Ugro Capital Ltd (NSE: UGROCAP) Q4 2025 Earnings Call dated Apr. 28, 2025
Corporate Participants:
Unidentified Speaker
Amit Mande — Chief Revenue Officer
Shachindra Nath — Founder, Managing Director
Anuj Pandey — Chief Risk Officer
Analysts:
Unidentified Participant
Kishan Rungta — Analyst
Rishi — Analyst
Rishab — Analyst
Krishnan PS — Analyst
Darshan Jhaveri — Analyst
Jaya Bhadwan — Analyst
Heath Kimwat — Analyst
Piyush Bothra — Analyst
Chetan Falak — Analyst
Vivek Kumar — Analyst
Ramesh Chandrasekharan — Analyst
Presentation:
operator
Ladies and gentlemen, good day and welcome to the UGRO Capital Limited Q4Y25 conference call hosted by MK Global Financial Services Limited. As a reminder, all participant line will be and there will be an opportunity for you to ask questions once the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing Star then zero on your touchstone phone. Please note that this conference is being recorded. I now hand the conference over to Mr.
Kishan Rongta from MK Global Financial Services. Thank you. And over to you sir.
Kishan Rungta — Analyst
Thank you. Good evening everyone. I’d like to welcome the management and thank them for this opportunity we have with us today. Mr. Sachendranath, Founder and MD Mr. Kishore Lodha, CFO Mr. Anuj Pandey, CRO Mr. Amit Mande, CRO Chief Revenue Officer Mr. Sharad Agarwal, CTO and Ms. Ritu Singh, Senior Economist and Head IR.
I shall now hand over the call to management for the opening remarks. Over to you Sir.
Shachindra Nath — Founder, Managing Director
Thank you Mr. Umtal. Good evening everyone. I’m delighted to share Uglo Capital’s strong performance for the quarter and financial year ended March 31, 2025. Our results underscore the strength of our data tech driven business model and the progress we have made in reaching under subbed MSV segment.
Across India over the past 18 months the public markets expressed significant concerns about Nbsp’s growth and sustainability. This was clearly reflected in the compressed valuation across most NBSP and microfinance companies including new growth. Market concerns started when the Reserve bank of India implemented several regulatory measures and series of actions which included on 16th November 2023 it increased the risk rate on banks exposure to nbsp by 25 percentage points and raised the risk rate on consumer credit to 125%. On March 24 it directed IFL Finance to seize and desist from sanctioning gold loans. On 17th of October 2024 it barred four NBFCs namely Ashiwad Microfinance, Arohan BMI Finance and Navi Finserve from sanctioning and disbursing loans.
It appears that RBI is now comfortable with the efficacy of its control measures and on the 25th of February 2025, effective first 2025 it rolled back the additional risk rate on MBSP exposure and consumer credit and also have now lifted the ban on all NBSC as well in addition, two consecutive repo rate cuts announced should lower the borrowing cost and further spur MSME credit growth across our distribution network. Irrespective, we maintain during this period that the real driver of credit demand MSME financing remains fundamentally unaffected. Our performance today validates that conviction. Crucially, none of these interventions impeded the flow of credit to NSMEs.
We remain fully growth oriented, our distribution continued to perform well, we continued our investment in expanding our emerging market brand footprint and our liability partners continue to trust us evidenced by robust growth in our targeted segment. In FY25 we achieved disbursement of 7651 crores marking a 30% year on year increase. Notably in Q4 FY25 we saw our highest ever quarterly origination of 2,436 crore up 57% year on year and 16% quarter on quarter. The record was driven by our emerging market channel wherein Q4 disbursement SARS2,669 crores 230% up year on year. We added 85 new energy market branches in FY25 bringing our total to 235 and we are on track to reach 400 branches by March 2026.
Our embedded financing platform Myshublai also crossed an AUM of 743 crores as of March 2025 reflecting our commitment to innovation and diversification. As of March 2025 our total asset under management stood at 12,003 crores up 33% year on year and 8% quarter on quarter. Despite rapid growth we maintained stable asset quality GNPA at 2.3%, NNPA at 1.6% with a provisioning coverage ratio of 47% and collection efficiency at 95%. Our net total income for FY25 rose 27% year on year to 814 crores with quarter 4 net income of 231 crores a 14% year on year growth PAT for FY25 was 144 crore up 21% and Q4 PAT was 41 crore 24% year on year growth demonstrating our ability to scale profitably.
On the liability side, we mobilized over 1,500 crores in borrowing in Q4 taking total borrowings to 6,904 crore as of March 2025. Our cost of borrowing remains stable at 10.61% supported by a diversified lender base across banks, NBSCs, VFIs and the capital market. Looking ahead, we will continue to expand our emerging market portfolio targeting a rise from 22% to 32% to 35% of AEM in next six to eight quarters. While leveraging our technology driven underwriting, data analytics and multichannel approach, we remain committed to operational excellence, aiming for ongoing improvement in cost to income and return on assets without compromising asset quality or profitability.
In the result presentation, we have provided a fact sheet for analysts by each of our distribution channels which guides them on disbursement volumes, yield, targeted GNP and credit costs. This would help analysts and investors to clearly infer ubro’s deliverable in coming year. In closing, we thank you thank our dedicated team, partners and stakeholders for their unwavering support. Ugro Capital is well positioned to capitalize on the growing MSME credit opportunity and we remain steadfast in our mission to empower India’s small businesses with tailored high impact financial solutions. Thank you.
Questions and Answers:
operator
Thank you sir. We will now begin with the question and answer session. Anyone who wishes to ask a question may press N1 on their touchstone telephone. If you wish to remove yourself from the question queue, you may press N2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question comes from the line of Rushi, an individual investor. Please go ahead.
Rishi
Hello, am I able?
operator
Yes, please go ahead with your question.
Rishi
Yes. Hi Astanath, thank you very much for the update and congratulations on a great quarter. I have a few questions with regards. To the latest release from the management. With regards to the qip and if. You could give us some color around what the intention behind the qip, that would be great.
Shachindra Nath
Yeah. This resolution which has been approved by the board is nothing but a standing resolution every year in order to cap the market opportunity. If required, we pass an enabling resolution so that whenever there is an opportunity, we should be able to raise capital through aqic. It does not entail or give an indication that we are about to do a qip. If you look at our past track record and every time annually we can just renew this resolution.
Rishi
That’s perfect. So we are not looking at raising. Cash where the market is still not. Valuing us where we should be technically. At least based on what we think. The business is worth. Would that be right
Shachindra Nath
with respect to the qip that the resolution of QIP is an expanding resolution which means we renew with respect to the new capital. It depends upon our capital adequacy and growth and wherever we would definitely need capital for maintaining our capital adequacy, we will tap the market at that appropriate point of time.
Rishi
And how does. Tie in with the existing warrants? Like for example we do have warrants which expire by December this year and they are definitely at a premium to today’s market price. And the subscribers have already paid 25% if I’m not wrong. So I’m just wondering like if in. Your discussions with them have they shown. Intent to the warrant even if the. Market price by December is not there. Technically because at least I mean the volume that they will be getting cannot be bought in the market. So the market price is not really relevant for the warrant subscribers from what I see because it’s about 50% dilution. The price in the market has nothing to do with the warrant conversion price because with the current liquidity warrants if forfeited and bought in the market would probably increase the price 4x or 5x. Would that be correct to assume?
Shachindra Nath
Yeah. So in June 2023, UGRO did a raise of 1265 crore of total capital commitment of which around 1010 crores for warrant and balance was compulsory convertible debenture that was done at price of 265 rupees of the 1010 crores of warrants. Our existing investor which is Samina Capital which is a large fund out of Dubai, they committed roughly around 500 crores. There was another fund out of Singapore which is called Arjun. They put in around 210 crore of which 168 crore were warrant. And then we had bunch of Indian family offices which we have put balance of the warrant capital commitment.
We are in continuous dialogue with most of these investors. One investor sits on our board and they are quite comfortable with the growth and the numbers we have delivered and demonstrated. Obviously share price is not in our hand. That’s a broader market the way we look at it. At an appropriate time they will take the call on conversion of the warrant. We are quite hopeful that most of these investors would not like to lose their money and will convert warrant when the time would come. And companies also considering Maize and me to see that how the warrant holders get comfort and commit their capital to the company.
Rishi
Okay, thank you very much. I think that helps.
operator
Thank you. Participants, please restrict yourselves to two questions. If you have any more questions would request you to rejoin the queue. The next question comes from the line of Rishabh, an individual investor. Please go ahead.
Rishab
Congratulations on a very good set of numbers. So my question is regarding the emerging loan portfolio which we are currently growing. We’re doing a disbursement of around 600 crores in a quarter. So going forward what is our target of returns like ROA and ROE from this segment once the book matures? Like you said, you are going to add around 400 branches as on 31st March 2026 by March of this financial year. So what is our target of ROA and ROE by the time the book matures?
Shachindra Nath
I would recommend that you look at slide 21 of our presentation which is the forward guidance, forward looking guidance which we have given to investors. If you look at we have said that at right now the Exit for the Q4 was 669 crores. This was at a of around 230 odd locations which will grow to 400 locations. We expect so. Which means the average number of branches this year would be roughly around 325. And we expect the productivity per branch to come at 1.1 crore. The average portfolio yield would be at around 17.6% and the credit cost being 1%.
Currently the opex for this vertical is hovering around 8 to 9%. Just because so much of the OPEX has gone. But at the maturity of all the branches between productive the OPEX should come at around 4.5%. So the way to look at this Is at a 17.5% on average trade costs of 1% and opex of around. This will deliver a very strong positive ROI.
Rishab
Sir, even after the GNP GNPA reaching a level of around 4%. Since our collection efficiency is now around like 95%. So once the portfolio matures, see even after taking hit of around like 3.7 to 4% in GNP we will still achieve a ROA of 4% you’re saying.
Shachindra Nath
Sir, you have to look the GNPA and the credit cards are two very different spectrum. Given that most of these 90% most of loans are secured loans secured by mortgages. GNPA does not necessarily mean equal to credit cost. GNPA is a portfolio which crosses 90 plus days. And because this is secured loan, there is a very strong recovery which happens because we have an ability to take over the collateral and auction that. And that’s why we have guided for a credit cost of 1%. So GMP aside, what you should in ROH, what you take into account is credit cost, not the gmp sir.
Rishab
But in the terms of ltv what is our LTV in these loans? So if my asset is around like 1 crore, how much am I given. Loan based on that security
Shachindra Nath
average LTV for you grow overall it must be around 55 to 60%.
Rishab
Okay, thank you.
operator
Thank you. The next question comes from the line of Krishnan PS from HNI Investor. Please go ahead.
Krishnan PS
Thank you. Good evening. For the EGRU Capital management team, you had shared a roadmap for EGRU Capital for FY26. That’s a year from now that some of the key metrics like aem, that you will achieve the AEM of growth.
Shachindra Nath
Sorry, we can’t hear you. Well, sir, if you’re on speaker, if you can switch off the speaker and speak in the mic, please.
Krishnan PS
Okay, fine. Yes. Are you able to hear me better now? Are you able to hear me better?
operator
Yes, please.
Shachindra Nath
Not very clear, but we will try. Okay.
Krishnan PS
Okay. All right. Yeah. So we have shared a growth map for uber Capital for FY26. And some of the metrics included achieving an AUM of 20,000 crore at a 4% return on assets. If you can share an update as to where we are on this growth curve and what are the timelines for achieving this metric and what do you see are some of the stumbling blocks towards our goal of achieving a 4% return on equity?
Shachindra Nath
If I understand clearly your question, you are saying that we have already, you know, guided certain return on asset and certain growth plan. Where are we on that? Is that question?
Krishnan PS
Exactly. That’s right. Yes. Correct. Yes.
Shachindra Nath
Okay. Do you want to take that somehow?
Anuj Pandey
Okay, I’ll answer. So we have been giving a guidance on what is the roadmap from the current about 2 2.5% ROAS to 4% ROA in next few quarters. And the major assumptions which we had given on that was on four counts. The first one was an increase in portfolio yields by about 175 to 100 basis points, a decrease in OPEX to AEM ratio by about 50 basis points, a decrease in cost of borrowing by about 50 to 50 basis points and an increase in credit cost by about 50 basis points. And we can very quickly take you through on what all has happened on that and what the company has done so far on the first bit on the increase of the total portfolio yields.
The strategy which we are executing is to increase the contribution of emerging markets. When we started the year it was in early teens as a percentage around 15% contribution. Today it stands at 22% contribution. And by the time we complete the next 80 branches expansion, it will start. The overall emerging markets contribution is expected to stabilize at around 35% of our total AUM. Added to that, we also have now an embedded finance platform which is doing extremely well, which is at A much higher yield than our average portfolio yields. So we are very much on the path of increasing the total portfolio yields.
Yes it got a little delayed as per our original plan. But once our second leg of 80 branches gets completed then from where we are today we would be about 100 to 150 basis point higher then coming to cost of borrowing overall macros triggers are showing us and as Sachin told in his initial speech as well, the market rates are softening and we are expecting that because of that it will impact favorably in our cost of borrowings as well. Notwithstanding that with increased scale and with increased portfolio vintages there is a chance that our ratings also will be favorably upgraded by the time by next year.
As far as on our OPEX to AUM ratio is concerned we took a deliberate call and we have been explaining that over last two, three investor calls as well where we said that we will look into the future in meat for medium term to long term and expand our emerging markets as fast as possible. That’s why during last year we took the call of increasing the branches by from the current to 85 more branches. That is the reason why the OPEX in the emerging market vertical continues to be at an elevated level. But once the branches which we have opened last year they typically will get breakeven between nine to 12 months and the result of that will start showing next year.
As far as the credit cost is concerned we had estimated because the emerging markets contribution was going up and the overall seasoning of the portfolio also was happening. We had anticipated earlier as well that our credit cost will start stabilizing around 2%. We are still less than that but in coming years we think that it would be around 2% level. So in short the four broad strategic initiatives which we had in mind are well into execution and we are quite confident that we will start reaching the desired ROA levels of about 4% next one to one and a half years.
operator
Does that answer your question Krishan?
Krishnan PS
Oh yes, definitely. Thank you very much.
operator
Thank you. The next question comes from the line of Darushil Javeri from Crown Capital. Please go ahead.
Darshan Jhaveri
Hello. Good evening sir. Thank you so much for taking my question sir. Hopefully I’m audible. Hello.
Shachindra Nath
Yes you are.
Darshan Jhaveri
Yeah. Yeah. Hi sir. Hi sir. So sir, just I was going through. Your presentation and just wanted to know. On an average like what kind of. AUM growth can we expect? Because in some parts we want to. Increase it by 15 to 20% but. I think our business own, we want. To you know kind of reduce it. To Meet our secured unsecured, you know mix. So just wanted to know like how will our AUM growth be and you know, going forward what kind of a secured unsecured mix can we expect? Sir
Shachindra Nath
I thought from slide 19 to slide 23 we gave very clear, you know, guidance. So if you look at we have said that on the prime intermediate secured business our exit run rate for the quarter was around 300 crore which would go up by 20%. So 300 into 20%. There is a number then if you look at we said that our exit of business loan was 285 crore which will go down by 30%.
So 300 divided less by 30%. Then we said that 669 crore was the exit for our emerging market secured loan. That was at a base of roughly around 230 odd location. And we go to 400 locations. Average number of location comes to around 330 odd crore branches at 1.1 crore. That makes roughly around 350 crore a month. So that should give you the number. And we have said that our green and acid channel is 287 crores. You multiply by 20% that will give you the number. And on our digital we said that it will continue at the same level.
I think. So in those four slides if you take our guidance and multiply the percentage you will get the dispersion numbers.
Darshan Jhaveri
Fair enough sir. That’s helpful sir. And so just wanted to know like how do we see the market currently like on the ground is there a higher competition to you know, capture the customer and you know, how is the, you know, competition eating up and on the ground is there like you know the risk that was seen in MFI and everything. So how is the demand for like. A, you know, good asset, like a good stable asset. So I just wanted to know about that sir.
Shachindra Nath
So sir actually and I write this to all the analysts/ fund management community and investor community. NBSC and asset classes are not homogeneous by nature. What is happening in MFI is not necessarily, you know, get translated to a gold loan or a CV or an auto or a consumer financing basis. MFI customer base is completely different. It’s underwriting is different, origination is different. Consumer financing, personal loan is a different segment. CV commercial vehicle is a different segment. Gold loan is a different segment. So is msme. So there are multiple players in the market.
Some players when they call themselves MSME they are very close or adjacencies to MSME financing. So for example if an MSME financer which does a 3 lakh rupee ticket size and say we do a secured loan to an msme they are actually closer to a micro finance customer, the microfinance borrower between 1 lakh, you know, 75,000 to 1 lakh rupees and such. Microfinance borrower, when you know, start some business, think of a carpenter or you know, an individual worker, you know, he starts becoming some kind of a mason and you know, become agency. Our customers are business customers.
We focus customers which are in the turnover bank of 15 lakh to 15 crore. We focus prime customers which are 1 crore to 15 crore. We focus with business emerging market customer in tier 2, tier 3, tier 4 town which are between 15 lakh turnover. In most of the cases between 50 lakh turnover to 3 crore turnover. We have machinery pool customers which are all above 5 crore to 15 crore band. And we have embedded financing or merchant financing. These are retail trade customers which will be in the range of say 25 lakh to 30 lakh.
So our customers are business customer which have defined vintage, defined cash flow and are into business activity either retail trade or manufacturing. We continue to see very robust credit demand. We continue to see stability in the cash flow. We also continue. We have seen hello, hello, hello. Period of time. We realized that the cost of origination and OPEX and the time to build that portfolio was coming very expensive. And we had other opportunity across our portfolio and that’s why we said that rather than going in the lower grid of the corporates whose vendor we were financing from a double A to go to BBB minus we are better off to exit from that business.
So that is fundamentally very different than pure play MSME financing. Second would be a question of that lot of many players which are big one are all saying that they would get into MSME financing. Sir, cost of borrowing is the not only reason why people can do credit. Because by that logic in consumer financing business, in second and vehicle financing business, there are players in the market whose cost of borrowing is also fairly similar to what the market leader is. But they are not being able to do the consumer credit. It is a function of your distribution, it is function of your underwriting.
It is a function of selection of customer and the vintage for a particular business. We are of the firm opinion that NBFC credit is domain of people who deeply specialize for a segment of the market and then deliver outlier credit performance and distribution performance. Bigger and diversified players not necessarily have the motivation or the same domain that they can enter into the same segment. The point in case that almost every large MBSP and large bank in India want to and are doing co lending with us because they also recognize for the same time and effort our credit underwriting stacks up and they can take the advantage of their cost of borrowing by partnering with us.
And last but not least, please believe me, the MSME credit under penetration in India is 1 lakh crore. If every lender in the country, including all the banks, including the largest bank in India tomorrow decides to do only MSME credit then also each one of us would grow at the rate of at least 25% CAGR 1 lakh crore of credit gap fulfillment required roughly around 20 lakh crore of equity capital. That kind of capital is not available in the market at this point of time.
Darshan Jhaveri
Okay, my second question was any is there any development where you had petitioned RBI and government for a separate categorization of msme lenders among NBFCs so as to separate you from ordinary MBFCs and micro finance NBFCs? So are they going to any any development is there in on that front separate categorization of MSME lending NBFCs that
Shachindra Nath
we can petition anything to the RBI or RBI would definitely take our petition in cognitive There has been an industry wide effort, some of which we are also part of, to categorize priority sector lenders as a separate category as we have housing finance category as a separate category.
We have micro finance as a separate category. We you know there are, you know certain institutions, industry bodies which believe that creating a new lending category called priority sector lenders will increase the overall penetration of priority sector. You would have seen a recent report in Economic Times that overall private sector lending in India has gone down and private sector includes both MSME financing and non MSME financing. So there is some industry effort but I don’t think that there is any concrete thought process or action as of yet.
Darshan Jhaveri
One last final question important 1.
Shachindra Nath
I have been told by the optical that we can allow only two questions to accommodate everyone in the queue. Sir, I would sincerely request if you can come back in the queue I think we will definitely have an opportunity
Darshan Jhaveri
Corning percentage going down to 42%.
Shachindra Nath
Okay, since you asked this question we will quickly answer the co lending percentage has gone down purely because in the intervening period as I said in my opening remark, there was a general noise about the unsecured financing. Banks also got overwhelmed by thinking that RBI is telling them not to do unsecured financing. While our assessment is that RBI said unsecured financing with respect to consumer credit and personal loan that’s why certain banks stopped the unsecured or business loan on co lending side and that’s why the percentage dropped. But now it has all come back. Most of the banks have restarted that.
operator
Thank you sir. The next question comes from the line of Jaya Bhadwan, an individual investor. Please go ahead.
Jaya Bhadwan
Hello. Yes. Am I audible?
Shachindra Nath
Yes, you are.
Jaya Bhadwan
Yeah. Sukha, you mentioned that there is a huge credit gap in the industry. I wanted to understand that. Everyone is growing at 25, 50%. What is our USP in the sense. Are we just growing because the industry. Is growing or are we taking the market share from other companies? Or is that a point of concern right now?
Shachindra Nath
I don’t really understand what do you mean by whether we are growing or we are taking market share? We are taking.
Jaya Bhadwan
So yeah, I’ll elaborate. So let’s say what does the MSME look at in a lender while deciding who to choose? So are we. Do we have some special offerings? We are better because our credit underwriting is good. So we are likely to have lesser npl. But is there a specific reason why an MSME borrower will choose us over another lender? That is what I wanted to understand.
Shachindra Nath
Amit, you want to take this?
Amit Mande
Yes. So. So you’re right. There is. There is enough competition in the market across all segments. But however, growth and sustaining growth is a function of servicing the customer turnaround times and ability to be responsive to them whether it’s the customer or the channel. I think why we’ve been able to garner that market share that we have in the market today is essentially because of our ability to reach the customer at the right time and also give out decisions faster than the industry. You must have heard about our growth score earlier as well. And our ability to say no. Hello. Our ability to say a no. To. A customer if we are not interested in giving a loan. Our ability to say a no is within few minutes. Post that. Our ability to really focus on the customers that we want to and give them a better turnaround time than the market is really our usp. So I’ll kind of reiterate. One is being able to reach and service the customer better and also turn around their credit needs faster. That’s the USP that we work on.
Shachindra Nath
Yeah. Thank you for all those who are listening. If you go to Slide six, it’s a very interesting question that why a customer comes to us and why he doesn’t choose any other network? I don’t think so. The answer is that there are not enough lenders today. There are Definitely enough lenders for every type of customer. Sometimes it is that we are the first one to reach out. But if you look at four of our channels, first is what we call the prime intermediated customer. All of these customers, when we say intermediated means that these customers are linked or associated with a direct selling agent and they are very well established in the market.
The DSA, when he receives a loan request or a file brings to multiple lenders a file get logged in with at least 8, 10 lenders. Because the competition here is almost every large lender in the country including bank and large industry. Our moat here is our turnaround time. Because our machine can decide and given in principle in 60 minutes. All of our intermediated partner or DSA likes the fact that we can say yes and no very very quickly. So if we say no, they don’t waste time with us and they can take the file to some other lender.
So the investment which we have done in the machine and its ability to pull the GST banking and bureau and take an in principle decision very quickly is the mode. If you look at our emerging market and what tier 2, tier 3 channel again our deep distribution and physical credit underwriting and a templated approach. So here we do offer nine sector and 300 plus sector. For this channel we have templated credit underwriting method. So for a bakery, once a customer comes in, both our sales and credit need know exactly what they have to see and their ability to then turn around and not only say yes but how much they can do is the most.
So it’s largely physical outreach and distribution driven. If you look at our green plus asset financing, I’ll give you an example. In our green financing, because we do rooftop solar, none of the lenders in the market really understand that for an MSME financing, as long as the loan tenor can be equal and the EMI is equal to existing electricity bill, you cannot do green financing. And we automate that by looking at what the customer can pay and what is the longevity of the asset in the machinery. Because we are embedded now with 50 plus OEM, we know each machinery type, we know which machinery has what is residual life, what is the income this machine generates and ability to say quick yes is our mode.
If you look at our digital embedded financing, it’s a high prowess technology and data integration. So partners like Phonepe, Fino, Airtel, which have more than 30 crore plus merchants, when we embed in the merchant app of a Phonepay or a Fino, we can within minutes say yes for a very short Term financing. So it’s very unique and large platform designed to service every type of customer need in the defined timeline. And that’s the mode.
Jaya Bhadwan
Yeah. Thanks. One additional question regarding this tech stack. So we are servicing a particular sector. Or industries, let’s say where we have an understanding how the cash flows work. Are we expanding the number of sectors that we will cater to? Second is our time. Okay, so second part is. So is this a rule based engine. Or is it a constantly learning. So do we sit, analyze data and then come up with the next iteration of the growth score or is it a constantly evolving system?
Shachindra Nath
Anuj you want to take that.
Anuj Pandey
While. It is a constantly evolving system because it is based on machine learning but we come up with the new versions of growth score every 15 to 18 months. Because the growth score predicts a probability of default for the coming 12 months. It is only fair that we test the model for at least 12 months and then do changes. But learning and the insight keeps happening online.
Jaya Bhadwan
Okay, Correct. Got it. So it is a machine learning model but you give it time so that the book mature then you can make a decision as to whether it makes sense.
Anuj Pandey
Correct.
Jaya Bhadwan
Thank you. Thank you so much. Thank you.
operator
Thank you. The next question comes from the line of Heath Kimwat from IIFL Securities. Please go ahead.
Heath Kimwat
Yeah, hi sir, a couple of questions from my side. One is on the new draft co lending guidelines which have come in. So just wanted to know how does it impact the CLM2 model which is basically when you originate the loan and then maybe T plus 3 or T plus 5 days it goes into a co lending to banks. So does the new guidelines allow that or does this change. Can you give any color on like any other major change that would have been brought about by these new guidelines? That’s one.
And secondly on the state of Tamil Nadu we currently would be having around a 13% share on advanced. So with the government talking about restricting forced collections in the state and things like that. Any, any idea on how things are shaping up on the ground in the state of Tamil Nadu? Yeah, those are my questions.
Shachindra Nath
I’ll take your co ending question. I will request Mr. Anitmandeva. She’s very offset to take the second question. I think so. I would urge you to look at slide 48 of our presentation. We have given our understanding of the draft guideline. Summary answer is that we don’t think so that the option two which is appeal to direct assignment would no longer exist. But the good thing is that after all of you and analyst fraternity as well as the investor fraternity. One of the view that CO lending is not a permanent feature and it is fragile and it may stop at some point in time.
Contrary to that public opinion, RBI has actually broadened the scope of CO lending or CO origination in India. It has done few things. One, it has now created a unified framework for CO lending between two regulated entities. So it has broadened the scope of CO lending between banks and nbsp nbsp to nbsp banks to banks technically right. It has then broadened the scope of CO lending outside the priority sector. Because prior to this graph guidelines and when to become guidelines, a particular bank which wanted to do a CO lending outside the priority sector, it used to go to RBI and take a specific approval.
Now CO lending is available for all banks to banks, all NBST to NBSC and NBST to banks and it is also available to priority sector. In summary, what RBI is saying that the banks and large nbsp liability cost advantage can definitely be utilized to give the expand the market and give benefit to the end borrower number two, which is our long standing demand that while the CO lending option two was as cumbersome to start with, One of the biggest problems was that when you lend at 15% and you ask a bank to give you a rate of say 9% and you cannot provide any kind of credit support bank, you are very uncomfortable to say yes to a no because they were taking the risk on the balance sheet without the skin in the game for the balance 80% by the NBFC.
Now the default loss guarantee has been allowed uniformly as it is allowed in digital lending guidelines. Same has been now allowed into the CO lending format as well. What in turn it would do that banks while they give loans to nbsc, they would be very, very motivated to now expand their CO lending portfolio because technically they will see as a risk free origination. So for example, if you look at our CO lending volumes of business, if our average credit cost is around say 2%, if we provide a 3% of credit guarantee, banks would see this as a credit cost neutral or free CO origination and they would pass on that benefit in the end pricing.
Last but not least, operational efficiency. The option two of CO lending was a discretionary option which means banks could reject. Now in option one, when this format would become alive, banks are supposed to fund every customer and then you can create a platform wherein two, three banks also come together. So I think there is some little bit of initial hiccup making so that this could expand the market banks would draw massive comfort with the first loss cover being provided Technology today. So the multiple technology platform around six, seven months back we hosted all the public market investors.
We brought UB as the platform which does the CO lending intermediation platform. Technology is now enabled both types of CO lending. So today for example with SIGV we do option one and as well as option two. With bank of Baroda we have fully integrated on option one. With multiple banks we have both on option one and option two. Till date most of the banks have preferred option two. But now technology being there, FNDG being provided, the market size of CO lending in my view would now expand very very rapidly. And this you should see as a major liability line for NBSCs which are in a category to AA minus category.
Heath Kimwat
Got it. So but just want to follow up. So you said like some would be on CLM1, some on 2. So with this CLM2 completely ends and then everyone will have to shift to CLM1. That is the right understanding.
Shachindra Nath
Right understanding. That’s the, that’s the condition.
Heath Kimwat
So there could be. Yeah. And in that there could be some hiccups on the disbursement in the near term until this realigns
Shachindra Nath
probably a 60 day maximum.
Heath Kimwat
Got it, got it. And there’s a second question.
Shachindra Nath
Sorry, the.
Anuj Pandey
Second question was regarding the Tamil Nadu and the recent bill that’s got tabled. So one is that of course it’s just tabled and it is yet to pass. But if you look at the contents of the bill, largely there is an existing RBI code of conduct on collections which takes care of timings of call. How does the calling has to happen? What kind of, how much intensity is permitted on the collections call? I think largely what the bill is doing is reiterating those code of conduct. I also read an article where it said that this is largely directed towards the moneylenders and not the lenders.
All lenders, irrespective of whether it is Tamil Nadu or Maharashtra or anywhere in the country. We have to adhere to the code of conduct or the RBI’s code of conduct on collections. And all lenders including us are well within those codes. So this is not going to really impact any of the portfolio that we have. Secondly, there are provisions like surface which allow possession of property well defined and timelines also have been defined. We use those provisions that are available to us. So at this point of time we don’t think this is, this is, this is not detrimental.
In fact it is good for the consumer for where the Consumers face coercion from the local money lenders. That’s how we own this.
Shachindra Nath
By the way, Pending Entities Bill 2025 does not include nbsp so you can. So if this coverage are entities which are not regulated by rbi. The draft says very clearly the money lending entities such as unregulated individual lenders and digital platforms. But it does not. It does not override the RBI regulated entity.
Heath Kimwat
Yeah, right. So I get that. But then sometimes there’s some collateral damage if you see like even if it is not applicable to res. But yeah, I get the get the understanding is helpful. So thank you.
operator
Thank you. The next question comes from the line of Piyush Bhotra from GMO Payment Gateway India Private Limited. Please go ahead.
Piyush Bothra
Yeah, hi. Am I audible?
Shachindra Nath
You are audible. Thank you.
Piyush Bothra
Yeah. Hi. So there are recent market murmurs about. Some inorganic corporate action which might happen. Buyout or a merger or those sort of things. I would like to seek some clarification from the management.
Shachindra Nath
I would repeat what we have told the journalists as well. Because of its size, its availability of capital, we keep seeing multiple opportunities for you grow to acquire other entities. We keep evaluating them but as of today there is nothing which we can tell the market or disclose to the exchange. But obviously anything which comes and there is a lot of which are up for sale. There are entities which are going through trouble and you know, people keep showing us. But nothing which is actionable at this point in time, which I should tell you.
Piyush Bothra
Okay, thank you.
operator
Does that answer your question? Piyush?
Piyush Bothra
Yeah.
operator
Thank you.
Shachindra Nath
And you are? Never mind us. So don’t worry. You know, if you were to do something, we’ll come to you first. Don’t worry on that.
operator
Thank you, sir. A reminder to participants, please restrict yourselves to one question so that the management can address as many participants as possible. The next question comes from the line of Chetan Falak from Vihan. Please go ahead.
Chetan Falak
Hi Mr. Nathan. Team. Hi. Congrats on the consistent set of numbers. I just had one question about the high yield EM portfolio, the product. What kind of risk management are we doing on this? Especially in terms of affordability and any other color you can add on the risk management. Thank you.
Shachindra Nath
Anuj.
Anuj Pandey
Your voice was not fully clear. I’ll just save clarity. You’re talking about emerging markets.
Shachindra Nath
Yeah. On the market portfolio. What’s the risk? You know, how do we mitigate the risk and what is general done that. Okay.
Chetan Falak
And especially the affordability.
Anuj Pandey
So.
Chetan Falak
Sorry, I meant you know, what kind of metrics. Affordability metrics. Do we Monitor Given that, you know it’s a high yield portfolio. So what kind of customer affordability do we monitor?
Anuj Pandey
So in our emerging market vertical, we operate our branches in tier 2, tier 3, tier 4, tier 5 cities where the specific target segments are customers up to turnovers of 3 crores. Here when we started we gave loans up to 50 lakh ticket size collateralized by their self owned residential or commercial property. But with our experience in prime markets of giving slightly higher ticket size loans as well, last year we started experimenting with slightly higher ticket size also with great success. So overall from affordability perspective it is quite affordable because that market yields are in the range of 21 to 24%.
Our average yields in this segment last year were in the vicinity of about 20, 21% as we increased our ticket sizes there. In our fact sheet also we have projected the incremental yields to be around 18%. So it is very much affordable. These customer segments typically in tier 3, tier 4, tier 5 towns otherwise are taking loans from local market Sahu cars or very small NBFCs. So they welcome when a very large franchise like us comes up, comes and gives an offer which is quite certain and very transparent in nature.
Chetan Falak
Okay, so a follow up on that. So that’s relative affordability. Right. So in terms of absolute affordability of. The customer or the business provider, do. We have any graph on the cash flows of the business and whether they will be able to meet and meet in case of a slowdown?
Anuj Pandey
Yes, and it is a very very comprehensive scope which we have on that. So customers within the emerging market, customers whosever turnover is greater than 40 lakhs where GST is applicable, we take help of the GST Banking and Bureau like our prime and do a statistical cash flow analysis for customers who are slightly lower turnover. We do a very detailed personal discussion and our credit manager goes on the field and assesses the cash income which he generates through the templated models which we have for each subsector within the sector in those. So if he’s a small tiffin home then we have our own proprietary developed cash flow input statement.
If he has a small, if he’s a small contractual worker, then we have a difference. So we have about 50, 60 of such templated cash flow analyzers in place which we’d make use of. So each loan before it is sanctioned, we ascertain the cash flows and the customer’s ability to pay EMIs in time.
Chetan Falak
Okay, great. Thank you.
operator
Thank you. The next question comes from the line of Vivek Kumar from Best Trials llp please go ahead sir.
Vivek Kumar
Am I audible? Sir?
operator
Yes sir.
Vivek Kumar
My doubt is regarding the co lending thing. So how restrictive is it in terms of our future growth and how dependent on the new guidelines the option one has to be taken. How eager do you think banks will be in passing on the rates and or is it coordination and trying to get integrated? All these things do you think is more restrictive or this is actually better for us in the long run? So in terms of.
Shachindra Nath
Yeah, I did a detailed explanation to the IFL analyst. I will repeat in our view that co lending now in the draft guideline RBI has clearly indicated that code ending is here to stay in a bigger and broader format. They have formalized the co lending between nbsp to bank. They have also formalized co lending between nbsp to nbsp which means large nbsp which have cost of borrowing advantage would be free to do partnership with people like us in a regulated format. Number two, because now co lending first loss, cover or default guarantee has been allowed to be provided by people like us, banks will become more motivated to move into co lending because they will find this as a credit cost free kind of origination for themselves.
And third, with respect to operational hassle, as I said with most of the at least 34 of the technology platform fully evolved to do co lending in the format of option one, which is co origination or option two and as these two things would coincide we don’t think that would be a major challenge. Obviously when we sign up on the new format there will be initial hiccups which is operational hassle which is no different than when we onboard a new bank for co lending. But in summary we think so that the co lending market would expand at least three times in aggregate from where it is today.
Vivek Kumar
So the integration issues is not going to be taking a lot of time like.
Shachindra Nath
Platforms have the ability to do both format.
Vivek Kumar
Thank you Sir. And an ROE of 4% was like because you stopped giving this in the presentations now is it like you want to get back to it once you get more clarity or can you guide on how many years or how many quarters away that is?
Shachindra Nath
No, it’s not a question of that. We have stopped giving I think so what we what we found it to be more prudent. We are at it that finally in order to create value for all of our stakeholders, shareholders and generally we have to get to a 4% return on asset and targeted return on equity. But we thought it would be more prudent because market being very dynamic, our roi Roa Bridge consisted of four elements. Increase in portfolio yield, decrease in cost of borrowing, increase in credit cost and decrease in operational, you know, efficiency or, you know, improve in our operating, operating efficiency.
We thought that means other than just making that broad statement, we give product by product, you know, trajectory of how we will evolve. That’s why this year, this time at the year end presentation, we have guided by our channels and what we would do in each of the channels so that people can infer that where we are standing, we continue to be on the path. And I think that the target which we have given will be there in six to eight quarters.
Vivek Kumar
Thank you, sir. Thank you, sir. And all the best.
operator
Thank you. Ladies and gentlemen, the last question comes from Ramesh Chandrasekharan, an individual investor. Please go ahead.
Ramesh Chandrasekharan
Hi, am I audible?
operator
Yes. Please go ahead, Ramesh.
Ramesh Chandrasekharan
Yeah. So one, congratulations on the excellent set of results. This question largely is on the fundraise that you guys made in May where came with both warrants and a convertible debenture. We are hearing a certain changes in the way you’re doing warrants. Is it also applicable for the CCD or. It’s only for the warrants.
Shachindra Nath
So we are continuously in engagement with the people who have put capital through warrants and CCDs. We are trying to see that what is the best form. We are hopeful either the share price recovers so that the warrant holders don’t lose money and company gets in required capital or we are in discussion with alternative group.
I can only tell you this much that all of our warrant holders and some of especially you know, one of our investors, which is an investor who sits on our board along with other warrant holders are fully convinced with the Ugro’s business model, the growth it has delivered and that its performance is on track. So we are in continuous dialogue and their discussions on we’ll see how it evolves. There is nothing which I can report right now and I can tell you till the time we have an approval from our board and our shareholders. Just one follow up there.
Are you making a distinction between warrants and CCDs in this entire approach or you’re treating this on the same footing when you go back to your board? Thing is that we are in continuous dialogue. There is nothing which has been approved as of yet for which I can tell you on a public forum right now?
Ramesh Chandrasekharan
Okay, thank you.
operator
Thank you ladies and gentlemen. That brings us to the end of the question and answer session. I would now like to hand the conference over to the management for the Closing Comments.
Shachindra Nath
Thank you all of you for spending time with us going through our story quarter non quarter. We hope that as we have delivered very strong performance, the market would start appreciating the effort being done by the management. We hope to come back to you every quarter and give very transparent and open view about what we think about the market and what we think we are delivering. And thanks for spending time. If any one of you whose question has not been answered or whose query has not been addressed, we are more than happy to answer those questions or queries on bilateral basis.
Who is our senior economist and Head of Industrial Relations will be very happy to engage and answer those questions. Thank you so much for your time.
operator
Thank you sir. Ladies and gentlemen, on behalf of MK Global Financial Services, that concludes this conference. You may now disconnect your lines.