IIFL Finance Limited (IIFL) Q3 FY23 Earnings Concall Transcript

IIFL Finance Limited (NSE:IIFL) Q3 FY23 Earnings Concall dated Jan. 31, 2023.

Corporate Participants:

Kapish Jain — Chief Financial Officer

Nirmal Jain — Managing Director

Monu Ratra — Chief Executive Officer, IIFL Home Finance

N Venkatesh — Chief Executive Officer, IIFL Samasta Finance

Analysts:

Shubhranshu Mishra — PhillipCapital India — Analyst

Saptarshee Chatterjee — Centrum PMS — Analyst

Sharaj Singh — Laburnum Capital — Analyst

Deepak Poddar — Sapphire Capital — Analyst

Arun — Unifi Capital — Analyst

Jyoti Khatri — Arihant Capital — Analyst

Bhuvnesh Garg — Investec Capital — Analyst

Nischint Chawathe — Kotak Securities — Analyst

Navneet Bhaiya — Individual Investor — Analyst

Nikhil Agarwal — Tusk Investments — Analyst

Aswin Kumar Balasubramanian — HSBC Asset Management — Analyst

Trupti Agrawal — WhiteOak Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to IIFL Finance Limited Q3 FY ’23 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to the management. Thank you and over to you. Participants please stay connected, the line for the management dropped.

Kapish Jain — Chief Financial Officer

Hi, good afternoon, everybody. On behalf of IIFL Finance, I thank all of you for joining us on this call. I am Kapish Jain, the Chief Financial Officer. On this call today, I am accompanied by Mr. Nirmal Jain, our Managing Director; Mr. Monu Ratra, CEO of IIFL Home Finance; Mr. N. Venkatesh, CEO of IIFL Samasta Finance.

I’ll hand over now the proceedings to Mr. Nirmal Jain to comment on the economy and the Group’s overall strategy including performance for this quarter. Over to you, Nirmal.

Nirmal Jain — Managing Director

Thank you, Kapish, and a warm welcome to everybody. In terms of economy and macro environment, I think we know that the environment is turbulent. But as far as Indian economy is concerned, underlying factors still are positive. While all of us have noticed that the consumer demand had a slowdown last quarter, maybe a quarter before there was a bit of a pent-up effect of post-COVID demand. But as far as demand for credit is concerned, it remains robust. Most of the segments of credit basically continued to see strong growth, double-digit growth for the whole economy of the nation as a whole. Interest rates have increased significantly. In fact RBI repo has gone up by 225 basis point, but most of it has not been transmitted because the longer tenure loans what we already had are at a contractual rate. Even the incremental borrowing we are able to negotiate better given our track record and the way we have handled the crisis in the last five years.

So, the cost of fund has gone up marginally and what we also passed on to our customer is a marginal impact and not the — the repo would reflect in a tenure loan of three to five years. Having said this, I think let’s keep — I don’t comment on the geopolitical or the market volatility, but underlying economy remains strong. Whether it grows by 6.5%, that may be a matter of debate, but the demand for credit is growing and unless interest rates go up significantly from here, we see that the outlook will remain positive and very optimistic on that front. Whatever interest rate hikes have happened till now, I think at least our customer segments have been able to absorb to that effect. Now I’ll just briefly comment on our four businesses and then hand it over to Kapish for more detail — a detailed deep dive into the financial numbers and then we’ll take Q&A.

So, we have four core businesses as you’re aware of. In gold loan, there has been intense competition because of a number of new NBFC players who just jumped in and also many banks and particularly the smaller banks have become very aggressive. And what they do is kind of undercutting with the price, they try and set up branches nearer the people and offer to the same customers at a low rate and sometimes these rates are below the cost of fund in the hope that probably they’ll be able to take the rate increase later. What we are doing and what we’ve been doing in last few quarters is that rather than react to this short-term strategy or approach, we track our customers and we make sure that even if they go for a rate which are not affordable by us, we track them. And whenever the competition, they try to take interest rate hikes in a manner which is not straightforward, we try and approach those customers again.

So what we have seen is that October, November months were not good for our gold loans, they had de-growth; but in December we rebounded strongly. And the quarter we ended with I think 3% growth on quarter-on-quarter. Our Y-o-Y growth remains fairly positive, about 20% for most of gold products. And then in fact many from competition now they are understanding and some new fintech who was not able to raise capital that undercutting price is not a long-term strategy. And also our brand is positioned on what we say [Foreign Speech]. We try to be transparent. Even if we lose business in short term, we don’t resort to the knee-jerk reaction or approaches where you have a teaser rate and then later it turns out to be something else. Our home loan again, we are moving more granular. Our ticket size is falling.

And in fact the subsidiary — we see that’s what probably would have depressed the growth little bit because subsidiary gets adjusted in the loan amount of the customer and to that effect — to that extent cost coming down. But here again probably we would like to see faster growth. The impact is the growth has not been as strong as we would have liked it to be quarter-over-quarter, primarily because we are moving towards smaller loans. So, the number of loans that we are processing is going up more significantly and the ticket size is falling. And more and more business is coming from what we call spoke locations that are smaller places compared to hub locations where competition is intensifying more. But I think as our network has in home loan also, in fact our branches have grown significantly in last nine months and as we get into smaller towns and we get market share there, I think the growth will become stronger.

Microfinance has seen very strong growth, in fact 55% Y-o-Y. But in the industry, many good players have growth at that pace and the demand is strong. The environment has become far more positive with the very pragmatic reforms by RBI where a number of reforms including remove the price cap and income-based assessment where the loan amount can be higher. And even our interest rate has gone up, but we should note that we are taking the interest rate increase only in the new loans and not reset the old loan interest rate and therefore the portfolio rate will grow at a slower pace, but over a period of time will catch up. And microfinance, I think the industry has turned around very well. We are very well diversified geographically from a strategy point of view. In business loan, we have a loan against property segment that has grown. That again is intensely competitive with NBFC and banks.

But what we are trying to do is focus on small ticket property loans which is like the ticket size typically can be less than INR10 lakhs incrementally. So, that’s the sweet spot that we are trying to target. These are the home loan customers of the same segment where they already have a loan, the loan has been repaid, then they take a new loan business which is classified as loan against property; a privately self-occupied residential property or smaller premises. But the digital loans we have separated this time because digital loan is a loan where we kind of do it untouched by hand where the entire processing is digital. Our strategy is to partner with big players who have got digital footfall. In digital loan if you look at most of the fintechs, they don’t make profit despite very high NIM primarily because customer acquisition costs are very high.

What we want to do is that we don’t want to incur customer acquisition cost ourselves by aggressive digital marketing. But we have tied up with number of players and many bigger relationships are also in pipeline where the testing is going on and the launch will happen very soon. So. we get the lease from these players and where we share the NIM or the fee in a pre-agreed manner. Now the digital loan can be personal loan and business loan both. So in India many times proprietary mom-and-pop shops are like it’s difficult to classify whether it’s business or personal because many of these self-employed people also use their personal accounts for business purposes as well. So, the digital loan is a loan where we are going to get — I mean where actually branches may refer, but primarily they happen through our app and through website and the lease come from partners. So, these are I think unsecured loans — predominantly unsecured loans so we got to keep it separate so that loan against property, which is like a mortgage, can be tracked separately.

So with this, I’ll hand it over to Kapish to take you through the financial numbers and will come back for Q&A. Thanks.

Kapish Jain — Chief Financial Officer

Thanks a lot, Nirmal. Just to tell you about the financial numbers and the performance. IIFL Finance profit after tax without considering or before considering the non-controlling interest part for the quarter was its highest ever at INR423 crores, which is up by 37% on a year-on-year basis. It’s up by 7% on a quarter-on-quarter basis same time last year. This, ladies and gentlemen, is largely driven by the AUM growth and also some bit of expenses that happened on our NIM part as well. We recorded pre-provision operating profit of around INR772.7 crores during this quarter, which was up by 26% on a Y-o-Y basis and 12% on quarter-on-quarter same time last year. As what Nirmal mentioned, our loan AUM has grown by around 24% Y-o-Y and 5% sequential quarters to INR57,941 crores. If I further dissect this and focus on our core products, which is what — which is largely the detail for us that we hold. That segment grew by 26%, 2% higher on a Y-o-Y basis and 5% quarter-on-quarter to INR54,689 crores.

And the core product segment now comprises of 95% of our total AUM. The non-core AUM primarily consists of the construction and the real estate financing, which further shrank by 7% on a Y-o-Y basis in line with the strategy that we have shared with the market earlier. As I mentioned, 95% of our loans are retail in nature and 67% of our retail loans are PSL compliant which excludes gold loan products. But having said that, gold loan product still qualifies for a zero risk rate for the bank and therefore banks even though they’re not PSL are keen to buy these assets from us. Lastly, the retail and the PSL compliant loans are of significant value in the current environment where we can sell down and with the kind of pristine asset performance that we’ve shown how to market, banks have always been keen to buy this from us and we ensure that we have a proper management and oversee on these assets from a correction, recovery, and risk management perspective.

In line with the capital optimization strategy, 39% of our AUM is either assigned, securitized, or under co-lending and bulk of it is now under assignment and co-lending and going forward, we’ll see a larger share of co-lending emerging in this number. The assigned loan book currently stands at INR15,939 crores, up by around 67% from last year. Besides this, there are securitized assets of INR1,049 crores, which is going down. And the co-lending book is the key highlight here, which I should mention has from zero almost gone to around INR5,700 crores in this particular quarter-end. It has been made possible by new relationship that we’ve added on the co-lending piece. We’ve added UCO Bank and Punjab & Sind Bank for co-lending of our gold and home loan products, including the MSME LAP products. So during the last nine months to support our growth, we have added 669 branches and 4,318 employees in all across all our businesses, which on our results shows a higher cost to income.

But with the monetization happening of the newer branches and the resources and people, we strongly believe that we should be able to bring this number down and this actually has also helped in our overall disbursements going up by around 44% from nine months to nine months. Our annualized return on equity for the quarter is at around 17.9% on a lower gearing because we had the ADIA infusion of INR2,200 crore, which came in the previous quarter, which is bringing our gearing down and therefore has some impact on the overall ROE with dilution on the capital position. And the ROA stays strong and stable at around 3.4%. Our capital adequacy for the standalone entity stands at around 31.5%, which is well above the minimum threshold of around 15%, which is clearly suggesting that we are able to grow ourselves without impacting hugely on our capital position through the on-book/off-book structure and model that we hold.

Our average cost of borrowing marginally increased by around 10 basis points and around 16 basis points Q-on-Q to around 8.79%. This is despite, what Nirmal mentioned, 235 basis hike in the repo rates and close to 100 basis points hike in the MCLRs or maybe 110 basis points. The gross NPA is getting closer to our endeavor or the guidance that we have given of around 2%. It currently stands at 2.08% and the net NPA similarly stands at 1.06%, significantly down from 2.42% and 2.22% respectively, which we gave and which we reported in the previous quarter. With implementation of the ECL model under AS, the provision coverage ratio on the NPA today stands at 164%. Our earnings per share for the quarter and not annualized stands at around INR10 per share, which is up 22% year-on-year and the book value per share now stands at INR225.6, which is up by 41% year-on-year.

A brief update on our liquidity position. During the quarter, we raised around INR4,340 crores of term loans, bonds, and refinance; all long-term money which helps in my ALM very strongly. Additionally, we did around INR3,700 crore of direct assignment of retail loans to bank. Our cash and cash equivalents and committed credit lines from banks and institutions of around INR8,462 were available at the end of the quarter adequate to meet not only for the near-term liabilities, but also to fund the growth momentum. And I must mention that this liability and liquidity position is also helping us in negotiating our borrowing without showing any desperation when we go and search for new liabilities from our bankers. We have a positive ALM thereby and inflows over and above the existing outflows across all buckets as you could see through the presentation that we have.

The net debt equity netting off the liquidity position thus is down to 3.2 compared to 4.2 and the total liquidity for the Group, as I mentioned earlier, is around INR8,562 crores. Loans classified as digital loans are part of the unsecured business loans with an active customer count of around 3 lakh. As what Nirmal mentioned on the digital front, we continue to focus on digitization and analytics to improve customer experience and enable a convenient one-stop shop for purchase an MSME. Our gold loan at home initiative, which started approximately two years ago, also saw significant traction with disbursements Y-o-Y increasing by around 90% to INR260 crores for this quarter.

With this, I come to an end and we open to Q&A. Thank you very much.

Questions and Answers:

Operator

Thank you very much. We’ll now begin the question-and-answer session. [Operator Instructions] First question is from the line of Shubhranshu Mishra from PhillipCapital. Please go ahead.

Shubhranshu Mishra — PhillipCapital India — Analyst

Hi, sir. Good afternoon. Thank you for the opportunity. Just wanted to understand the gold finance business a bit in detail. What kind of tonnage do we have here and what kind of LTVs are we running — average LTVs on the portfolio? And if you can also speak on the competitive intensity, there has been some amount of balance transfers happening through banks. So if you can speak on that. Thank you, sir.

Nirmal Jain — Managing Director

So in terms of tonnage that we have, I’d say our average loan to value is around 16% or 17%. So, what is the tonnage? You have the numbers with you? Maybe we’ll get that number, I don’t have it right now with me. In terms of industry so since last year it became very competitive, but what we’re seeing is that more — I mean there are few new players and they try to do balance transfer and in terms of — so this is a factor that happens in this industry. What we have to do is that as far as we are concerned, we make sure that money is coming from customers’ account because you don’t want to violate even for a smaller amount the money laundering and the KYC process what it is and if we get our full money, obviously customer has the right to take his gold back. But the competitor that is trying to do balance transfer has to put money in customer’s account without the gold to that extent. And then normally what they do is that people will accompany the customer, get the money transferred to customer’s account, customer will transfer to our account, and then basically release the gold. This is as far as outward — outbound balance transfer is concerned. Inbound, we don’t encourage normally. If customer is very old and known, but other than that, I think customer have to come on their own.

Shubhranshu Mishra — PhillipCapital India — Analyst

Understood, sir. And tonnage, will you come back to me, sir?

Nirmal Jain — Managing Director

55 tonnes, I think.

Shubhranshu Mishra — PhillipCapital India — Analyst

55 tonnes. And this has grown on a Y-o-Y basis and a Q-o-Q by how much, sir?

Nirmal Jain — Managing Director

I’ll get you that number. It must be 8%, 10% I think it has grown. So, I’ll get you those numbers and maybe we’ll try and put those numbers also.

Shubhranshu Mishra — PhillipCapital India — Analyst

Sure, sir. And if I’m allowed to…

Nirmal Jain — Managing Director

Before the end of the call, I’ll get you those numbers.

Shubhranshu Mishra — PhillipCapital India — Analyst

Sure, sir. And if I can squeeze in just one last question, sir. If we can split the AUM into less than INR1 lakh ticket size, INR1 lakh to INR3 lakhs, and more than INR3 lakhs as a proportion of AUM, sir, it will be very helpful.

Nirmal Jain — Managing Director

Yeah. So, I think we’ll get you these numbers by the end of the call hopefully.

Shubhranshu Mishra — PhillipCapital India — Analyst

Thank you so much, sir. Best of luck.

Operator

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

Saptarshee Chatterjee — Centrum PMS — Analyst

Yeah. Good afternoon, sir. Thank you for the opportunity. My first question is on the digital loans. Now if I see digital loans, the GNPA percentage has reduced year-on-year or quarter-on-quarter, but there has been de-growth in disbursal as well as AUM. Can you please explain what is happening in this side?

Nirmal Jain — Managing Director

Can you — you’re saying that — sorry, what has reduced? The asset quality has improved. That’s what you’re saying, right?

Saptarshee Chatterjee — Centrum PMS — Analyst

Sir, asset quality has been better, but the AUM as well as disbursal both have reduced. So, should have been more aggressive on this part, right?

Nirmal Jain — Managing Director

Yeah. It’s a very valid point. So digital loans what has happened is that there was RBI circular in September, which basically laid down certain guidelines for partner sourcing and particularly I think from KreditBee and [Indecipherable], the incremental loans have been insignificant and the earlier books are typically short tenure so they run down very quickly. So, organic growth is there in that loan book and it is very strong. Maybe what you’re seeing is a quarter-on-quarter number, I mean that’s where the September RBI circular had an impact. Now in terms of asset quality and all those things so there was some old book, which has been written off or which has been closed. So, that could be one reason. A year-ago the book was quite small so the growth — although you don’t see growth in this quarter, but in the previous two quarters there has been good growth. But this quarter again the continuing partners where we have a direct — where we are fully compliant with RBI’s new guidelines, that business is growing. But there are two large partnerships that actually has shrunk in this quarter.

Saptarshee Chatterjee — Centrum PMS — Analyst

Understood, sir. Very helpful. And secondly as a data point like in nine months FY ’23 I see that around close to INR658 crore kind of provisions that you have made in the P&L. Can you please give a breakup of how much is coming from like a write-off? How much is from standard asset provisions that way?

Nirmal Jain — Managing Director

Sorry, can you repeat the question?

Saptarshee Chatterjee — Centrum PMS — Analyst

Can you please give the breakup of nine-month provision number in the P&L?

Nirmal Jain — Managing Director

Okay. I think it’s there in the slide, but I will give to you. Okay. I’ll get these numbers because I think these numbers are quarterly. So for nine months, we’ll just get you these numbers before the end of the call.

Kapish Jain — Chief Financial Officer

So I mean the previous question of Shubhranshu. The gold loan tonnage has grown by 20% Y-o-Y.

Saptarshee Chatterjee — Centrum PMS — Analyst

Okay. And sir, lastly if you can give like if I see your investment book. Investment book has grown by around INR1,000 crores quarter-on-quarter also. So what are the general breakup of the investment book and how much investment — like how much investments we are doing on the IIFL Wealth side on their funds?

Nirmal Jain — Managing Director

No. This data is not correct actually. I don’t think we have grown quarter-on-quarter by INR1,000 crores unless you’re including which happened on the liquid assets business. Where have you gotten this INR1,000 crores number from?

Saptarshee Chatterjee — Centrum PMS — Analyst

So if I see your balance sheet from quarter two to quarter three and both including like cash and as well as short and long-term investments.

Nirmal Jain — Managing Director

Okay. In short-term investments, we use liquid mutual funds whatever liquid we have. So, that will keep varying based on sometimes we put in mutual funds and sometimes we put in FD. But other than that, there is hardly — there is no change in the investment.

Saptarshee Chatterjee — Centrum PMS — Analyst

Okay. So as on date like we have around INR3,000 crore kind of investment. What is our like exposure towards IIFL Wealth funds or real estate funds?

Nirmal Jain — Managing Director

So IIFL Wealth — no. IIFL Wealth funds is nothing much, but the real estate fund of SSG that is about INR1,000 crores — INR900 crores, INR1,000 crores is there in that fund in total.

Saptarshee Chatterjee — Centrum PMS — Analyst

Understood, sir. Thank you. I’ll come back in the queue. Thank you so much.

Operator

Thank you. Next question is from the line of Sharaj from Laburnum Capital. Please go ahead.

Sharaj Singh — Laburnum Capital — Analyst

Hello, sir. Thanks for the opportunity. Sir, my question was again on the write-offs part. The MFI book we’ve taken around INR100 crores of provisions this quarter and again there has apparently been some write-offs here because the PCR hasn’t gone up. So, can you quantify this amount?

Nirmal Jain — Managing Director

So, this INR123 crore write-off in MFI book and primarily because there are some of the old loans. Although we continue our efforts to recover, but above 180 days or the older loans that we’ve written off. And there was provisions last time also. So there is a provision which is there last time and also additional provisions have been created on the book which is growing faster.

Sharaj Singh — Laburnum Capital — Analyst

If I see the provision, it’s actually come down quarter-on-quarter, the overall provisions on the MFI side and the…

Nirmal Jain — Managing Director

So, the old provision released is taking care of the new loans. So, I think the total hit to the profit and loss account in MFI is how much? Because I think the provision was created in last few quarters and against that, we have written off the loan book. So some of the older loans, they get fully provided for given the provision policy that we have in MFI and out of that, some of these things have got written off.

Sharaj Singh — Laburnum Capital — Analyst

So, can you quantify the amount again for the write-offs you’ve taken?

Nirmal Jain — Managing Director

Yeah. I’ll just give the amount. One second.

Sharaj Singh — Laburnum Capital — Analyst

Okay. And sir, have we seen incremental slippages because if I look at the Stage 3 again, it’s come down very — by around INR35 crores only whereas the provision we’ve adjusted is around INR100 crores. So, do we continue to see some slippages there? Hello? Yeah. Am I audible?

Nirmal Jain — Managing Director

Yeah. So I am seeing in MFI, we have taken INR105 crores of total net provisions so it is including the write-offs. So the write-off plus new provision minus old provision is INR105 crores.

Sharaj Singh — Laburnum Capital — Analyst

I wanted the write-off figure actually, sir. Just the write-off figure.

Nirmal Jain — Managing Director

I think write-off figure is around INR123 crores.

Sharaj Singh — Laburnum Capital — Analyst

INR123 crores. And sir, are we continuing to see the incremental slippages here or is it broadly now provided for?

Nirmal Jain — Managing Director

Incremental business after November ’21 is doing very well. The older ones where we had a moratorium and restructuring cases, that is what we’ve been trying to sort out. So, that I think is becoming — I think the problem is just getting sorted out. So older loans whatever we can recover as there is a good recovery also or wherever we can close by a one-time settlement so we are doing that. So, what we’ve done is that we have divided the book in two parts. The older book where during the COVID period all the restructuring or moratorium was given, we are handling that book separately and wherever cases are getting closed, we just write it off primarily against provision and just get over with it.

Sharaj Singh — Laburnum Capital — Analyst

On the credit cost, overall we guide for 150 bps to 200 bps for the year. So, how should we look at it now and going forward, sir?

Nirmal Jain — Managing Director

So I think it will remain in that range. But as the book grows probably — so if you see, our book is about INR40,000 crores give and take. So if you see that 150 basis points, 200 basis points means every quarter you’ll see around INR200 crores.

Sharaj Singh — Laburnum Capital — Analyst

Okay. So, we should stay in that range for the whole year I think sir?

Nirmal Jain — Managing Director

Yeah, we’ll stay in that range. It is slightly on the higher side of that range primarily because still microfinance things are getting sorted out, but I think in terms of guidance or expectation, I think we’ll be in that range.

Sharaj Singh — Laburnum Capital — Analyst

Okay. And sir, on the gold loan side, you mentioned this on the growth we are looking at — you mentioned that the growth is not as per the expansion. But how should we look at it going ahead? I mean given the competition which has come in both on gold and home loans, how should we look at the growth here?

Nirmal Jain — Managing Director

Okay. Just your question that investment, what you are seeing is the investment done by HFC in the instrument, which is just short-term instruments because we have received money from ADIA last quarter so that money is not fully deployed so that money is invested in short-term instruments.

Coming back to your question on gold loan and home loan. So gold loan in last 10 years, we have seen these kind of things happening in spurts where some new players come and they think that they can take the market by undercutting and after some time they also realize that this is mug game in which nobody wins. What I think about gold loans and what we are seeing this quarter is that gold prices have been firm and gold loan should do well now. Whatever we have seen is the worst is over at least in terms of the cut-short competition and the impacts of that on the price. And if you don’t want to compromise or you don’t want to be in that game, then obviously you lose the growth. But I think that is over and we should see much better time for gold loan. Coming to home loan again, the segment that we cater to which is the mid-segment, which is around 10, 15 — maybe — Monu is there on call? Monu? Maybe can you take this question? I mean this question you would have heard that how do you see gold loan competition on the environment. Yeah.

Monu Ratra — Chief Executive Officer, IIFL Home Finance

Absolutely, yes. We have seen that with interest rate cycle going up and some competition also beefing up. But if you would see that in the last two years we’ve been expanding ourselves pretty deep in the geographies in the Tier 2 and Tier 3 towns. So we see that as our distribution also increases, if at all there is any slight slackening in the hub or metro areas, we should be able to offset it by our distribution which we have in Tier 2, Tier 3 towns. And our ability to price comparatively with co-lending also in place, I think we are good to see the growth in home loan to continue.

Sharaj Singh — Laburnum Capital — Analyst

Sir, one last question if I may.

Nirmal Jain — Managing Director

The competition is intensifying mostly in larger cities so maybe say Top 20 cities or Top 30 cities, but our strategy is to expand beyond that where still competition has not reached or is expensive maybe because the business is not so much as to cover up for many new players and we can ride on the gold loan branch network as well. Am I right, Monu? That’s what you’re going to say?

Monu Ratra — Chief Executive Officer, IIFL Home Finance

Yes, absolutely. So, the distribution and reaching out to Tier 3, 2, and 4 markets is there and this is reflective in our current quarter’s performance as well.

Sharaj Singh — Laburnum Capital — Analyst

But here the problem, as you mentioned, is like basically the ticket size is much smaller so the overall delta on the book will be lower, right? Or like do you expect even with the smaller ticket size, we’ll be able to generate enough volume to give the 20% growth we’ve been targeting?

Monu Ratra — Chief Executive Officer, IIFL Home Finance

Absolutely. So I think to answer this, if you will see that there is — if you look at the HFC numbers, there has been an increase in distribution and the operating cost also there. But at the same time, we are able to have a very consistent growth plan. For example whatever we grew in the last complete year, we’ve already done that in the first nine months itself. So, we are pretty confident of continuing this growth because of the efficiency of the technology which we use as well. And obviously they come up with a better spread than what we get in the urban areas. So, we should be pretty consistent for growing as well along with the profitability as well.

Nirmal Jain — Managing Director

So, our ticket size already come down quite a lot in last few quarters. So now this is the level at which we — this is the ticket size which is a sweet spot for us to operate. So, that damage to growth or the impact on growth has already been taken I think more or less because we are now at INR14 lakhs, INR15 lakhs ticket size. So, we’ve already gone into these smaller places.

Sharaj Singh — Laburnum Capital — Analyst

Okay. And sir, one last question on the co-lending piece. So a lot of our growth has been coming, but with the deposit growth for the system slowing down, could we see a slowdown here as in the banks not wanting to extend their balance sheet on the — for the co-lending business and trying to cater to their own customers? I mean how do you look at it? Will co-lending be affected if the deposit growth slows down for the system?

Nirmal Jain — Managing Director

No, I think it’s very unlikely because today if you ask me, the demand for co-lending is maybe 10 times what we can offer. So what is happening today is that banks still need — in last so many years, if you see PSU banks and many other banks, PSU banks in particular, they haven’t really expanded the network while the economy and credit demand has grown much faster or they expanded much slower. So, the demand is much, much stronger and still their credit deposit ratio is quite low. If you see the PSU banks’ balance sheet, then they still have to catch up. But keep that aside for a moment saying that the deposit environment really becomes very difficult. So what is happening is that the CASA is moving to fixed deposit. It’s not that the money is not there in the system. And secondly, I know if you look at as a company even if we have to take the loans on our own books, it will not be very difficult for us. Supposing theoretically so I don’t think that there’s a possibility at least in the foreseeable future that we don’t have to do co-lending, we can very well keep the loans in our book and grow like any other NBFC for that matter.

Sharaj Singh — Laburnum Capital — Analyst

Will we have enough bandwidth for that, sir, I mean?

Nirmal Jain — Managing Director

The bandwidth, we are managing the loans as of our own. You’re talking about equity maybe?

Sharaj Singh — Laburnum Capital — Analyst

Yeah. Liabilities and probably, yeah.

Nirmal Jain — Managing Director

That’s not a problem today actually. So in terms of liability and equity, so like our capital adequacy in housing finance is almost 49% and our gearing is 3 times. So we have enough room to grow on our own should there be a need for that. But at this point in time, we see that there is tremendous latent demand and in fact we are not able to — and of course it takes time to build up your systems, people, train people, and network; but the demand is very, very strong. [Speech Overlap] See what is happening today, the banks also for 9% — 8%, 9%, their cost of funding is 3% to 4%. They get major credit where the losses are minimal and they need these for their PSL and for their balance sheet. So, it’s a win-win relationship. It’s a mutual — in fact many banks that we’re talking to, we are talking about long-term arrangements where they also want to have a commitment that every quarter will deliver so much of co-lending or direct assignment. So, we negotiate on that front actually.

Sharaj Singh — Laburnum Capital — Analyst

Okay. Thank you, sir. I’ll come back in the queue.

Operator

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

Deepak Poddar — Sapphire Capital — Analyst

Hello.

Nirmal Jain — Managing Director

Yes, Deepak.

Deepak Poddar — Sapphire Capital — Analyst

Thank you very much, sir, for the opportunity and many congratulations for the good set of numbers. Sir, I just wanted to understand on the credit cost, you mentioned that it will remain in that range. I just wanted to clarify what is that range you’re talking about? Is it on percentage basis or on absolute basis you’re talking about?

Nirmal Jain — Managing Director

No, percentage basis. So on book loan, around 200 basis points in a year, that is what you should try and look at.

Deepak Poddar — Sapphire Capital — Analyst

Yeah. So that’s what we have been maintaining, right? But I think currently it is around 350 basis point, right, as on the second and third quarter?

Nirmal Jain — Managing Director

Not really because if you see, second and third quarter we are in the range of INR200 crore per quarter, right?

Deepak Poddar — Sapphire Capital — Analyst

Yeah. So total is about INR330 crores, right?

Nirmal Jain — Managing Director

No. This quarter is INR230 crores and last quarter was INR195 crores — so INR213 crores is this quarter and last is INR195 crores.

Deepak Poddar — Sapphire Capital — Analyst

Okay. So you look to maintain that 200 basis point kind of credit cost, right, even in FY ’24 if we talk about?

Nirmal Jain — Managing Director

Yeah. So there will be some benefit from old things getting sorted out, but we want to be conservative because we have a digital loan which are unsecured and probably will — I mean that’s still small but that’s growing. So, we need to keep. So, I think that is what probably will be — I think one can factor in that as the expected cost.

Deepak Poddar — Sapphire Capital — Analyst

Understood. Fair enough. And in terms of growth, how do we see the growth going forward? I mean I think currently, we are at about 25%, right, so…

Nirmal Jain — Managing Director

I think 25% is the growth that we can — we should be able to maintain in next two years.

Deepak Poddar — Sapphire Capital — Analyst

Okay. So 25% CAGR for next two, three years is a likely scenario, right?

Nirmal Jain — Managing Director

That’s what we are targeting, yes.

Deepak Poddar — Sapphire Capital — Analyst

Okay. Understood. And lastly on the cost-income ratio, I mean the current — is there any improvement or efficiency we are looking at in the cost-income?

Nirmal Jain — Managing Director

So, there was a slight improvement from 43% to 42% in last quarter and we will see some — I mean we’ll see improvement over next few quarters. Maybe you can say that actually our target internally is to bring it down to 35%, which should take a few quarters. So 1 percentage points or 2 percentage points every quarter if we bring it down, then we’ll be there in next five to six quarters.

Deepak Poddar — Sapphire Capital — Analyst

Okay. But ROA 3.5% is what we have been maintaining, right?

Nirmal Jain — Managing Director

ROE will be — okay. ROA is around 3.5%. ROE has come down little bit in this quarter because ADIA money — the ADIA equity infusion has added to the net worth and that basically so that depresses the ROE little bit. But over medium term, I think our ROE should be 20% plus.

Deepak Poddar — Sapphire Capital — Analyst

Okay. Understood. Fair enough. Yeah. That’s it from my side, sir. Thank you. All the best.

Operator

Thank you. The next question is from the line of Arun from Unifi Capital. Please go ahead.

Arun — Unifi Capital — Analyst

Hello, sir. Congratulations on the good set of numbers. Just wanted to check on the capital adequacy part. Currently the capital adequacy is at 21.5% for the standalone entity. What would be the capital adequacy that you’d be comfortable working with, sir, and at what level you would look to raise fresh equity to support both the standalone business and also to support the capital requirements of the subsidiaries?

Nirmal Jain — Managing Director

So, you are saying at what level will we raise equity you’re saying? So I think equity — okay. The way we have structured our business that we should not need — we should not be desperate or we should not need equity for a very long time. Having said that, when we raise equity also depends on the market valuation but it’s unlikely in the near future. So, I think our business model is a little different. Once market and investors have understood it very well and when we believe that they are giving us a fair value, that’s the time we can look at it or if there’s acquisition opportunity or something, we can look at it. But at this point in time, we don’t see any need to do these things.

Arun — Unifi Capital — Analyst

Okay. Is there any covenant with the lenders…

Nirmal Jain — Managing Director

Sorry?

Arun — Unifi Capital — Analyst

Is there any covenant with the lenders that the capital adequacy shouldn’t be less than 20% or 18%?

Nirmal Jain — Managing Director

Yeah. So there is a — I think that’s there in the microfinance. Microfinance has been worth more in terms of credit rating, but we’ll negotiate because we don’t need that kind of covenant given our track record. But yeah, some lenders in microfinance have a covenant of 18% capital adequacy. So coming to one question about nine months and our profit and loss account hit INR657 crores for loan losses and provisions. And in terms of total write-offs we have done is INR736 crores. So on the net basis, additional provisions we did is INR79 crores. Sorry. You can go check this out.

Arun — Unifi Capital — Analyst

And also, ADIA has invested INR2,000 crores in HFC. Similarly, are we looking for external investors in the MFI subsidiary also, sir?

Nirmal Jain — Managing Director

At some point in time, yes. But right now we have put in INR200 crore from the parent in the company as it’s growing and we have to keep capital adequacy properly. So, we have INR200 cores of equity investment has happened from the parent in microfinance. But at some point in time, we would look at our strategy for a financial investor in microfinance. What has happened in microfinance, this industry has passed through turbulent and roller coaster kind of a time period. But after RBI reforms and the recovery in the economy, the industry is doing well and some of the leading microfinance companies you would have seen that their valuations also have improved. So at an appropriate time, what we can do is over next five years, I mean that’s not immediate future, is that HFC and microfinance when they become large enough, then they can be separately listed just like we did with our parent company. We earlier had three businesses; wealth, finance, and securities. All of them became large enough, we split them. The way we do the demerger, there is no equity dilution required because holding company’s shareholders get shares of subsidiary companies and the holding company ceases to exist. But that is something which is not in the immediate future, but some time later this can happen.

Arun — Unifi Capital — Analyst

Got it, sir. That’s it from my side. Thanks.

Operator

Thank you. Next question is from the line of Jyoti from Arihant Capital. Please go ahead.

Jyoti Khatri — Arihant Capital — Analyst

Yeah. Congratulations on a good set of numbers. A couple of things. I think last quarter you had mentioned that there was some high cost borrowing amounting to $400 million that is likely to get repriced. So, has that happened in the quarter?

Nirmal Jain — Managing Director

No. So, $270 million is outstanding. I’ll just reconfirm the number, give me half a minute. And that is being — that is I think due for payment in April ’23 and which we are fully prepared because our cash is much more than that. So we’re talking about roughly INR2,000 crores or thereabout. And there also if we get an opportunity, we can prepay some or buy the bonds in the market and close that faster. But at this point in time — what is the outstanding amount? $270 million, $275 million so that we are fully prepared to repay.

Jyoti Khatri — Arihant Capital — Analyst

So nothing has come in this quarter, right?

Nirmal Jain — Managing Director

No.

Jyoti Khatri — Arihant Capital — Analyst

Okay. So most likely next fiscal?

Nirmal Jain — Managing Director

Now I think the residual term is so short that it will be difficult to prepay because — it’s just two, three months so everybody will wait and just close it.

Jyoti Khatri — Arihant Capital — Analyst

Broadly on the margin side…

Nirmal Jain — Managing Director

It’s just about 2.5 months left.

Jyoti Khatri — Arihant Capital — Analyst

Okay. So broadly, how do you sense margins to shape up in next fiscal given the fact that the current levels, do you feel that you can sustain this current high level of margins going forward?

Nirmal Jain — Managing Director

Yeah. I think our strategy is to go granular and that is how we can maintain the margin. So the smaller ticket we do, it does impact on operating cost and network required, but that basically allows you to have higher margins.

Jyoti Khatri — Arihant Capital — Analyst

Okay. And on the gold loans you just described, but if you can just give more details about how do you see growth happening on that side? Because if we see for other NBFCs — the other gold loan NBFCs, their AUM growth is not happening. What makes you say that probably better days are yet to come on the gold loan side?

Nirmal Jain — Managing Director

So actually in 2020 and ’21, we expanded our gold loan branch network very aggressively and we have — as you would have seen if you’ve been tracking our company for a few years, that has resulted in significant increase in operating cost because the branch network has almost gone up by 40%, 50%. So, that is what is helping us to maintain some growth. But logically I mean I think if the industry revives, then we should grow faster than what we’ve been growing given the expansion that we did. So I think other players that you’re talking about, if they have not grown their network maybe as aggressively, then obviously the same-store sales, what you can call them, have been under pressure in last few quarters. It’s too early in this quarter, but I think probably we’ll see some recovery in this quarter.

Jyoti Khatri — Arihant Capital — Analyst

Okay. And on the home loans, do you see the competition is relatively less in smaller ticket size loans like less than INR20 lakhs whereas for higher ticket size, we are seeing the competition and plus there has been slowdown in the growth across the players for the banks and for the NBFCs as well. So, how do you sense that?

Nirmal Jain — Managing Director

No. So in home loan, we are smaller — you’re right. In the smaller ticket size, the competitive intensity is slightly lesser although there are some new NBFCs, but they’re very small and regional. So when we look at the whole country, then relatively speaking the small ticket size, which is less than INR20 lakhs, INR15 lakhs, INR16 lakhs or even INR10 lakhs, INR12 lakhs, the segment that we are now catering to, has lesser intensity of competition.

Again we should understand it’s not easy for anybody to become a competitor in this segment because it requires network of branches and people who can do say the title verification and valuation in smaller places and which is operating cost. And when you have small ticket loans, it takes longer to breakeven. So competition is lesser and that is why banks are also very comfortable doing co-lending and even long-term co-lending partnership with us.

Jyoti Khatri — Arihant Capital — Analyst

Okay. And sir, these digital loans are nothing but the business loans, right?

Nirmal Jain — Managing Director

Business loans and personal loans. As I explained in the beginning of this call, that is many times when there is a mom and pop shop or a one man professed self-employed and even his business is done from his personal account. So, that is one. Secondly, we have tied up with Zest also so that also we are getting certain personal loans from that relationship as well. So, these are personal and business loans both. Mostly the salaried employees will not come to us because they’ll get at much cheaper rate from — salaried employees in formal sector so they will get at much cheaper rate from big banks like SBI or HDFC. But the people who come to us are self-employed or some of them may be salaried, but in informal sector where the document for their payslip, PF are not full proof that way.

Jyoti Khatri — Arihant Capital — Analyst

Okay. Sir, one last thing on the branch expansion side. What outlook can we expect for next fiscal?

Nirmal Jain — Managing Director

Sorry.

Jyoti Khatri — Arihant Capital — Analyst

On the branch expansion side, any guidance for next fiscal?

Nirmal Jain — Managing Director

Yeah. Branch expansion side, we have slowed down the branch expansion, but expansion will continue.

Jyoti Khatri — Arihant Capital — Analyst

Okay. Any number to take there?

Nirmal Jain — Managing Director

We have a team that does the data analysis and keeps tacking the opportunity areas and we set up our branches. I think branch expansion at normal pace will continue forever, but the aggressive spurt where we did like 40%, 50% expansion in 18 months, that kind of thing will not happen. But 15%, 20% or 10%, 15% expansion every year will continue.

Jyoti Khatri — Arihant Capital — Analyst

Okay. Thank you, sir. Thanks.

Operator

Thank you. Next question is from the line of Sharaj from Laburnum Capital. Please go ahead.

Sharaj Singh — Laburnum Capital — Analyst

Thank you for the opportunity again, sir. Sir, on the NIM, I wanted to know is there any one-offs there on account of the assignment income? On the NIMs, is there any one-offs we are seeing due to assignment income or something or these are normalized NIMs?

Nirmal Jain — Managing Director

No. These are normal NIMs.

Sharaj Singh — Laburnum Capital — Analyst

Normal NIMs. Okay. And sir, on the home loan side, if you could just give some light on the customer segment, is more self-employed? So I understand we’re going more to the Tier 3 towns probably now so what is the segment of customer we’re dealing with and what is our edge here?

Nirmal Jain — Managing Director

Monu?

Monu Ratra — Chief Executive Officer, IIFL Home Finance

Yeah. Nirmal, can I take this?

Nirmal Jain — Managing Director

Yeah, please.

Monu Ratra — Chief Executive Officer, IIFL Home Finance

Yeah. So typically our customer, about 60% of our customers are salaried people and 40% belong to the self-employed segment. The TG, the target group which we are looking at is people with a household income of below INR50,000 in the urban areas and in the smaller towns it could be household income of less than INR30,000, INR35,000. Typically if you see these people would be in the blue collar jobs and usually these people could be working in private limited companies or even sometimes a proprietorship as well. So, this is the kind of a target group which is there. As Nirmal mentioned earlier also, the edge or the moat for us is about the distribution which we have set up for the past so many years. And along with the NBFC network available of gold loan branches, for us to reach and breakeven is much faster. The opportunity has always been here for everybody else. But to make it a profitable business if you look at our cost-income ratios also would be fairly better off than the industry affordable housing players. The reason for that is how we use technology to enable this and have a faster growth path as well. So I think the distribution, understanding of the local policies, process, and the technology that’s put together gives us a good moat to scale up this business further.

Sharaj Singh — Laburnum Capital — Analyst

Okay. And sir, the yields there would be around — what will the yields we’ll be offering? Around 11%, 12% or higher?

Monu Ratra — Chief Executive Officer, IIFL Home Finance

Yeah. Nearly 11%. As you can see, it’s about 10.9%.

Nirmal Jain — Managing Director

Yield has gone up in last one year.

Sharaj Singh — Laburnum Capital — Analyst

Okay. Thank you so much, sir. That was the question.

Operator

Thank you. Next question is from the line of Bhuvnesh Garg from Investec Capital. Please go ahead.

Bhuvnesh Garg — Investec Capital — Analyst

Yeah. Hi, sir. Thank you for the opportunity. My question is on gold loan. Sir, just want to know what would be the count of gold loan branches today and what is our target for branch expansion and overall AUM growth in gold loan for FY ’24?

Nirmal Jain — Managing Director

So out of 3,965 branches, around 2,800 will be gold loan roughly — 2,700 to 2,800. So, I’ll give you the exact number. Sorry. Gold loan is 2,589 so 2,589 branches.

Bhuvnesh Garg — Investec Capital — Analyst

Okay. And what is our target for FY ’24 in terms of branch expansion and AUM, gold loan?

Nirmal Jain — Managing Director

I think we’ll set up another 300 branches. Maybe we’ll reach 3,000 by FY ’24 for sure. Our average pass is about 8 crores, but we’d like to take it higher to 9 crores, 10 crores. So I think 20% to 25% growth is what we’d probably target in most of — all our core products.

Bhuvnesh Garg — Investec Capital — Analyst

All right, sir. All right. Yeah. Thank you.

Operator

Thank you. Next question is from the line of Nischint Chawathe from Kotak Securities. Please go ahead.

Nischint Chawathe — Kotak Securities — Analyst

Hi. Two questions from my side. One is on the…

Operator

Nischint, sorry to interrupt. Your voice is not clear. May I request you to speak through the handset, please.

Nischint Chawathe — Kotak Securities — Analyst

Yeah. Is this better now?

Operator

Yes, sir. Thank you.

Nischint Chawathe — Kotak Securities — Analyst

Thanks. My question is first is on the gold loan branch [Technical Issues] around 300 odd gold loan branches. Just to clarify, you don’t need to take any regulatory permission for adding branches, right?

Nirmal Jain — Managing Director

No, we need — okay. Now there is a bit of ambiguity on this but to be safe side, we take regulatory approval. So, we took approval and we got approval for 1,000 branches in 2020. We’ve got another approval for 700 branches, out of which we would have set up maybe another 200 so we got approval for 500 — 400 or 500 more branches. So, we are taking approval. It’s a little vague whether we need approval or not, but okay. I’ll give you background. Earlier there was a circular when the gold loan industry came under pressure in 2013-’14 saying that the gold loan companies if they expand their branch network beyond 1,000, they should take approval. Now whether we are a gold loan company or not is again a difficult question. But on the overall portfolio we are less than 50%, but you look at standalone NBFC, we may be more than 50%. So to err on the side of caution, we go to RBI and take their approval and we actually present them the entire data of how we have gone into underpenetrated market and what has been the track record of earlier approval and what have we done. So, we have the approval now. I think we have adequate approval for next one year.

Nischint Chawathe — Kotak Securities — Analyst

Sure. And just for my understanding, your branches are not exclusive gold loan branches, right? I mean what you have essentially is a IIFL branch and you probably do gold or — I mean you can do multiple products from the branch. So, it’s not an exclusive gold loan branch that you do.

Nirmal Jain — Managing Director

Okay. So practically speaking if you look at our goal loan branch count, it’s 2,589. Our housing finance — home loan is about 370. So what has happened is that many of the gold loan — some of the gold loan branches will double up as home loan also and many a times what happens is that the home loan works in a hub and a spoke model. Like say in Bombay we have about 100 gold loan branches, but there will be only 10 home loan branches. But what will happen those 90 gold loan branches will feed the leads of home loan to those 10. So supposing we have a branch in Borivali so entire Andheri to Dahisar area will give those home loan leads to Borivali branch. So we leverage our branch base to get the lead, but out of these 2,589 branches, almost 2,200 will be exclusively only gold.

Nischint Chawathe — Kotak Securities — Analyst

Got it. And just one little bit clarification on numbers. Your cost of funding is going up by around I think sequentially around 10 basis points and — sequentially 15 basis points and annually around 10 basis points. So, just trying to understand what is the secret sauce?

Nirmal Jain — Managing Director

What is the…?

Bhuvnesh Garg — Investec Capital — Analyst

What is the secret sauce?

Nirmal Jain — Managing Director

Yeah. I think it’s a good question. So one is that we have a longer tenure loan and I think if you see, the loans before 2018 were even more — the interest rates were higher than what it is today. And so what is happening is that sometimes when these get repaid, what we are getting now is even after this MCLR increase is still not too bad. The dollar loans, which are at a very high rate, I think we’ve been able to bring that down by 130. Third thing is that in NHB refinance what we get because we are affordable and really catering to the low income group, we get from NHB. NHB has different schemes, 5%, 6%, 8% depending on what kind of loans you’re doing. So, the refinancing is also at a competitive rate. And also given our track record, we are able to negotiate with banks better. So the premium or what we are paying to MCLR now, we can — we might be able to negotiate at MCLR or sometimes even better than that. So, it’s a combination of everything.

Nischint Chawathe — Kotak Securities — Analyst

Sure. And just to understand, in IIFL Finance standalone as against your weighted average cost of borrowing of 9%, what would be your incremental cost last quarter?

Nirmal Jain — Managing Director

Incremental cost last quarter was — one second I’ll give you. Incremental cost, the new loans. It’s similar, it’s around 9%.

Nischint Chawathe — Kotak Securities — Analyst

Okay. Perfect. Thank you. Those were my questions.

Nirmal Jain — Managing Director

Thank you.

Operator

Thank you. Next question is from the line of Navneet Bhaiya, individual investor. Please go ahead.

Navneet Bhaiya — Individual Investor — Analyst

Hi, sir. Congrats for the good results. I have two questions. First, your leverage profile of course has improved quite significantly after the ADIA money raise. So is there a timeline by which you are looking to revert back to the earlier leverage profile if you are looking to it? That’s my first question. And second is your standalone results across your total income, PPOP, there has been a dip sequentially as well as Y-o-Y. So while you’ve mentioned some reasons on the gold loan competition etc., but if you can throw some more insights on that?

Nirmal Jain — Managing Director

So okay. There is one also component is our markdown in the value of investments which the valuations happen every quarter and that’s why you see that the fair value gain is in negative. And so the standalone book basically comprises the old business loans, the construction finance, and gold loan. Gold loan has been under competitive pressure and there is a bit of a markdown on the investment that we made, but those valuations happen every quarter so it’s like a — it’s a quarterly movement.

Navneet Bhaiya — Individual Investor — Analyst

Understand. On the leverage bit, sir, your leverage of course after the ADIA money raise is a lot more conservative. So…

Nirmal Jain — Managing Director

So in last year, I think we had covered bond gain. What was it, Kapish? Can you just…?

Kapish Jain — Chief Financial Officer

See in the last year we had the — some of the off-book assets which were sitting into a trust which when they get closed, there was a one-off profit which came of around INR202 crore in the entire — in the standalone financials of IIFL Finance. It didn’t affect the consolidated numbers, but in the standalone numbers this aberration of INR202 crore of additional interest income came in.

Nirmal Jain — Managing Director

But in consol, it gets knocked off.

Kapish Jain — Chief Financial Officer

So, which resulted in the standalone numbers looking low compared to last year. That’s one one-off impact. The other is the impact that we talked about mark to market on the investment assets.

Nirmal Jain — Managing Director

Yeah. Sorry. Go ahead.

Navneet Bhaiya — Individual Investor — Analyst

Sir, the second question was on the leverage. Are you looking back to…?

Nirmal Jain — Managing Director

So leverage I think we don’t want to go back to the 5, 6 or whatever. So from 3.2, I think we’ll be comfortable at least whatever we have discussed in the Board to go up to 4. And we — I think we’ll try and contain — I mean that should be the level that we should try and not cross.

Navneet Bhaiya — Individual Investor — Analyst

Okay. And by when would you look to sort of reach that level because that obviously means your ROE also perhaps would improve to that extent?

Nirmal Jain — Managing Director

So I think given that incrementally we can do co-lending, I mean we can achieve that level in 12 to 18 months and stay there and increment — as the business mix stabilizes at whatever level we want. So, it could be 12 to 18 months’ time by when we get the leverage back to that level.

Navneet Bhaiya — Individual Investor — Analyst

Understood, sir. Thank you so much.

Operator

Thanks very much. Ladies and gentlemen, we’ll take that as the last question. I now hand the conference over to the management.

Kapish Jain — Chief Financial Officer

There’s more questions coming, just we can close all of them. Hello.

Operator

Sure, sir.

Kapish Jain — Chief Financial Officer

Don’t close the conference because I can see four questions in the queue.

Operator

All right. The next question is from the line of Nikhil Agarwal from Tusk Investments. Please go ahead.

Nikhil Agarwal — Tusk Investments — Analyst

My question is on the mix of the co-lending securitized and the on-balance sheet book. So right now we had 27%, 28% on-book — off-book balance sheet lending. So can you talk on the breakup of the off-book balance sheet lending and the on-book balance sheet lending for the different businesses that we have?

Nirmal Jain — Managing Director

So primarily gold loan, home loan, and LAP are off-book. The construction finance obviously completely whatever we have is on-book. And business loan also the digital loans are new, I mean that’s probably more or less on-book. So in terms of if you really want to have the exact number, then you can work out the numbers from the loan AUM and the assets on balance sheet difference, which is there in the presentation. But the total assigned assets are INR15,939 crores and total co-lending is INR5,700 crores. So, on-book is around INR36,300 crores and off-book is around INR21,600 crores.

Nikhil Agarwal — Tusk Investments — Analyst

Okay. Got it. And incrementally in the microfinance book, are we doing more co-lending or any assignment is happening or everything is on…

Nirmal Jain — Managing Director

Yeah. Microfinance also probably will do more co-lending and assignment going forward. It requires some seasoning and I think going forward that’s also a great product to be the partner with banks.

N Venkatesh — Chief Executive Officer, IIFL Samasta Finance

Just to give you a perspective in the microfinance, the single objective of capital optimization stayed. We did around INR1,550 crores of assignment in Samasta Retail compared to INR250 crore that we did in the same time last year. So, that’s where we are building the similar arrangement for doing off-book assignments for this business.

Nirmal Jain — Managing Director

Last year we couldn’t do much because the — because of COVID restructuring, the entire business was in bit of a turbulent phase.

Nikhil Agarwal — Tusk Investments — Analyst

Got it, sir. And this time microfinance growth has been 17% quarter-on-quarter, which has been the major driver for the growth in the book. So, how do you look at this book growing?

Nirmal Jain — Managing Director

Last quarter was 17%, but yeah, I would say there is a bit of aberration actually. I don’t think that growth will continue, but it will be a strong growth for next few more quarters. I mean whether it’s 55% Y-o-Y or 17% quarter-on-quarter is difficult to say and I mean that level won’t sustain forever, but 25%, 30%, 35% is quite doable in this year and next year.

Operator

Thank you. Sir, the line for the participant dropped. [Operator Instructions] The next question is from the line of Aswin Kumar Balasubramanian from HSBC Asset Management. Please go ahead.

Aswin Kumar Balasubramanian — HSBC Asset Management — Analyst

Yeah. Hi. I just wanted to check in terms of the capital on the standalone entity. So the Tier 1 is 13.8%. So what — up to what level of Tier 1 would you be comfortable going with? And also this has declined from about 18% last year so any reason for the decline from 18% to 13.8%?

Nirmal Jain — Managing Director

So actually the last year in the December quarter, there were more assignments and the book had come down significantly. We have not done that in last quarter. But for the March quarter is the quarter when most of these assignments happened. I think we would like to keep it around 13%, 13.5% is a level that we would like to maintain for Tier 1 at least.

Aswin Kumar Balasubramanian — HSBC Asset Management — Analyst

Okay. Thank you.

Operator

Thank you. Next question is from the line of Jyoti Khatri from Arihant Capital. Please go ahead.

Jyoti Khatri — Arihant Capital — Analyst

Yeah, sir. Sir, any updates from the asset quality standpoint on the CRE book?

Nirmal Jain — Managing Director

No, I think in terms of CRE book asset quality continues to be what it has been. The CRE environment is improving. If you see the demand for housing and the real estate sector in general, it’s seeing good traction. So I think most of the projects, things are picking up faster than historically what we have done.

Jyoti Khatri — Arihant Capital — Analyst

Okay. And if you can just tell us what was the total income generated in terms from the off-book in Q3 versus in Q2?

Nirmal Jain — Managing Director

So, I think these numbers are there in the off-book [Speech Overlap].

Jyoti Khatri — Arihant Capital — Analyst

The total other income which is there, that is purely coming from off-book. That is there in the presentation.

Nirmal Jain — Managing Director

Non-fund income that you see, INR530 crores in Q3 and INR476.6 crores in Q2, that is off-book income.

Jyoti Khatri — Arihant Capital — Analyst

Okay, sir. Yeah. Thanks.

Operator

Thank you. The next question is from the line of Trupti Agrawal from WhiteOak Capital. Please go ahead.

Nirmal Jain — Managing Director

Just one point. This time we have given an Excel sheet which is like a data book, which has got lot of these granular details that you’ve been asking for. You can find those numbers in those Excel sheets and the numbers are in an Excel sheet so that you can — you compare or you can use — you can analyze on your own. Go ahead, Trupti.

Trupti Agrawal — WhiteOak Capital — Analyst

Yeah. Thank you for this opportunity, sir. Just two quick questions. One is…

Operator

Trupti, sorry to interrupt you. Your voice is not coming very clear. May I request you to speak through the handset, please?

Trupti Agrawal — WhiteOak Capital — Analyst

Just kindly give me a moment. Yeah. Am I audible to you now?

Operator

Yes. Thank you. Go ahead.

Trupti Agrawal — WhiteOak Capital — Analyst

Yeah. Sorry. So sir, what I just wanted to understand is that on the co-lending side — co-lending of home loans, I see a quarter-on-quarter decline in the disbursements from about INR818 crores to INR643 crores, that’s about a 20% decline. So I just wanted to understand the reason for the same because we’re talking about very big opportunity in this space and couple of new tie-ups that we’ve done in this quarter. So, that is one. And my second question is what is the…

Nirmal Jain — Managing Director

Actually with ADIA, we are sitting on a huge cash on which we just earn 3%, 4%. So although we have a relationship with the banks, otherwise ideally we shouldn’t do any co-lending till we utilize our cash and have a huge negative carry there. But maybe, Monu, you have anything to share on this?

Monu Ratra — Chief Executive Officer, IIFL Home Finance

Yeah. So this is one reason which is there, as Nirmal mentioned. And also we’ve been seeing that we’ve also now added a bit of our non-HL book, the loan against property also has got into co-lending as well. So if you put both together, they are almost the same as last quarter. But as Nirmal said, we have ample liquidity we’re sitting on so we’ll better consume that first rather than having a negative carry.

Trupti Agrawal — WhiteOak Capital — Analyst

Sure. Sorry, did you say that now we are doing the LAP along with home loans so put together, the disbursements would be almost similar? Is that what you said?

Monu Ratra — Chief Executive Officer, IIFL Home Finance

Yes.

Trupti Agrawal — WhiteOak Capital — Analyst

Okay. Got it. And my second question is that just wanted to understand the reasons for such a sharp increase in operating expenses in the home finance subsidiary both on a quarter-on-quarter and nine-month basis. What really is the nature of these expenses?

Nirmal Jain — Managing Director

There is expansion of branches and people happening mostly in — yeah, you’re talking about HFC? Monu, you want to talk — you’re talking about HFC?

Trupti Agrawal — WhiteOak Capital — Analyst

Yeah. HFC. I’m talking about the HFC.

Monu Ratra — Chief Executive Officer, IIFL Home Finance

Yes, yes. So if you will see that in the last — almost from the last 1.5 years, the count of our headcount including the branch network has also increased reasonably. So we are in that — once again in that investment phase and because as we are setting ourselves for a brisk growth in the coming years so this investment has happened in the last one, one-and-a-half years. However, as you will see the — as we are going to Tier 2, Tier 3 towns, there is an increase in the operating cost. So similarly, the spreads have also improved because in those markets you can earn a better spread. So, now the investment phase is evening out. From hereon, we should be able to come back to our original operating ratios as we get these branches more productive.

Trupti Agrawal — WhiteOak Capital — Analyst

So how many home loan branches do we have as at the end of this quarter?

Monu Ratra — Chief Executive Officer, IIFL Home Finance

370. Total about 370 branches.

Trupti Agrawal — WhiteOak Capital — Analyst

All right. And sorry, if I can just ask one last question, which is in the business loans, what exactly has been the issue on the digital loan side?

Nirmal Jain — Managing Director

No. The digital loan side, RBI came up with a circular which put down certain guidelines about partnering with fintech in terms of FLDG credit, the money is to go to the customer’s account directly and not through these partners. So there are number of such conditions were put and that is what has impacted. So we have many partners in digital loan and particularly two partners, which are fairly significant, that’s where the business has come down. I think it’s a process change because like money going to customer instead of through the partner and many such things, we have just operational issues we put it down — we try and sort it out. In terms of underwriting, we always want to do credit underwriting ourselves. So some of these partnership business will also come back, it’s just a matter of time. I think this circular if I’m not mistaken came sometime in late September and that is why you see last quarter there is some impact on a couple of partner business.

Trupti Agrawal — WhiteOak Capital — Analyst

Sure. Got it. Thank you. Thank you so much.

Operator

Thank you very much. As there are no further questions, I would now like to hand the conference over to the management for closing comments.

Kapish Jain — Chief Financial Officer

Yeah. Thank you very much, ladies and gentlemen, for joining us on this call. I think it was a very detailed conversation and hope we were able to address all your query. The data book should also help you to get — do further analysis and it’s in Excel form for your convenience. Still if anything further remains, do come back to us at our Investor Relations email ID and we’ll be happy to address it back to you. Thank you.

Nirmal Jain — Managing Director

Thank you so much. Have a good day ahead. Thank you.

Operator

[Operator Closing Remarks]