Muthoot Finance Ltd (MUTHOOTFIN) Q3 FY22 Earnings Call Transcript

Muthoot Finance Limited (NSE:MUTHOOTFIN) Q3 FY22 Earnings Concall dated Feb. 14, 2022

Corporate Participants:

George Alexander Muthoot — Managing Director

Oommen K. Mammen — Chief Financial Officer

Analysts:

Ansuman Deb — ICICI Securities — Analyst

Ankush Agarwal — Research Capital — Analyst

Deepak Gupta — Reliance Nippon Life — Analyst

Vivek Ramakrishnan — DSP Mutual Fund — Analyst

Gaurav Kochar — Mirae Asset — Analyst

Kartik Saini — Myriad Asset Management — Analyst

Aswin Kumar Balasubramanian — HSBC AMC — Analyst

Piran Engineer — CLSA — Analyst

Abhijit Tibrewal — Motilal Oswal — Analyst

Digant Haria — GreenEdge Wealth — Analyst

Nidhesh Jain — Investec — Analyst

Manan Tijoriwala — ICICI Prudential EMC — Analyst

Sunesh Khanna — IIFL AMC — Analyst

Bunty Chawla — IDBI Capital — Analyst

Shweta Daptardar — Elara Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Q3 FY ’22 Earnings Conference Call of Muthoot Finance Limited hosted by ICICI Securities Limited. [Operator Instructions]

I now hand the conference over to Mr. Ansuman Deb from ICICI Securities. Thank you, and over to you, sir.

Ansuman Deb — ICICI Securities — Analyst

Good afternoon, ladies and gentlemen. It’s an honor and privilege to host the Q3 FY ’22 Results Conference Call of Muthoot Finance Limited. From the company, we have Mr. George Alexander Muthoot, Managing Director; Mr. Alexander M. George, whole-time director; Mr. George M. Alexander Whole-Time Director; Mr. George M. George, Whole-Time Director; Mr. George M. Jacob, Whole-Time Director; Mr. Eapen Alexander, Executive Director; and Mr. Oommen K. Mammen, Chief Financial Officer.

I will now request the management for some brief opening remarks, post which we will open the floor for Q&A. Over to you, sir.

George Alexander Muthoot — Managing Director

Thank you, and good afternoon to all. I will straight away get into the business aspects of it. The consolidated assets under management increased to INR60,886 crores, showing a 9.9% year-on-year growth for the nine months and the profit after tax increased to INR3,025 crores, up by 8%. Stand alone assets under management increased to INR54,688 crores as against I think shows a growth of 9%, and the stand-alone profit after tax increased to INR2,994 crores.

We have been — we had a tough quarter in the sense that the Corona impact on the third wave impacted us in this quarter. Therefore, we — although the advances were up but the releases or their closers and the auctions were also there. So we had a flat growth to the gold loan business, almost a flat growth in this quarter. And hopefully, this quarter, things are starting to look up, and we should show a growth in the AUM this quarter.

The other — the subsidiary companies have also — some of them have not done well because of the economic scenario, but the overall business in the subsidiary has come down, except for the micro finance. The others, we are having a cautious attitude to all of them, the home finance, the vehicle finance company. But the subsidiary, which is doing the insurance broking business has done very well. So that is what we have. All the other things I think are there in the presentation which is there.

I think that we will open now — we’ll open for Q&A.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Ankush Agarwal from Research Capital. Please go ahead.

Ankush Agarwal — Research Capital — Analyst

Well. Hi Sir. Thank you for taking my question. Sir firstly, in the last six, eight years our yields have been constant at around 20%, 1% or 2% here and there, while the cost of funds are falling from 12% to 8%, which has allowed us to increase the spread from low 10%, to 13%, 14-odd percent, right? So now if the interest rate environment is such that the interest rate starts inching higher, so how do you see it affects Muthoot? And do we are going to charge higher rates to our customers and maintain our spread?

George Alexander Muthoot — Managing Director

Okay, okay. Thank you. So I think we have been able to maintain our spread and our yield in spite of the spread has been maintained, in spite of, we having to reduce some of our yields, but then, going forward, I don’t see a very great surge in the borrowing cost. Probably in the last two years, the borrowing cost has come down by about 200 basis points. In the next six months, I expect the borrowing cost to go up by probably 50 basis points. But we will see that we will tweak our products and offer different types of products to customers to see that we are able to maintain our spread.

Ankush Agarwal — Research Capital — Analyst

Right, right, but in a hypothetical environment wherein interest base does jump and our cost of borrowing also increases quite a lot. So is there a room to increase the spread?

George Alexander Muthoot — Managing Director

Yeah. If overall interest rates are going up, then our borrowers also are in the same place only. They will understand that everywhere rates are going up we have always room for that because our customers, especially the smaller customers, smaller low ticket customers are not that interest sensitive. And if everywhere the interest rates are going up, we can increase our interest rates also.

Ankush Agarwal — Research Capital — Analyst

Okay, right. And secondly, sir, on the growth of our gold loan business, right, given that it is the business wherein the repayments are quite fast, it is difficult to build a loan book and now at a INR55,000 crore loan book, probably we would be doing about INR1.2 lakh crores kind of business every year. So I just wanted to know like, what gives you the confidence that you will be able to grow this book from this level? Like, what are the key factors that will drive it? Would it be branch expansion, the overall up-tick in economy, if you can highlight something?

George Alexander Muthoot — Managing Director

Yeah. I think the overall up-tick in the economy is what we should be looking at, because now we are seeing business also getting opened up. Our mainstay customers, the MSME customers as well as the small shopkeepers, small businesses, they are restarting business and I am sure this should increase the business.

Probably, we will again restart or do a little bit more advertisement also. We should be able to maintain a reasonable growth rate going forward also. I understand the base is going up, which is earlier much lower which has gone up to INR55,000 crores. So it’s not easy. But then probably, we should be able to do more per branch business and maintain the growth momentum.

Ankush Agarwal — Research Capital — Analyst

Great. So sir, is branch expansion has the direct impact on the growth, like you increased the branches quite a lot, will that have a direct impact on the growth?

George Alexander Muthoot — Managing Director

Not much so, because we are reasonably well placed with the branches even now. So I think you would have noticed that our, per branch business has been steadily going up from INR7 crores, INR8 crores, now it is almost touching INR11 crores plus.

Ankush Agarwal — Research Capital — Analyst

Right.

George Alexander Muthoot — Managing Director

So we can definitely any branch can handle much more business. We only need to increase the number of employees in that branch, so that we can do much more business. Also their, per ticket size also is going up. It was about INR30,000…

Ankush Agarwal — Research Capital — Analyst

Right.

George Alexander Muthoot — Managing Director

…few years back, it is now about INR60,000.

Ankush Agarwal — Research Capital — Analyst

Right.

George Alexander Muthoot — Managing Director

So, we feel that this existing branches which are spread all over the place, can easily handle more business.

Ankush Agarwal — Research Capital — Analyst

Right. Okay. And lastly sir, in terms of diversification into other lending products with microfinance, home finance and online, how interesting you think you would be in the medium to long-term? Or you would continue to maintain 90 spread and 10 spread between gold and other business?

George Alexander Muthoot — Managing Director

Yeah. The microfinance sector is now, I think, reasonably well placed and the things are getting into control, it is showing growth. Our microfinance company in particular. We have received an approval for equity infusion also in that company. So I think the microfinance, we should — we feel should be doing well.

The affordable home finance and the vehicle finance, we are going a little bit cautious and also the personal loan business. We are going a little cautious, because we will be calibrated growth only. Still, we are sure or more confident about the economic growth because all — most of those are almost unsecured. Even vehicle loans are…

Ankush Agarwal — Research Capital — Analyst

Okay.

George Alexander Muthoot — Managing Director

You can see it is not that secure as a gold loan. And so those will take a little more time for the economic activity also to pick up and economy to stabilize. Once that stabilizes, we will be able to grow. But if you ask in the short term, we are not planning on aggressive growth in the non-gold loan business.

Ankush Agarwal — Research Capital — Analyst

Yes. My question was that, is there some kind of internal target in terms of diversifying away from the gold loans?

George Alexander Muthoot — Managing Director

No, no, no. We would definitely like to do more of gold loan business also because earlier, two years back, we had thought of having 10%, 15% and 20% non-gold loan portfolio. But unfortunately, after the COVID, etc, things are not looking bright for the — as far as we are concerned for the non-gold loan, so we are going slow on that. So probably after three or four quarters or five or six quarters, things should improve, and we are ready — we have every back end, everything is — we are ready for doing more business when the opportunity is there.

Operator

Thank you. The next question is from the line of Deepak Gupta from Reliance Nippon Life. Please go ahead.

Deepak Gupta — Reliance Nippon Life — Analyst

Hi, good afternoon. Thank you for taking my question. Sir, firstly, if you could share some perspective on the rise in Stage three loans? Is it — how much of that was on account of RBI circular?

Oommen K. Mammen — Chief Financial Officer

Stage three assets increase is not because of RBI circular, it’s because of a larger disbursement happened in Q2 of last year. Some of its customers because of the cash flow challenges, they could not meet their repayment commitments. Large part of the defaults we have auctioned it off. Some are still there because those customers asked for some more time. So that is the reason why there is an increase in the Stage three assets. As you know, it is all collateralized by gold jewelry. We don’t expect any losses. I think the Stage three assets will get stabilized by the end of the fourth quarter.

Deepak Gupta — Reliance Nippon Life — Analyst

So sir, what was the quantum of auction that you’ve done for the quarter? And how that was in last year and last quarter?

Oommen K. Mammen — Chief Financial Officer

So this quarter, we have done INR2,800 crores.

George Alexander Muthoot — Managing Director

Last year was much less, negligible.

Deepak Gupta — Reliance Nippon Life — Analyst

Okay. Sir, any specific reason for the auction, given the fact that you’ve always maintained the stance that you will avoid auction as much as possible because you lose the customer if you auction the gold? Why you thought there was the need to do an auction this time around?

George Alexander Muthoot — Managing Director

Yes, because it is — those customers who have taken loans in the Q2 of last year, many of these customers or some of these customers, they were not able to get the repayment which they expected. When a customer is taking a gold loan, if he had that, in his mind he has a calculation that, yes, I’m expecting some money from somewhere in the next two months, three months, four months and six months. That is why he’s pledging the gold and taking only 75% instead of selling it and taking all the 100.

But some of these people, their calculations were — their calculation for getting back their money from the business or whatever has not been forthcoming so probably they would have abandoned that and the next option for us is to auction it. So as Oommen was saying earlier, we tried to give little more time to the customer and hold some of it in the book as Stage three assets despite of it being a Stage three because it is fully secured. So we try to accommodate the customers as far as possible. And when it’s not possible, then there is no other way other than to auction it.

Deepak Gupta — Reliance Nippon Life — Analyst

Sir, would you want to call out — is there any particular geography this loan auction as in from where these loans originated?

George Alexander Muthoot — Managing Director

All over the place, not particular geography — everywhere.

Deepak Gupta — Reliance Nippon Life — Analyst

Sure. And how many customers it could be possibly?

George Alexander Muthoot — Managing Director

The average ticket size should be about INR60,000 or INR70,000, so it’s about four lakh customers.

Deepak Gupta — Reliance Nippon Life — Analyst

Got it, sir. And sir, I noted that the LTV has come down sharply this quarter. Is it only because of the rise in gold prices by 5% quarter-on-quarter, which is why LTV has reduced meaningfully from Q2 to Q3?

George Alexander Muthoot — Managing Director

LTV or AUM?

Deepak Gupta — Reliance Nippon Life — Analyst

I’m talking about loan-to-value, sir?

George Alexander Muthoot — Managing Director

The loan to value is based on today’s gold price. So if the gold price is soft, LTV will be lower.

Oommen K. Mammen — Chief Financial Officer

The average LTV as on December, it is 69%.

Deepak Gupta — Reliance Nippon Life — Analyst

Right. And last quarter, it was at 73%.

Oommen K. Mammen — Chief Financial Officer

Yes, last quarter it was 73%.

George Alexander Muthoot — Managing Director

It’s a function of the price.

Deepak Gupta — Reliance Nippon Life — Analyst

Okay. So largely because of the price. Right. And sir, just last question. You have guided for 12% to 15% kind of a loan growth for year end. You think you’ll be able to meet that guidance for FY ’22?

George Alexander Muthoot — Managing Director

We will try our best, but then things are not fully in our hands also. The business environment also needs to change a bit. We lost third quarter also due to lockdown. We had a lot of releases of repayments in quarter three, that is the quarter three, quarter four should do some plus, but probably we may not be sure of the rate, but definitely, there will be growth in fourth quarter.

Deepak Gupta — Reliance Nippon Life — Analyst

Sure. Thank you so much, sir. All the best.

Operator

Thank you. The next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund. Please go ahead.

Vivek Ramakrishnan — DSP Mutual Fund — Analyst

Sir, good afternoon. This is a follow-up to the previous question. In some customers, you have given forbearance on retaining the loans and in others, you have auctioned of the loans. So when you give a gold loan, do you do any cash flow analysis on the customers’ business profile or the personal financing because or is collateral the main value that you see and the lending is against that? And then, if there are delays, how do you take care of it? Thank you.

George Alexander Muthoot — Managing Director

No. See, the loan is to be given in quick time, maybe five minutes, 10 minutes, 15 minutes, and we may ask the customer for repayment of his place from where he is going to repay, etc. We will not get a correct forthcoming answer. So as you said, it is really security-based. Probably he has some calculation in his mind, but of course, we don’t do any checking off that or verification of the cash flow sources. So we don’t do that, but some customers come and request us in the branch.

The branch manager is the person who recommends that, okay, he feels that he will get some money in the next two, three months. So what maximum we give is two, three months only, that’s it. If he is not coming be the next three months, we just auction it in the next quarter. So what NBH [Phonetic] you saw, 1.85% in Q2 has been fully released by Q3 and the 3.8 you see in Q3 is a new one. We give two, three months’ time right, accommodate as far as possible so because we are sure that we will not have a loss on that account.

Vivek Ramakrishnan — DSP Mutual Fund — Analyst

Okay. Thanks. That was clear. Also if you could explain the movement in Stage two loans, if Oommen could provide some clarification and — there has been a sharp fall.

George Alexander Muthoot — Managing Director

Stage two which…

Oommen K. Mammen — Chief Financial Officer

September, Q2 Stage two was 6,153. So that became Stage three in Q3 which we either recovered or auctioned off or some are remaining as Stage three assets. Q3 Stage two has fallen. The fall is because the increase first of all happened in September — Q3 because of 12 months back, we had a certain surge in disbursements post the first lockdown. So now from Q3 of last year, I think it’s more or less the normalized disbursement so that you can see it from our disbursement and collection start in the presentation. I think it’s on page 29.

Vivek Ramakrishnan — DSP Mutual Fund — Analyst

Okay, sir. Thank you very much and I wish you luck.

Operator

Thank you. The next question is from the line of Gaurav Kochar from Mirae Asset. Please go ahead

Gaurav Kochar — Mirae Asset — Analyst

Yes, hi, good afternoon. Thanks for taking my question. Sir, just wanted to understand what would be the LTV of Stage two loans if I capitalize the interest of Stage two loans, what would be the LTV typically for majority of the loans?

Oommen K. Mammen — Chief Financial Officer

Well, we don’t have the exact numbers, but it should be somewhere around 90%, 95%, including the interest portion.

Gaurav Kochar — Mirae Asset — Analyst

Okay, okay. Understood. That’s helpful. And any sort of internal targets for March year-end, I mean, where do you want to bring the Stage two and Stage three assets down to either with auction or repayments? Any trend that you’re looking at?

George Alexander Muthoot — Managing Director

Nothing like that. We should have some 2%, 3%, that’s it, Stage three assets.

Gaurav Kochar — Mirae Asset — Analyst

2%, 3% of Stage two assets?

George Alexander Muthoot — Managing Director

Stage three.

Gaurav Kochar — Mirae Asset — Analyst

Stage three assets?

George Alexander Muthoot — Managing Director

Stage two is indeed making money so it is time for us to give more time to the customer. So if we give more time to the customers, they’ll be happy, they’ll be comfortable and if we can accommodate, people in the Stage two in our books, so be it.

Gaurav Kochar — Mirae Asset — Analyst

Right. Understood. And sir, from a provisioning standpoint, if I look at you carrying INR three billion additional provisions COVID-related buffer that you had made. So do you expect to utilize this in case of any sort of elevated credit cost in 4Q? Or you believe that you can end the year with nominal credit cost without utilizing this buffer? Just wanted some thoughts on credit costs.

Oommen K. Mammen — Chief Financial Officer

So it’s up to the board to take that decision. So this is — this excess portion is — seeing during the transition process from our IDR accounts to the Ind AS, which is not any excess COVID provisions.

Gaurav Kochar — Mirae Asset — Analyst

Okay. So will we be using — you’re saying board will decide that, okay.

Oommen K. Mammen — Chief Financial Officer

Yes.

Gaurav Kochar — Mirae Asset — Analyst

Sure. And just lastly the cost of funding has come down sharply in this quarter. What is our marginal cost of funds for this quarter?

Oommen K. Mammen — Chief Financial Officer

See, I think we should — we are raising somewhere between seven to 7.5 percentage on maybe 7.25% or 7.3% on the bank funding, depending on the tenure. And on the securitized market, it is given on the LCDs that is even lower.

Gaurav Kochar — Mirae Asset — Analyst

Okay. On a blended basis, is it fair to say it is around seven?

Oommen K. Mammen — Chief Financial Officer

See, I think we should see the cost of funds coming down significantly maybe in the next six months.

Gaurav Kochar — Mirae Asset — Analyst

Okay. Sure because the — fall in cost of fund is despite lower share of CPs, CP has come down for some time, is it on a maybe quarter-end basis is it done or during the quarter also CP was lower for the last quarter.

Oommen K. Mammen — Chief Financial Officer

Yes. So because we are carrying excess liquidity we thought reducing our finance cost a little bit. So we repaid some of the CPs for the interim. So we have only a small amount outstanding. As and when we require funds, we’ll start borrowing again through CPs.

Gaurav Kochar — Mirae Asset — Analyst

Okay. Sir, just to get this, I mean, a little more granularly, you expect another cost of funds to decline in the next six months, but what would trigger that? Are you raising money at lower cost?

Oommen K. Mammen — Chief Financial Officer

No, assuming a stable interest rate regime, I think we will retire our older borrowing taken at a higher cost. I suppose the general rate of increase, there is an increase, to that extent, that decline will be offset. But in the current environment, I think you should see a reduction in our borrowing cost.

Gaurav Kochar — Mirae Asset — Analyst

Okay. Okay. And it is a quantum 15, 20 basis points higher?

Oommen K. Mammen — Chief Financial Officer

Yes, certainly, maybe 15, 20 basis points.

Gaurav Kochar — Mirae Asset — Analyst

Okay. That’s all from my side. Thank you so much and all the very best.

Operator

Thank you. The next question is from the line of Kartik Saini from Myriad Asset Management. Please go ahead.

Kartik Saini — Myriad Asset Management — Analyst

Hi, sir. My first question is around your number of active customers. So sequentially, there has been a decline of about 2%. I just want to understand your strategy and what’s your target growth for this.

George Alexander Muthoot — Managing Director

See, the decline is because as we said, there were more releases this year — this quarter than new advances. That is why the active number of active customers have really come down. So that is one point. But then new customer addition has been steady, and we have done at 2.5 lakh…

Oommen K. Mammen — Chief Financial Officer

3.5 lakhs.

George Alexander Muthoot — Managing Director

3.5 lakhs new customers have got added. But then as we also saw some customers due to auctions and releases, etc, aggressive repayments, they also went away from the book but we have been able to add new customers. I think that is the strong point here. We’ve been able to add 3,50,000 customers this quarter also, new customers.

Kartik Saini — Myriad Asset Management — Analyst

Okay, sir. Thank you. And my second question is around your NIM. So if you see the last four quarters, I think it’s around 4.2 for Q3. So I just want to understand, given that it’s an increasing rate environment, where do you see your steady state NIM?

Oommen K. Mammen — Chief Financial Officer

See, I think we answered that earlier. So assuming a stable interest rate scenario, I think we should see a decline in our borrowing costs in the six months. Now if there is a rate increase, which is going to happen — which happens, then to that extent, that decline will be offset because of that increase. But we are expecting about maybe 15, 20 basis points decline in the next six months in the borrowing costs.

Kartik Saini — Myriad Asset Management — Analyst

Thank you. Got it. All the best, sir. Thank you

Operator

Thank you. The next question is from the line of Aswin Kumar Balasubramanian from HSBC AMC. Please go ahead.

Aswin Kumar Balasubramanian — HSBC AMC — Analyst

Yes. Hi. Just wanted to understand the higher auction which you mentioned, is it because the last year, September, December quarter, we would have disbursed some of these loans at higher gold price. As a result, those would have sort of now become the customers not have rolled over earlier and that also explains why the NPV has come up because of the higher LTV loans already booked.

Oommen K. Mammen — Chief Financial Officer

See, we disbursed about INR50,000 crores during that quarter. Out of that, only INR2,800 crores got auctioned off, which is a very miniscule number compared to the disbursements. So which also explains the reason why some of these accounts have been auctioned. So might be facing some challenge in terms of the cash flows. We gave them time, further time. But unfortunately, he’s not able to generate, we can’t wait any longer. In spite of that, we have kept some of these loan assets as Stage three assets, which we will liquidate in this term quarter.

Aswin Kumar Balasubramanian — HSBC AMC — Analyst

So — I am just trying to understand — is it also linked to the gold price because that was the quarter when we saw sharp fall from then on. And so on a year-on-year basis, the gold prices lowered.

George Alexander Muthoot — Managing Director

In Q2, there was actually a lot of demand from people who are opening up their premises etc, and they wanted funds, and we are there to give them funds — and the gold price — the higher gold price at that time also helped, definitely helped. So they took, they borrowed, they wanted to — if they wanted to liquidate it, they would have sold it and got 100%, but they had sort of — they had expected some cash flow in the coming three to six months, but it didn’t materialize for them the so the final option was to auction it.

Aswin Kumar Balasubramanian — HSBC AMC — Analyst

So that means these auctions will continue going forward also?

George Alexander Muthoot — Managing Director

No, it is part of every gold loan business. If the customer is — if the economy is not doing well and these people are not getting the cash flow which they are expecting, if they are mentally expecting. Unlike a salary person who is getting a regular cash flow, 99% of the people are not salaried people. They are all small businesses and traders and a lot of things are uncertain and probably they don’t get cash flow they expect, finally they abandon the gold and that is what we auctioned. We try to give them as much time and accommodate them in our books as maybe Stage two and Stage three, etc. We try to accommodate as far as possible. And then when that is not possible, then we just auction it off.

Aswin Kumar Balasubramanian — HSBC AMC — Analyst

Right. But is the decision to auction also related to the gold price? I mean I am trying to understand or…

George Alexander Muthoot — Managing Director

Auction is not related to gold price, etc. But suppose, the gold price goes up very high, when customers were — those who thought of abandoning the gold will think of why should I abandon the gold. I will try to release it somehow. That’s the only thing. Other than that, it is not related.

Aswin Kumar Balasubramanian — HSBC AMC — Analyst

Okay Thank you.

Operator

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

Piran Engineer — CLSA — Analyst

Yes. Thanks. Just one accounting question. So do we reverse the accrued interest after 90 days past due or immediately on one day past due?

Oommen K. Mammen — Chief Financial Officer

So after 90 days past due.

Piran Engineer — CLSA — Analyst

So then we’ll reverse the full 15 months accrued interest, is it, from an accounting perspective or just three months?

Oommen K. Mammen — Chief Financial Officer

For 15 months.

Piran Engineer — CLSA — Analyst

Full 15? Okay. Got it. And sir, secondly, just regarding balance sheet liquidity, now for a while, we’ve been maintaining very high levels of balance sheet liquidity. 20% of our balance sheet is kept in liquid assets. So — and this was not the case earlier about two years back. So do we see a case of trimming liquidity from the balance sheet?

Oommen K. Mammen — Chief Financial Officer

I think we have done this as an exercise in this quarter. I think you would have seen that our absolute finance cost has come down a little bit. That is partly because of some kind of a treasury management which we have done. Liquidity, as we have always mentioned, we have to keep it at a higher level, because of the LCR requirement, as well the challenging times, which is there. And also because being an NBFC, we need to have higher liquidity. And it also helps in giving more comfort to the rating agencies. So that — you should see that as a part of our business model.

Piran Engineer — CLSA — Analyst

Okay. So the high level is your decision, to simply put?

George Alexander Muthoot — Managing Director

Not the very high level, at reasonable liquidity we should expect now. We should be keeping now. two years back, we had all the IL&FS issue. So many, so many NBFCs issued and everything every time liquidity for an NBFC, we don’t get any funding or support from the Reserve Bank. We need to have our own liquidity. So keeping liquidity even at the cost of some interest loss, it’s not a bad idea. It’s what the Board has been always thinking. So we will keep good liquidity, but not necessarily the very high liquidity.

Piran Engineer — CLSA — Analyst

Got it, got it. Okay, sir. That’s all from my end. Thank you and all the best.

Operator

Thank you. The next question is from the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.

Abhijit Tibrewal — Motilal Oswal — Analyst

Yes. Thanks for taking my question. Sir, just wanted to understand, gold prices have recovered in the months of November and December and remained totally flat in January. So I mean if I am doing my math right, I understand that there were forward flows of about INR1,000 crores in the third quarter in your Stage two and Stage three. So basically, even if I net off these auctions that you did about INR2,800 crores, there were forward flows of about INR1,000 crores in Stage two and Stage three. So what are the forward flows that you’re expecting now? And to that extent, what is the quantum of auctions that one could lead to.

That’s my first question. And related question. I mean I think you and even the other gold fin ventures always talk about that extra LTV, which is the making charges, which kind of acts as a margin of safety for you. But does that really play out in the real world, given that — I mean I was seeing — if I look at the monthly average gold price of August when gold prices were at peak August 2020 to maybe the monthly average gold price in January 2022, it is broadly around 92% of what the peak gold prices would have been, I’m talking about monthly averages. So — and despite that customers still want to abandon their gold. How should we look at this?

George Alexander Muthoot — Managing Director

So, first of all, can you just tell me what is meant by forward flows? I didn’t understand this, forward flows.

Abhijit Tibrewal — Motilal Oswal — Analyst

Sir, what I meant is, I mean, if I look at your Stage two plus Stage three, which is 30 plus DPD as on 2Q and as on 3Q and kind of take the difference of the 30 plus DPD and then net off this INR2,800 crores of auctions that you did, there’s still another INR1,000 crores, which would have probably flown from Stage one into Stage two or Stage three.

So what I’m asking, sir, looking at the gold prices today, I mean, what is the quantum of overflows that you expect in fourth quarter? And what is the quantum of auctions that it could lead to?

Oommen K. Mammen — Chief Financial Officer

So we have given the breakup of Stage two assets and Stage three assets. Stage two asset logically should move to Stage three assets if it is not liquidated. Stage three assets, it’s already there as a Stage three or it has to be either liquidated or it will remain as Stage three. We can’t quantify in terms of auctions because a lot of these customers come and close the loan by paying the amount. As I said earlier, in Q2 of last year, we disclosed INR50,000 crores. Out of that, we had to auction only on INR2,800 crores and probably another INR2,000 crores. So which means that out of INR50,000 crores, only INR4,800 crores went at overdue. So it’s a miniscule amount.

So the reason why we have to auction it, I know you are also mentioning about the making charges. This is why we have lent this INR50,000 crores at the peak of the gold price. We need to grow comfort for the fact that INR45,000 crores got repaid. So that could be either because there is adequate customer is interested in the jewelry. It could be because of also the sentimental attachment that could also be because of higher equity in the ornament through making charges, etc, all these factors play a role.

Now the reason why it goes for an auction is customer doesn’t have the cash flow, what we can do? Even if it is diamond, if he doesn’t have the money, what he can do. No, it will finally go for an auction. So that is the reason why the auctions are happening because we can’t wait any longer for him to generate cash flows and repay this. Ideally, we would like these customers to come and take back the ornaments, but we can’t wait beyond that period.

Abhijit Tibrewal — Motilal Oswal — Analyst

Got it. So this is useful. I have just one more question. Sir, given — I mean, I understand that you’ve always kind of said that I mean the competition doesn’t really affect you a lot and kind of visible in the yields and the spreads that you report. But, I mean, I just wanted to get some comfort that looking at the competitive landscape today and whatever rates the peers and the competitors are lending, do you have, I mean, that comfort that you will be able to maintain your spreads going forward?

The last question that I also had is you talked about interest income reverses when a loan becomes an NPA. And to that extent, when a loan becomes an NPA, you also kind of like this quarter increased your ECL provisions. So now, I mean, let’s say, next quarter, when you do those auctions and the NPAs come off, would you see a reversal of the interest income that you took during the third quarter?

George Alexander Muthoot — Managing Director

There will not be a reversal, but the interest income will be higher and the new loans on which interest has accrued will be higher. No need of Reversal, new things will come. You are still — what was the earlier question?

Abhijit Tibrewal — Motilal Oswal — Analyst

The competitive landscape and your comfort on the spreads?

George Alexander Muthoot — Managing Director

Competition is always there. We have to survive the competition also. So we have to devise new products. We will be giving new products. We will come up with something to see that we are able to maintain our fees reasonably well or our net interest margins or the spread reasonably well. We’ll try our best to do it. That’s it.

We will — with our, what should I say, our leader advantage, given the gold loan business advantage, many customers should be coming to us, some go away because of the lower rates offered by some people, but I think part of them should come back to us, and we should be able to reasonably maintain our interest spread.

Abhijit Tibrewal — Motilal Oswal — Analyst

Great, sir. Thank you so much and wish you and your team the very best, sir. Thank you so much.

Operator

Thank you. The next question is from the line of Digant Haria from GreenEdge Wealth. Please go ahead.

Digant Haria — GreenEdge Wealth — Analyst

Sir, my questions are mostly at the industry level. Sir, any gold loan business which happens at the branches, how important are the employees for relationship management with the clients? And if I would just raise the need of an employee for maintaining relationships with the client or doing the operations, which is evaluating the gold and doing the other things which a loan disbursal process would be, where would you rate this relationship? Like how important is it in the gold loan business generally and for us also?

George Alexander Muthoot — Managing Director

Okay. That’s say, very nice deduction in things which you have done. I think relationship is important, probably some competitors feel that the relationship is so important that they’re trying to take away our staff thinking that the relationship will bring more business. It is not only the relationship, it is also the goodwill and other things of Muthoot which also brings customers. Relationship to some extent helps, but it is not all in all about it. Just because x moves away from Muthoot to somewhere else not that all the customers will move with him, probably that could be there for some wealth management companies, companies who are managing the wealth of somebody. If we move from x company to y company, they tend to move.

I don’t think gold loan people are like that because most of the people come to Muthoot because of Muthoot’s, name and Muthoot’s standards etc. But a small, very, very small percentage of things is there with the relationship. Then your process is successor. The processing and the turnaround time is also very important. And because of Muthoot, we have been in this field for quite some time, we have been able to iron out so many other things so that we can do a good turnaround time, a good turnaround time. Those are all factors which helps. So to answer your question, the branch manager or the relationship executive in the branch not the sole deciding factor for customers to come to or not come to.

Digant Haria — GreenEdge Wealth — Analyst

Sir, you already answered my second question which I was going to ask that if the customer — if the employee attrition is high because I generally hear that even Kotak Bank or an Axis Bank, everybody wants to build a gold loan team. And because we have such trained employees and long-standing employees, like — are they asking you for raises? Is employee costs going to meaningfully rise because of the market scenario? Or you think we can really manage this whole intense phase?

George Alexander Muthoot — Managing Director

We wouldn’t like to lose good employees, definitely we wouldn’t like to. And then people just don’t go away merely because of some salary, etc. But then we have got good incentive scheme so that they are also happy incentives, rewards, recognitions etc, which keep them attached to us. But in spite of that, but actually what we have seen is in the recent past, it is not that people are going away from us. We have seen that some people are actually not interested in work.

They are thinking that I’ll go home and take rest, I will go to my village, especially in cities, etc. We have seen that people have gone home for COVID. They don’t want to come back to the cities, decided to stay I think. So there are a lot of people who have just not come back. Anyway competition, to some extent, some churn happens, some churn also needs to happen always. You can’t have somebody keeping there all the way.

Digant Haria — GreenEdge Wealth — Analyst

Right. So thank you for the answer. There is one more question, if I can ask. One start-up is claiming that they are taking photograph of big gold ornament and they’re doing some machine learning and artificial intelligence to detect if the gold is pure or not. So certainly, I think a lot of people can claim whatever they want. But you as the largest player, as a leader, as the innovator, are you seeing any such spots in the market which somebody has cracked well which probably we need to learn and adapt? Or we are good with the developments which are there? Any thoughts on these?

George Alexander Muthoot — Managing Director

We are not at all good with the developments. We are there. We are also thinking. We also have some R&D departments, etc, which constantly evaluate the things under — our Chief General Manager, Bijimon, who recently been promoted to Executive Director. He says that one day, we will see that he wants somebody to put some gold in the vending machine and the cash should come out from the other side.

Digant Haria — GreenEdge Wealth — Analyst

Right. Right. Good to hear that. All the best.

George Alexander Muthoot — Managing Director

And the door should come out from the other side. So we are also everyday thinking of it, but some people sometimes come with some things, but what we have been not able to crack is how to test the gold ornaments without defacing it or actually cutting it, etc. That is the challenge we have. Probably after some time, something may happen. And if something will happen, we will be the first to do it.

Digant Haria — GreenEdge Wealth — Analyst

Right, great. Congratulation and thank you so much for answering the questions.

Operator

The next question is from the line of Nidhesh Jain from Investec. Please go ahead.

Nidhesh Jain — Investec — Analyst

The first thing, the auction…

Operator

Mr. Jain, sorry to interrupt, your voice is not clear. If you can speak closer to the handset, please?

Nidhesh Jain — Investec — Analyst

Is it better now?

Operator

Yes.

Nidhesh Jain — Investec — Analyst

So when the auction is, is there any, is there any loss you’ve booked on interest on the EBITDA pre-entire could be interested them.

George Alexander Muthoot — Managing Director

No, we don’t have any principal loss. Probably small interest reduction maybe there, that’s all. Nothing substantial. There will definitely be some interest rate loss, but nothing substantial.

Nidhesh Jain — Investec — Analyst

Sure, sure. Clearly, there are lot companies marketing gold loan going on at a 60 basis point per month scientists point and I think looking here also in marketing that. So how we differentiate between customers which — to whom we will be able to give low interest rates and who you will be able to charge high interest rates?

George Alexander Muthoot — Managing Director

I think it is the branch manager or the people there to decide probably we have some schemes also where big loans are there, regular customer is there who has been with us for long time who also have some other loans. That is where we give interest concession, new interest scheme. We have some specific schemes for that and it is for the scheme we keep it.

Nidhesh Jain — Investec — Analyst

What is the lowest interest rate you’re offering to the customers?

George Alexander Muthoot — Managing Director

Today it is 6.9% per annum.

Nidhesh Jain — Investec — Analyst

Lastly, the number of new customers which has been declining unique was this are there tell you that’s to increase Pareto. We had built to pay the same customer able to activate but new customer execution numbers had been declining quarter-on-quarter basis?

George Alexander Muthoot — Managing Director

This quarter also, our new customers acquisition has actually gone up. It is 3.5 lakhs this quarter. It’s the new customers. But unfortunately, many customers in the old loans, etc, they had to be auctioned and many customers also very good.

Operator

[Operator Instructions] Ladies and gentlemen, we have the line for the management reconnected. Over to you, sir.

George Alexander Muthoot — Managing Director

Please continue, your line broken.

Nidhesh Jain — Investec — Analyst

I was asking about new customer acquisition but number has declined Q-on-Q and Y-o-Y so this quarter, that number.

George Alexander Muthoot — Managing Director

Overall, the outstanding customers would have declined. But then new customer addition has been the very high in this quarter, 3.5 lakhs is new customer addition. But unfortunately, many customers closed their account also. Larger number of customers close their accounts and we had to do auctions also. Because of that, the net interest — net increase in customers are not there. That is what. But then what we see is what the relieving fact is that new customer acquisitions are high.

Nidhesh Jain — Investec — Analyst

Lastly the entire customer acquisition. High Sir, lastly and the, and the execution Ubuntu like are we look to acquire any from the floor banks and apart from branches.

George Alexander Muthoot — Managing Director

We have different channels. So online, we have lead generation, in online channels, we have lead generations coming through other channels also. Our repeat customers are there. Our customers who were earlier been there, they’re not coming now. We win back customers, all those things are there. But then the customer has to come to the branch.

Nidhesh Jain — Investec — Analyst

Understood. Thank you, that’s it from my side.

Operator

Thank you. The next question is from the line of Manan Tijoriwala from ICICI Prudential EMC. Please go ahead.

Manan Tijoriwala — ICICI Prudential EMC — Analyst

Hi there. I wanted to understand what would be the quantum of asset that would be above 10 lakh ticket size in our portfolio right now?

Oommen K. Mammen — Chief Financial Officer

About 20 percentage.

Manan Tijoriwala — ICICI Prudential EMC — Analyst

Okay. So will you be able to understand a bit more from that what would be the competitive intensity from the banking sectors and other NBFCs you could provide some thoughts on that?

George Alexander Muthoot — Managing Director

Yes. It is because if you say higher loan, it does not mean that the competing intensity is high. So we also have lower interest schemes for high customers, etc. We have different interest schemes. So competition intensity will be there, but that is probably our job to see that we retain our customers.

Manan Tijoriwala — ICICI Prudential EMC — Analyst

Fair enough. And sir, what would be the quantum of asset price below the 10% rate of interest which is previously that we have launched for and everyone has launched in the last two quarters?

George Alexander Muthoot — Managing Director

I think that is again a moving number, what is there this month may not be there next month. So we haven’t done some math on that.

Manan Tijoriwala — ICICI Prudential EMC — Analyst

Okay. If you could provide a range?

Oommen K. Mammen — Chief Financial Officer

Manan, that information is not available.

Manan Tijoriwala — ICICI Prudential EMC — Analyst

No issues. And sir, what will be LTV on the Stage three assets that we hold?

George Alexander Muthoot — Managing Director

LTV at the time of — it will be at that — the time when we clear the loan Stage three, can be maybe INR3,400, just INR100 above of today’s rate. That is the math.

Manan Tijoriwala — ICICI Prudential EMC — Analyst

It will be over INR100.

George Alexander Muthoot — Managing Director

More than what it is today.

Oommen K. Mammen — Chief Financial Officer

No, what MD sir was saying is that at that time, 12 months back, we had given probably at around INR3,500. So 12 months interest got added to it. So it will be somewhere close to 90, 95 percentage.

Manan Tijoriwala — ICICI Prudential EMC — Analyst

Okay. So it’s still below 100…

Oommen K. Mammen — Chief Financial Officer

No, just because these assets are Stage three, it doesn’t mean that customer has not paid interest. There are so many loan accounts where customer has paid up-to-date interest. But because these loans are cost 15 months, it is classified as an NPA. So those cases also will be there.

Manan Tijoriwala — ICICI Prudential EMC — Analyst

Got it. That was my answer. Thank you.

Operator

Thank you. The next question is from the line of Sunesh Khanna from IIFL AMC. Please go ahead.

Sunesh Khanna — IIFL AMC — Analyst

Yes. Hi there. Given that we have had a flattish quarter, so are we maintaining a 15% growth target for the year that it looks difficult in that way any other target or color you would like to give will be maintained in the year somewhere around 9% that we have delivered or it could be slightly higher?

George Alexander Muthoot — Managing Director

It should be slightly higher than 9%. But anyway, we also see that we will not be able to do the 15%.

Oommen K. Mammen — Chief Financial Officer

Yes, it will be a little higher than 9%, yes. I don’t want to do any number now, definitely higher.

Sunesh Khanna — IIFL AMC — Analyst

Okay. And for next year onward or we maintain our guidance of 15%.

Oommen K. Mammen — Chief Financial Officer

Yes, I think we should be able to do that 15% next year.

Sunesh Khanna — IIFL AMC — Analyst

Got it. That’s it from me. Thank you.

Operator

Thank you. The next question is from the line of Bunty Chawla from IDBI Capital. Please go ahead.

Bunty Chawla — IDBI Capital — Analyst

Thank you. Thank you for giving me the opportunity. My question, sir, almost been answered. The one question on the subsidiary part. If I see the Muthoot Money, which is an NBFC, it has reported a huge loss of INR9 crores. And if I see there has been increase in the branches, there has been an increase in the employees, Stage three assets have gone down, but there has been a reporting of the profit — loss of INR9 crores. So any change in that strategy in that NBFC if you can share that.

George Alexander Muthoot — Managing Director

So I think what is happening is all the loans which are good, especially the commercial vehicles, used vehicles, etc, have become Stage three. And as a total mixture we have just written off many of these things, but we expect these more recovery to come even if we written off it, but we just wanted to show a better position with regard to the assets which we have on book. That’s why aggressive write-off we did, that is aggressive write-off when we sell, it is beyond the Stage three. That is why we have taken a loss.

Bunty Chawla — IDBI Capital — Analyst

Okay, sir. Thank you. Thank you very much and best of luck sir.

Operator

Thank you. The next question is from the line of Shweta Daptardar from Elara Capital. Please go ahead.

Shweta Daptardar — Elara Capital — Analyst

Thank you for the opportunity. A couple of questions. One is, if I look at your auctions realization, if I go back and look at for FY ’21 has been slightly lower than past two to three years. So is it that the pandemic has been also impacting on the realization front? And how would the picture pan out going ahead? It is now that we have slightly higher numbers?

Oommen K. Mammen — Chief Financial Officer

Can you repeat the question?

Shweta Daptardar — Elara Capital — Analyst

Sir, auction realization, if I look at your FY ’21 annual report, that number has been lower than your last two to three years run rate. And now that we are slightly higher number on the auction front, how will the realization pan out going forward?

Oommen K. Mammen — Chief Financial Officer

How do the?

Shweta Daptardar — Elara Capital — Analyst

Realization for auction, how do that pan out going forward?

Oommen K. Mammen — Chief Financial Officer

See, realization on auctions is depends upon the price at that point of time. So now on to the first question, past years, the options were lower because the collections were better. Now earlier in the call, we have explained the reasons why the auction numbers have went up because of the larger disbursements we have done in Q2 and Q3 of last year.

So — and as I said, out of INR50,000 crores of disbursements in Q2, the auctions done is only around INR2,800 crores, which is a very small number. We could have given some more time, but market expects certain level of certain limits in terms of the Stage three assets. So no, we didn’t have a choice but to auction these accounts.

Shweta Daptardar — Elara Capital — Analyst

Okay. Sir, secondly, in terms of your gold loan growth, so you have mentioned last quarter that you have also moved out of home turf looking at new geographies like north. So how is it like doing business in North on the gold loan side different from what you’re doing currently in the existing geographies? And will that be a new trigger to the gold loan traction on it?

George Alexander Muthoot — Managing Director

I don’t know what — there is nothing like a new strategy for North, etc. The only difference in North and South is North, East and West our branches are in the bigger cities. And in South, we are there in smaller towns also. That’s only difference. Otherwise, the same strategy, same growth is what we see most times.

Shweta Daptardar — Elara Capital — Analyst

Okay. Okay. And my last question in terms of provisional run rate on P&L. So this quarter, last quarter, the provisions have been around in the range of INR700 million, INR800 million odd. So how do you see this number ballpark guidance going forward? You also mentioned that your GNP [Phonetic] of Stage three should come down to 2% to 3%. So how will it reflect on the provision on your P&L?

George Alexander Muthoot — Managing Director

There is actually technically practically, if you ask me, there is no need of any provision in the — for a gold loan company because the loan is fully secured. We have the full security with us. But technically, we have to provide provision. Maybe whatever you see provisions are actually reserves because we never had a need to look into the provisions till now. So we don’t need it actually, but the provisions goes up because standard provisioning also goes up because if asset goes up standard provisioning goes up.

For the NPA, whatever provisions we are earlier also, we’ve never tried to reverse it. We had excess provisions earlier. We just net it there. So I think we have around INR900 crores to INR1,000 crores of provisions in the balance sheet. Actually, which — if you ask me, it’s actually a profit of the company or reserves of the company, because none of these loans you see as NPA will result in a loan loss. We have to write off the provision or keep it as a provision. Probably next year also if the Stage three is higher, we need to do a provision more. If the Stage three is lower, the provision will be lesser.

Shweta Daptardar — Elara Capital — Analyst

Okay, sir. Thank you.

Operator

Thank you. Ladies and gentlemen, due to time constraint, we take that as the last question.

I now hand the conference over to the management for their closing comments.

George Alexander Muthoot — Managing Director

From my side, managing director here, our CFO, Mr. Oommen and our new ED, Mr. K.R. Bijimon; and the other new directors who also joined the call on all their behalf, I thank ICICI and the team who have arranged this and also definitely thank all the participants for their participation. And also thank them for their support, and we hope, and we are sure we’ll continue to support the company from our side.

We will do our best to run the company well and for both investors and other stakeholders. We will be — we’ll try our best to give you good returns or good expectations of — we will try to realize your expectations around the company from our side. Thank you, and good day.

Operator

[Operator Closing Remarks]