IIFLNSEQ1 FY23August 04, 2022

IIFL Finance Limited

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Management on call

Nirmal Jain

our Managing Director, Mr. Monu Ratra - CEO - IIFL - Home Finance, and Mr. N Venkatesh -

Key numbers — 40 extracted

75 basis point

environment as we all know, the global environment is turbulent, yesterday FED hiked the rate by 75 basis point which was a little aggressive, but maybe most people say this was much required or called for.

95%

s because these are the products where we are focusing for growth and now they account for almost 95% of our portfolio. Growth was 26% in terms of core loan AUM, and the pre provision operating profi

26%

where we are focusing for growth and now they account for almost 95% of our portfolio. Growth was 26% in terms of core loan AUM, and the pre provision operating profit was up 32%. We had high provisi

32%

ortfolio. Growth was 26% in terms of core loan AUM, and the pre provision operating profit was up 32%. We had high provision this time again, and the post provision profit before tax and profit after

24%

n this time again, and the post provision profit before tax and profit after tax were up by about 24%. So, the provision requirement was higher as we have restructured microfinance pool and in fact c

Rs.375 crore

e provision requirement was higher as we have restructured microfinance pool and in fact close to Rs.375 crores which was restructured earlier, came out of restructuring in last quarter, the payment would hav

Rs.100 crore

g some stress and we have been conservative, we provided for it aggressively. We have taken about Rs.100 crore additional provision in microfinance. But what is noteworthy this quarter is that NPA has started

3.2%

But what is noteworthy this quarter is that NPA has started falling and the GNPA number which was 3.2% at March end, even after following RBI stricter norms, which RBI has given some discretion till S

2.6%

to follow the norms that will come in force by September 2022. And with that our GNPA number was 2.6% for the entire book, NNPA or the net non-performing assets after provision for stage three was 1.

1.5%

6% for the entire book, NNPA or the net non-performing assets after provision for stage three was 1.5%, down from 1.8%, and the provision coverage ratio has improved and is now 137% as against 123% in

1.8%

book, NNPA or the net non-performing assets after provision for stage three was 1.5%, down from 1.8%, and the provision coverage ratio has improved and is now 137% as against 123% in the p

137%

or stage three was 1.5%, down from 1.8%, and the provision coverage ratio has improved and is now 137% as against 123% in the previous quarter. Our net gearing which if you net of the cash l

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Guidance — 20 items

Rajesh Rajak

opening

“With this, we aim to strengthen our offering, making our entire product range available to MSME customers.”

Nirmal Jain

“So, suppose restructuring is over as on 31st March, then your payment will become due sometime in the next quarter.”

Sukriti Jiwarajka

“No, just for the half that we don’t expect to come back, are we 100% provided there?”

Nirmal Jain

“We may need some more in the next quarter, I guess.”

Nirmal Jain

“In gold loan, in the last financial year, almost from September to March, people were actually quite irrational in terms of the interest rates that they were quoting, like 49 basis points per month and many of these players have cost of funds more than that, and they thought that they will get the customer and they will be able to raise the price when they default or whatever.”

Nirmal Jain

“Both the businesses, both the segments will grow.”

Amit Mantri

“So, what is the credit cost guidance for the full year that we have now, because last quarter you had given a credit cost guidance of 1.5% for this year.”

Amit Mantri

“So, as of now what is the guidance of full year?”

Nirmal Jain

“There are two things - one is the provision amount that we take, the MFI additional provision may come, it may taper off after a period of time, but it can continue in the next quarter.”

Nirmal Jain

“So, one quarter we have already seen, probably we will see some impact next quarter as well.”

Risks & concerns — 15 flagged

But the fact which very few people doubt is, that there is an imminent slowdown or recession in the developed world and particularly USA and Europe.

— Nirmal Jain

And there we are seeing some stress and we have been conservative, we provided for it aggressively.

— Nirmal Jain

Interest rate hike is always a worry for any lending institution, but as far as the concern for us, given our retail small ticket granular book and even home loans that we operate in affordable housing relative to the rest of the financial sector, we will have better capacity or better superior ability to pass on the interest rate hike, as long as in a reasonable band.

— Nirmal Jain

Just on the first point you mentioned the stress that you’re seeing in the restructured book is only the MFI restructured loans or the overall Rs.

— Sukriti Jiwarajka

So, the stress that we are seeing is predominantly in MFI.

— Nirmal Jain

And once you have defaulted for 90 days, then only it becomes GNPA or a stress asset.

— Nirmal Jain

See, what happens is the customer under normal circumstances not paying for say 90 or 180 days then you are right, that will become very difficult to collect.

— Nirmal Jain

See 50, 100 basis points price pass on in this industry is never difficult.

— Nirmal Jain

But what was challenge in the last one year was, that many players were coming with a teaser rate which were completely irrational below their cost and obviously, customers actually see this over six months, nine months that the rates that were promised to them when they took the loan, and actual is very different.

— Nirmal Jain

So, because the rest of the book is anyway we don’t take the risk on the asset?

— Amit Mantri

So, 60 to 90 days, it goes into a little lower and the 90 days would become even more difficult.

— Nirmal Jain

So, suppose you are giving home loan for 15 years, it is very difficult to borrow for 15 years in Indian market because in the market for long-term borrowing such long term tenure don’t exist for corporates or tenures are very low.

— Nirmal Jain

No, it’s difficult to give breakup of write offs and recovery but, some has been written off and there is some the recovery as well.

— Nirmal Jain

I joined late, maybe you may have answered this question, sir wanted to understand this decline in stage three book last time, we also had something which was classified as a deemed NPA, now has that subsided on to the stage three, or we have done away with it, sorry just wanted to understand what has happened?

— Akhil

So, it’s all put together what we’re seeing is the decline, so it was about a little over Rs 1074 crore last quarter.

— Nirmal Jain

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Q&A — 12 exchanges

Just on the first point you mentioned the stress that you’re seeing in the restructured book is only the MFI restructured loans or the overall Rs. 400 crores restructure that you reported last quarter?

Nirmal Jain

MFI was a large part of it and the other restructured book actually came out was relatively lesser. So, the stress that we are seeing is predominantly in MFI. Okay. No, because last quarter as of 31st March, the MFI restructured book was zero. So, suppose restructuring is over as on 31st March, then your payment will become due sometime in the next quarter. And once you have defaulted for 90 days, then only it becomes GNPA or a stress asset. So, all this will slip into NPA right? Not necessarily, because as they come out of restructuring some customers do pay, and some of them don’t pay or som

Sir my question is on the provisions front, so this quarter we have done almost 2.9% of the book on an annualized basis as provisions in microfinance,. So, what is the credit cost guidance for the full year that we have now, because last quarter you had given a credit cost guidance of 1.5% for this year. So, as of now what is the guidance of full year?

Nirmal Jain

Actually, what you’re saying is right, that the provision is higher than expected and almost like Rs.100 crore of additional provision in MFI so now it should be between 1.5% to 2% for the whole year. If you see now, the provision is around Rs.250 crores for the quarter on a 52,000- crore plus book and so full year we should be anywhere between 1.5% to 2%. This provision is on the own book, which is almost around Rs.33,000 - 34,000 crores. So, because the rest of the book is anyway we don’t take the risk on the asset? Yes, I stand corrected, what you are saying is right that the provision is o

Just couple of questions, firstly on few of your business segments like for example gold finance, how has been the competition intensity now and what has led to increase in yields on quarter- on-quarter basis?

Nirmal Jain

Competitive intensity is easing and the cutthroat prices, they are now going out of the market. So, what happened is that with these teasers schemes, we also sort of tried to follow the industry, but very quickly we withdrew them in the last quarter itself. We realized that even the volume growth is slower sometimes, and we have to sacrifice something, but we would rather be and as our tagline is “Seedhi Baat”, that we will be more transparent state forward to the customer that this is the interest rate, rather than saying something else and charging something else later on. And so, last quart

In Construction and real estate business last quarter, we had around stage two, stage three together around close to Rs.250 crore exposure this quarter this has come down drastically, can you please give up the breakup of write off and recovery in this?

Nirmal Jain

No, it’s difficult to give breakup of write offs and recovery but, some has been written off and there is some the recovery as well. And also there are new loans also in this. It’s not that we are settling it down but the new loans are from HFC for the approved project and of smaller amount so, it’s a mix of this and even the DCCO portfolio what we had has come down now. So, DCCO portfolio which last quarter was Rs.890 crore now down to almost Rs 490 crore. Understood. But the reduction would be largely like write off or would it be more or less recovery? Both. It’s a combination of both the t

So, in regard to that MTN dollar bonds, there’s a maturity later on in April. I believe somebody raised that question, I just want to make sure that I heard that right, that you guys intend to gradually pay it it off and don’t plan to extend that notes any further is that right?

Nirmal Jain

Yes, that’s right. So, we will be able to pay it off based on RBI guidelines, it is a little complicated formula by which is calculated how much you can buy back. But if you can have ECB which is external commercial borrowing dominated in dollars, you can use that money to buy back. So, at this point in time we don’t have any intention to renew the dollar bond because the cost is significantly higher than our borrowing cost locally. So, what we intend to do is that we’ll pay it off gradually, and whatever is balance we will pay it off on the maturity day. That’s what our current plans are, you

I have two questions. One is on the capital adequacy ratio calculation itself; it has decreased from 16% to 15.3% in March. And if you see your loan book and securitized book, you have to provide capital for securitized book and it also has barely grown. So, what explains the different capital adequacy and given the fact that we are doing co-lending would, gearing be a better ratio to look at your company, that’s question number one and question number two, is I heard Nirmal’s mark over the center of the economy, do you expect collection efficiency to go over 100% as going to the next quarter,

Nirmal Jain

So, collection efficiency technically if it goes above 100% then it will have to come down because it can’t be over 100% forever, because so the way they calculate is that their overdue amount and the due amount, and what you’re collected is the numerator, so it can be over 100% only for a short time period not for a longer time period. And only if it was lower, then it has to be bounced back to above 100% to catch up. And about your question about capital adequacy, Rajesh maybe you can explain. Yes, so Vivek, this capital adequacy is obviously for the standalone company. And in the standalone

I had two questions on the gold loan book. The first question is, what is your outlook on the gold loan book in the light of falling gold prices, the reason I’m asking this is because a lot of the larger gold companies seem to have derived their growth over the last four, five years from the change in prices of gold rather than tonnage. So, I just wanted to check how it’s going to impact us in the future if the trend continues?

Nirmal Jain

So, actually in India, the fall in the gold price has been lesser than the global because the duty has increased. But as the total prices continue to fall, obviously your ability to loan on the quantum of gold reduces. So, that will have a negative impact on the growth and the growth can slow down for the gold loan industry as a whole. We should be able to gain market share in the organized sector with our increased network of branches. But of course if the gold prices, what you are saying is right that the last two, three years and particularly 2021, the significant increase in gold loan asse

So, I just wanted to understand first of all, on your credit cost, now you mentioned about 2% of credit cost for this year, maybe 1.5% to 2%. So, even if I take the higher band of that 2%, so, we are looking at maybe Rs.750 crores?

Nirmal Jain

Around Rs.800 crores, book will also grow. Yes, assuming the 25% growth in book. So, Rs.250 crores we have already done so, we are left with Rs.160 crores kind of a credit cost per quarter Rs.160 to Rs.170 crores for the remaining three quarters in this year. So, ideally what we are saying is that from this quarter onwards, our credit costs should normalize is that the right interpretation? That’s what logically should happen, but nobody has a precise view of the future. So, this quarter onwards, next quarter, all these quarter we should see it going down. Provision should go down quarter-on-q

Sir just couple of questions, sir in the MFI book disbursements were quite slow last quarter. So, how is the disbursement picking up from July?

Nirmal Jain

So, actually, last quarter we were focusing lot more on setting up collection infrastructure and collection apparatus in place. So, this quarter onward, the disbursements will pick up. Sir how much would be the percentage? So, if you see microfinance disbursement last quarter we did Rs 1,374 crore vis-à-vis around Rs.2500 crore in the previous quarter. So, we should look at something like Rs.2000 cores as a normal number in the quarter. Okay. And sir on the employees expense, quarter-on-quarter the employee expenses increased drastically by 10%. So, is there any involvement of variable expense

Nirmal Jain

So, in the stage three we have taken some write offs and we also provided for it. And some resolutions have been done. So, it’s all put together what we’re seeing is the decline, so it was about a little over Rs 1074 crore last quarter. No, last time if I combine your normal stage three and stage three including the deemed NPA, it was closer to Rs 1,857 crore, which has now come down. No, it was Rs.1074 crore. If you see the slide so there is Rs. 1,074 crore which includes Rs.783 crores. So, there’s a little bit of decline 10% to 15% this quarter. Got it sir. Sir last piece on the construction

I just want to understand you said that you’re looking at AUM growth of around 25% odd. So, I want to understand where the growth will come from because with the drop in the prices of the gold, AUM growth will be very difficult to come there. And on the MFI portfolio, also the growth will not be that significant, so large part of growth, if AUM has to grow by 25%, home loans will have to grow at a much higher rate. So, do you foresee that high growth is possible there, what will drive this?

Nirmal Jain

First gold loan will grow maybe at a slower pace in case gold prices continue to fall or fall significantly. So, there are two assumptions here, first of all, the gold prices will fall, but we don’t know about it. And even if gold prices fall then we may grow slower, as the tonnage growth will grow at least 12% to 15%. So, that is one, secondly home loan will of course grow, but even microfinance now will start growing because, as I said the disbursement in the first quarter was lower as we are focusing more on collection but the industry is growing and microfinance also we should see good gro

Thank you, everybody for being in the conference. And in case you have any more queries or any questions, you can always reach out to our Investor Relations or CFOs department. Thank you and have a good day. Thank you.

Management

Speaking time

Nirmal Jain

Sukriti Jiwarajka

Moderator

Saptarshi Chatterjee

Harsh Shah

Amit Mantri

Deepak Poddar

Mudita Nahar

Rajesh Rajak

Akhil

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Opening remarks

Rajesh Rajak

Good afternoon everyone. On behalf of team IIFL Finance, I thank all of you for joining us on this call. I am Rajesh Rajak – Chief Financial Officer. I am accompanied by Mr. Nirmal Jain – our Managing Director, Mr. Monu Ratra - CEO - IIFL - Home Finance, and Mr. N Venkatesh - CEO - IIFL - Samasta Finance. I will now hand over to our Managing Director Mr. Nirmal Jain to comment on the economy and the group’s overall strategy and plan. Over to you sir.

Nirmal Jain

Thank you Rajesh. Good afternoon and welcome to the analyst call. So, macro environment as we all know, the global environment is turbulent, yesterday FED hiked the rate by 75 basis point which was a little aggressive, but maybe most people say this was much required or called for. Market rallied maybe for a variety of reasons. But the fact which very few people doubt is, that there is an imminent slowdown or recession in the developed world and particularly USA and Europe. So, the global backdrop is worrisome. But in that backdrop, if you see India then the underlying momentum in the economy is very strong. So, if you look at all the headline numbers of GST collections, the consumption demand or auto sector, at the same time, there are recovery signs in the rural economy as well. And also this is corroborated by earnings particularly of banking and financial sector, IT sector as well as capital goods. So, India seems to be a sweet spot in this global economy. And coming to NBFC sector

Rajesh Rajak

Thank you, Mr. Jain. So, in line with the momentum of the previous quarters, our profit continued to grow, the profit after tax for the quarter was highest ever at Rs.330 crores, which is up 24% on a year-on-year basis and 3% sequentially. The major drivers being the volume growth of 22% in AUM and the higher non-fund base income. The PPOP was at Rs.674 crores, up 32% on a year-on-year basis and 1% sequentially. Our loan book structure is such that 95% of our loans are retail in nature and 67% of our retail loans are PSL compliant with the exclusion of gold loans which are not classified as PSL loans, but we have other benefit for banks in terms of capital charges. This is in line with a capital optimization strategy that 39% of our AUM is either assigned, securitize or under the co-lending model, the same number for the previous year for the same period 34%. Since April 21 till June 22, that is a period of 15 months we have added almost 11,000 employees and over 1000 branches. This ha

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