Srikanth Gopalakrishnan — Chief Financial Officer

Mahrukh, anything?

Operator

I would now like to hand the conference over to the management for any closing comments.

Lakshmipathy Deenadayalan — Chairman and Managing Director

So, thank you, all. Thank you for listening us very patiently about our new business model, niche business model that we’ve created and their follow-up on results. Thank you. As I said, March quarter will be also better than this quarter. I’m hoping in a very optimism way, and see you soon on the Q4 conference call. Thank you.

Operator

[Operator Closing Remarks]