IIFL Finance Limited (IIFL) Q2 FY23 Earnings Concall Transcript

IIFL Finance Limited (NSE: IIFL) Q2 FY23 Earnings Concall dated Oct. 27, 2022

Corporate Participants:

Rajesh Rajak — Chief Financial Officer

Nirmal Jain — Managing Director

Kapish Jain — Deputy CFO & Head of Investor Relations

Analysts:

Harsh Shah — L&T Mutual Fund — Analyst

Analyst — — Analyst

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

Deepak Poddar — Sapphire Capital Partners LLP — Analyst

Kashyap Javeri — Emkay Investment Managers Limited — Analyst

Unidentified Participant — — Analyst

Nikhil Agarwal — Tusk Investment — Analyst

Jigar Jani — Edelweiss Wealth Management — Analyst

Tushar Sarda — Athena Investments — Analyst

Sharaj Singh — Laburnum Capital Advisors Private Limited — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and welcome to the Q2 FY’23 Earnings Conference Call of IIFL Finance Limited. [Operator Instructions]

I now hand the conference over to Mr. Rajesh Rajak, Chief Financial Officer. Thank you, and over to you, sir.

Rajesh Rajak — Chief Financial Officer

Good day everyone. I am Rajesh Rajak, Chief Financial Officer. Thank you all for joining us on this call. On behalf of the entire team at IIFL Finance, I would like to extend best wishes for Diwali and a very prosperous New Year ahead to all of you. On this call, I am accompanied by Mr. Nirmal Jain, our Managing Director; Mr. Monu Ratra, CEO of IIFL Home Finance, Mr. Venkatesh N, CEO of IIFL Samasta Finance and Mr. Kapish Jain, Deputy CFO and Head of Investor Relations.

I’ll hand over to our Managing Director, Mr. Nirmal Jain to comment on the economy and the Group’s overall strategy and plan. Over to you, sir.

Nirmal Jain — Managing Director

Thank you, Rajesh. And I think all of you had a good Diwali and I wish you and your family and loved ones a very happy Samvat New Year.

So to begin with, I think India’s macroeconomic fundamentals are very strong. India stands out as the bright spot in a gloomy world. This is where investors can expect visibility earnings growth, political and economic stability, favorable demographics, and something that is not talked about much is the fact that, India is leaped from the rest of the world to build the best-in-class, digital India for a billion people to rise out. And the sector that is most impacted and is crucial for economic growth is transit services. So India has come a long way on the agenda of financial inclusion still financing credit has not reached INR7 billion. All the bank branches’ networks still not able to reach out to all media borrowers and there is a growing realization amongst the policymakers that banks and NBFCs work together to achieve the goals of financial implements quicker and Fintech have a role to play as well.

There are several FinTech that are mushroomed all over. So, it is no-brainer that there’ll be a high mortality there. RBI has its regulatory guidelines to prevent systemic issues by imprudent credit products from non-regulated entities. In fact, RBI’s timely intervention is the biggest shot in the arm for the FinTech industry. An orderly growth of Fintech will facilitate breakthrough innovations and solutions for credit to the masses. And our PM said it very rightly a few days ago, that FinTech will lead to financial revolution. Our current, in IIFL Finance, I think we are in the sweet spot to seize the opportunity and participate meaningfully in India’s financial inclusion drive.

Besides in house team driving digital innovation and innovative solutions, we have brand, balance sheet, and branches. I believe that we are at the cusp of unprecedented growth opportunity and we augment our organic efforts to acquire new customers through partnerships such as OpenMoney and very recently ZestMoney to reach out to the underserved customers and access their data with consent for instant loans.

We continue to look for alliances and innovative partners. And for balance sheet, we continue to partner with banks through co-lending and direct assignments. Last quarter, our co-lending book grew 22% quarter-on-quarter. This quarter I think is the [Indecipherable] quarter in our opinion because our differentiated strategy of breaking on one end and the partnership on the other end is getting vindicated by the performance and perceptible potential. Our vision is to be the most respective non-bank in India for innovation, quality, growth, customer centricity, and not only meeting but exceeding all the stakeholders’ expectations.

So last quarter, we achieved healthy profit growth, but more importantly, we also improved our asset quality, as we reduced our gearing further. And this quarter we have taken our standard even higher. We have added a section with business and financial details of our Group entities, namely the holding company NBFC IIFL, The Housing Finance Company, and The Microfinance Company as well separately. This will then show how they are consolidated the reported numbers.

So, thank you. With this, I hand it to our Head of Investor Relations, Kapish. Thank you.

Rajesh Rajak — Chief Financial Officer

Okay. A brief highlight…

Nirmal Jain — Managing Director

Okay, Rajesh, you can speak.

Rajesh Rajak — Chief Financial Officer

IIFL Finance’s profit after tax, the non-controlling interest for the quarter was the highest ever at INR397 crore, which is up 36% up on a year-on-year basis and 20% on quarter-on-quarter. This was driven largely by volume growth and lower credit cost. We recorded a pre-provision operating profit of INR685 crore during the quarter, which is again up to 23% up on a year-on-year basis and 2% quarter-on-quarter. Loan AUM grew by 25% year-on-year and 5% quarter-on-quarter to INR55,302 crore. our core products grew faster at 28% year-on-year and 5% quarter-on-quarter to INR52,221 crore. They are mainly home loan, gold loan, and microfinance loans.

Our Non-core Loan AUM primarily, construction and real estate financing shrank by 9% year-on-year, in line with our strategy. 95% of our loan are retail in nature and 69% of our retail loans are PSL-compliant. We are excluding gold loans, which are not classified as PSL loans under extant RBI regulations. The last year of retail and PSL-compliant loans are of significant value in the current environment, where we can sell down these loans to raise long-term resources. In line with our capital optimizing strategy, 39% of our AUM is either assigned, securitized, or under the co-lending as of September 2022, which is up from 35% during the same period last year.

During the quarter, IIFL Finance tied up with the South Indian Bank and Karur Vysya Bank for co-lending of gold loans in Indian Bank for business loans. During the half year, we added over 450 branches and over 4,000 employees. As a result, cost-to-income ratio has increased to 43% from 40% last year, but this paves the way for accelerated growth in the future. Annualized return on equity for the quarter just ended is at 20.4% and the annualized RoA is at 3.4%.

Our capital adequacy ratio is at 21.7%, which is well above the statutory requirement of 15%. As a result of the improved credit profile of the Company, our quarterly average cost of borrowing declined 3 basis point quarter end, and 29 basis points a year-on-year to 8.4%. Gross NPA stood at 2.4% and net at 1.2% as of September, which is down from 2.6% and 1.6% respectively from the previous quarter. Our provision coverage on NPAs now 147%, which is up from 137% in the previous quarter. Earnings per share for the quarter not annualized stood at INR10 per share, which is up 30% on a year-on-year basis, in line with the increase in profit, and our book value per share is to be spent INR215.2, which is up 41% year-on-year.

A bit of update on liquidity. During, we raised approximately INR3,800 crore in debt and in addition, we assigned loans worth INR3,500 crore during the quarter. Our cash and cash equivalents and committed credit lines from banks and institutions of INR8,191 crore were available as of quarter end, adequate to meet not only the near-term liabilities but also to fund the growth momentum. We have a positive ALM, thereby, inflows cover or exceed expected outflows across all buckets. Our net-debt-to equity ratio is at 3.1x, which is down from 5x as on September ’21.

IIFL Home Finance, our subsidiary received which is INR2,200 crore from ADIA in August 2022, thereby boosting the net worth of IIFL Home Finance more than 80%. This will help the Company consolidate its competitive position in the affordable housing finance market in India. It has tremendous long-term growth potential. This also gives us a gun quarter to tap the growth opportunity in the housing segment. With affordability index decade high, we believe that dip in the rate will be well absorbed by the customers with marginal crops[Phonetic]. The total liquidity of the Group now stands at INR9,480 crore.

IIFL Finance has entered into a partnership with ZestMoney which is India’s leading and fastest-growing digital EMI checkout financing platform to offer credit to potentially millions of new-to-credit customers. Through this industry partnership, IIFL Finance as a dedicated partner, will get access to a new customer base on this Zest norm and play a crucial role in driving financial inclusion for a large section of people in the country.

Little bit of digital updates. We continue to focus on digitization and analytics to improve customer experience and enable a convenient one-stop shop for corporate and investment needs. During the previous quarters, we had mentioned about our DIY, a digital initiative for disbursement through WhatsApp and MyMoney. More than 60,000 customers have been on-boarded till date under these initiatives. During the quarter the DIY disbursements were INR352 crore, up 36% quarter-on-quarter.

On the Gold Loan at Home initiatives, which started approximately a year ago, also saw significant traction with disbursements increasing 118% year-on-year to INR227 crore during the quarter. The IIFL Loans app and MyMoney app is being increasingly used by our customers for various transactions, and thereby giving customers ease and convenience. We have more than 3,000 [Phonetic] average active users, monthly active users across both these apps. This comes to an end of update and we can now open the floor to questions. Thank you.

Operator

Thank you very much. Sir, before we could go ahead. Sir, there is a slight disturbance which is coming along with your voice.

Rajesh Rajak — Chief Financial Officer

Okay. Is it better now?

Operator

Yes, sir. Much better.

Rajesh Rajak — Chief Financial Officer

I think this is the same instrument we’ve been using for several quarters. I don’t know why there is a problem. But let’s start Q&A. You can be a bit louder.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions]

The first question is from the line of Harsh Shah from L&T Mutual Fund. Please go ahead.

Harsh Shah — L&T Mutual Fund — Analyst

Yeah. Good afternoon, gentlemen, and congratulations for such a strong quarter. The first question is on the opening remarks that Rajesh sir said. You had mentioned that the overall cost of fund has gone down. Can you just explain how?

Rajesh Rajak — Chief Financial Officer

So, hi, Harsh. So, two, three things which are responsible for this. Number one is, we have bought back approximately USD100 million worth of our overseas bonds and replaced them with low cost rupee financing under ECB. So basically, we have had a gain on that. And if you remember, our second lot of buybacks were done at a lower than par also. And increasingly what we’re seeing is, our off-balance sheet funding which is loan assignments, which was 35% last September has now become 39%. So that also gives us a significant advantage because the direct assignment, because of the stronger asset comes in at a lower cost of funds.

So it’s really a combination of all this. Also, Samasta Microfinance, approximately, a year ago got upgraded. The credit rating was upgraded from A plus to double A minus, which is I think probably just one or two MFI in the whole country to have that rating. So it’s really a combination of all these factors that have contributed to the stable cost of funds till now, in a rising rate environment.

Harsh Shah — L&T Mutual Fund — Analyst

So if I just remove the co-lending and off-book funding that you get, like I’m just referring to the PPT in which you have given this.

Rajesh Rajak — Chief Financial Officer

The the primary thing is that the dollar bonds were very expensive because the fully-hedged cost was about 10%, actually, maybe closer to 11%.

Harsh Shah — L&T Mutual Fund — Analyst

11%?

Nirmal Jain — Managing Director

Yes. The dollar bond that we raised in February 2019 in the wake of liquidity crisis. So what happens at the hedging also as we repay the dollar bonds, we can remove the hedging also. The total cost comes down. I mean, as I’ve said, it is like kind of cost that if we displace it in half time, we save money.

Rajesh Rajak — Chief Financial Officer

And, Harsh, that bond is anyway due for maturity in April 23. We have adequate liquidity to repay that. And with that, slightly higher borrowing going off the books, we should see more stability in the forward-looking.

Analyst — — Analyst

Given an opportunity, we’ll probably try and buy that entire thing, but not precise now.

Harsh Shah — L&T Mutual Fund — Analyst

Understood. Understood, sir. And the second question is, you have done some small accounting change this time. You had mentioned it in your P&L, that co-lending, sorry, the spreads on co-lending has been now classified under non-fund based. So can you just help us understand how that works?

Nirmal Jain — Managing Director

So, in case of co-lending, sorry, suppose we are 90% and bank basically, as Rajesh said is 9%. So then what happens that the accrued, so every — so in the quarter, supposing the interest in 15. The difference basically goes as non-fund income because assets are okay. So on the 20% component, will account for 15% interest as interest income. On the remaining 80% of component but banks have 6% for the quarter growth as non-funded income. So when we just started the entire thing has been taken as the interest income. But now we are trying to adjust it because if you understand the underlying assumptions, because 80% assets are not in our books.

Harsh Shah — L&T Mutual Fund — Analyst

Correct.

Nirmal Jain — Managing Director

And risk is also….

Harsh Shah — L&T Mutual Fund — Analyst

20% will go into interest income and the rest 80% are going in non-fund based.

Nirmal Jain — Managing Director

Right. And now the co-lending becoming significant. It might become visible. But the remaining 80%, the difference of the excess interest are our share will go as non-fund income.

Harsh Shah — L&T Mutual Fund — Analyst

Understood, sir. And just last question from my side. I mean AUM growth you have been quite vocal of maintaining at current run rate, plus, minus few basis point. But considering how strong your RoA was in this quarter, you think for the balance of at least H2 you will maintain it or is there also a further scope of increase in this RoA?

Nirmal Jain — Managing Director

I think we should target to maintain it, given the fact that there would be upward pressure on interest cost also. Liquidity has tightened significantly in the system now.

Harsh Shah — L&T Mutual Fund — Analyst

Understood. And has there been any changes in your OpEx strategy because even OpEx as a percentage of assets has been inching upwards? OpEx as a percentage of total AUM.

Nirmal Jain — Managing Director

OpEx as the percentage of total AUM has gone up because of the branch expansions that we have done very aggressively and that has continued through the [Technical Issues]

Operator

I am sorry to interrupt. Sir, we couldn’t hear you. Can you please repeat your last line?

Nirmal Jain — Managing Director

No, I’m saying that the OpEx has gone up significantly because we had large number of new branches, almost 400 new branches commissioned in last quarter, the full impact of cost comes in this quarter. But going forward, it should flatten and it should start coming down as we slow down the pace of branch expansion.

Harsh Shah — L&T Mutual Fund — Analyst

Understood. Understood. That’s it. That’s it from my side. Thank you very much, and all the very best. Thank you.

Operator

The next question is from the line of Sukriti Jiwarajka from Laburnum Capital. Please go ahead.

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

Hello?

Nirmal Jain — Managing Director

Go ahead.

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

Hi. Congratulations on a strong quarter. Congratulations Kapish for joining the team. My first question is on gold loans and this is one of the core businesses, core segments that you highlight for growth and while the sort of price competition that we saw last year between NBFCs has abated a little bit, you do see banks, especially HDFC Bank saying that now we want to expand gold across our branches, let’s say in Maharashtra. We want to take gold from 1,500 branches from 3,000 branches in the next two years. So this will impact and there has been, we discussed it in the past where you say that you know banks can’t do gold loans like NBFCs can. But when a large bank comes and says that we want to expand consumer gold loans to so many more branches and have the gold value every day in the branch. It will impact you in one of two ways, either growth, or sort of the 15% to 20% lease that you earn in gold today because, these are the rates and we do it at 13%, 12%. So, what do you think about that? Am I seeing this wrong? And if yes, then how would you counter that?

Nirmal Jain — Managing Director

I think your point is valid and that is what is seen in the gold loan business results of ours and gold companies as well. So if you see, our growth is very moderate, given the fact that we expanded our branches to 40% in last 18 months. But quarter-over-quarter, we have been to just 4% growth. So either you compromise with your twelve-year yield or your loan growth will be muted because of intense competition from banks. But if you look at last 10 of 12 years history and what happens at many times we have seen that the NBFCs and Fintech have basically the jump in, because the optically it looks like that the NIM is very high and very attractive for a relatively zero risk kind of business but typically gold operating cost is we for a relatively mature kind of a business of the loan areas.

So it’s not that the margin or any interest rates has succeeded in exorbitant but either the bank balance is, I don’t know how they do the accounting, but if they do it, then probably people discover. Also is very vulnerable to fraud and drawbridge and many other things. Now, you know little, you go back six months or 12 months than most banks are scrambling for retail assets and loan growth and that is the time probably most of the banks also jump into this, but this is a small ticket loan item where the growth is not so rapid.

I — already what we are seeing is, many new FinTech and we NBFC that were doing the lock-weeding [Phonetic] kind of price offer like INR0.34, which means around 6% to 7% per annum. They have already withdrawn. So I think that sense has already started to prevail in terms of the competition, in terms of banks also — we can target the regions and geographies which are not easily accessible to the bank until now, that is the new branches’ focus will be on that. It is neighborhood businesses. Like nobody goes from Andheri to Virar from to take gold loan. So we have to work out our strategy and we are also working on a strategy to make sure that the cross-sell and fee income and other things. So, this decrease should lead customer base significantly. But your point is valid, that the competitions have intensified and banks are becoming very aggressive, in fact on the yield and the growth.

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

Got it. Got it. My second question is on the assignment income. Now this INR418 crore of assignments and co-lending, have you divided this anywhere between, how much is from the assignment and how much from co-lending?

Nirmal Jain — Managing Director

Maybe as a good point, maybe from next quarter we’ll start or maybe we’ll then figure it out how do we disclose that separately. But at this point in time, so what happens is that even in the co-lending, or even in the assignment, okay, maybe we have divided into the upfront portion, the NIM portion, and then the amortization and the fee portion. So we will work on these numbers. But just now, I mean, right now I don’t have it with me.

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

Yeah. Yeah. So, the declining trend is probably because a lot of up-front is turning into amortized. I think that would be it. Correct?

Nirmal Jain — Managing Director

Yeah? Can you repeat, please?

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

No, I’m saying there was a slight declining trend in overall income from assignment.

Nirmal Jain — Managing Director

Yeah. I think the declining trend is understandable because in co-lending we are not up-fronting anything. We have interest as it is received every quarter. But in case of assignment, based on India’s accounting policy, you make some contributory estimate and because the risk in balance sheet, we try and upfront. I mean, basically we end-up upfronting the discounted value of the income. So as we move from the co-lending more and more, the upfronted portion will keep reducing and the flow of interest income on the upfront will increase.

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

Got it. Makes sense. And also the write-offs this quarter. We didn’t see it anywhere in the PPT. Maybe I missed it.

Nirmal Jain — Managing Director

Write-offs and the provision for losses, the loan losses provisions and write-offs are all together in that amount of INR196 crore.

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

No, no. What is the write-off?

Nirmal Jain — Managing Director

So we don’t have any write-offs as such.

Rajesh Rajak — Chief Financial Officer

INR58 crore.

Nirmal Jain — Managing Director

So, INR58 crore are write-offs in total.

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

Okay.

Nirmal Jain — Managing Director

Sorry. Sukriti, just one second. Let me confirm [Technical Issues] Hello? Yeah.

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

I can hear you.

Nirmal Jain — Managing Director

Well, I think the amount is not including anything.

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

Okay.

Nirmal Jain — Managing Director

Hello? Yeah.

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

Yeah. Okay. Also, you just mentioned to the last quarter, I mean that is dollar offshore bonds that we replaced, which is a reason for the cost remaining that it is actually going down little bit. How much of today’s borrowing now, are these dollar offshore bonds and how much are you looking to replace over the next few quarters here and what sort of cost of funds advantage can we get from that?

Nirmal Jain — Managing Director

So, dollar — there are two types exposure that we have and we did both. So, one is the dollar bond issue that we did, which is kind of a public offering kind of issue, you kind of open and get the bids and do that. So, that was about USD400 million that we did it in February 2019. Out of which about USD100 million or maybe a little over than….

Rajesh Rajak — Chief Financial Officer

USD130 million.

Nirmal Jain — Managing Director

USD130 million, we already bought back. So the outstanding will be USD278 million to USD250 million, maybe up to USD270 million is the outstanding out of that issue.

And then there are [Indecipherable] loans, which are, which we really can’t repay it because you can buy back. See these are the listed bonds. The USD400 million that we did in Feb ’19, and the listed bonds you can try and whenever the market — see today, if you see the yield on all emerging market bonds has gone up. Even good quality banks also are available at a very attractive dollar yield. So this USD400 million, USD130 million we have bought. USD270 million is still outside, which, I mean we will try and buyback and if we don’t, we have to repay it in April 2023.

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

Okay. Okay. Okay.

Nirmal Jain — Managing Director

That is the answer.

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

Yeah. Yes. I have one more question if I can.

Nirmal Jain — Managing Director

Yeah. Please go ahead.

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

So, actually business loans had a particularly good quarter. The growth run rate went up, NPAs came down. You also provided more for this book. There is that arrangement which opened last quarter. How do you — is this something now that you would say this is in your sort of core growth segments because traditionally you saw this urban home loans, gold loans and MFI as your core segments. Where is business loans? How do you think about it in terms of growth? And what are these? These are really — are these term loans or are these working capital loans? Or are these lap loans.

Nirmal Jain — Managing Director

This is a core segment for growth for sure. So, i think we will have four core businesses, which is home loan, gold loan, microfinance and business loans. And this is business loans. The larger loans we target the property, against the proper quality of property and the smaller loans will be unsecured. Now typically, all the loans they seem term loans and we really don’t do OD or overdraft like banks do. But these term loans are also taken by these businesses for working capital requirement, primarily. So, unsecured loans are primarily for working capital requirement.

So if we look at the average ticket size of our loan, incrementally is around, unsecured loans will be around INR4 lakh, INR5 lakh and all put together the ticket size has been coming down with INR61 lakh in the last quarter. But incrementally is around INR10 lakh, INR20 lakh. So what has happened historically, we a larger LAP, that businesses continues. So quarter after quarter, we see that this is coming down.

And so these are all small businesses like shopkeepers, traders, these freight operators or these are sometimes some of these are self-employed professionals or people who are self-employed or non-professional, all the people who are running any kind of business and these are all typically small businesses. So that is what we will be targeting as a core growth and open partnership and all the many other partnership that we look for is this kind of business.

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

You are actually doing unsecured in the business loan segment today.

Nirmal Jain — Managing Director

Yeah. Unsecured, secured, it will be again but yeah, we are doing unsecured also. So, if you see the quarter, the split is 75%-25%. 75% is secured and 25% is unsecured in our book currently.

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

And in the disbursement?

Nirmal Jain — Managing Director

Okay. In disbursement, unsecured maybe slightly more. But the scanner is shorter. So probably no, in terms of loan, it’s 75%-25%, disbursement, maybe sort of one-third.

Sukriti Jiwarajka — Laburnum Capital Advisors Private Limited — Analyst

Okay. Okay. Thank you so much.

Operator

Thank you. The next question is from the line of Anusha Raheja from Dalal & Broacha. Please go ahead.

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

So, basically one question. [Technical Issues]

Nirmal Jain — Managing Director

Your voice is not clear Anusha. Can you just speak again?

Operator

Can you please use your handset?

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

Yeah. Am I audible now?

Operator

Yes.

Nirmal Jain — Managing Director

Yeah.

Operator

Please proceed.

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

Yeah. I’m saying how do you see growth panning out for the balance part of the year?

Nirmal Jain — Managing Director

Balance part of the year the growth…

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

So far we have seen good growth.

Nirmal Jain — Managing Director

Yeah, I think the balance part of the year should be equally good or better. But there is no reason for —I think we should be able to sustain the growth and margins both. And right now, the environment is looking very positive in terms of demand for credit and the banks’ willingness to partner and the economy is doing well. So actually, most of the businesses are coming back on track and they take business loan as well as gold loan. Even in a real estate sector, the interesting thing is, while the interest rates might have gone up, but there is no slowdown because builders have kept the nominal prices down or they have not increased the prices. So they are also, they also basically want to sell or liquidate. So we are seeing good demand for all businesses. Microfinance has also picked up very well and the entire industry has picked up very well in the last quarter. So I think it looks like the outlook for the next few quarters as well.

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

Okay. And what are your margins for the Q2?

Nirmal Jain — Managing Director

Margins?

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

Yes. What were the margins for the Q2?

Nirmal Jain — Managing Director

You are saying net interest margins?

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

Yes. Net interest margins for the spread?

Nirmal Jain — Managing Director

It is around 8%.

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

It’s around 8%. And what are the incremental yields and the cost of funds? If you have that numbers with you. So, the cost of funds as Rajesh mentioned that we’ve been able to bring it down in last quarter by a repayment of the high-cost dollar bonds. So they are flattish. It is not that many basis points are decline. The yield on an overall level has gone up because the interest rates have gone up. The portfolio yield is [Indecipherable] for the quarter as compared to 15.3%. So, 20 basis point increase in the yield. And in the cost of funds, what was teh decline?

Rajesh Rajak — Chief Financial Officer

The decline was about around 10 basis points.

Nirmal Jain — Managing Director

Around 10 basis points decline there. So margins have improved by 20[Phonetic] basis points.

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

Okay. Okay. And just one last question. On the OpEx side, in last one or two-quarters or three quarters, we have seen sizable amount of branch expansion. So going forward, any outlook on the OpEx side, what are your plans to roll out branches in terms of employee expenses? Any guidance there on the OpEx side?

Nirmal Jain — Managing Director

So, see branches that we are expanding, see, the operating cost will [Indecipherable] because our net worth has become much bigger. And so, last quarter, quarter-over-quarter the OpEx increase was around 7%. No, I think that the 4% to 5% is something that can continue for a couple of quarters and then in ’23, ’24, we will take a call on the strategy that we will continue with our branch expansion or slow it down. Now that again depends on the business environment, because if you feel more confident and more positive then we can continue to expand the network and still maintain our return on assets. So then we will continue to expand the network. But at this point in time, it might flatten, it’s not going to come down significantly, but it won’t increase in any rapid manner also.

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

Okay. Okay. Got it, sir. Thank you so much.

Operator

Thank you. The next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead.

Deepak Poddar — Sapphire Capital Partners LLP — Analyst

Hello?

Operator

Please proceed.

Nirmal Jain — Managing Director

Yes Deepak.

Deepak Poddar — Sapphire Capital Partners LLP — Analyst

Thank you very much, sir, for the opportunity and many congratulations for the great set of numbers. Sir I just wanted to understand more on that credit cost front. Now have excess provisioning that we have been doing for the last couple of quarters, driven by the RBI policy. So we are through with that currently?

Nirmal Jain — Managing Director

So, actually, we are pretty close to our guidance and whatever we had spoken back, in terms of that. So, credit cost is coming down. We’ll continue, should continue the 10 on a relative basis, relative to the portfolio or relative to the loan book. So I think we are on the right track there. If you see, INR35,000 crore, INR36,000 crore loans on our book, INR35,000 crore plus, and for the quarter if we take 50 basis points, it is INR135 crore. But I think our credit cost this quarter is INR196 crore. so I think we’re pretty close. So guidance is, actually anywhere between 150 to 200 basis points in a year. And I think over next two, three quarters, we should move towards that. We are moving towards that, but we should reach there.

Deepak Poddar — Sapphire Capital Partners LLP — Analyst

150 to 200 basis points credit cost. And this number is based on your on-books AUM right, not on total AUM?

Nirmal Jain — Managing Director

Yes. This number is on-book AUM, not on a total AUM. So what happens is that we have to worry about on-book AUM only and not on the total AUM.

Deepak Poddar — Sapphire Capital Partners LLP — Analyst

Fair enough. Fair enough. That’s it from my side. And all the very best. Thank you.

Nirmal Jain — Managing Director

Thank you.

Operator

The next question is from the line of Kashyap Javeri from Emkay Investment Managers. Please go ahead.

Kashyap Javeri — Emkay Investment Managers Limited — Analyst

Yeah. Thank you very much, sir, for the opportunity. And sorry to harp on this, but to the earlier question on co-lending, when this 80% of the book get transferred to banks, a, I understand that the whole risk also transfers from our book to their book, if that’s correct and b, is that, in which case…

Nirmal Jain — Managing Director

Go ahead.

Kashyap Javeri — Emkay Investment Managers Limited — Analyst

So, in which case the accounting of income will then be similar to what we do for assignments?

Nirmal Jain — Managing Director

Well, there is a difference.

Kashyap Javeri — Emkay Investment Managers Limited — Analyst

Or we sort of amortize the income over the life of the asset which has been transferred?

Nirmal Jain — Managing Director

Exactly. So, here it gets amortized over the life of the asset and whatever we do is based on India’s accounting and auditors guidelines. I believe that all the companies are doing in a similar way. So what is happening in case of assignment. Suppose, you have a seven years loan and say you’re going to make a margin of 10. So what we’ll do, you basically say 10 for seven years. You discount it at present value.

Kashyap Javeri — Emkay Investment Managers Limited — Analyst

Right.

Nirmal Jain — Managing Director

Then you reduce the operating cost and they say seven year, you’ll say that really do you think that it might get repaid? So then you take only for four years and you discount and reduce the cost and then you upfront it. But in case the co-lending and it doesn’t work like this. Basically, that you will have to 10 every quarter, every year as it comes.

Kashyap Javeri — Emkay Investment Managers Limited — Analyst

And the eight that you pay out, we will account that as the expense over that. And in the other income…

Nirmal Jain — Managing Director

It is just that, you don’t have to do that because the interest directly goes to them from the customer.

Kashyap Javeri — Emkay Investment Managers Limited — Analyst

Okay. Okay.

Nirmal Jain — Managing Director

So money from [Indecipherable] straight away goes to the respective partner. Or we connect on behalf of bank as an agent and give to them.

Kashyap Javeri — Emkay Investment Managers Limited — Analyst

Okay. And just last clarification, in which case you, in the other income, you will account for only that spread, the differential?

Nirmal Jain — Managing Director

That is right. On the 80% component or 90%, or 70%. Now in co-lending also this percentage varies.

Kashyap Javeri — Emkay Investment Managers Limited — Analyst

Okay. Okay. Okay. Yeah. Got it, sir. Thank you so much.

Operator

Thank you. The next question is from the line of Darshan Pandya from Pinterest Capital. Please go ahead.

Unidentified Participant — — Analyst

Hello?

Operator

Please proceed.

Unidentified Participant — — Analyst

Can you hear me, sir?

Nirmal Jain — Managing Director

Yes, yes.

Unidentified Participant — — Analyst

Congratulations, sir, on this good number, sir. My question is on the Microfinance segment. It is contributing around 12% to the AUM and we have seen year-on-year growth of 49% and we have come in from probably INR840 crore in FY’18 to INR6,000 crore of AUM in FY’22. Sir, do you see this number more getting up, contributing more to the revenues, because you know the market opportunity is very big as we have mentioned in the investor presentation and we are putting up well? So where do you see this number going up?

Nirmal Jain — Managing Director

So this year growth is basically because of the lower base of last year. The last year it has not grown. The last few years have been really weak and and also we expanded the branches. So, I think that we would like to be a meaningful player in the industry. So we are among top 10 but we would like to be among top five or top three for sure. So business will grow. I mean the 49% or 25%, 30% that is all matter of depending on how the business is. But our objective is to go a little faster in the industry. Not too much faster and not too slower also.

Unidentified Participant — — Analyst

Right. And sir, also something on this gross GNPA and NNPA?

Nirmal Jain — Managing Director

About the Microfinance or overall business?

Unidentified Participant — — Analyst

Yes, about the Microcap.

Nirmal Jain — Managing Director

So incrementally we are seeing a good quality assets and the so, okay, GNPA and NNPA will come down in this business, unless something which I am foreseeing as a black swan will happen again.

Unidentified Participant — — Analyst

Okay. And any specific sector that we are giving up loans from microfinance segment?

Nirmal Jain — Managing Director

No, not really because we have branches in suburbs, say urban, as well as rural areas. So privately they go to these kind of women for [Indecipherable]

Unidentified Participant — — Analyst

Yeah. Okay. Okay. That’s it, sir. I just wanted to ask about this microfinance. Thank you so much sir. We’ll see you refer in the next quarter. Thank you.

Operator

Thank you. The next question is from the line of Nikhil Agarwal from Tusk Investment. Please go ahead.

Nikhil Agarwal — Tusk Investment — Analyst

Hi. Can you hear me?

Nirmal Jain — Managing Director

Yeah. Yes Nikhil, we can hear you.

Nikhil Agarwal — Tusk Investment — Analyst

Congratulations on the good quarter, sir. I have one question on the investment book. So, our investment book has added another INR1,400 [Phonetic] crore in this quarter. Can you explain what was the details of the increment in this investment book?

Nirmal Jain — Managing Director

Can you repeat the question, please?

Nikhil Agarwal — Tusk Investment — Analyst

My question is on the investments book, sir. We have added some INR1,400 crore of investments in this quarter. Can you explain the terms of this investment and what is the collection repayments total and the recovery that we can get in this investment book?

Nirmal Jain — Managing Director

You are talking about INR1,400 crore book?

Nikhil Agarwal — Tusk Investment — Analyst

Yeah. Yeah. So, the INR1,200 crore has become INR2,500 crore. So, we have added another INR1,400 crore to that.

Nirmal Jain — Managing Director

Actually, we’ve got a Andhra bonds of INR500 crore, which is part of our liquidity. Andhra State bonds. And then there are assets, some assets that have been transferred to the ARC and there is a AIS. So all these assets are valued every quarter based on the recoverability only and the mark-to-market, wherever required is provided for. So we get them valued and weighted every quarter by the auditors who get it. And I think the rating agencies also do, [Indecipherable] also does the assessment and based on that we provide for mark-to-market. So that you see are recoverable.

Nikhil Agarwal — Tusk Investment — Analyst

Okay. And what is the interest rate and the returns we can expect in this book? Because a lot of this book is also continuing the AIS and the CRE book, which we have, right?

Nirmal Jain — Managing Director

Yes. That is correct.

Nikhil Agarwal — Tusk Investment — Analyst

And we see the [Indecipherable]. I think that was the guidance?

Nirmal Jain — Managing Director

So, broadly I think you can say that around for varies from 7% to 9%.

Nikhil Agarwal — Tusk Investment — Analyst

7% to 9%. Okay. I mean is there any further details that you have on the book in terms of asset qualities?

Nirmal Jain — Managing Director

I think — okay. The real estate assets that we have transferred to AIS, they are doing better now because the environment has improved and quality of the real estate part of it is good. Even in the ARC asset, we have real good recovery in last quarter. So in a way, I think as the economy improves and the real estate sector improves, the asset quality is improving.

Nikhil Agarwal — Tusk Investment — Analyst

Got it, sir. I have one last question on the Microfinance book. Sir, this quarter, again, we have seen some very high provision similar to last quarter. And I think last quarter we had mentioned that a huge part of the restructured book had come out of restructuring. So how do you see this panning out, going forward because the RoE in the business is now quite low, the half year RoE. So…?

Nirmal Jain — Managing Director

As I said last quarter also, that microfinance we were pain and the call that we took last year of giving moratorium and restructuring as the book comes out of that, we were seeing that there is a lot of [Indecipherable] there and we are course you to take write-off in microfinance because above 90% is considered as we to fully provide for that. I think this — and therefore the microfinance RoE is additionally low to our historical trend has been. I think this will continue for another two quarters and we start tapering off and probably, I think we should be able to see a [Indecipherable] next year. Our target is to have 20% RoE. And this is as of now depressing it, but we are working on it. We want two more quarters only.

Nikhil Agarwal — Tusk Investment — Analyst

Sure. Thanks a lot.

Nirmal Jain — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Jigar Jani from Edelweiss Wealth. Please go ahead.

Jigar Jani — Edelweiss Wealth Management — Analyst

Yeah. Thanks for taking my question and congratulations on a great set of numbers and a Happy New Year to everybody. So, my question is on the Stage 2 assets, especially in the gold loan side. So starting from Q4 onwards, if you see, Stage 2 effects on the gold loan side, they have gone from 4.9% of the gold loan book to almost 11% now. Any particular reason why we are seeing such a sharp rise, especially the gold loan from the Stage 2 side? Even on an overall basis that has pushed our Stage 2 assets from 5.5% in Q4 to almost 7%. So some color on that. Why such an increase? Also same is the case in home loan, to some extent, not as much as gold loan, but quarter-on-quarter we are seeing increase in Stage 2 assets.

Nirmal Jain — Managing Director

So the Stage 2 in the Gold loan has gone up from INR662 crore to INR843 crore quarter-on-quarter, partly because of the book growth and partly in the festival time and in this time, sometimes the collection get little bit delayed. So what I mean there is some psychology in the customers and the industry, the way they operate, that they can collect it on the, they know the 90 days allowed kind of thing. So you’ll see in Stage 2 that normally, typically, not because of the gold quality but with the customer also, so they don’t go beyond 90. But it’s just a discretion of collection efficiency and putting in more pressure on the system to track it carefully. But it has gone up a little bit with the book also and maybe some bit of collection delays and typically, people know, customer know that the default gold is with us. There are some technical, some cash flow distinctions we give. So normally, people are not forced in the 90 days to pay for their account. Customers can be sometimes late, but the apart is noted that, I mean, it’s something which is, thanks for bring into our attention, but that’s the reason.

Jigar Jani — Edelweiss Wealth Management — Analyst

Okay. Right. And for home loans also it is the same case?

Nirmal Jain — Managing Director

Home loan has a slight increase with the book growth also. So I don’t think there is —that is going 15% to 5% or 4%, that’s what you’re talking about, right? There is a flow but not very significant.

Jigar Jani — Edelweiss Wealth Management — Analyst

Yeah.

Nirmal Jain — Managing Director

So, the book is just much larger.

Jigar Jani — Edelweiss Wealth Management — Analyst

So is it possible to share the one DPD plus for the whole loan book?

Nirmal Jain — Managing Director

Maybe for all businesses, right now we don’t have it. But yeah, I think I’ll note the point that whether we should have one DPD plus or a separate this thing.

Jigar Jani — Edelweiss Wealth Management — Analyst

Sure.

Nirmal Jain — Managing Director

And the the home loan is broadly around 1,300 in this one DPD plus.

Jigar Jani — Edelweiss Wealth Management — Analyst

1,300. Okay. Understood. Thanks. And just last, if this early indicator for Stage go up say, this is only for our own book, which is on-book but I believe similar performance will be replicated on your assigned book or your co-lending book. So does it impact your ability or are there any repercussions on asset quality or credit cost for us? Maybe I should know it should be recouped but on the co-lending side, are there any clauses wherein if there is a quality rate oriented, especially for book that we have originated that we supervise more on share more of credit cost. Something of that sort?

Nirmal Jain — Managing Director

So now that the quality and you all within the accepted. This point in time I don’t see any stress or any challenge. Because this is something which is, I’m not worse than the rest of the industry or banks, their own portfolio typically. So that is how we look at it.

Jigar Jani — Edelweiss Wealth Management — Analyst

Thank you so much for patiently answering my question. Thank you, and best of luck.

Operator

[Operator Instructions]. There is a follow-up question from the line of Anusha Raheja from Dalal & Broacha. Please go ahead.

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

Yeah. Thanks for taking my question. Sir, what is the returns that we would be expecting from your AIS book. I mean CRE book, which was sold to AIS, given the fact that the real estate sector is still improving, what are the basically terms of profit sharing there on that side.

Nirmal Jain — Managing Director

So I think, till we fully redeem the book, which may be another two, three years, it may be very difficult to take any guess on that. So at this point in time, it’s a very difficult question. What happens is that, if there are 10 investments there, some will do very well, some will not do so well. And we’ll discover the entire thing when the full book is across liquidated publishing. Another two, maybe two and a half years.

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

Okay. And you have still USD270 million of bonds on your book currently, which are high cost. So those might bonds come up for repricing in this business?

Nirmal Jain — Managing Director

These are fixed rate bonds.

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

I am sorry?

Nirmal Jain — Managing Director

These bonds are fixed rate bonds.

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

Fixed rate bonds. Okay. So I mean, whether you redeem that might it also replaced by lower cost. So you might have a benefit of margin expansion from that as when?

Nirmal Jain — Managing Director

Absolutely right, because this USD270 million is still we are bidding in terms of cost. So I think when we do that there’ll be some cost of funds advantage there also.

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

So that might come in next fiscal FY’24?

Nirmal Jain — Managing Director

Yeah. Yeah mostly in fiscal ’24.

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

Okay. And…

Nirmal Jain — Managing Director

I mean there may be a small buyback, but otherwise, they will come primarily in fiscal ’24 only.

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

Okay.

Nirmal Jain — Managing Director

See, what is happening, the bond are also not selling because we know that within six months we’ll get the full money. So, why sell it at a discount. And so we don’t get liquidity in the market and then there is no, our track record that we have bought back most of it, if there is liquidity, we buy it back. So I think it will come, it will come one shot somewhere in April ’23.

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

Okay. Okay. And in reference to your accounting treatment in your co-lending book, if you can elaborate more on that?

Rajesh Rajak — Chief Financial Officer

So Anusha, I want to clarify, this is not a change in accounting treatment. See, the accounting has always been the same. For the presentation purposes, we have be reclassified it from net interest income to non-fund-based income. Don’t need any funds on this. So, the accounting has been consistent. As we also explained on this call, is that we take the margin on that 80%, which is the bank share and that was, it will be, interest income,n now it is non-fund based income. It’s only a reclassification and not a change in accounting.

Nirmal Jain — Managing Director

Yeah, that is reclassification for the analyst presentation and no change in the accounting.

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

Okay. Okay.

Rajesh Rajak — Chief Financial Officer

I hope I answered your question Anusha?

Anusha Raheja — Dalal & Broacha Stock Broking Private Limited — Analyst

Yeah. Yeah. Thanks.

Rajesh Rajak — Chief Financial Officer

Okay.

Operator

The next question is from the line of Tushar Sarda from Athena Investments. Please go ahead.

Tushar Sarda — Athena Investments — Analyst

Yeah. Thank you for the opportunity. I wanted to understand the valuation basis for selling 20% stake to ADIA? When I compare it with other listed housing finance company, it looks very cheap. So if you can share your thoughts on that?

Nirmal Jain — Managing Director

So, I think very difficult question to answer but, so what happened is that the listed companies when compare they are outlier in value significantly higher but it must [Indecipherable] economic value must be relatively much lower. If you really look at the valuations for what we got and based a couple of historical book value, I think it was maybe three and a half or four times kind of thing.

You can see the historical trend. So I think — but if you really look at the entire housing finance universe, one or two companies where the valuations are higher. That is one. Secondly, what happens to be the candidate there was also overhang of the parent company valuation. And thirdly, if you look at our track record, then all while we have made significant multiple on that investment and we generally leave something on the table, so that the investors have a good exit. So, in the history, if we see ADIA, Fairfax. All of them have made a lot of money on our investments.

Tushar Sarda — Athena Investments — Analyst

Okay. Thank you. I just wanted to understand your thought process. Thanks so much.

Operator

Thank you. The next question is from the line of Sharaj Singh from Laburnum Capital. Please go ahead.

Sharaj Singh — Laburnum Capital Advisors Private Limited — Analyst

Hello?

Nirmal Jain — Managing Director

Yeah.

Sharaj Singh — Laburnum Capital Advisors Private Limited — Analyst

Hi, sir.

Nirmal Jain — Managing Director

Please go ahead.

Sharaj Singh — Laburnum Capital Advisors Private Limited — Analyst

Just a clarification on the earlier question on the default protection that we might have to provide on the co-lending book that you originate. So did you say that the banks have not asked for any such default protection? So in the future, they might or there is no such thing there?

Nirmal Jain — Managing Director

There is no such thing possible, actually as per the RBI policies and guidelines. See what happens, if the banks take any before protection then they can’t claim as a priority sector asset, because RBI is very clear, that when we have been a private sector, the loans and the risks should be with the bank. Secondly, the risk is price build. So I won’t give a price also and risk cover also and so the way all these transitions happen, they are without any recourse in terms of risk. And structurally, we have no other way to do these based on the RBI policy also. See, why the RBI is encouraging co-lending because banks have a balance sheet and an ability to take risk. If the risk has to be taken by NBFC then why would you — then the whole purpose is defeated.

Sharaj Singh — Laburnum Capital Advisors Private Limited — Analyst

Right. Okay. No other questions. Thank you so much.

Nirmal Jain — Managing Director

Okay

Operator

Thank you. As there are no further questions, I would now like to hand the conference over to Mr. Kapish Jain for closing comments.

Kapish Jain — Deputy CFO & Head of Investor Relations

Thank you very much. Thank you very much, ladies and gentlemen for joining us for our quarter’s results call. It was a very entertaining discussion with all of you. And for any further query that you wish to have, please reach out to us separately with the Investor Relations team and we’ll be happy to connect and answer all your queries. Thank you. Have a good day and Happy Diwali to all of you.

Operator

[Operator Closing Remarks]