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Edited Transcript of MUTHOOTFIN.NSE earnings conference call or presentation 13-Nov-19 11:30am GMT

Q2 2020 Muthoot Finance Ltd Earnings Call

KOCHI Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Muthoot Finance Ltd earnings conference call or presentation Wednesday, November 13, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* George Alexander Muthoot

Muthoot Finance Limited - MD & Whole Time Director

* Oommen K. Mammen

Muthoot Finance Limited - CFO

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Conference Call Participants

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* Anirvan Sarkar;Principal Asset Management Private Limited

* Bhavik Dave;Nippon India Mutual Fund

* Christine Rowley

Sloane Robinson LLP - Partner

* Deepak Agrawal;Impetus Advisors

* Digant Haria

Antique Stockbroking Ltd., Research Division - Assistant VP, Equity Research

* K. SivaKumar

Unifi Capital Pvt. Ltd. - Assistant VP & Fund Manager

* Kunal Shah

Edelweiss Securities Ltd., Research Division - Associate Director

* Nirmal Bari

Sameeksha Capital Private Limited - Equity Research Analyst

* Nischint Chawathe

Kotak Securities (Institutional Equities) - Senior Analyst

* Roshan Chutkey

ICICI Prudential Asset Management Company Limited - Associate VP and Analyst

* Shubhranshu Mishra

BOB Capital Markets Limited, Research Division - Analyst

* Utsav Gogirwar

Investec Bank plc, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to Muthoot Finance Limited Q2 FY '20 Earnings Conference Call hosted by Antique Stock Broking Ltd. We have with us today the management from Muthoot Finance Limited represented by Mr. George Alexander, Managing Director of Muthoot Finance; and Mr. Oommen K. Mammen, Chief Financial Officer.

(Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Digant Haria from Antique Stock Broking Ltd. Thank you, and over to you, sir.

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Digant Haria, Antique Stockbroking Ltd., Research Division - Assistant VP, Equity Research [2]

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Hi. Good evening to all of you. And apologies for this 15-minute delay. It was an eventful quarter in terms of the gold price hike, the liquidity tightness, the Kerala strike and the tax rate changes, so without spending any more time, I will hand over to Mr. George Alexander Muthoot who is the MD for opening remarks, and then we can take Q&A. Over to you, sir.

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [3]

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Thank you, and good evening. This is George Alexander Muthoot, Managing Director of the company. I have with me our CFO, Mr. Oommen Mammen; and also our VGM, Finance, Ms. Shanthi. So the results this quarter has been encouraging. The consolidated loan assets under management has increased by 13% year-on-year and today stands at INR 40,319 crores for the half year ended. And the consolidated profit after tax increased by 42% year-on-year and stands at INR 1,472 crores for this half year.

Similarly, the standalone loan assets under management increased by 11% year-on-year and now stands at INR 35,731 crores for this financial year -- half year. And the standalone profit after tax has again increased by 42% year-on-year and stands at INR 1,388 crores. The branch network, including the subsidiaries, have increased to a force of 5,190. And the contribution from Muthoot Finance as a company in the gross loan assets under management is 93%. And contribution to the consolidated profits from the Muthoot Finance is 97%. The standalone results of Muthoot Finance and subsidiaries, yes, that I told you, Muthoot's Homefin subsidiary has increased its loan portfolio to INR 2,098 crores as against INR 1,775 crores, year-on-year increase of 18%.

During the quarter and the quarter-on-quarter, the loan portfolio increased by INR 110 crores, showing a quarter-on-quarter growth of 6%. And the total revenue has also increased and stood at INR 91 crores and INR 150 crores as we gave the previous total of INR 55 crores and INR 104 crores.

Belstar Microfinance has registered a subsidiary of the company, where Muthoot holds 70% of the company. It grew its loan portfolio to INR 2,107 crores as against the last year's similar year-on-year outstanding of INR 1,381 crores, showing an increase of 53%.

During this quarter, the loan portfolio increased by INR 169 crores. It achieved a profit after tax of INR 28 crores and INR 51 crores, in quarter 2 of INR 28 crores and for the full half year, INR 51 crores as against the previous tax in previous year's profit of INR 16 crores and INR 29 crores.

Muthoot Insurance Brokers have been registered direct broker, so doing insurance products. It's a wholly owned subsidiary, generated a total premium collection of INR 71 crores and INR 132 crores for the quarter and half year fully. And it generated a profit after tax of INR 4 crores and INR 7 crores, INR 4 crores for this quarter and INR 7 crores for the half year. After this, INR 4 crores and INR 6 crores.

The Sri Lankan subsidiary, where Muthoot holds a 72% stake, increased its loan portfolio to LKR 1,340 rupees as against last year's INR 1,124 crores, has a year-on-year increase of 17%. It generated a profit after tax of INR 3 crores -- LKR 3 rupees as against the previous year's profit of INR 2 crores.

Muthoot Money Ltd. became a wholly owned subsidiary of Muthoot Finance in October 2018. It's an NBFC and deals in extending loans for vehicles. And operations are now centered in Kerala and Andhra Pradesh. The company has started extending loans for commercial vehicles, equipments, costs and also started 2 winters now, both in the used as well as in the new vehicle sectors. It has increased its loan portfolio to INR 426 crores during this half year -- quarter end, and a natural increase. The revenue has increased from -- stood at INR 13 crores and INR 31 crores.

Okay. Just during the quarter, the company got rated by 3 international credit rating agencies: Fitch, again, a rating of BB+, Stable; S&P Global, again, BB, Stable; and Moody's Investors, also BA2, Stable, which is equal to BB of the other companies.

In October 2019, the company raised USD 450 million through issuance of 6.12% senior secured notes, making the first private sector NBFC to make a debut issue under 144,000 KRE, a rigorous move. I think all the other things are also there, total income, share, et cetera, brands and return and return on average assets, loan assets, et cetera. The capital adequacy stood at INR 27.11 crores, and the share capital and reserves stood at INR 10,599 crores.

The goal in -- the credit -- the goal in our outstanding for this half year is INR 34,942 crores as against last year's INR 32,037 crores. The credit losses for this half year is INR 17 crores as against INR 5 crores in the last -- in the corresponding last year of -- corresponding period of -- half year of last year. The percentage of credit loss on growth, loan assets under management, is 0.046%.

We have also done -- during October, the company successfully completed its 21st public issue of nonconvertible debentures, raising INR 459 crores.

I think I will stop there and hand over this time to the investors to ask their questions or their clarifications. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Shubhranshu Mishra. Please go ahead.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [2]

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My first question was with regards to your note and your result that you put out. We have now -- we now have an investment in a Nepalese financial company as well, is that correct?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [3]

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Thank you. Okay, Shubhranshu, we didn't understand.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [4]

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Sir, do we have a financial investment in a Nepalese financial company as well. That's in one of your notes in the notes to accounts.

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [5]

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Yes. Yes, yes. We have a INR 34-crore investment in a Nepalese company. That has been done 2 years -- 1 year back.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [6]

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So what was the plan over there, sir, and why are we venturing into other geographies? Like Sri Lanka is not a substantial part of our AUM or bottom line. And what is the game plan here if we want to make this a subsidiary, if that is the game plan? And how do we look at this particular subsidiary, if it becomes a subsidiary, that is?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [7]

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So it is not a subsidiary. We have just invested 20% in this company. But that company wants to do a gold loan business. We are not doing gold loan business today, so they wanted the expertise of Muthoot Finance to start gold loan in their portfolio. That is why we have joined them. They have started doing gold loans now, sir. We are helping them in that.

Probably, going forward, if there are private stakes in the -- inside the company also doing well, we are comfortable, we can increase that stake also. But again, from -- the idea is to start gold loan business there.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [8]

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But sir, don't we have enough scope in India? Why are we going to Nepal, sir?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [9]

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No. We should -- there is scope everywhere, but we should go to Nepal also. Why not? Why not?

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [10]

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And what do we think of the bottom line from the Nepalese investments, sir?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [11]

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No. Really, it's convenient. You know what, it may take 2, 3 years for it to stabilize its gold loan portfolio and maybe bring in profits for the company as well. It should definitely do good.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [12]

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Sure. Sir, my next question is with regards to your interest payment. What proportion of loans are on monthly payment/quarterly payment? And what proportion of AUM is on a bullet payment?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [13]

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All our AUMs are on a bullet payment of 1 year, but customers have the option of paying monthly or quarterly according to their convenience. All at bullet payment of 1 year.

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Operator [14]

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(Operator Instructions) The next question is from the line of SivaKumar from Unifi Capital.

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K. SivaKumar, Unifi Capital Pvt. Ltd. - Assistant VP & Fund Manager [15]

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Sir, can you comment on the sluggishness in the loan growth for gold loans? And what is the way forward for the rest of the year?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [16]

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In the last quarter, our loan growth has been muted -- rather, it was flat because -- mainly because of the problems in the NBFC sector with regards to funding, et cetera. Now things are behind us. And as we are speaking, we have already grown by INR 1,300 crores in this 1.5 months itself. So we are now -- to both your questions: one, the reason for that was the NBFC issues and the funding issues; the second is, going forward, we are sure of doing much better in these last 2 quarters.

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K. SivaKumar, Unifi Capital Pvt. Ltd. - Assistant VP & Fund Manager [17]

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Right. Sir, my second question is with regards to the yield. We see that the yield has racked up to almost 23%. Are there any one-offs in that? How should we look at it? Is it a sustainable yield?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [18]

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No. But in the last quarter, we have been able to recover quite a lot of our old loans at NPAs. We gave little onetime settlement schemes also with the offering. But the state, we were able to offer much lesser interest concessions. So always, when all the loans get leased, the yield is much higher, 23%, 24%, 25%. So this kind of proportion of that was higher, and that was the reason we got so. And to your question, we should see it as a one-off.

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K. SivaKumar, Unifi Capital Pvt. Ltd. - Assistant VP & Fund Manager [19]

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Sir, and you have recently raised foreign borrowings at about the 6.125%. Have you hedged that particular borrowing?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [20]

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Sorry. Come again?

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K. SivaKumar, Unifi Capital Pvt. Ltd. - Assistant VP & Fund Manager [21]

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At the regional, taking costs associated with that. That's what they wanted to.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [22]

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Yes. So those then, those will be outgoing on a fully hedged basis. There is an additional cost, so the reason why we went for this borrowing is not from a cost perspective. From -- if you look at it from a cost perspective, it doesn't come cheap. It is costlier than the normalcy borrowings. But no, it is a new source of funding and it is a diversification. And most certainly, when you do this funding, you need to get the rating from international credit rating agencies. And you are getting a new set of investors.

From a long-term perspective, we have locked -- looked at this borrowing opportunity. So that is the reason why we have it for this ECB borrowing.

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [23]

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It is fully hedged more than the secular investors' hedge.

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K. SivaKumar, Unifi Capital Pvt. Ltd. - Assistant VP & Fund Manager [24]

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What will be the full cost, sir? Including hedging, how much will it cost you?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [25]

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So no, it will be much higher than the domestic borrowings. That's all I can say now.

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K. SivaKumar, Unifi Capital Pvt. Ltd. - Assistant VP & Fund Manager [26]

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Got it. Sir, and are you revising your AUM growth estimates for FY '20?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [27]

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So we are not providing -- no, we haven't guided 15% growth, so that -- with regards...

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [28]

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It still holds good.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [29]

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It holds good.

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K. SivaKumar, Unifi Capital Pvt. Ltd. - Assistant VP & Fund Manager [30]

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15% possible on AUM? Is that correct, sir? 15% for the gold loan either?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [31]

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Yes. Yes.

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Operator [32]

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The next question is from the line of Christine Rowley from Sloane Robinson.

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Christine Rowley, Sloane Robinson LLP - Partner [33]

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And congratulations on the good results. I just wanted to...

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Operator [34]

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Christine, sorry to cut you off. Can you please speak a bit louder?

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Christine Rowley, Sloane Robinson LLP - Partner [35]

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I'm sorry. I just want -- and congratulations on the excellent result. I just wanted to return back to the previous question relating to Slide 28, the interest income on average loan assets at 23.6%. You indicated that you had a boost from various interest concessions on recovering some old NPAs. In the absence of that kind of one-off boost to interest income on average loan assets, what sort of -- what would be a normal interest income on average loan assets for you to have achieved this quarter without that benefit?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [36]

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So the interest collection is probably could be higher. Currently, it's higher by about INR 200 crores for the quarter, approximately.

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Christine Rowley, Sloane Robinson LLP - Partner [37]

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So the benefit from that was about INR 200 crores above and beyond what you would normally have seen from interest collections during the quarter.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [38]

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Yes. INR 200 crores could be treated as maybe a one-off kind of collection.

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Christine Rowley, Sloane Robinson LLP - Partner [39]

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Okay. My second question is -- thank you for the insights on how loan growth is trending in the quarter to date. You mentioned also that the NBFC crisis, at least as far as Muthoot Finance is concerned, is in the past, not that the company was over -- very directly affected. But I wondered if you could provide us with some insight on how your interest expense on average outside liabilities is tracking this quarter. We see a small increase in the quarter ending in the second quarter, but I wondered if you might be able to share how the interest expense on average outside liabilities is tracking quarter-to-date, please?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [40]

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So for the first quarter, our interest expense for outside liabilities was 9.17%. For second quarter, it is 9.3%. For the half year, it is around 9.26%.

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Christine Rowley, Sloane Robinson LLP - Partner [41]

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Yes. And how is it tracking in the current quarter? How are things -- are you experiencing a drop in your funding cost for outside liabilities?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [42]

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I think it will trend, I know, and move closer to 9.5%.

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Christine Rowley, Sloane Robinson LLP - Partner [43]

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Okay. So you expect it to increase further because of the foreign exchange borrowing?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [44]

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Yes -- not really because of the foreign exchange. Even the domestic rates have not come down because all the lenders are adding NBFC risk premium for all indices other than the play-rated companies. So we are not an exception to that. So we are also paying a higher interest cost nowadays. Of course, the advantage for us is the past long-term borrowings we have raised in far too many NCDs, which is keeping our borrowing cost at a lower rate. And also, on commercial paper, we are able to borrow at a very low rate.

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Christine Rowley, Sloane Robinson LLP - Partner [45]

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Last question. Was the company proactive in terms of slowing loan growth this quarter relative to demand for loans because you were concerned about the NBFC financing situation? Or did the company experience weakness in gold loan demand from your customer because economic growth has obviously been slowing very dramatically in India? Is it a demand problem or a supply problem?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [46]

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So Christine, if you look at the first quarter, we have -- we had grown by about INR 1,500 crores. That growth was primarily funded through our expedition that's happened in March and June.

Now in the second quarter, we wanted to grow at a particular pace, but the resource rating was not commensurate with the growth requirements. Hence, we were working mostly towards raising resources. If you look at it now, we have raised the USD 450 million through ECB, and we have also raised by about INR 460 crores through the domestic entities in October.

So at the end of the day, for us, money is a raw material. Unless we raise resources, it is very difficult to grow. So it is not from a demand perspective. It is more from a resource constrained to meet the growth, not a -- but let me clarify, it's not a liquidity crisis, it is more the funding determined to meet the growth.

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Operator [47]

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(Operator Instructions) The next question is from the line of Kunal Shah from Edelweiss.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [48]

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Yes. This is Kunal over here. So firstly, in terms of this INR 200-odd crores, if I look at one interesting delta point, which is there with respect to the disbursements and the repayment monthly trend which you have disclosed in this quarter, I think the overall delta, which has been there in this quarter, is to the extent of like 7 million to 8 billion-odd because 60 billion is more kind of a normalized run rate of repayments.

So if I have to look at it in terms of a monthly 7-odd billion quarterly, maybe 21 billion, which is INR 2,100 crores, so would it be fair to assume that this INR 200 crores is on 2,000 now because that seems to be much on the higher side, almost like 10-odd percent? Otherwise, I think 60-odd billion is a normalized run rate, and this will occur every quarter.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [49]

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So the INR 200 crores, which I was just comparing in the first quarter, so the differential is that, now, that would be the incremental. Of course, I know it's not an exact number. I know there's a difference between the first quarter interest collection and the second quarter interest collection.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [50]

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Also, how should we look at it in terms of the trend? So maybe if this continues to be like the average monthly collection still continues to be like 70-odd billion or 69-odd billion, would we see the incremental? So was it like this quarter phenomena that we have started off in this quarter? So -- or maybe it should be more or less factored in this quarter and we should not expect it in the second half.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [51]

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I think we should, going forward, next month, we should expect about 21% average yield.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [52]

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21% average yield.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [53]

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Yes.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [54]

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Okay. And secondly, in terms of the update on Kerala. So last time, we highlighted that out of 608-odd branches, we are looking at closure of, say, 43. And maybe if you would give some sense in terms of the rundown in that portfolio and the proportion in the average monthly disbursement and the collection, particularly from Kerala. So if we look at it in terms of 68 billion and 69 billion of disbursements in collection, how much is flowing from Kerala? And what are the plans in terms of the shutdown of the branches out there?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [55]

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So Kerala contributes 3.4% of our total portfolio, Kerala as a whole. 42 branches -- Understood? The 42 branches which we are planning to close, the AUM there is INR 100 crores, which is gradually running down. By the time we close it, it should come down to almost negligible numbers. But the total portfolio, which will come down, we are already making up for that through the other states.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [56]

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Okay. So now it is almost INR 1,200-odd crores kind of a Kerala portfolio, which, last time, you highlighted to be roundabout INR 1,600-odd crores. Is that the right assumption?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [57]

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Almost correct. Not exact, but almost correct. Yes.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [58]

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Okay. And then maybe in terms of the collections, so is the incremental delta in the collections particularly from the Kerala or more or less in general across -- it's largely depending there now?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [59]

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What is this delta you're speaking? I don't understand it. Delta?

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [60]

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Because if you look -- no. Because if you look at the collection trend, that's quite high. Normally, it's like, say, 56, 60. Okay, this particular quarter, I think it's gone up to almost 69. So -- and that's where we have seen more or less flattish.

So in terms of the chart which is there on Slide #24, okay, if you look at the average monthly collection in FY '19, it's 58. Maybe when you look at it in Q1, it is 60. And all of a sudden, in this particular quarter, it's gone up to 69. So I'm just not able to get the sense as to why there is such a rise in the collection. Is it more of the recovery effort? Is it related to the Kerala portfolio? What is leading to this?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [61]

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What is there in Kerala, I don't understand. If you look at the whole chart graph because it started from 43 and now it is 68, I don't know what is there. Every quarter, it's increased in that city.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [62]

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And so the area of collection is still going up, and that one particular quarter, it seems to be slightly on the higher side. So just trying to get some sense out of it.

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [63]

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I think the sense is that every -- we were able to collect quite a lot of them because we were both concentrating on not concentrating much on disposal. We have more time for collection. So we -- our collections were better. And all this, all the loans where the interest component there is very high, we collected that. That is one of the reasons.

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Kunal Shah, Edelweiss Securities Ltd., Research Division - Associate Director [64]

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Okay. Okay. And again, maybe in terms of GMP, as it's slightly up despite relatively better collections, so it's moved up another 23-odd basis points this quarter sequentially after this kind of a collection and even a higher write-off of INR 140 crores -- maybe almost like INR 1,400 crores?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [65]

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GMP is not an old GMP. It's a new one, which have -- so those loans which have completed more than 15 months in this quarter comes as GMP. The old ones are already out of our books, which is not that the GMP of last quarter is carried out to the next quarter. The GMP of the previous quarter is fully out by the time the next quarter comes, a new GMP comes out. So understand, the proportion of loans which are following the 15-plus months would have been higher. That is why the GMP is higher, not because of the carryover. There's no carryover.

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Operator [66]

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The next question is from the line of Nirmal Bari from Sameeksha Capital.

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [67]

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My first question is...

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Operator [68]

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Nirmal, sorry to cut you, can you please speak a bit louder?

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [69]

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Yes. Is it better now?

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Operator [70]

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Yes.

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [71]

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Yes. So my first question is, is there -- was there some auction during the current quarter?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [72]

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Sorry, come again?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [73]

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Auction.

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [74]

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Auctions about INR 58 crores.

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [75]

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That's INR 58 crores. So the rest of the collection effort that we are seeing, that actually came from collecting from the customers and not selling off gold?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [76]

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Yes. It is exactly the point which we are trying to convey. So because of the higher prices, there is a better recovery, if possible. No other with some portion of or maybe another portion of that onetime auction. Normally, our auction is about INR 0.350 crores to INR 500 crores, which we were able to manage without doing an auction.

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [77]

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Okay. But -- and then the gold assets, and that is gold with recaptured security, that has come down by about 4 items during the quarter. So what was the reason for this? Was it because we were not focusing on diversifying, and that this portfolio and these customers went away from us to some other people or...

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Oommen K. Mammen, Muthoot Finance Limited - CFO [78]

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No. That is because the gold prices have gone up and now that the gold price goes up, now our lending rate is per gram, our lend rate per gram of gold also goes up. It means that no customer needs to place a low quantity for gold, which tends to bring down the gold holding.

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Nirmal Bari, Sameeksha Capital Private Limited - Equity Research Analyst [79]

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Yes. But for a given loan sale, once the gold prices goes up, is there an option with the customer that we can release some part of the gold and take it away?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [80]

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Well, it's always possible, if we otherwise only can pay a part of it and more than take back a part of the gold.

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Operator [81]

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The next question is from the line of Roshan Chutkey from ICICI Prudential.

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited - Associate VP and Analyst [82]

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Sir, where are you experiencing the GMP? Is there any particular geography then you are experiencing the GMP?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [83]

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No. Please don't consider GMP as gold loan companies at all. GMP is just a -- NOLs which just crossed the 13 months -- 15 months, and we are giving a little more time to the customer to take the gold. That's it. That's all. It is not a nonperforming effect. We don't lose any money on the GMPs. We have never lost any money. We will never lose any money in the future also. We get -- most of the -- we will get the full principle and most of the industrials, sir. So GMP is just a deductible being given extra time, 2, 3 months to release the gold, that's it.

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited - Associate VP and Analyst [84]

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Sure. And in terms of the excess collection this time around, is it prepayment? What is our understanding?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [85]

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Prepayment? It's not that. All loans are given for 12 months and the customers are free to repay the loan at any point-of-sale without any penalty. There is no penalty. So that is not -- there is no prepayment in the collection. They can repay the daily sales, no prepayment charges, et cetera. So I'll be repeating thus. Collections we get only on loans which have cost about 9 months, 10 months, 12 months, 13 months, 14 months. That is where we get much more industry. We get fees with collecting and thus also...

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited - Associate VP and Analyst [86]

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But why are we seeing excess repayments coming out? Maybe because we have increased the lease? What is the reason? And if you can just comment a little bit on it, please?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [87]

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You collect the -- you can charge just after 12 months. You, in a personal loan, collect payment charges. It is known, common with the interest rate. And on NPAs, you derecognize your interest income and costing when it's collected. Now you recognize those interests.

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited - Associate VP and Analyst [88]

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Right. So there's 2 -- so after INR 200 crores, how much is penal charges?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [89]

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I don't have the makeup of that idea and approximate number for interest collection.

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited - Associate VP and Analyst [90]

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Sure. And just a quick question on this borrowing that was going through the ECB route. Why are we doing it through the ECB route if we can see it higher than our domestic expenses?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [91]

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Because I still feel soft giving this money.

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Roshan Chutkey, ICICI Prudential Asset Management Company Limited - Associate VP and Analyst [92]

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That at most, you can reconcile again...

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [93]

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Really, I was given all these.

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Operator [94]

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The next question is from the line of Anirvan Sarkar from Principal Mutual Fund.

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Anirvan Sarkar;Principal Asset Management Private Limited, [95]

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One question. While I do realize that I think you have stated quite clearly that it's a lack of funding that has made you hold back on the divestment part and those problems are now largely behind us, if I look at the cash balance on the balance sheet, it has more than doubled in -- between 1Q and 2Q. So we do seem to have a lot of cash with us. And is it a lack of lending opportunities? How should we look at this? I mean why are we choosing to maintain excess liquidity with us if that is the case?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [96]

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Well, so of course, as a part of responding, we need to maintain certain levels of liquidity. Those can come at any point of time. Especially during tough times, it is always better to be positive rather than being overaggressive. If you look at it now, it will be around the content platform. We have already done a good level of growth in the third quarter. So I think that's that. Sir, maybe you would like to comment?

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Anirvan Sarkar;Principal Asset Management Private Limited, [97]

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Yes, I get the part about wanting to conserve liquidity. What I was trying to understand is that, if you look, this has actually led to a sequential decline in our loan book. So when we have ample opportunities to lend and we do have the liquidity as well for this, then why hold back on the growth is what I'm trying to understand. Or maybe I could -- I don't know if this could also be a function of trying to run down the Kerala book, but if we have growth opportunities outside Kerala, then what is the need to preserve this liquidity? I mean it's quite healthy, the amount of liquidity that you have, I'm just trying to understand what could be the thought for again, having more than...

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Oommen K. Mammen, Muthoot Finance Limited - CFO [98]

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So the -- no. Of course, no, no. I repeat what we said earlier. There was a resource constraint to meet the growth. Of course, we had a certain amount of liquidity, but we chose to remain cautious rather than doing an aggressive growth. We thought once we have a solid funding in our books, we'll start growing. Nothing lost in -- by just missing 1 quarter, so we can always make up in the subsequent quarters.

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Operator [99]

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(Operator Instructions) The next question is from the line of Bhavik Dave from the Nippon India Mutual Fund.

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Bhavik Dave;Nippon India Mutual Fund, [100]

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Just a couple of questions on your home finance business. So one is we've significantly slowed down from what we were growing at. So just trying to understand what exactly is happening in your home finance book? And secondly, also, there's some uptick in your NPA there as well. And thirdly, that is also the counterintuitive ROA improvement, like reported ROE improvement, from 1.3%-odd last quarter to now 2.75%. So I just wanted to understand how does all this tie up, just giving more sense on your home finance.

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [101]

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So home finance, that's only affordable homes -- affordable loans. The average loan is only INR 10 lakhs. We don't know any net picks. We don't do any delta financing, nothing, only a formal housing.

Today, we are a little cautious on the business because, today, our customers, also, we don't encourage them to take a risk on builders who have not completed a house. So we are also looking at houses, which are 85%-plus completion. So there's just time to expose our borrowers also to builders who may or may not complete their projects full year. We are extra cautious on that. That is one of the reasons, so we are not going for highly targeted, high disposal or high wiggle room, but be more cautious and go riskless, number one. The ROI has improved because we have done a securitization of the portfolio, and that's according to entry.

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Bhavik Dave;Nippon India Mutual Fund, [102]

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Okay. And your NPAs are like -- obviously, they're very small right now, not a very significant number, but 0.8 to 1.1. So is there any stress in specific markets that you're seeing where you've lent like maybe Maharashtra or any other state where you have seen excessive pressure versus the other?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [103]

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Yes. Overall, the economy is not doing well. People are losing their jobs also. So all that can affect these portfolios because these are all low-income people. But as things go forward, I think it should stabilize.

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Bhavik Dave;Nippon India Mutual Fund, [104]

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Great. And secondly, on the Kerala gold loan business, so I just wanted to understand that you mentioned that maybe in October and November, things have gotten back to normal. So I just wanted to understand where the demand is coming from. So like are there any specific geographies or are there specific customer segments that the growth is picking up because on the ground, activities are quite neutral? So I just want to understand how the growth is coming from and where exactly it is coming from? And what are the ticket sizes that incrementally are we lending? What are the kind of incremental tickets are we lending?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [105]

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So just we expect the -- all the gold loan book to grow by 15% by the end of the year, which I think we should really do because we see growth -- good growth in the third quarter in the last -- and the last few months -- or last 1.5 months as well as in the months going forward until the end of the year.

Growth is coming from all the geographies. So one thing also you must understand, when some people are not able to get funding from -- maybe for their business, small business, et cetera, from banks or other NBFCs, which do not have funding, probably, they use the gold loan method a little more, a little more gold loan root. So that is one of the reasons we would be getting more, which is in spite of the economy not doing very, very well. In some markets, things are looking better. But overall, even if people are not able to get funding from other regular banking or nonbanking sources, there is the asset in the jewelry box that we need to enroll in a finance company and get a loan. So we should see that type of customer is also very much in the coming days if the funding is not coming from other sources.

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Bhavik Dave;Nippon India Mutual Fund, [106]

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And so last one. I just want to learn a little more. Is there LTV demand from the customers increasing? Obviously, they're not getting funding from other sources like banking, NBFC. Are they demanding for higher LTVs on the loans on the product side?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [107]

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Well, our LTV is restricted to 35%, and we don't do more than 35%.

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Bhavik Dave;Nippon India Mutual Fund, [108]

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Correct. But like I just wanted to understand like the whole 6 months back, with people riding off different ideas, are there really the need of the customer increasing to 70%, 75% because their funding needs from other sources are not getting full pay?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [109]

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So our average LTV today is 68% only. So I think it was around the same rate earlier also. 68% is the number. 60 -- ours is...

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Oommen K. Mammen, Muthoot Finance Limited - CFO [110]

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Is full pay.

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [111]

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Sorry, 60%, yes, because it's already full pay.

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Operator [112]

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The next question is from the line of Utsav Gogirwar from Investec India.

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Utsav Gogirwar, Investec Bank plc, Research Division - Analyst [113]

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Sir, can you give some color on the credit cost because over the last 5 quarters, we have used excess provision on our books? But in this quarter, we have -- it looks like we haven't used any excess provisions. And I just wanted to understand how I should look at full year credit cost. Number one. Number two, also I want to understand why the write-offs are increased in this quarter, like especially, I know quarter 4 was higher, but it has spiked up in Q2.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [114]

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So in terms of the ECL provision, we -- as we had mentioned in the presentation, we have a certain amount of excess provisions coming out of the early ride gap. So until June, we were using it for the incremental leasing provision.

Now we have taken a call there. We'll hold this excess provision as of now because, probably, RBI may also think about coming out with certain guidelines in terms of the provisions under the -- in there. So we're not keeping water as a remaining excess provision impact.

And the second thing is on the burglary written off...

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [115]

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The burglary is enough. Year-on-year, we -- approximately INR 15 crores to INR 20 crores is what we write off. So in some quarters, it may be low. In some quarters, it may be high. But on an average, what we have seen is about INR 20 crores is what the credit cost -- credit loss is.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [116]

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So this quarter, specifically, there were no one incident in terms of the burglary. So although there is an insurance claim, we have, as a prudent measure, we now write off all those costs immediately. And subsequently, if one of the insurance claims has risen, we bring in back just income.

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Utsav Gogirwar, Investec Bank plc, Research Division - Analyst [117]

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Okay. And sir, second question is on the delta. So we are seeing a good growth in the Microfinance business. And at the same time, the asset quality is also improving. But are you seeing any straight number in the industry level, especially in investment dollar renewal? Are there certain pockets? And how are the part -- city trends for you?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [118]

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Belstar has been able to, I think, compared to others in the industry, they are much better off even with regard to the PAR. It's a PAR ratio, et cetera. They are much better off, and I think that credit cost, the credit quality, et cetera, is much better than many others that slide. They are doing well in that aspect. I don't know about the spend plus, et cetera, not very much into the details of the states, but I think they are mainly in Tamil Nadu, Karnataka and such places.

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Operator [119]

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(Operator Instructions) The next question is from the line of Nischint Chawathe from Kotak Securities.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [120]

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Just trying to understand, on an ongoing basis maybe for the next 2 quarters, how much cash would you like to keep on the balance sheet? I mean would it be the elevated level that you are maintaining now? Or is it something that you may want to kind of sort of moderate down, maybe to quantity levels?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [121]

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No. Nischint, we have no lend and then process. So no, but to answer your query, we would like to maintain a certain level of cash. We don't know how the events are unfolding and how the industry, the issue, which is now going to come out. So as a prudent measure, we would like to hold off with some cash.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [122]

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Yes. I know. But would it be like somewhere between the first and the second quarter, or would it be kind of be higher than the second quarter?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [123]

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No. Look at it. What we are holding 1 year back, we view the percentage of the absolute number. We should hold something -- a little more -- something more than that because of all these confusions.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [124]

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Yes. The other thing is just a point on Stage 3 provisions that you are making, a bit maybe just to clarify that once again. You said that you're not using the earlier I-GAAP provision. So how does that really get reflected in the numbers because I know your Stage 3 coverage increased significantly? So is it something that -- is it because of maybe the Stage 3 that the coverage has gone up? Or is it something that you are making maybe some provisions earlier there that are not kind of...

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Oommen K. Mammen, Muthoot Finance Limited - CFO [125]

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Yes. So the impairment provision has one, is a write-off, which is about INR 14 crores and the remaining about INR 11-odd crores is because of the increase in the Stage 3 assets, where we are making a log maybe even before including of 13.79%. So that, from this quarter onwards, then we have decided to better to P&L rather than taking it out of the excess provision we are carrying in the balance sheet.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [126]

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But your coverage in Stage 3 has gone up from 13.8% to 22.2%.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [127]

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Yes. So on a INR 1,236 crores, we held INR 169 crores of Stage 3 provision. So that will be about...

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [128]

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Between INR 70 crores and INR 200 crores.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [129]

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Yes.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [130]

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I thought your presentation said INR 272 crores versus INR 158 crores.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [131]

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So that will be the overall provisions, right? Just a few more seconds. But the sale for overall provision is INR 701 crores. Take INR 3 crores out of the INR 701 crores, and it will be INR 169 crores. So that will be 13.79%.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [132]

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Okay. Okay, okay. Then maybe -- okay, sure. INR 169 crores. I got the message. Okay.

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Operator [133]

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The next question is from the line of Christine Rowley from Sloane Robinson.

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Christine Rowley, Sloane Robinson LLP - Partner [134]

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I just wanted to ask a follow-up question, if I could, please? In terms of looking towards the company's growth in AUM, particularly on the gold lending through the balance of this year into next year. I noticed that you had an increase in employee numbers this quarter from 24,000 team members, to 25,000 team members, which would signal the company kind of building resources for growth in the future. However, the advertising and publicity expenses was kind of flat quarter-on-quarter and in the first half of this year, was down year-on-year relative to the first half of 2019. So I'm looking at Page 36 in the presentation. With respect to employee numbers and your expenditure on advertising and publicity or in addition, perhaps, business promotion expenses, can you give us some guidance into how that will change if the company wants to achieve its 15% growth in AUM on the gold lending side in the current fiscal?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [135]

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About the advertisements, we were slow in advertising, et cetera, in 2 -- quarter 2 because of the funding constraints. So we were not aggressively lending, so we were not aggressively advertising also. In Q3 and Q4, the advertisement expenditure definitely will go up because we are looking at a much higher disbursement, higher -- a much higher growth target in the next 2 quarters.

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Christine Rowley, Sloane Robinson LLP - Partner [136]

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So should we expect at the end of the current fiscal to see advertising and promotion expenditure? In March '19, it grew by about 50% year-on-year. In March '20, should we be expecting for the full year for the company to be showing some sort of advertising and publicity growth commensurate with 15% growth in AUM for the gold lending side and faster, I guess, with your other assets?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [137]

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Definitely. Definitely. This year, the retrenchment expenditure should be higher than what we did last year, which is -- could be higher in Q3 and Q4.

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Christine Rowley, Sloane Robinson LLP - Partner [138]

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Okay. And similarly, I remember when the company was asked the growth angle on the gold lending side, you let your employee numbers remain very static or maybe even declined slightly as you kind of consolidated towards stronger team members. Should we be interpreting this growth in employee numbers from 24,000 to 25,000 as a signal the company's passing to us about expecting growth in the future?

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [139]

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The numbers have been from 26,600 -- 24,600, we have gone to 25,000, so there's an increase of, I think, 450 employees in the last quarter. We would have added some branches also on the new -- like new business also with that increase. So definitely, it's the cost. And for information on the broad cost, there's not much growth.

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Christine Rowley, Sloane Robinson LLP - Partner [140]

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No. It's clear that you're having a kind of great benefit, very significant benefit in terms of faster interest income growth and operating expense growth, so that's clearly been a benefit to you this quarter.

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Operator [141]

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(Operator Instructions) The next question is from the line of Deepak Agrawal from Impetus Advisors.

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Deepak Agrawal;Impetus Advisors, [142]

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So I'd like to know what is the maximum leverage that you're comfortable with. Or in other words, what is the minimum capital adequacy that you're comfortable with?

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Oommen K. Mammen, Muthoot Finance Limited - CFO [143]

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So today, if you look at my leverage, is only around 2.5x. So there's no point in asking what is the maximum. It's a long way to go. So I really wish to not leverage more than 5x.

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Deepak Agrawal;Impetus Advisors, [144]

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Okay. No, that's right. I mean the environment is not conducive for that. But you still -- okay, so you think 5x is going to be like 5x better.

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Operator [145]

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Ladies and gentlemen, due to time constraints, that will be the last question for today. I'll now hand the conference over to the management for closing comments.

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Oommen K. Mammen, Muthoot Finance Limited - CFO [146]

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No -- thank you for joining the call. I think we had a reasonably good quarter. I think we'll -- compared with a better growth. We hope to come back with a better growth in the third quarter and also with a better profitability.

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George Alexander Muthoot, Muthoot Finance Limited - MD & Whole Time Director [147]

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So he is the Managing Director also. So thank you for your support. Please keep supporting us. This is your company. And I'm sure we will leave no stone unturned to see that the company does well in all aspects versus growth, profitability, quality, governance, et cetera. So rest assured that and we will try our best, and we consider Muthoot as -- Muthoot Finance as one of our, what shall we say, on our -- just in the family. So I'm sure we will be all out there to see that the company grows when it's time to strike. Thank you for your support. Please keep supporting us. Thank you.

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Operator [148]

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Thank you very much. On behalf of Antique Stock Broking Ltd., that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.