Indiabulls Housing Finance Ltd (IBULHSGFIN) Q3 FY21 Earnings Concall Transcript

Indiabulls Housing Finance Ltd (NSE:IBULHSGFIN) Q3 FY21 earnings Concall dated Feb. 12, 2021.

Corporate Participants:

Gagan Banga — Vice-Chairman, Managing Director

Ramnath Shenoy — Head, Analytics & Investor Relations

Analysts:

Kang Zheng — Tahan Capital Management — Analyst

Hariharan — NWI Management — Analyst

Abhiram Iyer — Deutsche CIB Center — Analyst

Nischint Chawathe — Kotak Securities Limited — Analyst

Pranav Tendolkar — Rare Enterprises — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Indiabulls Housing Finance Limited Q3 FY ’21 Earnings Conference Call hosted by Investec Capital Services. [Operator Instructions]

To discuss the quarterly performance of Indiabulls Housing Finance, we have with us Mr. Gagan Banga, Vice Chairman, MD and CEO; Mr. Ashwini Hooda, Deputy Managing Director; Mr. Sachin Chaudhary, Chief Operating Officer; Mr. Mukesh Garg, Chief Financial Officer; Mr. Ashwin Mallick, Head, Treasury; Mr. Ramnath Shenoy, Head, IR and Analytics; Mr. Veekesh Gandhi, Head, Markets; Mr. Hemal Zaveri, Head, Banking.

I now hand the conference over to Mr. Gagan Banga. And over to you, Mr. Banga.

Gagan Banga — Vice-Chairman, Managing Director

A very good day to all of you, and welcome to the quarter three FY ’21 earnings call. While we have largely resumed working out of our offices, some of us are taking this call from our homes. Therefore, we request that you restrict yourselves to high-level questions. Granular numbers beyond the ones detailed in the earnings update or on this call can be taken directly from the Investor Relations team by e-mailing them.

I will first quickly cover the headline numbers before discussing the business and the quarter in greater detail. Now I’ll request all of you to please refer to the earnings update that has been sent across. Please refer to Slide 3. Our loan book stood at INR70,282 crores. On the back of the up-cycle in the real estate sector, we are seeing strong traction on developer loan refinance. Our regulatory capital adequacy stands comfortably at 30.5%, of which Tier 1 capital is 23.7%, well ahead of the regulatory requirements. Our net debt to equity remains very low at 3.3 times. As cost of funds have started to moderate, spread on loan book has marginally expanded, leading to a rise in our net interest income, which for the quarter rose to INR809 crores against INR750 crores in quarter two and INR731 crores in quarter one.

Profit before tax was at INR437 crores against INR413 crores last quarter and INR354 crores in quarter one, while profit after tax for the quarter came in at INR329 crores against INR323 crores in quarter two and INR273 crores in quarter one. On Slide 6, we have detailed the building blocks of the business going ahead. I request you to refer to the slide. The blocks detailed here are our key focus areas for the next few quarters and years. This will help us build a larger granular profitable book, increase our customer base and enhance profitability. For the past several quarters, we’ve been running down our development loan book, and this consolidation continues to be an area of key focus. We will now also very shortly begin incremental lending to the developer segment through an AIF structure in tie up with a foreign portfolio investor who will be a partner in the AIF. The discussions to this end have ended and now the setup of the AIF, etc., that whole process, will begin shortly.

We expect to start business via this route by quarter two of fiscal ’22. As far as the main balance sheet is concerned, we will continue to derisk our developer loan book through refinance and securitization of loans. With the pickup in the residential real estate cycle, we have been seeing strong traction in developer loan refinance. By March ’21, we are on track to generate liquidity of further approximately INR3,000 crores through refinance and securitization of the developer loan book. Overall, we have set a target to reduce our wholesale book by 33% from here by March ’22 and by 50% by December ’22.

The next area of focus is to expand our distribution reach for retail loans. We are already in the process of adding technology-enabled smart branches in up-country locations. Our near-term target is to add 50 such branches by September ’21 to our branch count at the end of September ’20. We will be able to release better yields on these retail loans, and thus — and this will also serve to diversify our loan book and customer base.

The most important goal is to increase our customer base by as much as 50% by March ’23 and double it by March ’25. Our people have historically been our greatest strength, and this is our next core area of focus. While I was recently looking at data, I was gladdened to know that the Top 200 people of the Company who really manage and oversee the day-to-day operations have been with us for an average of nine-plus years. People are our engines of growth. And as we look to take advantage of this residential real estate up cycle, we will expand our team such that we are in capacity to be able to disburse as much as INR1,500 crores of retail loans a month by September this year. And by March, we should be able to disburse as much as INR2,000 crores of retail loans in a month.

Given the fact that it is the same 200 people who used to oversee over INR2,000 crores of retail disbursals in 2018, this is a very, very achievable target. Next with our co-lending partnerships falling in place, we can now leverage on it to give us a balance sheet-light growth and profitability. We’ve scaled up to five partnerships from 2002 [Phonetic] and the implementation of the new relationships will begin by quarter one of next fiscal. With our current partners, we have started achieving meaningful traction. And with all of this, we are scaling up to achieve INR1,500 crores of quarterly disbursals through the co-lending model by September ’21.

In parallel, we’ve also begun work on our technology platform to give us one interface to integrate with the systems of our partner banks, such that we can seamlessly source and onboard loans to partner banks wherever the jointly agreed credit policies converge. This interface is also targeted to be operational by September ’21. In other key technology initiatives we are working on is to create a technology-driven housing solutions ecosystem. We also do well — we may also do a small technology company acquisition to implement this. We want to create a platform, which provides to our target customer in a wide age group of 25 years to 55 years, services for renting, sale, purchase, resale, upgrade of house, so the entire real estate ecosystem when you start working at around the age of 25 to around the time that you’re buying your final house, the entire ecosystem we wish to cater. This will form a ready customer base for us and will also open up multiple fee generation avenues.

We are looking to make substantial progress on this by September ’21, and an update will be provided to you on a quarterly basis. These will be the building blocks of our business going ahead. Besides this outlook, as communicated in our last earnings call, I will get into the other two important aspects of our business, which are capital, gearing liquidity and funding and asset quality.

Starting with the capital gearing, liquidity and funding. Following our QIP and stake sale in OakNorth, our capital adequacy stance boosted to 30.5% and the net gearing at a low 3.3 times. This lends to a lot of comfort to both our lenders and credit rating agencies. Our borrowing program has shaped up well. Our funding costs have started to moderate with cost of funds now having gone below 8.5% on a book basis. This has thus helped expand our spread on book to 2.6%. In addition to availing funds at decreasing costs, we are also raising large sums of long-term moneys of over five years tenor, which bodes well for our ALM. Overall, in fiscal ’21, the Company has raised a total of over INR28,000 crores through equity, bank lines, bonds and loan sell downs.

The details of monies we have raised are tabulated on Slide 4 of the presentation. Not only does the successful funding raise provide liquidity for growth, but also supports an upward credit rating trajectory. We believe that the Company has demonstrated ability to raise equity capital in tough market conditions. Normalization offers access to debt markets and assumption of growth prospects support the Company’s credit ratings. We are in continuous touch with rating agencies. Movements in ratings are largely also driven by macros. And with the strong tailwinds for the residential real estate sector, house sales, which are at multiyear highs in quarter three, we are fully expecting the Company’s rating trajectory to turn upwards now.

If you now refer to Slide 7, we have shown our ALM at the end of December ’20. The ALM is shown on a cumulative basis up to each bucket. As on December 31, 2020, we had liquidity buffers, cash, investments and undrawn available sanctions of over INR17,000 crores, covering over 20% of our loan book. We are positive across all buckets and have a positive net cash of almost INR14,000 crores at the end of the first year. Our detailed 10-year quarterly ALM is in the appendix slides on the earnings — of earnings update on Slide 20.

Moving on to asset quality, collection efficiency and derisking of the developer loan book. Our reported gross NPAs at the end of December ’20 are at 1.75%, while net NPA stand at 0.77%. Without the Supreme Court directed standstill on asset qualification — classification, our pro forma gross NPAs without the Supreme Court dispensation would be 2.44% as of December 31, 2020 against 2.21%. We’ve continued to pad up on provisions, and we now have a provision pool covering over 3.4% of our loan book.

We’ve also done accelerated write-offs from where recovery is expected of roughly INR1,100 crores. All of this put together has created — has resulted in having total effective provisions of almost 5% of the loan book. Our stage three provision coverage ratio stands at 40% of pro forma gross NPAs without the Supreme Court dispensation. Had the Company not chosen to degrow its book in the past one year, the pro forma gross NPAs of 2.44% would have actually been just 2.06%. We believe we are past the asset quality pain that the industry was to endure, and we will now see a very stable sort of asset quality. The Company has also had to restructure only about 0.95% of its loan book, which strongly supports this outlook.

Our collection efficiency has also normalized at about 98% against 95.2% in September. The NPA numbers have held up during these difficult times, and our strong demonstrated recovery capabilities will ensure that asset quality should be maintained within a tight range. As we approach the end of the fiscal year, I am reflecting back on the thoughts I had around March 2020 and through the initial phase of the lockdown, when I would keep reminding myself to hold fast during the storm and to try and steer IBH towards the light. I feel we are closer to that light than ever before. Things are looking up for IBH, our NBFC sector, the real estate industry and for our beloved country. As we progress, I look forward to ending the year at a high of our performance in quarter four fiscal ’21. As Indiabulls Housing bounces off from the crisis the sector has been facing for almost the last 30 months, and the world has been suffering for the last one year, we need to remain mindful that troubles don’t get over very quickly, but we are certainly today much, much further ahead in the bounce back than we’ve ever been.

As we move towards the last 45 days of quarter four, I’m confident in our ability to stay resilient and deliver on the guidance provided to stakeholders. This confidence comes from witnessing how much we’ve been through as a company and being part of a strong and committed team, which also gives one a sense of calm. Even though at times through the course of the last 30 months, one has felt isolated, but the team has held up, and we’ve looked over one another. I look forward with both calm and confidence to the next chapter we will begin in April ’21 after successfully achieving goals set for March ’21. We’ve shared the building blocks, which will allow us to double our customer base by March ’25, leveraging on our superior technology capabilities. Across challenges, we remain committed to deliver a brighter fiscal ’22 to all our stakeholders.

On this note, the IBH management is now open for questions. Thank you.

Questions and Answers:

Operator

[Operator Instructions] The first question is from the line of Kang Zheng from Tahan Capital Management. Please go ahead.

Kang Zheng — Tahan Capital Management — Analyst

Hi. Good evening.

Gagan Banga — Vice-Chairman, Managing Director

Good evening.

Kang Zheng — Tahan Capital Management — Analyst

Yeah. My first question is regarding the loan book growth. So previously, the guidance was that by the end of FY ’21, we’ll have 20% growth for AUM and 5% to 7% for on balance sheet loan assets. So — but it seems like the latest quarter number shows that both AUM and on balance sheet book loan assets are down quarter-on-quarter basis. So can you share with us what’s the — what’s behind this development?

Gagan Banga — Vice-Chairman, Managing Director

Yeah. So I’ve shared last time that as a mathematical outcome of our wholesale book reduction and the retail book growth. We will operate in a range on the loan book side between INR70,000 crores and INR76,000 crores. As we’ve detailed in both my opening remarks as well as in the earnings deck, we have seen accelerated repayments on the wholesale book side, much ahead of what we thought we would be getting. The retail disbursals continue to track up and are growing on a month-on-month basis, and we are headed in a direction where we should be able to get to a retail monthly disbursal of INR1,500 crores by September of this year. My sense is that we are right now at INR70,000 crores, which is, per se, the floor in my expectation. From here, as of end of quarter four, we should be certainly higher on the loan book side since the retail disbursals have begun and are happening quite aggressively. Feb and March are anyways very important months as far as the retail business is concerned. So we are well within the guided range of between INR70,000 crores and INR76,000 crores. I had clarified it repeatedly in the last earnings call as well that this is the range, and it is a mathematical outcome since — when a wholesale loan gets refinanced, we get, let’s say, $50 million, $100 million, but to disburse that on the granular side takes its own time. I hope I have clarified.

Kang Zheng — Tahan Capital Management — Analyst

Yeah. That’s a great answer. So can we understand what is the kind of breakdown in terms of overall disbursements in the last quarter?

Gagan Banga — Vice-Chairman, Managing Director

Yeah. I can get — so the retail disbursals are growing. I think we would be now tracking to something around INR2,000-odd crores for the quarter. I can ask my IR team to send you the exact details in terms of breakup of retail and wholesale disbursals, if it’s required by you.

Kang Zheng — Tahan Capital Management — Analyst

Yeah. Sure, thanks. My other question is regarding the OakNorth stake. So the Company has talked to a couple of investors between September and November, raising, I think, close to INR20 billion. So right now, how much shares do you still own of OakNorth? And what was the average selling price for the September to October transactions?

Gagan Banga — Vice-Chairman, Managing Director

Yeah. So we’ve raised the total — for the stake that we had, we have raised a total of over — just over INR2,000 crores. And so Ramnath, if you can just detail out the enterprise value, if you have it off hand? And I think now, we’re left with about 1.5% of the bank, which should be valued in the ballpark of INR300 crores.

Ramnath Shenoy — Head, Analytics & Investor Relations

Yeah. I can just give the numbers. Sorry, sorry. One moment, please. I just need a couple of minutes to pull it up, and I’ll get out the numbers.

Gagan Banga — Vice-Chairman, Managing Director

Sure. So if 1.5% is INR300 crores, it can just get extrapolated. This is on the basis of —

Ramnath Shenoy — Head, Analytics & Investor Relations

[Speech Overlap] INR300 crores.

Gagan Banga — Vice-Chairman, Managing Director

Yeah, so all the shares which were sold between September and November was sold at one price. There was no price range, and it is by that valuation only that we have calculated the residual value of 1.5%. We’ll anyways just update you in a minute as to what will be the exact valuation.

Ramnath Shenoy — Head, Analytics & Investor Relations

So it has come to around $3 billion for the entire OakNorth Bank.

Kang Zheng — Tahan Capital Management — Analyst

Okay. Got it.

Ramnath Shenoy — Head, Analytics & Investor Relations

So I have the details. So we had purchased it for about INR6.6 billion. We sold in December ’17 worth INR7.7 billion. Through these various stake sales, we’ve realized another INR20 billion, and our residual stake is worth about INR200-odd. So in all, for a purchase price of INR6.6 billion, we have — what we’ve realized plus the value of residual stake is just under INR30 billion. So about 5 times is what we’ve made on this.

Kang Zheng — Tahan Capital Management — Analyst

Okay. One quick question. So how do we define the collection efficiency? So is it the amount that you’ve collected versus the value that you have billed your customers?

Gagan Banga — Vice-Chairman, Managing Director

No. It is the due for the month versus what we have collected for the month.

Ramnath Shenoy — Head, Analytics & Investor Relations

No. Just one other thing. So it is not all collections. It’s only collections against what is due. So if there is any prepayment or such, that is not taken in the numerator, right. So it truly measures what we’ve collected against the demand we’ve based. If you include prepayments, it would be well north of 100.

Kang Zheng — Tahan Capital Management — Analyst

Great, great. One last quick question. So obviously, the dollar bond is in next year — next May, so you’ve got maybe like 15 months due then. So — but is there any early thoughts about the management on how it can be dealt with, given that the reason — your existing bond is almost close to par. So is the current yield prohibitive to the Company or not?

Gagan Banga — Vice-Chairman, Managing Director

The current yield is certainly high. Once it starts trading at premium, at that point in time, we can engage with investors. At this point in time, we will continue to focus on raising capital around sources of capital, which make commercial sense, have a running coupon, which is viable, which — for which we are focusing on our bankers to continue to support us, our securitization partners, both banks and financial institutions, to continue to support us. And as and when one feels that there is an appropriate appreciation of the fundamental strengths of the Company in the overseas market, one can engage with overseas investors as well. That’s the update as we speak.

We obviously are engaged with all types of pools of capital, both debt and equity at all points in time. As a company, we require frequent doses of capital, and we shall continue with that engagement. So let’s see if the dollar bond has performed well, especially for investors who have come in over the last year or so, they’ve made a lot of money. So I’m sure there will be support on whatever the Company plans to do.

We’ve also — we are also going to be repaying a tranche of our Masala Bonds later this month, which was as per — as detailed in our last investor update sent in December. We’ve already funded the repayment trust for that quite a few months ago. So once that happens, that will further create a better appreciation for the Company. I think that payment will happen around the 25th of this month. So given all of this and given the fact that the ALM is good, as I detailed, we should be left with about INR14,000 crores after one year. So let’s see. We will engage at that time.

Kang Zheng — Tahan Capital Management — Analyst

All right. Thank you very much, guys.

Gagan Banga — Vice-Chairman, Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Hariharan from NWI Management. Please go ahead

Hariharan — NWI Management — Analyst

Gagan, congratulations. We were involved with you right through the last four or five quarters, and I know what you’ve gone through. And you’ve done a fantastic job. So — and the presentation reveals that. I have a question on just the dynamics of the business as you see it now, specifically on two items. One is on the liability side, at one point in time, obviously, related to concerns about the industry in general and also concerns about credit quality of NBFCs and so on, some of the traditional pools of capital you were accessing in the past went away. Has there been any change in terms of your sources of liquidity locally? Or is there still a large kind of dependence, if you will, on public sector banks? And then secondly, on the business itself, you talked about the incipient pickup in demand. What can you tell us about ability to price? What is the margin outlook given the combination of improving liquidity and liability prospects versus demand? And finally, from a target market perspective on the asset quality side, are you able to get into the kind of target market you need now? Or is there tremendous competition among everybody because of the massive liquidity surpluses in the system? Thank you.

Gagan Banga — Vice-Chairman, Managing Director

Thank you, Hari. Thanks for the support you have provided to the Company for the last many months and also the guidance you’ve given to the management from time to time. We are stronger today than ever before, thanks to supporters and stakeholders such as you. Now coming to your question, on the liability side, the way that we are prioritizing the raise of capital is pretty much what we’ve been focusing on the last three or four quarters. The most important pool of capital for us right now is the liquidity that we generate by — on a gross basis, reducing our wholesale book. That allows us to raise liquidity for making sure that more capital goes into those projects, which we had already financed and are under construction. Those projects don’t stall and hundreds of people are working on those projects to bring them to early closure and to eventually — that is the fastest and the most efficient and profitable way of getting back the money from the wholesale book, and that is generating a fair amount of liquidity. As I indicated, just in the next 45 days, one is expecting almost $500 million from just this initiative. So that’s the quantum of liquidity we’re being able to generate.

The second pool of capital, which is of interest to us and is the most viable is our retail securitization, which has to be done tactically given the fact that the loan book is already — has already shrunk by a lot, so we can’t just go out there and raise all — a lot of liquidity through that source. We have to keep that as more a balancing number. The third pool of capital is lines for onward lending being raised from public sector banks, which come to us at a fairly cost-efficient manner such that we can also compete in the banks.

Now as far as the mutual funds is concerned, I believe that mutual funds are still not really subscribing to bonds of non-bank finance companies aside of a couple of AAA companies and some gold loan companies. My sense is that as companies such as ours continue to add up on equity capital and continue to demonstrate steady asset quality. Short-term bonds would start getting subscribed by these mutual funds. The CIO of a large mutual fund has, just about two weeks ago, also spoken about this in public forums that at least in his fund, he’s looking to pad up. At a company level, we will approach that pool of capital with great caution. What we have realized as a company is that as we go through cycles, on the up cycle, we will — usually, and this is, in some ways, related to your second question also, on the up cycle, we will be able to usually be able to beat our peers in terms of asset growth, asset quality, etc. Once — if the cycle is down, especially as an outcome of a crisis sort of a situation, then given the fact that we do not have a corporate house backing us or a large financial institution backing us, we’re an entrepreneurial organization, we have to cut back and cut back more sharply than our peers.

The cycle is turning and, therefore, I believe the cut back process is now done. And as we look to grow, the other interesting pool of capital will be how we engage with the overseas market. And while we may still take our own time in issuing some sort of an instrument there, that engagement for me is very important as a key area of focus to diversifying our liability profile. So this is broadly how we intend to continue to fund ourselves at least over the next 12 months to 18 months.

Once the rating trajectory is moving up again, that’s the time to, again, reengage with insurance companies and provident funds for bond subscription. I think we have a good time for that, and that pool of capital is certainly open on a more longer-term basis. Moving on to now your second question about price outlook, target market, etc., from an incremental lending perspective, we are looking at granular home loans. We are slicing it by market. Key area of focus is Tier 3, Tier 4, Tier 5, semi-urban kind of locations where we do home loans, which are in the ballpark of INR15 lakh odd, INR1.5 million. And then on the urban center side, we are more focused on looking at doing home loans, which are anywhere between INR3 million to INR30 million, either on our balance sheet or co-lending with either a public sector bank or a large housing finance company. With all of this for the loans that we keep on our balance sheet as well as keep on our balance sheet temporarily for eventually securitizing, we should be able to get a yield of, give or take, 9%.

Since the urban centers still have loans, which are happening in double digits, in the more competitive markets, loans will happen at about 8%, 8.5%. For the slightly higher ticket sizes beyond INR2 million, on an average, we should be able to get between 9%, 9.3%. This product, we will only be competitive and will be able to sustain an ROA, which then [Indecipherable] into an ROE if we originate and securitize. We’ve done that at scale. As has been detailed in the earnings deck, we have originated and securitized over — close to about $10 billion in the last few years. So that process will continue. I am not making any claim that’s going to be an ROE-sustainable business by being able to keep it on my balance sheet. So the area of focus as far as target market is concerned, A, is the smaller urban centers and the semi-urban market. In the urban market, loan ticket sizes of INR3 million to INR30 million. When we blend salaried with self-employed and all of these ticket sizes, we are able to comfortably get to a position where till the time that the loan is with us, we make close to about 100 basis points of spread. And after that, we just keep earning on that loan without putting at work our capital.

I hope I’ve been able to answer that. Just the last point, as far as this is concerned, through the period of 2009 to 2017, we did not enjoy a AAA credit rating from CRISIL or ICRA. And through that period, we were still earning a very respectable high-teen kind of return on equity from our retail business. So by just originating and securitizing and building that engine, refining it, now we have the added advantage that we’ve already seen scale. Our technology platform has already seen scale. We are already at a very, very low cost-to-income ratio of 13%. So one is of a strong conviction that we will be able to get, just on the retail side, to a high kind of a teen ROE over the course of the next two years as we scale up. And for that, we have set and disclosed targets today, where we are saying that by September, we’ll be in capacity to do INR1,500 crores, and by March INR2,000 crores a month.

Hariharan — NWI Management — Analyst

Thank you. Just as a quick follow-up, Gagan. What is interesting is given the kind of numbers you have posted, the capital adequacy, trends in credit quality, collections and also your efficiency and costs and so on and so forth, I just wonder whether — when I — at least, according to the information we have on Bloomberg, the Company is still selling at a price to book of 64%. Is that an issue in the sense that the equity investing institutional investor market in India does not quite — has not quite figured out your business model? In other words, is there still a fixation on asset growth and loan growth, etc., as opposed to this concept that you want to become a very nimble originate-to-sell kind of an institution? Is that why we have this unbelievable discount to book value in your equity price?

Gagan Banga — Vice-Chairman, Managing Director

I believe there are three parts to this discount. The first part is, as you’ve rightly mentioned, India and most analysts in India would prefer larger and larger — or used to prefer larger and larger balance sheets, which kind of moved our way of thinking from being an efficient originator and then subsequently distributing those loans to or trying to bloat up the balance sheet. I think over the course of the last two years, thanks to the efforts in communication that we have made, other NBFCs have made, the regulators have also contributed by coming up with guidelines, etc. I believe now most analysts are appreciative that the viable way of doing long-term mortgage lending is by NBFCs, which historically and technically cannot have access to pools of capital which are long term in nature. The best way is to park these loans with banks or other financial institutions in due course of time. This is a — I would say, a recent change in outlook. It will still take its own time.

At our end, while we’ve spoken about it, we have to still demonstrate that we can really scale this up, which is why, today, we chose, in consultation with our Board, to clearly articulate what we will do with co-lending, what kind of number and what kind of time frame, etc., such that we can be tracked and measured on how we are succeeding as far as this — the creation and the scaling up of this entire machine is concerned. So the proof-of-concept is underway. The change in mindset has occurred in my opinion. But yeah, as we progress along the proof of concept, the valuation will come. Historically, if you look at a company like Indiabulls, and I will — I’m happy to share a chart, and it’s anyways on Bloomberg, our price to book has historically moved with our credit ratings. And I believe that may be true for most NBFCs. I’m also quite sure that as the credit rating trajectory steadies and moves up, there would be a further appreciation as far as price to book or any other way of measuring the equity value of the Company.

The third is the entire perception, which got — which has to shift. From our perspective, we’ve taken all the right steps, which were required, to make sure that the market believes that we are a well-governed organization. We will continue to take the right steps in terms of having the right shareholder representation on the Board, etc., which is the next level of enhancing the governance standards of the company. So while we do a lot of things as far as ALM, asset, co-lending model, technology, people, etc., is concerned, that’s again something in terms of continuous enhancement of governance, having shareholder representation on the Board, which are other steps that the Company’s management is taking. As a result of all of this, much like the dollar bond, which appreciated with consistent communication and performance, I’m quite sure that the stock price will also continue to appreciate with consistent performance and communication and with a strong governance framework.

Hariharan — NWI Management — Analyst

Thank you, Gagan. Congratulations again. Good luck.

Gagan Banga — Vice-Chairman, Managing Director

Thank you. Thank you, Hari.

Operator

Thank you. [Operator Instructions] The next question is from the line of Abhiram Iyer from Deutsche CIB Center. Please go ahead

Abhiram Iyer — Deutsche CIB Center — Analyst

Yeah. Thank you for taking my call. My first question was with respect to the expenses line item for the quarter. This has sort of increased from the previous quarter and impacting from quarter one. So is there any particular reason for that? That’s one. And the second question was on the co-lending process. Could you just give us an idea of how much of — how much loans are now being disbursed through this process and how much have been stopped? What’s your quantum of loans that have been disbursed through this process?

Gagan Banga — Vice-Chairman, Managing Director

Yeah. So the expenses are — have moved up for two reasons. One, towards the end of the year, we have to start providing for the mandatory 2% CSR expense that has to be done by each company. And — so this quarter, we would have done close to about, I think, INR25 crores or INR30 crores more of CSR expense provision versus last quarter and about INR35 crores more than the first quarter. And as per the IndAS accounting, on a quarter-on-quarter basis, the ESOP schemes of the Company are valued, and there could be a loss or a gain on that. Last quarter, there was a reversal of expense. This quarter, there is an expense. So there would be a slight volatility in expenses. It’s beyond my control. It’s as per the accounting standard. Since the overall base of expenses over the last two years has drifted down, so this number of INR30 crores, INR35 crores has become relevant. Otherwise, it would not be noticeable. As we scale up and increase the capacity, which have been repeatedly speaking about, obviously, the underlying absolute expense will move up, so will the income line. One continues to be confident that the cost income ratio, which is in the handle of 13%, should still be — we should still be able to either hold it here or decline it at least at the rate of 40 basis points, 50 basis points annualized. So I’m not obsessing any more about reducing expenses as long as the cost income ratio is broadly in this range, and we are continuing to create the right kind of capacity for doing the right kind of loans. I think it’s a good investment. But yeah, the quarter-on-quarter movement is explained by these two items.

As far as co-lending is concerned, the co-lending process is marginally different for different banks. The process involves us to source the loan, give a soft approval, send it to the bank for a hard approval, the bank approves, the system then generates a joint sanction letter. We get in front of the customer and get the loan paperwork done. We upload the loan paperwork. And both the bank and us disburse into an account — into to an escrow account jointly. And from the escrow account, the customer gets its disbursals. What we are trying to now do, this is the recent November circular of RBI it gives a certain degree of flexibility which shortens this to and fro between the banks. With one of our private banks partners, we’ve already arrived at a new arrangement, where we can sanction and eventually move the loan after a couple of days on to their balance sheet. So we don’t really have to do a to and fro of this. Since the partnership is a few months old, there’s also greater predictability in terms of the credit decision. So that’s the next level of co-lending that we are — we’ve already moved on to. At this point in time, close to about 10% of what we are doing is co-lending. The goal is that in about two years, we should be able to get about 35% of what we’re doing under co-lending.

Abhiram Iyer — Deutsche CIB Center — Analyst

Got it. And just to clarify, is there a risk that sanctioning before essentially moving the loan on cost — the loan to sort of remain on your balance — from your balance sheet?

Gagan Banga — Vice-Chairman, Managing Director

Just a couple of days. It’s not a — it’s like a continuous process. So today, I will move loans that I’ve disbursed perhaps on Monday.

Abhiram Iyer — Deutsche CIB Center — Analyst

Got it. Got it. Fair enough. [Indecipherable]

Operator

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

Nischint Chawathe — Kotak Securities Limited — Analyst

Yeah, hi. Am I audible?

Gagan Banga — Vice-Chairman, Managing Director

Yeah, Nischint. Please go ahead.

Nischint Chawathe — Kotak Securities Limited — Analyst

Yeah. Just one data-keeping question. Have you done any disbursements under the government ECLGS scheme and if you mentioned any amount on this?

Gagan Banga — Vice-Chairman, Managing Director

Yes. We have certainly done disbursals under the ECLGS scheme. They are not very large or significant disbursals. My sense is they’ll be in the handle of INR100-odd crores, but we can get you the number. Ramnath, if you could please source the number and share it.

Nischint Chawathe — Kotak Securities Limited — Analyst

Perfect, perfect. Thank you very much. It was my pleasure.

Operator

Thank you.

Gagan Banga — Vice-Chairman, Managing Director

Yeah. We’ll take one last question, please.

Operator

Sure. The next question is from the line of Pranav Tendolkar from Rare Enterprises. Please go ahead

Pranav Tendolkar — Rare Enterprises — Analyst

Hi. Thanks a lot for the opportunity and congratulations for holding through this crisis and coming out stronger. Sir, I have a question about the co-lending. How big it can be, one? Second is that how is the risk shared? Like, for example, if you originate INR100 loan, there will be some fee that will be charged, and then there will be a loan that will reside on each of partner’s book or how the arrangement is? And how is the ROE in this case? [Speech Overlap] the opportunities? Yeah.

Gagan Banga — Vice-Chairman, Managing Director

Firstly, thanks, Pranav, for your support and for your kind words. The way that the co-lending arrangement works is the scope of the business is practically unlimited given the fact that the entire system today is tuned towards doing retail loans. Most of the system is dysfunctional in terms of its ability to do retail loans at scale or to do them efficiently. And therefore, they look for partners such as us who’ve been traditional partners with these banks for securitization. The securitization process takes a year. So if I disburse today, I can securitize after a year. And therefore, the retail growth of that bank happens after a year. Given the fact that the last 12 months to 24 months disbursals for us and other NBFCs were muted, therefore, you can only do so much of securitization. Therefore, these banks are in the near term looking for retail growth, they have to do co-lending. And then once you get set on co-lending, where you’re — you have a say in the decisioning, right, from day one, you are very comfortable with that entire process.

So this is a long-term partnership which one is creating. It is a self-correcting partnership. So my sense is that the scope and the size of the opportunity is a function of how my portfolio will perform. As long as my portfolio performs, the size and the scope is endless. Why I have confidence about this option is that my securitized portfolio of INR65,000 crores, INR66,000 crores has performed. Money has come back for these banks. Delinquencies continue to remain extremely low. So this co-lending business will also thrive in a very similar manner.

Now as far as risk sharing, etc., in the classic co-lending, which is what we are doing right now, there is no risk guarantee or risk cover that we provide. For the 80%, which is on the bank’s balance sheet, it is their risk. For the 20% on our balance sheet, it is our risk. There is no cover that we are providing. The recent RBI circular allows for a first loss default guarantee product also, which, in my view, actually is a very, very good solution. We know the kind of loss that can come in our granular assets. If you are able to provide that kind of guarantee, own their decision and use the bank to warehouse these loans, it serves both purposes, and it’s a great collaboration model. So a first loss before guarantee is something that we have recently just signed off with one of our partner banks, and we are now starting to originate. As we do that, I believe the scale-up in that product with 1% to 3% kind of guarantee would be much, much, much faster than what a joint decisioning process will take.

The last point in terms of how much we can do and so on, we are in the midst of a very, very interesting relationship, actually two of them, which can really limitless the whole opportunity for us and also make sure that we have options, which cut across all type of risk spectrums. So the real value in this proposition would come. And the true ROE, you will be able to generate once this is happening at a scale of INR500 crores to INR1,000 crores a month across all kinds of pricing. So you’ve been able to do a lot of manufacturing at 7%, and you also have a solution for the 11%, 12% borrower.

We are now at that stage where I believe we have the entire bouquet of this offering firmly in place. You will hear of some announcements also as soon as our agreements, etc., are behind us. So as we do that, this product should scale up. In theory, as I said, this can be a very, very high ROE product, provided you have scale. What we are targeting is that, over the course of the next three years, a blend of onward lending for securitization, and this in a ratio of 65:35 should be able to get us a 17% to 18% ROE.

Pranav Tendolkar — Rare Enterprises — Analyst

That’s great to hear. And what would be the fee that you will charge for this origination?

Gagan Banga — Vice-Chairman, Managing Director

There are different arrangements that we have with different banks. The arrangement that we strongly prefer is a higher trailing income on a per-year basis as against an upfront large fee. I believe that a trailing income over a period of time is a much more valuable stream of income. We do get an offset of our costs, and there are clearly two models. If we get a higher fee, then we get a lower trail. If we get a lower — we just get an expense reimbursement, then we get a higher trail. We cross-sell, and whatever we cross-sell, that is all income to us. Not in this particular earnings deck, but in the previous deck, all of this has been detailed. The numbers pretty much remain unchanged. So if you refer to the September deck, all of these granular details are there. And if required, I can ask my Investor Relations team to engage with you directly and also provide you that information.

Pranav Tendolkar — Rare Enterprises — Analyst

Thanks a lot. Thanks a lot.

Gagan Banga — Vice-Chairman, Managing Director

So thank you, everyone. The world is recovering from COVID. At least around India, we are bouncing back. The vaccination process is strong. The residential real estate cycle is certainly on the upswing. The NBFC sector is also seeing better days. The Company is seeing much, much better days. So thank you for your support through our testing times. And as I said towards the end of my comments, it is a commitment that we will deliver a very, very strong fiscal ’22 to you. Thank you so much.

Operator

[Operator Closing Remarks]