Ugro Capital Ltd (UGROCAP) Q2 FY23 Earnings Concall Transcript

Ugro Capital Ltd (NSE:UGROCAP) Q2 FY23 Earnings Concall dated Nov. 11, 2022

Corporate Participants:

Kaitav Shah — BFSI specialist

Kishore Lodha — Chief Financial Officer

Anuj Pandey — Chief Risk Officer

Amit Mande — Chief Revenue Officer

Nirav Shah — Chief Strategy Officer and Head of Investor Relations

Analysts:

Anil Tulsiram — ContrarianValueedge — Analyst

Wayne D’Mello — Individual Investor — Analyst

Chinmay Bhargava — Analyst — Analyst

Jaydev Trivedi — Analyst — Analyst

Sanjay Kumar — ithoughtpms — Analyst

Nikhil Kumar Agrawal — VT Capital — Analyst

Nemin Doshi — Analyst — Analyst

Presentation:

Kaitav Shah — BFSI specialist

Good afternoon, everyone. My name is Kaitav Shah, and I’m a BFSI specialist with Anand Rathi Institutional Equities. Today, we have the pleasure of hosting an MSME finance focused company in its high-growth phase, namely Ugro Capital. I welcome the top management of Ugro, Mr. Anuj Pandey, Chief Risk Officer; Mr. Amit Mande, Chief Revenue Officer; Mr. Kishore Lodha, Chief Financial Officer; and Mr. Nirav Shah, Chief Strategy Officer and Head of IR Relations.

The format for the call will be as follows. We will hear brief comments about the results from the management in their respective areas of expertise, post which we can open for Q&A.

Handing over the call now to Mr. Kishore Lodha. Over to you, sir.

Kishore Lodha — Chief Financial Officer

Good afternoon, everyone. This is Kishore Lodha, CFO of the Company. I, on behalf of Ugro Capital, welcome you on the call. Unfortunately, Mr. Nath is not here because of some personal commitments. We have shared the investor presentation yesterday and hope you have gone through the same. Along with me, our Chief Risk Officer, Mr. Anuj Pandey is there; our Chief Revenue Officer, Mr. Amit Mande, is there; our Chief Strategy Officer, Mr. Nirav Shah is there, and we will be covering the entire portion of the results in our respective areas.

As far as this quarter is concerned, the growth momentum continues. Over the previous quarter, quarter-on-quarter growth on AUM has been 20%. We have closed the quarter with INR4,375 crores of AUM, which is 126% over the same period last year. We recorded highest disbursement during this quarter. We stood at INR1,653 crores, 110% growth over year on year. Overall, loan originated during H1 stood at INR3,011 crores whereas it was INR1,123 crores in the previous year in the same period. The yield has improved, not only the business has grown significantly during the quarter, the yield has also gone up from 16.7% to 17.2%. The yield increased by two factors. One is that the mix, we are changing a little bit where we are going for the higher rating portfolio as well as due to increase in the market rate interest rate, we have also increased our lending rate to our customers.

Total net income has increased by INR87 crores, which is 24% higher compared to the previous quarter. Opex ratio continues to improve whereas in the last quarter, it was close to 73%, now it has come down to 62%. On PBT, we have closed the quarter at INR17.6 crores, whereas last quarter we closed around INR10 crores, so there is almost 70% growth quarter on quarter as far as PBT is concerned. However, the PAT has gone down from INR7 crores to INR5 crores. It is largely because we have taken the reversal of deferred tax asset of INR7.19 crores during the quarter. So, had that not been there, the PAT would have been 70% higher compared to the previous quarter. During the quarter, we have added six more lenders in our lending books. So, now there are more than 65 lenders, which is quite diverse. So, almost every lender you can name is there in our borrowing book now. Some of the impact funds we have added during the quarter, some of the large NBFCs and banks we have added during the quarter. Overall, though, the interest rate scenario is looking difficult. Overall, repo rates have gone up from 4% to 5.9% in the market, but our rates have gone up by only 20 basis points during the first half. It is because of the efficiency that we are bringing in with the seasoning with the lenders that is coming in. Our rates have remained more or less flattened during the quarter. So, as we discussed in our earlier calls that we will be doing more of co-lending, increasing our exposure in co-lending and co-origination book, and we have continued with that strategy where co-origination and off-book has increased from 21% to 29%, and our endeavor would be to take it up to 35% until March 2023, which will add to the ROAs and ROEs as we have deliberated in our earlier discussions.

Now, I will hand over to our colleague, Mr. Anuj Pandey, to talk about the asset qualities and the collection for the quarter and for the half year ended 30th September.

Anuj Pandey — Chief Risk Officer

Thank you, Kishore. Good evening, everyone. Before I take you through the asset quality for the first half of the year, I would like to recap our underwriting approach and model. So, we use what we call GRO Score 2.0, which is a statistical-based underwriting template, which has been developed in-house, and the idea was to look at the chosen sectors of ours, which are nine of them, and develop models for customers, based on their banking behavior and repayment behavior. We have been using this since our inception. We are currently on the Version 2 of that Score. When we started, we were only using the repayment based scoring. And this has — we have seen tremendous efficiencies because of that, both in terms of a very predictable portfolio performance and giving a very good turnaround time as far as underwriting decisions are concerned. So, our approach on a scientific templated underwriting model is well underway, and we are quite happy with the progress. In fact, now we are upgrading our GRO Score template to the Version 3, where the plan is to also include the GST data in using and predicting the repayment behavior. And in future, we would like to forecast the cash flows by customer for each of the sectors, which we have chosen and also get some estimates on the eligibility itself from this. So, overall, from the robustness and from the results of scorecard perspective, we are quite happy with the progress.

Now coming to the portfolio performance. The gross NPA at the end of September 30th is a little less than 1.7%, quite stable. We were at 1.7% in previous quarter as well. The net NPA stands at around 1.2%. Our overall approach on the portfolio mix has been quite clear from the start. We would like approximately 70% of the portfolio to always be secured, either by collateral or by some kind of credit enhancement. So, we continue to do that. The portfolio at the end of September 30th is also in the same ratio, 70:30. Some of investors and analysts keep asking us about the portfolio performance in the light of less seasoning of the book. And I would like to touch upon this topic, and this is something, which we closely monitor, the approach which we had adopted because the true test actually will come post the portfolio gets seasoned for a few more years. But now with the scientific tools available to us, we keep tracking the early portfolio indicators. Also, if you recall, we had started — when we started, our focus was to garner more of secured assets at relatively lower yields, which historically have proven and given lower NPAs. So the philosophy is to build up slowly to lend to customers who have very good repayment track record. We don’t lend to new-to-credit and keep tracking the early portfolio indicators. So far, we have seen that all of them are tracking quite well. We also every quarter do a proof-of-concept of our GRO Score. And in that, we widen the net, and we keep also assessing the customers who were scored by us, but were not given a loan for a variety of other reasons. But we keep tracking their portfolio performance for their repayment behavior in other loans, and we find that indeed, the risk ranking, which is coming out of our internal GRO Score, is stacking up. On the collection efficiencies front, the collection efficiencies on overall portfolio level remains stable. They are at around 94%, and this has been the number for last two, three quarters. In fact, our estimates are that they will steadily improve with overall improvement in the macro economy. On the bounce rate fronts also, we have seen a steady decline in bounce rates. Now at an overall portfolio level, they are at around 17%.

A little bit on the restructured book in the portfolio. When we started at the end of pandemic two, the total restructured book was around 7% of the portfolio. Now, it has got reduced to 2.6%. So, in absolute terms, about INR113 crores of the portfolio, which was restructured, is on books. About 95% of those restructured customers, the repayment period has started. And now, we have a very good fix and hang on how the portfolio under restructuring is behaving, and we are quite happy with that progress as well. In terms of overall provisioning, our provision coverage ratio for Stage 3 has improved by more than 200 basis points, and now it is around 30%. Our overall Stage 1 contribution has seen a lot of improvement, and it has gone up now to 96.4% from 94.6% in last quarter. So, on average and whole, this has been quite a good quarter as far as portfolio performance is concerned.

Now, I’ll hand over to Mr. Amit for his views on business.

Amit Mande — Chief Revenue Officer

A quick, in fact, wrap up of whatever Kishore and Anuj spoke. Kishore spoke about our achievements on disbursements and AUM, Anuj then spoke on the health of the total portfolio. I would like to only add a couple of points. In fact, I wanted to add that we have now very strong inroads in every type of distribution, which essentially means strong inroads in the intermediary layer, the direct distribution, the ecosystem in that distribution, and the fintech-led digital origination. What is important to note is that all our products in our underwriting framework is now acceptable in all the banks on the co-lending piece, which means now we have the confidence to spread out our infrastructure and people to build — that we’ve built over the last two years. What we are very excited about is that we’ve built a very robust distribution with a granular portfolio and the average ticket size keeps going down from the current INR16.5 lakhs. The mix of the unsecured/secured remains also very healthy as Anuj spoke. So, we will continue to build efficiencies to fuel our growth trajectory on the disbursements and the AUM to touch the INR7,000 crores AUM by end of this financial year and across all parameters as the guidance that we’ve provided in our presentation.

So, having said that, Nirav, you want to do the closing comment?

Nirav Shah — Chief Strategy Officer and Head of Investor Relations

No, I think — so thanks, Amit. So, most of it has been covered my dear colleagues, Kishore, Anuj, and Amit. What is important for all of us is to note that we were very bold in terms of releasing what we will achieve in FY ’23 going towards FY ’25. When we did that, a lot of questions had come to us saying it is too futuristic a number for you guys to kind of deliver, and a lot of the sell-side and buy-side will actually tie in and say that you have not been able to achieve on time, compare yourself with our achievements. We were actually very bold that time. But what we are now doing is we have spent a very good amount of time ensuring that each of the line items when it comes to yields, when it comes to interest cost, when it comes to employee expenses, etc., we are tracking it very granularly on a month-on-month basis, right? And we believe now that what we have set out, we are there to achieve it. I think that is the only thing I wanted to convey to the community that, yes, it is difficult for us to kind of achieve the bold numbers that we had given out, but I think we are very well on track to achieve those numbers.

I think with that, I will hand it over to Kaitav, and Kaitav may want to open the floor for questions.

Questions and Answers:

Kaitav Shah — BFSI specialist

Thank you, Nirav. We can open the floor for questions. I would like to request the participants to raise your hands and to introduce yourself before taking a question. Thank you so much.

Nirav Shah — Chief Strategy Officer and Head of Investor Relations

I think there’s a question from Anil Tulsiram. Maybe Anil, please go ahead and ask the question.

Anil Tulsiram — ContrarianValueedge — Analyst

Yeah. Thanks for taking my question. This is Anil Tulsiram from ContrarianValueedge. My first question is on the capital raise. So, first — so I want to understand how important it’s for you to raise the funds in the next 12 to 18 months. And in the unfortunate case that you’re not able to raise the funds, then what is the maximum leverage credit rating agencies and lenders will allow us?

Nirav Shah — Chief Strategy Officer and Head of Investor Relations

Sure. So, we had — during our last call, we had given a guidance that we would be doing an equity fund-raising process by end of this financial year. And that process is something that is currently on. Even in case where we are still not able to achieve or being able to raise that equity, we will still believe that with our co-lending approach, we should be good enough for the next 12 to 18 months’ timeframe and still be able to achieve the same numbers. With respect to your question on the leverage, we always believe that we would cap our leverage at 4 times debt-to-equity ratio. And there is still a long way from the current 2.85 times leverage that we have at this point in time.

Kishore Lodha — Chief Financial Officer

To add to what my colleague has said that if you look at our capital structure, as of now, we are entirely relying on equity capital where we have the option to raise Tier 2 capital up to 50% of the Tier 1 capital, which we have. So, that option, we have not explored until now, but that option is also available if the need arises.

Anil Tulsiram — ContrarianValueedge — Analyst

On leverage, I have a question. There are many microfinance companies, which gave the guidance that they are comfortable with 5 times leverage. Being unsecured, they are comfortable with 5 times and their credit rating agencies are comfortable. Then why do we want to restrict ourselves to only 4 times? What is the rationale behind it?

Nirav Shah — Chief Strategy Officer and Head of Investor Relations

So, I think, Amit, there’s no real, as such, rationale. I think we just wanted to make sure that we are able to weather any kind of a storm that comes in future. So, by restricting us, so there is no hardcoded 4 times debt-to-equity ratio that we are saying. What we are saying is that once we have achieved that or we are close to that number, then we should be looking at other avenues of fundraising. It could be equity, as Kishore said, could be Tier 2 debt, etc., etc., while with our vintage, we are pretty much sure that we can still reach 5, 5.5 times debt-to-equity ratio. But just to be within our limits of — and to have a very clear visibility, we are saying we will not — we’ll preferably not want to go beyond 4 times at this point in time. That also leaves something what we call as a confidence capital on table for the other large debt participants like public sector banks, etc., who would become very comfortable when it is sub 4 times leverage.

Anil Tulsiram — ContrarianValueedge — Analyst

Okay. Sir, and my next question is on the account aggregator. I think it is going to get implemented from the early next year. And once it gets implemented, what we are trying to do with the GRO 3 that any bank will be able to do it, it means collecting the account statements and the GST data. So, in what way, it will be difficult for them to replicate what we are doing or means — how the underwriting is much more beyond just this bank statement and GST, that is what basically I want to understand.

Anuj Pandey — Chief Risk Officer

So, I’ll take this up. In fact, account aggregation and the account aggregated model is already live. And there are about 10 banks, which are already live. And what it does is basically on one consent of the customer, it allows the financier to fetch all his bank accounts. Eventually, all his financial assets will get added in this network. That is the broad plan. Now to your question of whether this will truly democratize the banking data and hence how we are different, if I understood you correctly. To tell you, the banking data is still available to all, including the banks themselves. The point is whether you are able to apply them in a smart way, in a statistical model, to your chosen target segment. That is where proprietary work and insight-based work comes upon. Now, today, our underwriting is primarily based on GST, banking and repayment. Now, these are things, which are available to all for last five years. But still, based on the application of machine learning algorithm on our chosen target segment, we have been evolving the underwriting model, and that is something which takes time. And hence, whosoever chooses to do that, of course, can do for their own chosen target segment. But in that journey, we think we would be always two to three years ahead.

Anil Tulsiram — ContrarianValueedge — Analyst

And sir, one last question is on the collection efficiency of the restructured assets. That’s it. With that, I’m done.

Anuj Pandey — Chief Risk Officer

So, currently, about 66% of the restructured assets is current. And the rest are in delinquencies. About 25% of total restructured assets have actually flown into NPA, which has already got reported in our total NPA figure. We have now got a sense of what more can come in, and it seems that maybe about 3% to 4% more from restructured assets, we estimate more NPAs to come in.

Anil Tulsiram — ContrarianValueedge — Analyst

That’s it, sir. I am done.

Kaitav Shah — BFSI specialist

Thank you, Anil. I think Mr. Wayne D’Mello can go next.

Wayne D’Mello — Individual Investor — Analyst

Hi. Yes. So, congrats on a good set of numbers. My first question was on the co-lending side, specifically on our GRO Xstream platform. So, we have partners fintech, NBFCs that we’ve partnered with who also have their own platforms, like you have Lendingkart which has their 2gthr platform, you have Yubi with their Co.Lend platform. So, my question on GRO Xstream is you’ve said that you want to grow it to be the biggest platform for co-lending in India, where even the smallest of the NBFCs can get in touch with the largest of banks. So, my question is, one, what do you see as the USP of our platform when compared to the other platforms that exist? And what are your goals? How do you see the progress? And what’s the timeline on that? That’s the first question.

Anuj Pandey — Chief Risk Officer

Okay. So overall, the difference is in the concept because we are a large lender ourselves. So, when a balance sheet provider makes a platform, which can be integrated with other lenders and other partners, then the insight which it brings, for example, we have a proprietary GRO Score, which is already developed and now is getting proved quarter-on-quarter on our chosen MSME segment. Now if someone — if a partner wants to use that for their data, that would be available to us. But our approach has always been complementing and not competing. So, for example, we are integrating with the Yubis of the world and other such platforms. Typically, what happens is a PSU bank, especially — it is very difficult for them to integrate with many platforms. And it might so happen that one of these platforms gets integrated first. Our approach has been to either integrate directly or integrate via these platforms so that overall we are able to serve the needs of the ecosystem.

Wayne D’Mello — Individual Investor — Analyst

Okay, that makes sense.

Amit Mande — Chief Revenue Officer

One more thing I would add is [Indecipherable] GRO Score [Technical Issues], so one more thing is that the ability of the smaller NBFCs, not only smaller NBFCs but also the larger banks and the NBFCs to use the proprietary GRO Score, which is the real value add. So one is, of course, a platform; two is the IP, intellectual property value add of the GRO Score for each of these partners to access and evaluate their portfolio; and third, of course, is the ability to be a lender to the smaller NBFCs. So, it’s a little different with a platform like Yubi, which is only a platform that connects multiple partners.

Wayne D’Mello — Individual Investor — Analyst

Yeah. Understood. Thanks for the reply. So, yeah, on co-lending again, by 2025, we’ve guided for 50% of our book to be off book. Of that, I think you said around 20%, 23% will be through co-lending, right?

Amit Mande — Chief Revenue Officer

That is correct.

Wayne D’Mello — Individual Investor — Analyst

Yeah. So, what is — what are your thoughts on increasing that percentage because it’s obviously better for us on the ROEs and on those metrics. And we have peers that are already doing up to 90% off book? So, do you have any thoughts on — are you flexible with taking it up from the 50% that you’ve guided for?

Amit Mande — Chief Revenue Officer

So, at this point of time, the guidance is 50%, and there is an opportunity to further increase it to higher percentages. There are two things the way we look at it. Just being a platform has to be acceptable because then we are just 10%, we are just a platform and so whether the people whom we are co-lending with, they don’t find [Indecipherable] in the game and so that acceptance [Indecipherable]. So the opportunity still [ exists ]. But we don’t just want to be a passive platform and a lender. We want to be — we want to have our skin in the game. So, at this point of time, we’re aiming that 50%. If the opportunity permits, we could further take it up as time goes by. At the current point in time, we anyways on month on month are off-booking 50% of our disbursement. You would have seen our off-book AUM now at 29% of the total AUM, which has moved from 21% in last quarter. So, it’s moving very rapidly. So, like you said, there is opportunity, but we would like to keep the skin in the game. We would like to give that confidence to our co-lenders, and so 50% is what we believe is the right number to reach by 2025.

Wayne D’Mello — Individual Investor — Analyst

Okay. Thank you. And one last question is just for this for the sake of investors, like how do you guys define collection efficiency? So, we are at 94%. So what comprises the rest of the 6%?

Anuj Pandey — Chief Risk Officer

So, we define collection efficiency by current demand divided by current use — current collection divided by current demand. Typically, in other financial services industry, a lot of people give collection efficiency by dividing the total collection by current due. If we do that, our collection efficiency would be closer to 99%. So, this rest 6% is what flows into what we call buckets. The first bucket is called Bucket X. Typically, in that Bucket X, our resolution rates are around 97% to 98%.

Wayne D’Mello — Individual Investor — Analyst

Okay. That’s all from my side. Thank you for the detailed replies and all the best for the future.

Anuj Pandey — Chief Risk Officer

Thank you.

Kaitav Shah — BFSI specialist

If there are any questions, please raise your hands. In the meantime, we have a question that has come up on the chat. In terms of portfolio concentration, our top three states are Tamil Nadu, Gujarat and Karnataka. In which regions are we focused primarily? Is it larger cities or the Tier 2 and 3 markets? Over to management.

Anuj Pandey — Chief Risk Officer

So, we have two distinct branch-led channels. One is what we call prime channels, which is now in the top 25 locations spread across nine states. And these typically are locations where the concentration of our targeted sectors is higher. For our microenterprises distribution, we had chosen five states to invest in. So today, we have about 75 branches in Tamil Nadu, Telangana, Karnataka, Rajasthan and Gujarat. We chose these five states basis a thorough statistical analysis by pin codes across the country for our kind of ticket sizes, the health of microenterprises and the portfolio performance. And we found that these five states were cut above the rest. So, our distribution strategy in micro going forward also would be focused on these five states.

Kaitav Shah — BFSI specialist

Sure. Thank you. Sir, if I may slip in a couple of questions. Could you talk about more on the competition in the market that you’re seeing given that we’re seeing the banks also growing in the PL space, in the LAP space and small ticket size loans, how are you seeing the competition shaping up?

Amit Mande — Chief Revenue Officer

So, there are two ways to look at it. One, the competition has always been there. The MSME segment has always been a hot segment where the banks always wanted to build their portfolios in. There is not only the bank’s or the institutional push, but there is a larger strategic push from the government itself towards NBFC. So, the competition is there in the segment. On one side, there is competition and banks and liquidity, on the other side, people talk about the credit gap that is there in the MSME segment. Now between these two things, one would have realized that delivery of credit to the MSME is an extremely difficult subject than people thought it was. And the large focus has always been on the consumer segment like the personal loans or the vehicle loan, etc. What we’ve been able to do is really focus by sector and by geographies into the MSME segment, but our dedicated and committed focus has also led us to build a risk model that is unique and can scale up. So, in that sense, we have a better risk and underwriting model and that is why our turnaround times to the customers and ability to assess and understand customers is better. And so while we appreciate and we really respect the competition that is there in the market, we believe that we have a unique proposition because of which we will stay ahead of the competition. So, in the segments that we are, whether it is a microenterprises segment or the machinery finance segment or for that matter the business loan secured and unsecured, our proposition is to work on data and technology and give fast turnaround time [Indecipherable] customer right and that has helped us to — that has been the real pillar of our growth in last three quarters.

Kaitav Shah — BFSI specialist

Sure. Thank you. Next question is from Mr. Chinmay Bhargava.

Chinmay Bhargava — Analyst — Analyst

Hi, all. Congrats on an excellent quarter. I just have a simple question today on the deferred tax that we had to pay out. Just wanted to ask why we chose to recognize it this quarter, whether we expect to recover any of the amount and whether there’s anything more that needs to be set off in the future?

Kishore Lodha — Chief Financial Officer

So, the reason of taking it in this quarter is that as per the income tax rules, after eight years, it lapses. So, that period is over. So, that is how it has to be taken into this quarter. So, this is by law where we have to take INR7.19 crore as taxes in this quarter. However, there will be further impact on future, it is difficult to tell at this moment because it will depend upon our future profitability. Whether we will be able to absorb the carryforward losses or not, depending upon that, further it may or may not come.

Chinmay Bhargava — Analyst — Analyst

Sure. But I just meant in terms of the structure we inherited, right, like this happened eight years ago. I just wanted to ask whether there’s anything else from pre-FY ’19 that needs to be set off?

Kishore Lodha — Chief Financial Officer

No, so this [Technical Issues] entire loss came because of merger which happened in 2020 [Phonetic]. And where we have recognized the deferred tax asset and once their eight years period has elapsed for this particular segment, we had to reverse it. There is another set of carryforward loss which is there. And whether we will be able to utilize it in future or not or we will have to reverse it, it will depend upon the profitability as we move forward.

Chinmay Bhargava — Analyst — Analyst

Okay. Thank you. All the best.

Kaitav Shah — BFSI specialist

Mr. Anil Tulsiram?

Anil Tulsiram — ContrarianValueedge — Analyst

Yeah. Sir, we started some micro branches I think some 12 months or 18 months back. So can you elaborate upon the journey and how the progress has been, what has been our experience, credit cost, successes, failures, whatever, how they’re shaping up basically, micro branches?

Amit Mande — Chief Revenue Officer

So, it’s an extremely good question and I appreciate this question because micro enterprises branches is going to be a focus area for us, an area of growth. We started about 75 branches in Q3 and 25 branches in Q1, Q2 and then we’ll reach about 75 branches in Q3 and Q4. The learning curve has been there — we always believed that there would be a learning curve and so, this year we decided to not expand and see how these branches become profitable so that it really powers our growth going forward. What we’ve seen is today, as we speak, from the 75 branches that we have, 31 branches have already broken even, and we will see the entire set of 75 branches breaking even by end of this year, which means that the breakeven period of between 12 to 15 months that we expected and the model is working. Once all these branches are up, or nearly all branches have broken even is when we set up to expand our distribution to 50 more branches in the first two quarters of the next year. On the credit losses, Anuj, you want to take the credit losses question?

Anuj Pandey — Chief Risk Officer

Yeah. So, overall, we have about a little over 12 to 15 months of experience of the book and the gross NPAs. They in our micro book are little less than 1%. So, from the underwriting perspective and choosing of locations perspective and the target segment, we are quite happy with the progress.

Amit Mande — Chief Revenue Officer

To add to what Anuj said, given that the portfolio and the target segment is right and the portfolio is behaving well, we would want you to also note that why is this a focus area is because this is (a) a secured product that we do on the micro enterprise branches, (b) the yields are in the range of 20% to 22%. And given [Indecipherable] roadmap of 250 branches in the next three years, this is going to be a large portion of our growth strategy.

Anil Tulsiram — ContrarianValueedge — Analyst

And sir, just one thing, I think micro branches does only unsecured loans, right, unsecured loans of INR5 lakhs and not secured loans. Is my understanding right?

Amit Mande — Chief Revenue Officer

In fact, it is not. Micro secured branches primarily does secured micro loans. So, our loan ticket size — secured ticket sizes — average ticket size ranges between — the loans are between INR1 lakh to INR25 lakhs. Our average ticket sizes are at INR7.5 lakhs at this point in time, and 85% of the loans that we originate are secured loans for the micro secured branches — microenterprises branches.

Anil Tulsiram — ContrarianValueedge — Analyst

Okay. Sir, and just one clarification, the loans which we do through our fintech partnership, when we represent [Indecipherable], we show it as under secured loans or under unsecured loans? How do we represent that?

Anuj Pandey — Chief Risk Officer

So, they are secured by FLDG. So, in our representation, we show it under secured loans.

Anil Tulsiram — ContrarianValueedge — Analyst

Okay. Thank you, sir. That is it. Thank you.

Kaitav Shah — BFSI specialist

Mr. Jaydev Trivedi?

Jaydev Trivedi — Analyst — Analyst

Hello. Am I audible?

Nirav Shah — Chief Strategy Officer and Head of Investor Relations

Yes, go ahead.

Jaydev Trivedi — Analyst — Analyst

Congratulations to the management for the impressive set of numbers. What I understand from the shared PPT is that we are targeting AUM of around INR7,000 crores and loan book of INR4,500 crores right by the end of FY ’23. So, for that, currently we have CAR of 28% [Indecipherable] of around 2.9%. So do you think in near future we are going to have some capital infusion to support the growth?

Nirav Shah — Chief Strategy Officer and Head of Investor Relations

Yes, we will have.

Anuj Pandey — Chief Risk Officer

So, Nirav had already addressed this. So, we are in process of an equity raise, but strictly from calculation purposes, we don’t need that. We will be able to meet our AUM targets both on book and off-book without the equity raise as well. But in our plans, we had planned to raise equity in this financial year, and we are working on it.

Jaydev Trivedi — Analyst — Analyst

And sir, one more follow-up on the same topic, we have some of the very known PE investors on our investor list, but as of now we haven’t seen any follow-up round from them. So, is it expected to come again or if you can disclose anything on that if it is possible.

Nirav Shah — Chief Strategy Officer and Head of Investor Relations

So having — so Jaydev, basically the idea of — we know while couple of our investors already own about 21 odd percent in the Company and they have been supporting us all throughout, we would want to have investors now who are more granular in terms of their ticket size of investments, okay. Either it could be them or it could be somebody who is coming in with a fresh capital now and has a horizon of staying on for the next 7 to 10 years as a shareholder. And hence we believe that — so then you want the new set of investors could be either somebody who can stay with us for 7, 10 years, or more like a capital market investors, right, who are more granular in nature. But if needed, then they will definitely support us.

Jaydev Trivedi — Analyst — Analyst

Understood. And sir, one more thing, they have been with us for a few years now. And is it possible they are looking for any exit, any of them, due to the tenure of their fund or anything?

Nirav Shah — Chief Strategy Officer and Head of Investor Relations

So, see, by its very nature, every private equity fund has a fund life, right. But the fact is out of our four years of operations, two years of it has been COVID and most of the private equity funds actually do understand that and support us on that front. There is currently no exit pressure from any of the funds at this point in time, but they will eventually look at an exit over the next two- to four-year timeframe. One of the private equity fund, PAG, has brought down its shareholding to about 9% from their original about 19%, they have been able to get the liquidity directly from the market itself. But having said that, for the existing 9-odd percent that they have, again there is no pressure on them to kind of sell, because most of the capital has been returned back, right. So, there is no current imminent pressure from any of the private equity funds.

Jaydev Trivedi — Analyst — Analyst

Right, sir. And is it Samena Capital has increased their holdings? And is it so from the current open market or anything else, if it is the case?

Nirav Shah — Chief Strategy Officer and Head of Investor Relations

No, that is actually not the case. Samena has been an original investor in the Company since the time we raised our money in 2018.

Jaydev Trivedi — Analyst — Analyst

I meant if they increased [Speech Overlap].

Nirav Shah — Chief Strategy Officer and Head of Investor Relations

They haven’t really increased or decreased their holdings.

Jaydev Trivedi — Analyst — Analyst

Okay, sir. Thank you. Thank you for the answers. Again, congratulations for the numbers.

Kaitav Shah — BFSI specialist

Mr. Nikhil Agarwal? I think he’s dropped out of the queue. Mr. Sanjay Kumar?

Sanjay Kumar — ithoughtpms — Analyst

Hello.

Kaitav Shah — BFSI specialist

Yes, Mr. Sanjay. Please introduce yourself.

Sanjay Kumar — ithoughtpms — Analyst

Sanjay from ithoughtpms. My first question is on collection efficiency. It’s around 93%, 94%, which means, on average, 6% of customers not paying. So, our slippage ratio or credit cost ratio should be close to this number, but that’s not the case. So, I know CE is not a rolling number as in customer who didn’t pay in August would have paid in September and would have dropped off the bucket. But there is this huge gap. So — and if I see your 30-day past due, 30 DPD is around 5%, 6%, and then there is a drop off in the 90-day past due to 1% to 2%. So, can you explain this client behavior? Are they always — they pass their due for a few days and then they — when they get the cash, they pay it back.

Anuj Pandey — Chief Risk Officer

Okay. Two things. One, the understanding of how the flow rates work. So, typically, whatever is bounced will move into DPDs or what we call collection buckets. Typically, there are 4 collection buckets, between 0 to 30 days past due, 30 to 60, 60 to 90, and 90 and beyond, which basically means whether you have one EMI due, two EMIs due, three EMIs due or more EMIs than three, which are due. For our kind of target segment, typically in the first bucket, the resolution rates are closer to 95%, 96%, 97% because this is a function of the nature of the target segment. This is an SME. He may not have the money on the due date, but he is fine paying the amount in that calendar month. Then, if there is more than one EMI due, then typically the resolution rates are between 70% to 80%. If there are more than two EMIs due, the resolution rates will fall, obviously, and it is around 50% to 60%. And then the case becomes NPA and then there is recovery rate depending on the product, which is about 20% to 25%. So, when you multiply all of them together, you get a number which is called product of flows. That is the number, which gives an indication of how much of your current asset is likely to become NPA in the subsequent three months. That number for us is between 0.1% to 0.15%. And this is a number we keep tracking regularly. The numbers, which you quoted for 30-plus and 90-plus, I think, were a little different. Our 30-plus number end of September is 3.5%. So, they are 3.5% of the portfolio where the customers have not paid more than one EMI.

Sanjay Kumar — ithoughtpms — Analyst

Got it, sir. Sir, if you could — more of a request, if you could give the 30 DPD as of September 30, because you’ve given it for the recent [Technical Issues].

Kaitav Shah — BFSI specialist

Mr. Sanjay Kumar, you’ll have to mute your line. [Speech Overlap]. There was a lot of disturbance. Can you come again? [Speech Overlap].

Sanjay Kumar — ithoughtpms — Analyst

Okay, now?

Anuj Pandey — Chief Risk Officer

Yes, it is okay.

Sanjay Kumar — ithoughtpms — Analyst

Okay. Sir, if you can give the breakthrough of the slippages, recoveries, and upgrades, and if you could give the latest DPD numbers in the PPT, that would be helpful. Sir, second question, so there was an increase in the credit cost. So, any color on that? And for this segment that you cater to, the MSME sector, is 1.5% credit cost the right number or is it slightly on the lower side compared to other banks because even the banks that are you co-lending partners, they have credit costs almost 2% or upwards. So, any insights on this credit cost piece and why there was an increase in this?

Anuj Pandey — Chief Risk Officer

Okay. So, the credit cost increased primarily because the disbursals increased. So, the way credit costs are done, whatever you disburse newly, you assign a provision, which used to be called good book provisioning or standard provisioning. So, because our disbursals in the first — in this quarter had gone up, that’s why the credit cost has gone up. That typically is about 1% of the new business generated. As far as your comparative credit costs are concerned, yes, we are a little lower, and we would like to remain that way because our underwriting is very different than a typical SME lender underwriting. We have been using our SME GRO Score database underwriting in a very different way. So, our estimates are that it will always be a little lower than what our peers are.

Sanjay Kumar — ithoughtpms — Analyst

That’s good to hear, sir. So, in that case, are BOB or SBI or even Central Bank, are they increasing their — the limits that they want to lend through your platform month-on-month? Or are we still yet to hit the targets that was in the original MOU?

Amit Mande — Chief Revenue Officer

So, I will take this question. So, at this point of time, whether it is State Bank of India or Central Bank or Bank of Baroda or [Indecipherable], the limits allocated are way higher than what we are — what we have co-lend with them today. So, at this point of time, we do not see any reason why we should go back to even change the limits. We will come to this question maybe about another year down the line or six, eight months down the line. Having said this, some of the banks that we are doing, we are the largest co-lending partners there, our co-lending book with the banks is now upwards of INR600 crores, and we are seeing more and more demand and more push from these public sector banks to co-lend with them. So, at this point of time, we do not have problems with the limits.

Sanjay Kumar — ithoughtpms — Analyst

Okay, sir. Third, on the provision coverage, so we are at, I think, 30% now. How comfortable are we with this 30%? What has been the recovery that we’ve been able to do in the recent past? And will this number be settled here, or do you want to take it higher because even a [Indecipherable] would be at 35%, 40%. I think even other secured guys would be at those levels. So, something on this, any insight on this?

Anuj Pandey — Chief Risk Officer

So, typically, the provision coverage ratios for Stage 3 asset keep going up as the vintage of portfolio keeps going up. And it is also — should be seen in light of your absolute gross NPAs and net NPAs. So, what one wants to balance out is that the uncovered portion of your NPAs should not be very high. So, today, our net NPA is only about 1.2%. And hence, at this point of time, we are very comfortable with 30% provision coverage ratio. But as our portfolio matures, as the book size increases, this provision coverage will also keep increasing gradually.

Sanjay Kumar — ithoughtpms — Analyst

Okay, sir. Thank you. That’s it from my side.

Kaitav Shah — BFSI specialist

Mr. Nikhil Kumar Agrawal, if you can ask your question.

Nikhil Kumar Agrawal — VT Capital — Analyst

Hello, am I audible?

Kaitav Shah — BFSI specialist

Yes, Nikhil, you’re audible. Please introduce yourself and ask your question.

Nikhil Kumar Agrawal — VT Capital — Analyst

Hi, good evening. My name is Nikhil Agrawal. I’m from VT Capital. So, sir, first of all, congratulations on the successful set of results. I just had a couple of questions. First about the FLDG model. So, I just wanted to get a clear view on how FLDG works because — so there was this regulation that banks and NBFCs cannot do FLDG together. So, NBFCs and NBFCs [Phonetic] have to do together, something like that. So, if you could give me a clear view on how FLDG works and how we are doing it in the correct way, so if you could just explain that. And my second question is about credit cost that so are you saying that with disbursals up, provisions are going up, and although we are comfortable at the 30% level right now, with the increase in vintage of Stage 3 assets, our provision will go up. And at the same time, it seems that our credit cost will remain under the current levels of 1.5%, 1.6%. So, is this going to be true because with increasing provisions and the increasing disbursements and AUM targets that we have, I think, there could be a further increase in credit cost. So, can you please explain these two things please?

Anuj Pandey — Chief Risk Officer

So, I’ll answer the second question first. When we are talking about the provision coverage ratio, we are talking about the provision coverage on Stage 3 assets or NPA assets. And when we are talking about the total credit cost, we are talking about the total credit cost on the overall book. So, they are two different things, although they are related in an indirect way, but should not be seen together the way you have interpreted it. The more disbursals we do, the Stage 1 provision, which is the book, which is current, that will keep going up. As our NPAs go up and the vintage of the NPAs within the Stage 3 goes up, the provision coverage will keep increasing for Stage 3. So, these both can exist together. Overall, in our calculation and in our annual plans and for the plans up to 2025, we see that overall combined both Stage 1, Stage 2 and Stage 3, the credit cost should remain in the vicinity of 1.5%, 1.6%. Within this, the Stage 3 provision coverage ratio will keep going up.

Nikhil Kumar Agrawal — VT Capital — Analyst

Sir, just one follow-up regarding this. So, I was not confused between the Stage 1 provision and Stage 2 provision. I just wanted to know that from the incremental provisions flowing through P&L, a major part of it would be for the NPA provisions, because vintage would go up. Is that a fair assumption or please correct me if I’m wrong?

Anuj Pandey — Chief Risk Officer

No. So, it will be — as long as our annual disbursals’ contribution in the total AUM is higher, in the vicinity of — so today, for example, we are at an AUM of INR4,400 crores with about INR1,300 crores getting disbursed in last quarter itself, which basically means that 25% of the total book has been recently sourced. So, this figure will keep going — as the portfolio keeps going up, this contribution of freshly sourced portfolio will keep coming down and that will have an impact. But having said that, the trade cost is also a function of our portfolio construct. We are very clear that 70% of the portfolio will remain secured, and 30% will remain unsecured. Now in unsecured, when it starts getting delinquent and starts moving to Stage 3, then the provision coverage on that part increases in an accelerated way, while in secured, we have seen that the recoveries happen and hence one is able to pull it back. So, the approach is twin. One is to keep steady on our portfolio design and also keep having a very close monitoring on the contribution of recently sourced portfolio to the overall portfolio.

Nikhil Kumar Agrawal — VT Capital — Analyst

All right. Thank you, sir. And FLDG, please.

Anuj Pandey — Chief Risk Officer

I hope that answers your question.

Nikhil Kumar Agrawal — VT Capital — Analyst

Yes, sir.

Amit Mande — Chief Revenue Officer

Let me take your first question. And your question on FLDG and is it allowed between the banks and the NBFCs or NBFCs to NBFCs. So, we do co-lending and co-origination on two sides of our business. One is with the banks for — on the liability side, as we call it. With the banks, there is no FLDG that is allowed. The risk is on a pari-passu basis, which means that 20% risk is ours, 80% risk is with the bank. That’s one. Two, between the [Indecipherable], which are both regulated entities, FLDG is what we do as guided by the securitization guidelines just on the guidance. And so, on the asset side, all our definitive partnerships and lending partnerships are regulated entities, and we have a first loss cover from them, to an extent, as guided by the securitization guideline. Does that — that’s the difference. Have I been able to answer the question on what is the difference and with whom are we doing what?

Nikhil Kumar Agrawal — VT Capital — Analyst

Yes, sir. Yes, sir. I got it, sir. And sir, what is the extent of the FLDG? Is it 10% or is it higher?

Amit Mande — Chief Revenue Officer

So, we can take FLDG up to 20%, depending upon what product and what kind of — so every partner on the asset side, we have common lending policy, that’s one. And basis [Phonetic] the policy, it could range anywhere between 10% to 20% depending upon the product, geographies, or the way the operations are evaluated by our risk and credit [Phonetic].

Nikhil Kumar Agrawal — VT Capital — Analyst

All right. Thank you so much, sir. That’s all. And best of luck for future quarters.

Amit Mande — Chief Revenue Officer

Thank you.

Kaitav Shah — BFSI specialist

Next question from Mr. Nemin Doshi.

Nemin Doshi — Analyst — Analyst

Hello, am I audible?

Amit Mande — Chief Revenue Officer

Yes, you are.

Nemin Doshi — Analyst — Analyst

Sir, my question was regarding how is the assignment income recognition different from the co-lending? And how does that co-lending thing flow in our accounts? And secondly, can you just help me with the numbers with regards to co-lending from banks like SBI and BOB, the numbers if it’s possible for you?

Kishore Lodha — Chief Financial Officer

So, I’ll take this question. So, there are two sets of co-lending guidelines. So, there is Scheme 1 and Scheme 2. Scheme 1 where you would do co-lending on a pari-passu basis where both the counterparties jointly lend to the customer. So, if customer is there willing to take INR100 loan based on the joint lending program, both the parties will fund in the ratio of the agreement. So, if the bank is taking 80% and the NBFC is taking 20%, at the stage of origination, both these parties will evaluate the customer, and if the customer is deemed fit, on the escrow account, proportionate funds will move, and from there the disbursal will happen. Here, the accounting would be like a normal lending accounting where 20%, you will recognize the interest and on the 80% where the bank is funding, the differential interest, if any is there, has to be accounted in the books of the originator. While in Scheme 2, it is more like direct assignment where you first originate the customer in your book and then downgrade it to the bank or the partner depending upon the co-lending program and the ratio. So, it can be 80:20, which is the most common practice. So, in that case, the income is treated like a direct assignment where you have to upfront the lifetime income of that particular loan and convert it into the entity and recognize in your P&L.

Nemin Doshi — Analyst — Analyst

Okay. Okay. Got it. Thanks. And with respect to numbers [Speech Overlap].

Kishore Lodha — Chief Financial Officer

First, on the co-lending side [Technical Issues] on this quarter, we have done close to INR170 crores of co-lending, which was about INR125 crores in the previous part.

Nemin Doshi — Analyst — Analyst

Okay. Okay. Okay. Thank you.

Kaitav Shah — BFSI specialist

We’ll take the last question due to time constraints, which is on chat. What is the impact of digital lending guidelines on co-lending, both partnership and alliance with banks? Thank you.

Amit Mande — Chief Revenue Officer

So, to answer, I think, first of all, one has to understand the spirit of the guideline. The spirit of the guideline says that the lender cannot be a passive lender and so should take active part in the risk assessment and risk management. So, that’s one. Two, it also talks about regulated and non-regulated entities. I partially answered this, all our partners on the asset side, when we do co-lending and co-origination are regulated entities, which means that where the FLDG now — and that is our opinion, FLDG is not applicable to a partnership between a non-regulated and a regulated entity. We do not have such relationships. All our relationships are regulated and so FLDG continues to be a part of the agreement. That’s one. Two, because these are all regulated entities, all other — three important or rather four important parameters that are defined in the guidelines. One is disbursement into the customer account; two, repayment from the customer directly into an escrow or our own account; three, the key customer factsheet [Indecipherable] the IT audit. All these have been carried out across all partnerships, and we are compliant across all relationships. So, that has not impacted us at all. This does not — it is absolutely similar with the banks that we co-lend with, and so we do not have any impact on the draft digital lending guidelines.

Kaitav Shah — BFSI specialist

Thank you. Ladies and gentlemen, this was the last question due to time constraints. We would like to thank the management of Ugro for taking the time out to address all of us. Thank you on behalf of Anand Rathi Institutional Equities.

Amit Mande — Chief Revenue Officer

Thank you.

Anuj Pandey — Chief Risk Officer

Thank you, everyone.

Nirav Shah — Chief Strategy Officer and Head of Investor Relations

Thank you, everyone. Thanks, Kaitav, for organizing this.

Kaitav Shah — BFSI specialist

Our pleasure. Thank you.

Nirav Shah — Chief Strategy Officer and Head of Investor Relations

Thank you.