Home First Finance Company India Ltd (NSE:HOMEFIRST) Q3 FY23 Earnings Concall dated Jan. 25, 2023.
Corporate Participants:
Manish Kayal — Head of Investor Relations
Manoj Viswanathan — Managing Director and Chief Executive Officer
Nutan Gaba Patwari — Chief Financial Officer
Analysts:
Mona Khetan — Dolat Capital — Analyst
Shreepal Doshi — Equirus — Analyst
Mayank Agarwal — Incred Equities — Analyst
Shubhranshu Mishra — Phillip Capital — Analyst
Raghav Garg — Ambit Capital — Analyst
Nidhesh Jain — Investec — Analyst
Jigar Jani — Nuvama Wealth — Analyst
Pooja Ahuja — Monarch Networth Capital — Analyst
Amit Jain — Axis Capital — Analyst
Abhijit Tibrewal — Motilal Oswal — Analyst
Mayank Agarwal — InCred Capital — Analyst
Ravi Naredi — Naredi Investments — Analyst
Nischint Chawathe — Kotak Securities — Analyst
Bhuvnesh Garg — Investec Capital — Analyst
Vignesh Iyer — Sequent Investments — Analyst
Chandrasekhar Sridhar — Fidelity International — Analyst
Presentation:
Operator
Ladies and gentlemen, good day and welcome to the Home First Finance Company India Limited Q3 and Nine Month FY ’23 Earnings Conference Call. [Operator Instructions]
I now hand the conference over to Mr. Manish Kayal, Investor Relations Head. Thank you and over to you, sir.
Manish Kayal — Head of Investor Relations
Thank you, Vivian. Good afternoon, everyone. I hope that all of you and your families are safe and healthy. I am Manish Kayal, and I look after Investor Relations for Home First Finance. I extend a very warm welcome to all the participants on our Q3 FY ’23 financial results con call.
As usual, Home First management is represented by MD and CEO, Mr. Manoj Viswanathan; and CFO, Ms. Nutan Gaba Patwari. I hope everybody had an opportunity to go through our investor deck and press release uploaded on stock exchanges and on our website yesterday. We will start this call with an opening remark by Manoj and Nutan and then we will have a Q&A session.
With this introduction, I hand over the call to Manoj.
Manoj Viswanathan — Managing Director and Chief Executive Officer
Thank you, Manish. Good afternoon, everyone. I’m pleased to showcase the strong business momentum that we are seeing in our business. Distribution expansion is our key focus area. We now do business at 261 touchpoints across Tier 1, 2 and 3 markets. Physical branches stand at 102. Quarter three FY ’23 saw the momentum continuing on disbursements. We disbursed INR780 crores in quarter three, which is our highest till date with a growth of 11.1% on a quarter-on-quarter basis and 37% on a year-on-year basis. The AUM grew to INR6,751 crores, a growth of 35.2% year-on-year and 7.6% quarter-on-quarter. The portfolio health has improved further. 1+ DPD has reduced to 4.4% from 4.7% and 30+ DPD reduced to 3% from 3.3%. GNPA has reduced to 1.8% from 1.9%.
We will now focus on some of the key drivers and metrics of the business. Coming to technology. During quarter three FY ’23, digital adoption has further improved. Usage of the customer app for various activities has increased. 91% of our customers are registered on our app as of December compared to 87% in September. 89% of our customer queries are now coming via the app. Digitally signed agreements have reached a significant 47% of all customer loan agreements, which were executed in the quarter.
We continue to focus our expansion in the states of Gujarat, Maharashtra, AP, Telangana, Karnataka and Tamil Nadu. Coming to margins, the spreads are at 5.7% after two repricing actions of 25 basis points in quarter two and 50 basis points in quarter three. Our spread guidance for the medium term remains at 5.25% along with the cost of borrowing increases. On borrowing, we continue to focus on diversifying our funding sources. We have raised INR280 crores from International Finance Corporation through a seven-year — up to seven-year debt.
On asset quality, all buckets continued to improve. In quarter three, 1+ DPD reduced to 4.4% from 4.7% and 30+ DPD reduced to 3% from 3.3%. Our Gross Stage 3 GNPA as per RBI circular dated 12th November 2021 reduced to 1.8% from 1.9%. This includes INR390 million that is 0.7%, which is currently in buckets which are less than 90 DPD, but included in the NPA due to asset classification norms as per RBI notification dated 12th November 2021. Adjusted further, the number stands at 1.1% in December.
Coming to the outlook. On growth, we will continue to focus on growth through a combination of three strategies; deeper expansion into Tier 2 and Tier 3 towns in existing states, we plan to reach 400 touchpoints in two years. Increasing market share in existing markets, that is the second strategy. Expansion of customer target segment through co-lending and we expect to reach the milestone of INR10,000 crores in the next 15 months to 18 months.
On technology, we will continue to maintain our lead on systems and technology to build moats in origination, underwriting and collections. Our technology lead will drive our industry-leading productivity metrics and profitability. Coming to funding, we have access to diversified funding sources and we will continue to build on this further. Lastly, a good team is most critical to achieve our ambitions and we will continue to invest in finding and training the right people so that we can build a team that can take the company to the next trajectory.
With this, I would like to now hand over the call to Nutan to take you through the financials. Nutan, over to you.
Nutan Gaba Patwari — Chief Financial Officer
Good afternoon, all. I will take you through our performance for quarter three FY ’23 starting with the key highlights. On financials, we continue to stay focused on our key operating matrices with an intention to deliver mid-teen ROE in a couple of years. Our net interest margin for the quarter is stable at 6.4% even in the increasing interest rate environment. Q-o-Q spreads are lower by 10 basis points. We have increased our yield by 50 basis points effective 1st December and book cost of borrowing increased by 30 basis points on a Q-o-Q basis.
Our core business health is very strong. Net interest income has gone up by 50.4% on Y-o-Y basis and 8.6% on a Q-o-Q basis. We did direct assignment of INR59 crores during the quarter as a liquidity strategy. We continue to have robust demand for our portfolio of assets. We also did a co-lending transaction of INR30 crores during the quarter. Opex to assets stands at 2.8% for the quarter. As guided earlier, we expect this ratio to remain in the range of 3% to 3.2% going ahead as we focus on expansion.
Cost to income at 35.3% in Q3 decreased of 210 basis points on a Q-o-Q basis. Q3 FY ’23 PPOP stands at INR81.7 crores, growth of 10% on a Q-o-Q basis and 25.5% on a Y-o-Y basis. Credit cost was at 0.4% is within our expected range. Our ECL provision stands at 1% of the total principal outstanding. We continue to remain conservative with the provisions. Total provision coverage ratio stands at 53.6%. Prior to NPA reclassification as per RBI circular, PCR stands at 87.4% versus 91% in Q2 FY ’23. Our profit after tax of INR59 crores grew by 8.2% on a Q-on-Q basis and 27.9% on a Y-o-Y basis.
Moving to liquidity and borrowings. The company continues to have diversified and cost effective long-term financing sources. During the quarter, we raised INR280 crores from IFC via NCDs to finance affordable and green housing. We have a healthy mix of borrowing with 56% [Phonetic] borrowings from banks, 17% from NHP refinance, 19% from assignment and 6% from NCDs. We continue to have zero borrowings through commercial paper. Our cost of borrowing is competitive at 7.4%, increase of 30 basis points from 7.1% on a Q-o-Q basis. Our marginal cost of borrowing for Q3 FY ’23 was at 8.5%. During nine months FY ’23, we have not availed any new industry borrowings.
Moving to capital. Our capital adequacy ratio is 49.6% with Tier 1 at 49.1%. Our December net worth stands at INR1,748 crores vis-a-vis INR1,574 crores as of March. Our quarter ROA stands at 3.8%. Our annualized ROE stands at 13.7% on Q3 numbers. Our book value share is INR199. We are also delighted to share with you that Home First is now been rated as low risk on ESG risk parameter by Morningstar Sustainalytics. Our score of 15.2, we believe is the best amongst BFSI peers. This validation by a large agency highlights Home First focus on sustainability and superior corporate governance.
With this, I open the floor for Q&A. Thank you.
Questions and Answers:
Operator
Thank you. [Operator Instructions] The first question is from the line of Mona Khetan from Dolat Capital. Kindly proceed.
Mona Khetan — Dolat Capital — Analyst
Hi, good evening. And congratulations on a good set of numbers. Sir, firstly on the PLR hike of 50 bps last quarter. Sir, is it fully built into the yields or yet to play out?
Nutan Gaba Patwari — Chief Financial Officer
Mona, because we’ve taken the repricing as effective 1st December, the P&L benefit has come only for one month. So the benefit of three months will come only in quarter four so to that extent, there is some upside on the each [Phonetic] line in Q4 as well.
Mona Khetan — Dolat Capital — Analyst
Sure. And if I look at the incremental yields on Slide 27, they seem to have moderated from 13.4% last quarter to 13.2%. Is that — am I reading the numbers right or there are some typos from this?
Nutan Gaba Patwari — Chief Financial Officer
The numbers are correct. So this moderation is to enable sustained growth as we have been now focused on more competitive pricing in the market. And so we will continue to maintain the wider spread that we’ve been doing of around 5.25%.
Mona Khetan — Dolat Capital — Analyst
Okay. So incrementally it has actually moderated versus last quarter, okay, because of pricing. Okay. Got it. And how about the BT Out, if you could give some color?
Nutan Gaba Patwari — Chief Financial Officer
BT Out, we’ve been published, it’s 4.8% for Q3. It’s mentioned in Slide number 24.
Mona Khetan — Dolat Capital — Analyst
Okay. Okay, sure. And just finally on the direct assignment book, the book and the related income has moderated over the quarters. So anything to read into it?
Nutan Gaba Patwari — Chief Financial Officer
So I think we’ve been able to generate lot of liquidity through other sources. So particularly for this quarter, we are doing the ISE transaction. We also had visibility into the CLSS subsidy that we received in December and also in January. From that perspective, we did not feel the needs to do assignment. It will continue to remain a good liquidity tool. So we’ve guided about INR100 crores a quarter so that remains the ballpark where we want to be plus/minus INR20 crores, INR30 crores a quarter.
Mona Khetan — Dolat Capital — Analyst
Okay. So if I look at the last four quarters or five quarters also, the DA share has come down in the overall area mix. So no change as such in strategy, right? It’s purely the liquidity parts you highlighted.
Nutan Gaba Patwari — Chief Financial Officer
Absolutely.
Mona Khetan — Dolat Capital — Analyst
Thank you. I’ll come back in the queue.
Operator
Thank you. The next question is from the line of Shreepal Doshi from Equirus. Kindly proceed.
Shreepal Doshi — Equirus — Analyst
Thank you for giving me the opportunity, and congrats on yet another strong quarter. My question was pertaining to the operational metrics. So if you look at the disbursements upon employee and AUM upon employee that has seen a very, like strong increase over the last, say, seven quarters, eight quarters, despite adding branches and employees. So what is the comfortable disbursement upon employee sort of a metric that we are looking at? So if you look at, currently, disbursement upon employees is almost INR80 lakhs and even upon employees almost INR7 crore. So what is the number that we are looking at, or we are comfortable with?
Manoj Viswanathan — Managing Director and Chief Executive Officer
INR80 lakhs per quarter, I guess, you mean.
Shreepal Doshi — Equirus — Analyst
INR80 lakhs per employee is the disbursement number that we have average if you look at like.
Manoj Viswanathan — Managing Director and Chief Executive Officer
For the quarter I guess you’re saying, right?
Shreepal Doshi — Equirus — Analyst
Yeah. For the quarter, yes.
Manoj Viswanathan — Managing Director and Chief Executive Officer
Yeah. So I think our attempt is basically to keep improving on that number. I mean we are not working with any particular number in mind, but we have — whatever we have, we keep working on improving it. And some of it is the discovery because we are implementing a lot of digital processes. For example, if you see compared to one year ago, 50% of our customers have migrated into e-signature process, so where they can complete agreements electronically. So many such small initiatives are helping us to improve the productivity of the team. So this is a number that can — that we are trying to keep improving over time. So we don’t have any specific target number in mind.
Shreepal Doshi — Equirus — Analyst
Sir, why I’m coming on to that question is also because if you look at our employees role, it’s much more comprehensive. Like they’re not only responsible for sourcing, they’re also responsible for collection part. So therefore, if you look at the AUM upon employee, that number is almost INR7 crore now. So from that perspective, is there a check because in an event of weak — say weak economic situation or bad collections, their efforts would shift towards bringing in those collections. So from that mindset, do we have any thought process?
Manoj Viswanathan — Managing Director and Chief Executive Officer
No, we have been through such phases during COVID when the emphasis was on collections, so — and that is an advantage of our model because these employees are well trained on collections. We don’t really need to deploy new resources or look for resources outside. They are — we are able to quickly redeploy them on collections if there is a crisis somewhere or if there is a crisis like situation. That has been — that’s the advantage of our model. And in the absence of any COVID-related shocks, it’s largely business as usual and collections and the time which is spent, time is well balanced between origination and collections.
Shreepal Doshi — Equirus — Analyst
Okay. Got it. Sir, the second question was with respect to the yields for the co-lending loans that we’re doing. So what is the yield there?
Manoj Viswanathan — Managing Director and Chief Executive Officer
The co-lending loans would be at typically, I mean in the context of today’s market rates, they would be at 10.5% or thereabouts, 10%, 10.5%.
Shreepal Doshi — Equirus — Analyst
Okay. And just wanted to understand the yield differential for home loans and LAP that we have. So if you can give me the — if you could provide the range for home loans and the range —
Manoj Viswanathan — Managing Director and Chief Executive Officer
150 basis points to 200 basis points between home loans and LAP differential yields.
Shreepal Doshi — Equirus — Analyst
150 basis points to 200 basis points?
Manoj Viswanathan — Managing Director and Chief Executive Officer
Yeah.
Shreepal Doshi — Equirus — Analyst
Okay. Got it. One last question was with respect to the NHB. So during this quarter we have not utilized any NHB lines. So — but how much do we have as sanction lines?
Nutan Gaba Patwari — Chief Financial Officer
INR600 crores, Shreepal. We’ve also mentioned that specifically in Slide number 33.
Shreepal Doshi — Equirus — Analyst
Sorry, ma’am, I missed that part.
Nutan Gaba Patwari — Chief Financial Officer
INR600 crores is the approval that we have from NHB.
Shreepal Doshi — Equirus — Analyst
Okay. It is not yet utilized for this year.
Nutan Gaba Patwari — Chief Financial Officer
Correct.
Shreepal Doshi — Equirus — Analyst
Okay. And then just last question was with respect to the PMAY subsidy. So when was the last credit that happened and are we expecting any credits that we will receive for our customers?
Nutan Gaba Patwari — Chief Financial Officer
Sir, we got INR80 crores of subsidy in December. We also got a slightly larger shrunk in January, after which most part of it is done. So we will have another INR20 crores, INR30 crores to go and that’s pretty much about it.
Shreepal Doshi — Equirus — Analyst
Okay. Got it now. Thank you, and thank you so much. And good luck for the next quarter.
Nutan Gaba Patwari — Chief Financial Officer
Thank you.
Operator
Thank you. The next question is from the line of Mayank from InCred Capital. Kindly proceed.
Mayank Agarwal — Incred Equities — Analyst
Thank you for the opportunity. And congrats on the good set of numbers. So my question is basically on the PMAY subsidy. So are you seeing any kind of lower sanctions, delay, tightening or anything there? And can the lower subsidy going forward from government can impact demand in our customer profile?
Manoj Viswanathan — Managing Director and Chief Executive Officer
See, the program, the subsidy program was closed as of last month itself and we have not offered subsidy to any customers who were onboarded after March. The subsidy that we are receiving now is for customers who were onboarded prior to that and who were eligible for the subsidy. So — and which is also now almost done and we will — I mean all the backlog has been cleared out. There is very little left to go now. So both the scheme as well as the subsidy process has kind of concluded now. And we have seen now almost one year of — not one year, about nine months post the closure of the subsidy where the demand has been very strong.
Mayank Agarwal — Incred Equities — Analyst
So basically we are not witnessing any impact demand to borrow on the subsidy?
Manoj Viswanathan — Managing Director and Chief Executive Officer
No. There is no — I mean, there is no demand impact because of the subsidy program being closed. So, yeah.
Mayank Agarwal — Incred Equities — Analyst
And my second question is basically on our bounce rate. So we have seen the bounce rate normalizing and last quarter you were talking about the customer shifting from cash to online payment because of which our bounce rate are impacted. So any color on that?
Manoj Viswanathan — Managing Director and Chief Executive Officer
The trend seems to continue. I mean it has moderated slightly compared to last quarter, but we are still seeing a very large number of customers paying immediately after bouncing the payment so that remains a mystery. So now, we have a very — I mean, we have a daily track of this. So we are getting almost 5% of the payments within three days of bouncing. So — and conversations with customers are not really yielding any insights on that as to why they’re bouncing and paying immediately.
Mayank Agarwal — Incred Equities — Analyst
Okay. Thanks. That’s all from my side. And best of luck.
Operator
Thank you. [Operator Instructions] The next question is from the line of Shubhranshu Mishra from Phillip Capital. Kindly proceed.
Shubhranshu Mishra — Phillip Capital — Analyst
Hi, good afternoon. Thank you for the opportunity. Couple of questions. The first one is, if we can give the split of employees function-wise; how many are in HO, how many in sales, how many in collections, how many in credit? The second is on the credit underwriting. Do we utilize our sourcing employees to do the underwriting as well or do we have a separate credit underwriting team? And also if we deploy any sort of external valuation experts to do the valuation? That’s the second. And the third would be on the collection itself. What percentage of collections are cash now versus say a year ago? And what percentage are on NACH? And on NACH, what is the bounce rate that we get? Thanks.
Manoj Viswanathan — Managing Director and Chief Executive Officer
Sure. So head office, we have about 15% of our employees, about 150 employees are in head office versus about 800 plus — sorry, close to 850 employees in the branches. And as far as underwriting is concerned, we have a central team. Our model — underwriting model itself is a centralized model where we have a central team of about 15 employees to 20 employees who are underwriting every loan. The data capture and some amount of data collection and customer interaction happens at the branch level. But at the branch level, there is no authority to approve any transaction. And as far as the legal and technical checks are concerned, it’s all done by service providers at each location. So we have a panel of lawyers and valuers who do the valuation and those reports are actually checked by the centralized underwriting team as well before giving the final go ahead.
And the last question I think was on collections, the cash part of the collections. So cash part of collections if you see five quarters back, it used to be about 8%. Now it is about 6% as per the chart that we are publishing. So, yeah, I think the trend, it has generally trended down from about 10% to about 6% currently. But even the 6% that we collect in cash is not being collected by our employees individually. It is — these customers deposit — these deposit the cash at Fino outlets, the Fino Payments Bank outlets. And the payment comes to us in an electronic format. So actual physical cash collection is only about 1% currently. The ACS coverage is there for 100% of the customers, and — but some of them bounce the payments and that’s where the cash collection comes into play.
Shubhranshu Mishra — Phillip Capital — Analyst
So balance 94% are on NACH?
Manoj Viswanathan — Managing Director and Chief Executive Officer
No, it is not like that. It’s actually the bounce rate is about 14% as we have published. So the 86% of the customers would have cleared their NACH payment and the 14% have bounced their NACH payment and we have to have some alternative method of collection for the 14% of the customers. So that alternative in most of the cases, it is also electronic. So like through a UPI payment or through the app, et cetera. But out of that 14, about six of those 14 customers are also paying in cash. The balance eight are paying electronically.
Shubhranshu Mishra — Phillip Capital — Analyst
Understood. And if I could just squeeze in one more question. The files are they stored at a centralized location or are they stored at the branches? Or is there an external agency again deployed for this?
Manoj Viswanathan — Managing Director and Chief Executive Officer
Sorry, what central? Sorry —
Shubhranshu Mishra — Phillip Capital — Analyst
The loan documents with various other documents, where are they stored? Are they stored in situ in branches? Or is there a centralized location? Or do we have a vendor for this?
Manoj Viswanathan — Managing Director and Chief Executive Officer
They are stored in a centralized. We have an agreement with or I mean arrangement with the vaulting company. The royalty agreements, the loan agreements, the property papers and other important documents, it’s vaulted directly there. So the branches actually send the document directly to the vault, and it is vaulted over there. So these vaults are actually located in the NCR region.
Shubhranshu Mishra — Phillip Capital — Analyst
Understood. Thank you. That is very helpful. I’ll come back in the queue.
Operator
Thank you. The next question is from the line of Raghav Garg from Ambit Capital. Kindly proceed.
Raghav Garg — Ambit Capital — Analyst
Hi. Thanks for the opportunity. Just a couple of questions from my side. If you could highlight what kind of competitive scenario that you are looking at in south of India where your exposure has been increasing since last several quarters. Also I think you’re focusing more on the row houses in that region. So specifically in that segment, can you comment what are the kind of ticket sizes that you’re financing? And what kind of customers are these which go for such houses? And my last question is are these loans which you give for row houses, are these generated through developer partnerships or you are — or there is some other model that you are following here? Thanks. That’s all from my side.
Manoj Viswanathan — Managing Director and Chief Executive Officer
Yeah. So in South India, the origination is largely individual customers who construct their own homes. The concept of row houses is not that prevalent in the southern states. It’s mostly customers building houses on their own plots. That’s generally what we originate. As far as row houses are concerned, the model exists in places like Maharashtra and Gujarat, especially in smaller towns. And there, the agreement or the partnership is with the developer who’s building the row houses and the developer censors the references of customers who require these loans. So that’s generally the origination model with row houses.
Raghav Garg — Ambit Capital — Analyst
Thanks.
Manoj Viswanathan — Managing Director and Chief Executive Officer
Raghav, are you there?
Raghav Garg — Ambit Capital — Analyst
Yeah. My questions are answered. Thanks.
Operator
Thank you. The next question is from the line of Nidhesh Jain from Investec. Kindly proceed.
Nidhesh Jain — Investec — Analyst
Thanks for the opportunity, sir. Firstly on the connector account. Can you share the number of active connectors for the quarter?
Manoj Viswanathan — Managing Director and Chief Executive Officer
2,100.
Nidhesh Jain — Investec — Analyst
Okay. Secondly on the incremental yields, the quarter-on-quarter drop in incremental yields. We have also witnessed increase in share of LAP in this quarter. So it is more strategic or it is competitive intensity that we are witnessing because of which the incremental yield has dropped?
Manoj Viswanathan — Managing Director and Chief Executive Officer
We want to maintain competitive pressure in the market and ensure that we are gaining share so which is why we kept the rates competitive. We thought right now when the rates are expected to taper off is a good time to be more competitive in the market and gain share because the risk of actually getting the spreads getting compressed is lesser at this point of time because we are expecting the rates to taper off. So we thought rather than increasing the rates, let us stay competitive and gain share. I think that’s the thought process behind the rates that we are maintaining in the market today.
Nidhesh Jain — Investec — Analyst
Sure. And lastly on the LAP book, we have seen very strong growth in that portfolio I think almost doubling up over a one-year period. So what is the strategy there? And how is the asset quality trends in that LAP book?
Manoj Viswanathan — Managing Director and Chief Executive Officer
LAP is something that we have been saying that we are comfortable with the 15% kind of a number for the AUM. And I think the percentage is catching up gradually. So as far as the delinquency trends are concerned, I think they are trending well, which is why we’re comfortable in onboarding them. So they are trending well as of now.
Nidhesh Jain — Investec — Analyst
Sure, sir. If you can share one DPD of LAP versus housing loan, what could be differential in that odd [Phonetic]?
Manoj Viswanathan — Managing Director and Chief Executive Officer
Broadly they will be in the same ballpark.
Nidhesh Jain — Investec — Analyst
Okay. Thank you, sir. That’s it from my side.
Operator
Thank you. The next question is from the line of Jigar Jani from Nuvama Wealth. Kindly proceed.
Jigar Jani — Nuvama Wealth — Analyst
Yeah. Hi, thanks for taking the question. And congratulations on a great set of results. So what are we seeing is basically that your new to credit customers have been consistently falling down at a rapid rate. And also we are seeing a substantial increase in the ticket sizes — average ticket sizes above INR15 lakhs proportion as a percentage of the 12-year [Phonetic] is going up. So broadly where do you see this settling? And do you think that we will eventually migrate to a more higher ticket size and competing more in the prime segment maybe two years or three years down the line? And what kind of competitive pressures do you think that will place on your spreads maybe two years or three years down the line? Some thoughts on that would be great.
Manoj Viswanathan — Managing Director and Chief Executive Officer
Yeah. So starting with the new to credit customers. So this is a function of actually credit activity in the market and we have been saying that every quarter this number of new customers, customers who are new to credit keeps decreasing. But having said that, even customers who have credit history — recent credit history do not find it very easy to get a housing loan and they generally form the target segment for us. And these are customers who may have informal incomes, who are working in small companies where documentation is — their income documentation is not very strong, et cetera. So while they may have a bureau score, the rest of the criteria that is required by larger lenders is not fulfilled and hence they form our target segment, plus the bureau score is also again on the back of very recent loans or very small loans like consumer loans et cetera, become a durable or two-wheeler loans. And generally lenders do not give much credibility to that bureau score. As a primary — you can say primary criteria for providing a housing loan to the customer.
So that really does not impact our target population in terms of size of the addressable market. As far as ticket size is concerned, it’s more of a secular increase, because we are operating in markets which are fairly you can say affluent and well developed in industrialized markets. So Gujarat and the southern markets, Maharashtra and including southern markets, the per capita incomes are much higher than national average and we are seeing a trend of people in the affordable segment also constructing better quality homes, larger homes et cetera, with their incomes rising up. And it’s more of a secular increase. The segment is the same, the target segment is actually the same, but people are preferring to spend a little more on their homes. And as a result of it, ticket sizes are moving up. Land values are moving up as a result of which your ticket size is also moving up, et cetera. So it’s more of a secular increase. I mean it is not really any conscious effort from our side to address a different population or a different target segment.
Jigar Jani — Nuvama Wealth — Analyst
Okay. Understood. Great. And sir, I think you were guiding for about 150 branches in the next couple of years. So what is the branch expansion plan maybe in Q4, and for the rest of FY ’24, if you could guide on the branch expansion?
Manoj Viswanathan — Managing Director and Chief Executive Officer
Branch expansion, we have about five to seven branches which are a kind of work in progress and which should get completed in this quarter. And kind of a similar number every quarter is what we are looking at. I mean some quarters there is a lull, and there’s some catch-up in the next quarter kind of a thing.
Jigar Jani — Nuvama Wealth — Analyst
Okay. So, it’s basically just one branch addition this quarter is just a one-off and you will again come back to the run rate.
Manoj Viswanathan — Managing Director and Chief Executive Officer
Yeah. Like, it’s just that there are few branches are in the last stages so we are just waiting for it to get completed kind of a number.
Nutan Gaba Patwari — Chief Financial Officer
We also front-loaded the branch expansion in first half of this year, where we added about 20 plus branches. So that kind of has most part of the job for this year has already been done.
Jigar Jani — Nuvama Wealth — Analyst
Okay. Understood. So most of the expansion that you will see is post Q4 and FY ’24, basically, the majority one?
Nutan Gaba Patwari — Chief Financial Officer
Yes. So Q1, you will see again or H1 next year, you will again see bulk of the additions for next year.
Jigar Jani — Nuvama Wealth — Analyst
Sure. And the last question. On your borrowing — bank borrowings, how much of this repo or MCLR or the general interest rate hikes have been factored in, in your borrowing cost as in how much more do you see the cost of borrowing inching up from here? Probably on the incremental cost of borrowing is 8.5%, how much more expansion do you foresee based on the current interest rate hikes that have been done till now or anything has been passed?
Nutan Gaba Patwari — Chief Financial Officer
Yeah. So on the marginal cost of borrowing, we are pretty much at the peak rate. Any further increase from here will largely depend on where the policy rates will be. On the back book or the book cost of borrowing, we are at 7.4% for the quarter with NHB coming in, in the next couple of quarters and then we should be able to manage this with 30 basis points to 40 basis points increase let’s say in Q4, and maybe be similar increase in Q1. So we should be keep it way below the marginal cost of borrowing at least next two quarters.
Jigar Jani — Nuvama Wealth — Analyst
And your yield increases, which is 50 bps will start reflecting from Q4 basically in your back book?
Nutan Gaba Patwari — Chief Financial Officer
See, there is a portion which is already reflected, because it was effective 1st December, but fully it will reflect in Q4.
Jigar Jani — Nuvama Wealth — Analyst
And any plans for any incremental yield increases for rate hikes from your end maybe in Q4?
Nutan Gaba Patwari — Chief Financial Officer
We are in discussion, but that will be more a Board and an ALCO decision, which will have to take place over time. What we are focused on was maintaining the spread that we have guided, which is 5.25%.
Jigar Jani — Nuvama Wealth — Analyst
Understood. Thanks so much for your answers and best of luck. Thank you.
Operator
Thank you. The next question is from the line of Pooja Ahuja from Monarch Networth Capital. Kindly proceed.
Pooja Ahuja — Monarch Networth Capital — Analyst
Yeah. Hi, thanks for the opportunity. Firstly, wanted to understand why it was mentioned in the opening comments that the credit cost we have been cautious in terms of maintaining additional provisions. Just wanted to understand on a sustainable basis what is our credit cost guidance for the next maybe two years, three years?
Nutan Gaba Patwari — Chief Financial Officer
30 basis points to 50 basis points is what we have been guiding.
Pooja Ahuja — Monarch Networth Capital — Analyst
So we maintain that.
Nutan Gaba Patwari — Chief Financial Officer
Yes, yes.
Pooja Ahuja — Monarch Networth Capital — Analyst
Sure. And given the disbursement growth that we have been witnessing, are we still maintaining our AUM guidance of 30%, or do we see higher growth there?
Manoj Viswanathan — Managing Director and Chief Executive Officer
No. We are maintaining a guidance of 30% because the aim of the team and objective of the team is to try do better, but 30% is something that we are guiding towards.
Pooja Ahuja — Monarch Networth Capital — Analyst
Okay. Sure. And lastly on the bounce rates, do you think this 14% or 15% level is now the normal levels or do we see further improvement from here on? We have seen some improvement in January, I think, but would it be in this 14% to 15% range?
Manoj Viswanathan — Managing Director and Chief Executive Officer
Looking at the behavior of the customers, it looks like it can improve substantially because we have been tracking the number of customers who pay immediately after bouncing and we are seeing that almost 5% pay immediately in the immediate three days after bouncing. So logically, it looks like these customers can be convinced to clear their payments and reduce the bounce rate, but we are still not getting any insights on how that has to be achieved and yes, we are working on that.
Pooja Ahuja — Monarch Networth Capital — Analyst
Okay. Understood. That’s it from mine. Thank you.
Operator
Thank you. The next question is from the line of Amit Jain from Axis Capital. Kindly proceed.
Amit Jain — Axis Capital — Analyst
Yeah. Hi, sir. Thanks for taking my question. Sir, I had a question on the mix of salaried versus self-employed. So the proportion of self-employed has been steadily rising, it’s close to 30% now. So is there any change in strategy, or is that a conscious decision? And what is the optimal mix that you would look at in terms of salaried versus self-employed?
Manoj Viswanathan — Managing Director and Chief Executive Officer
So I think it’s a function of the distribution. So historically, our distribution was more focused on larger towns where there is a larger population of salaried customers. And now with continuing expansion into smaller towns, Tier 2, Tier 3 and Tier 4 towns; the population of self-employed is larger. So there is again a very, very gradual increase in the population of self-employed. Other than that, there is nothing that we are doing consciously to onboard self-employed customers specifically.
Amit Jain — Axis Capital — Analyst
Sure, sir. That’s it, sir. Thank you.
Operator
Thank you. The next question is from the line of Abhijit Tibrewal from Motilal Oswal. Kindly proceed.
Abhijit Tibrewal — Motilal Oswal — Analyst
Yes. Thank you for taking my questions. Hi, Manoj. Hi, Nutan. Both of you are doing well. Again congratulations on a very good quarter. My question is more around the demand environment and let me kind of take a few seconds to explain what I’m trying to understand. At least can we, I mean speak to the larger HFCs. I mean they have talked about I mean some sluggishness in demand, which was there in the third quarter. Obviously, I mean, our disbursements were very healthy and they don’t kind of suggest that. Moreover, what you also kind of suggested that I mean incremental needs at these levels, you are kind of trying to gain market share, which is also praiseworthy.
But what I’m trying to understand is are you seeing — why I’m trying to understand this is, I mean, I believe prime housing and affordable housing are very different things and should be looked upon differently. So what I’m trying to understand is, because the EMIs have gone up given the higher interest rates has the loan eligibility of the customers come down and which may kind of impact the demand going forward? I mean, how are you kind of looking at the demand environment in addition to kind of gaining market share?
Manoj Viswanathan — Managing Director and Chief Executive Officer
Demand in the segment that we are targeting, the demand in the segment is strong, and it doesn’t seem to have got impacted by increase in interest rates. While in the higher ticket segment, it could have impacted because ticket size is also large and the EMI changes due to increase in interest rates are also large. In our segment, we have not seen any impact on demand as such. So — and the customers also take a while to actually take a decision to build a house and there are many other moving parts in building a house like buying a plot, et cetera. So the interest rate is only one component out of their multiple decision points. So we are — so far we are not seeing any impact on demand. And — so demand continues to remain strong. I don’t know whether that answers your question.
Abhijit Tibrewal — Motilal Oswal — Analyst
It does. I mean, because I mean, what I was trying to understand is affordable housing we are continuing to see good demand and you’re not seeing any impact on demand because the interest rates have gone up. I mean, that’s — I’ll take it as a healthy sign.
Second question that I had was for Nutan, the other two questions for Nutan. One is, I mean, how should we think about the provisioning cover or I mean, either on Stage 3 loans or with the ECL, EAD. I mean, why I’m asking this is there are two pools of thought here. One is, I mean, one are companies who say that, listen, this is our ECL model and based on that what our ECL model indicates and this is the kind of provisioning cover that we want to maintain. And then there is another set of companies who think differently who say that, I mean, when the going is good, and when the profits are good, then maybe we should kind of build up some work for in terms of provisions. So how are we thinking about the provisioning cover?
Nutan Gaba Patwari — Chief Financial Officer
So Abhijit, as a company, we have focused on early delinquency. So you would have seen that the bounce rate is trending well, one DPD is down to March ’20 levels. We are amongst very few companies where the 30 DPDs are 3% now. So all is going good in terms of delinquencies. What we want to really do on the ECL side is to have an extremely strong balance sheet, so that my net NPA over timing is manageable in terms of discussion from a financial perspective. So that’s the goal. Now like you said, if you’re in a place where we have some room, idea is to keep the provision levels healthy and run with that. So we’ve been guiding 1% of ECL provision on the total principal outstanding. That’s essentially the number we’ve been carrying for some time. And as long as possible, we will want to do so. So we are not deviating from that in the medium term.
Abhijit Tibrewal — Motilal Oswal — Analyst
Got it. And then lastly, Nutan, I wanted to understand, I mean, there are a few HFCs who have reported, there’s a larger HFCs who reported. And who kind of suggest that there is a one-time gain that they’re seeing from the assigned pools of loans. So I mean, is there anything that we are seeing, I mean, how we kind of do accounting typically in an assignment transaction, they book the upfront assignment income. But now that interest rates are going up. I mean, is there a positive or negative variance, which is there from the assigned pools of loans?
Nutan Gaba Patwari — Chief Financial Officer
So that assigned pool is mark-to-market essentially. What you’re talking about needs to be done at every quarter-end and we do so. What ends up happening is that the modification amount that ends up coming is a relatively low number because there have been some assignment that have been done prior to the rate increase, which is let’s say pre or pre mid-COVID and some assignment that has been done post mid-COVID. So on a blended basis, the number doesn’t remain meaningful and it goes through the other operating income line.
Abhijit Tibrewal — Motilal Oswal — Analyst
Got it. This is very, very useful. Thank you so much and wish both of you the very best and to the rest of the team. Thank you so much.
Nutan Gaba Patwari — Chief Financial Officer
Thanks, Abhijit.
Manoj Viswanathan — Managing Director and Chief Executive Officer
Thank you.
Operator
Thank you. The next question is from the line of Mayank from InCred Capital. Kindly proceed.
Mayank Agarwal — InCred Capital — Analyst
Yeah. Thanks for the follow up. So my question is on the spreads of 5.25%, when do we expect to reach that level, in mid-term or long term?
Nutan Gaba Patwari — Chief Financial Officer
Mid-term.
Mayank Agarwal — InCred Capital — Analyst
I guess two years to three years.
Nutan Gaba Patwari — Chief Financial Officer
The spread of 5.25%?
Mayank Agarwal — InCred Capital — Analyst
Yeah, yeah.
Manoj Viswanathan — Managing Director and Chief Executive Officer
What was the question — last part of the question?
Mayank Agarwal — InCred Capital — Analyst
So why do — when we do expect to reach the level of 5.25% spreads?
Manoj Viswanathan — Managing Director and Chief Executive Officer
5.25% is we are in this interest increasing interest rate scenario, we are guiding towards a 5.25% spread. So currently it stands at 5.7%. So if interest rates increase further and they are likely to increase or there’s likely to be some catch-up of the increased interest rate now for the next two quarters so that’s why we are guiding towards 5.25%.
Mayank Agarwal — InCred Capital — Analyst
So by next one year, we can expect to reach 5.25%.
Manoj Viswanathan — Managing Director and Chief Executive Officer
Yeah. In the next one year or maybe next two quarters, three quarters.
Mayank Agarwal — InCred Capital — Analyst
Okay, thanks. That’s all from side. Thank you.
Operator
Thank you. [Operator Instructions] The next question is from the line of Ravi Naredi from Naredi Investments. Kindly proceed.
Ravi Naredi — Naredi Investments — Analyst
Thank you very much. Thanks, Mr. Manoj and your team for fantastic result and growth. Sir, my question is when we are technology driven company, why cost to income ratio rise by 2.3%, 230 basis points?
Manoj Viswanathan — Managing Director and Chief Executive Officer
So I think last year when we spoke, we had mentioned that our costs are likely to increase in the medium term because during COVID, we did not make certain investments. And we are making those investments now for the next 12 months to 18 months and we had guided that the cost is likely to increase. And then after that, it will again start moderating. So that is the trend that we are following.
Ravi Naredi — Naredi Investments — Analyst
Okay. And sir, do you find more challenge from asset side or liability side in this scenario?
Manoj Viswanathan — Managing Director and Chief Executive Officer
So I think asset side, we went through a certain, let’s say, difficult phase during COVID, but we have come out of that well. And frankly speaking, same on the liability side as well. So as of now, we are fairly comfortable on both these aspects.
Ravi Naredi — Naredi Investments — Analyst
Okay. And sir, when we are growing since last 45% AUM, why you are thinking the growth will be 20% in future, guidance 20%?
Manoj Viswanathan — Managing Director and Chief Executive Officer
30%, sir. We said 30%.
Ravi Naredi — Naredi Investments — Analyst
30% is okay. Thank you. Thank you, sir. Thank you.
Operator
Thank you. The next question is from the line of Nischint from Kotak. Kindly proceed.
Nischint Chawathe — Kotak Securities — Analyst
Thanks for taking my question. Your borrowing cost is around 7.4%, and you mentioned that your incremental cost of borrowing is somewhere close to 8.5%. If I hear that rightly, 8.5% or 8.75%. So when do you really think that your weighted average cost of funding will kind of come to the marginal rate? Is it like two quarters away, four quarters away, if you could give some color on that?
Nutan Gaba Patwari — Chief Financial Officer
So Nischint, the marginal cost of borrowing of 8.5% does not include the benefit of NHB borrowing. As we continue to drawdown the NHB funds in Q4 and subsequently in Q1, we will get that benefit and that will start also reflecting in the book cost of borrowing. At the same time, the lagged increase of ancillary will also flow in. So in an ideal situation that NHB did not exist. This convergence would have happened, let’s say, in two quarters to three quarters from now. Because of the presence of NHB borrowing and this mix being at 20% plus, the overall cost of borrowing will remain below 8.5%. That’s what we are looking at right now in our model. So we are looking —
Nischint Chawathe — Kotak Securities — Analyst
Ex-NHB, how much would be the difference? I mean if one has to look at 7.4% ex of NHB?
Nutan Gaba Patwari — Chief Financial Officer
Yeah. So almost I would say 50 basis points will be the benefit on the total book if you peel off the NHB borrowings.
Nischint Chawathe — Kotak Securities — Analyst
So you’re comparing 7.9% versus 8.7%, something like that?
Nutan Gaba Patwari — Chief Financial Officer
That’s right. That’s right.
Nischint Chawathe — Kotak Securities — Analyst
And as of now, there is no plan to raise lending rates on the asset side? So I mean if you don’t do anything, you should kind of come to 5.25% or maybe two quarters or so?
Nutan Gaba Patwari — Chief Financial Officer
If we don’t do anything, yes. But some of these —
Nischint Chawathe — Kotak Securities — Analyst
That’s a call you obviously will be developing over time.
Nutan Gaba Patwari — Chief Financial Officer
Yes, sure.
Nischint Chawathe — Kotak Securities — Analyst
And on the ticket size, if you could kind of give some guidance. I think the ticket size seems to be inching up a little bit or you’re doing more disbursements towards slightly larger tickets. So is there a trend over there or are we trying to read too much?
Manoj Viswanathan — Managing Director and Chief Executive Officer
No. This is more of a secular trend and very gradual trend because we are operating in some of the more affluent markets. We are seeing customers are also spending more on building homes. So just related to that and we are not reading too much into it.
Nischint Chawathe — Kotak Securities — Analyst
Because I think you also mentioned that you’re going into the slightly interior or Tier 3, Tier 4 towns.
Manoj Viswanathan — Managing Director and Chief Executive Officer
Right.
Nischint Chawathe — Kotak Securities — Analyst
Is it something kind of sort of gearing to be more of an inflation all throughout, or is it something that there is a mix change when you go into the smaller towns? Because very logically everything has been same if you go to the smallest, the ticket size would go down, but it is going up so higher, and how one should read that?
Manoj Viswanathan — Managing Director and Chief Executive Officer
Yeah. But in southern market [Technical Issues] Southern markets, the ticket sizes seem to be stable or larger actually as we go into smaller towns. People seem to build larger houses in even Tier 2, Tier 3 towns. So we are not seeing that reduction in ticket size as we go more deeper. That trend is I think somewhat more common in the northern markets where the houses become smaller and the budgets are smaller in smaller towns. But in southern markets we’re not seeing that trend as a result of which, the ticket sizes are holding up or increasing slightly.
Nischint Chawathe — Kotak Securities — Analyst
Is that something like average for an apartment size in terms of square feet or something that you track, which gives some sense in terms of a pricing return? I mean if you have any color that you can share on that.
Manoj Viswanathan — Managing Director and Chief Executive Officer
We will have to get back on that. I think you’re talking about the square foot.
Nischint Chawathe — Kotak Securities — Analyst
Something like that, whether it is a sign of an inflation out there or is it just a sign of affluence of people buying a house?
Manoj Viswanathan — Managing Director and Chief Executive Officer
Yeah, yeah. So we have that. We don’t have it off hand right now. But it’s also — it’s a bit of both, I think maybe it’s increase in square footage as well as people using better material or more expensive material in their homes. So it’s a bit of both, which is contributing to the ticket size.
Nischint Chawathe — Kotak Securities — Analyst
Sure. I’ll take it offline as well. Thank you very much and all the best.
Operator
Thank you. The next question is from the line of Bhuvnesh Garg from Investec Capital. Kindly proceed.
Bhuvnesh Garg — Investec Capital — Analyst
Yeah. Hi. Thank you for the opportunity. I have a question on the bounce rate. So just want to understand that what kind of penalties are charged to a customer by the bank and the company in the scenario of payment bounce? And what’s the reaction of the customers during your conversation on this? Do they understand these charges and what’s their reaction to having to pay these charges?
Manoj Viswanathan — Managing Director and Chief Executive Officer
Yeah. Mainly the charges are related to bouncing. So we take a bounce charge from the customer, which is INR500 plus GST, so a total of INR590 is what we charge from the customer, if they bounce the payment. And the collection is generally on a best-effort basis, so it’s not collected from customers who pay immediately. If they have delayed a little bit, then we collect a bounce charge. So currently the penetration would be probably 20%, 20% of the customers will be making the bounce charge so it’s not very hard and fast.
Other than that, there are no other penalties as such. The penalties accumulate, I mean, we don’t bill the penalties to the customer. So the customer is in 30 days past due or higher bucket, then we keep accumulating the penalties. When the customer comes to settle the property or when they finally come to close the loan, that’s when we charge the penalties. So that’s been our process for several years now. The ideology behind it is that if the customer is ready to make an installment payment, then we would ideally like to collect that installment payment other than charge penalties from the customer.
Bhuvnesh Garg — Investec Capital — Analyst
Okay, sir. So this INR500 is the penalty by the company, right, that you might get? And then there would be some penalty charged by the bank as well, right?
Manoj Viswanathan — Managing Director and Chief Executive Officer
Yeah. The bank from which the customer has issued mandate, they will also charge something which ranges between INR50 to INR200, INR300, generally.
Bhuvnesh Garg — Investec Capital — Analyst
Okay. And you are saying 20% of your customers who bounce, eventually they end up paying this bounce charge.
Manoj Viswanathan — Managing Director and Chief Executive Officer
Correct. Because majority of the collection also happens electronically on the app, et cetera. And we have not made it very hard and fast on the app. So if customers are paying on the app and we are avoiding any — since we are reducing our collection effort to that extent, then we don’t insist on the bounce charge.
Bhuvnesh Garg — Investec Capital — Analyst
Okay, sir. Fine. Thank you. All the best.
Operator
Thank you. The next question is from the line of Abhijit Tibrewal from Motilal Oswal. Kindly proceed.
Abhijit Tibrewal — Motilal Oswal — Analyst
Hi, thanks for allowing a follow up. One more thing I wanted to understand. Manoj, during your opening remarks, you talked about 261 touch points across Tier 1, Tier 2, Tier 3 markets. Wanted to understand, let’s say, about two years back at the time of our IPO, if I were to kind of look at our branch presence, they were predominantly urban centers, metros, peripheries of metros and urban centers. So, I mean, how are we now thinking about it? I mean, are we — these distribution touch points in addition to branches that we’re adding, are these touch points coming up in Tier 2 or in Tier 3 markets? And if you have this data out of our AUM today, what proportion of the AUM is coming from Tier 2 and Tier 3 markets? And how has that number changed vis-a-vis let’s say one-year or two-year back?
Manoj Viswanathan — Managing Director and Chief Executive Officer
So we are — so broadly about 30% is coming from the Tier 3 markets and Tier 1 and Tier 2, we generally used to be present even say a couple of years ago. But Tier 3 would be a new addition or a good number of Tier 3 markets would be an addition over the last two years. So about 30% of our business is coming from Tier 3 markets now.
Abhijit Tibrewal — Motilal Oswal — Analyst
30% from Tier 3 markets.
Manoj Viswanathan — Managing Director and Chief Executive Officer
Yeah, 30% is coming from Tier 3, markets. I mean that number would have been much lower two years ago.
Abhijit Tibrewal — Motilal Oswal — Analyst
Okay. And 30% is of your disbursement mix — proportion of your disbursement mix. Got it. And the idea going forward is that these touch points that you are adding will largely be there in Tier 2 and Tier 3 markets?
Manoj Viswanathan — Managing Director and Chief Executive Officer
Largely yes in Tier 2 and Tier 3 markets. There may be a few pockets where some Tier 1 or Tier 2 markets are also not yet covered in some states, but largely in Tier 2, Tier 3 markets. Yes.
Nutan Gaba Patwari — Chief Financial Officer
Also Abhijit, by virtue of the presence we’ve had in Tier 1 markets, we’ve kind of covered those markets from all angles in terms of the housing demand where it’s getting generated from. So in those markets, it’s about — in the Tier 1 markets, it’s about market share growth. So in some markets we’ll probably be, let’s say 2.5%, 3%. The idea is to take it up in those markets in combination with deepening presence in Tier 2, Tier 3 markets. So that mix will not change a lot because in the disbursal proportion, both will continue to grow. One will grow because of market share, the other will grow because of penetration.
Abhijit Tibrewal — Motilal Oswal — Analyst
Got it. This is very useful. Thank you so much.
Operator
Thank you. The next question is from the line of Vignesh Iyer from Sequent Investments. Kindly proceed.
Vignesh Iyer — Sequent Investments — Analyst
Congratulations, sir, on good set of numbers. I did miss some part of the call, so apologies if it sounds repetitive. I just want to know so your disbursement is at INR780 crores in this quarter with 11% Q-o-Q. So I just wanted to understand going ahead for quarter four or even for FY ’24, are we heading towards a four-figure number? If you could just help us understand.
Manoj Viswanathan — Managing Director and Chief Executive Officer
Yeah. I mean the target is to keep going and keep moving up. So I don’t know whether we’ll hit four figures in the next quarter or the quarter after that, but yes, that’s the next milestone.
Vignesh Iyer — Sequent Investments — Analyst
Okay. And so any ballpark numbers, I mean any like you gave something for AUM guidance. So anything on similar lines?
Manoj Viswanathan — Managing Director and Chief Executive Officer
The aim is to keep growing at about 7%, 8%, 10% on disbursement every quarter. That’s the growth that we’re looking at.
Vignesh Iyer — Sequent Investments — Analyst
All right. Okay. Thank you, sir. That’s all from my side. Thank you. All the best.
Operator
Thank you. The next question is from the line of Chandra from Fidelity. Kindly proceed.
Chandrasekhar Sridhar — Fidelity International — Analyst
Hi. Manoj, just a quick question. So when we look at the flow of Home First app, you said that on a flow —
Operator
Mr. Chandra, sorry to interrupt, sir. Your voice is very low. Could you speak closer to the handset?
Chandrasekhar Sridhar — Fidelity International — Analyst
Yeah. Is it better now?
Operator
Yes, thank you.
Chandrasekhar Sridhar — Fidelity International — Analyst
Yeah. Sorry, Manoj, on a flow basis I think for the LAP you’ve indicated in the past is 15. So my assumption is that over a period of time LAP gets to 15. We do that at possibly about 200 bps higher yield. So if I had to sort of just look from the margins over a period of time 8 bps to 10 bps, you should have a tailwind to margins over a period of time from that. Secondly, as you’re saying you’re doing a little more business in Tier 3 towns where price sensitivity is not as much. So my sense is that your ability to hold yields should be a little better. Just given these two factors as tailwinds to sustainability, just a little curious on the spread number which you talked about. A, is that more, little more temporary because right now I mean cost of funds is rising a little quick and maybe two years out instead of 5.25%, once the rate cycle sort of turns and in the past given you’ve held yields well that maybe this number could be something different?
Manoj Viswanathan — Managing Director and Chief Executive Officer
Yeah. See, we are guiding to this number because there has been sharp increase in rates. Also as far as the rates in the market are concerned, we don’t want to do too many changes so which is why you’re seeing our origination yield also moderating. We have kept it that way in the expectation that it will — the rates will taper off and then start declining over a period of time. So we don’t want to keep increasing the rates in the market and then after a couple of quarters, then we have to reduce it, reduce it on the back book, et cetera. So which is why we’ve kept it this way, so which is why there is a medium-term guidance of 5.25%. But you’re right, we have some tailwinds and we have certain things on our side. The LAP penetration is one and the penetration to smaller market is another one. And similarly, we are co-lending and stuff like that. So yes, we should be able to cross those numbers that we have mentioned.
Chandrasekhar Sridhar — Fidelity International — Analyst
Sure. So essentially this — I mean there is a near-term obviously cost headwind and you want to effectively just keep your yields where they are. But if the cycle turns, I mean this 5.25% is not sort of the be all and end all of everything. I mean, there is —
Manoj Viswanathan — Managing Director and Chief Executive Officer
Absolutely.
Nutan Gaba Patwari — Chief Financial Officer
Yeah.
Chandrasekhar Sridhar — Fidelity International — Analyst
Okay, great. Thanks.
Operator
Mr. Chandra any further questions.
Chandrasekhar Sridhar — Fidelity International — Analyst
No, that’s it. I’m done. Thank you.
Operator
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.
Manoj Viswanathan — Managing Director and Chief Executive Officer
Thank you, everyone, for joining on the call. I hope we have been able to answer all your queries. In case you require any further details, you can contact Manish, or get in touch with Orient Capital, our external Investor Relations advisors. Thank you very much.
Operator
[Operator Closing Remarks]