The rebranded Poonawalla Fincorp — it was formerly Magma Fincorp — announced its Q1FY22 numbers on August 14. The non-bank lender saw flat growth in its assets under management (AUM) at Rs 14,424 crore and a consolidated profit before tax of Rs 81 crore as compared to Rs 47 crore in Q4FY21. The capital adequacy ratio increased to 57.8 percent in June 2021 from 20.3 percent in March 2021, largely due to a capital infusion of Rs 3,456 crore.
In an exclusive interaction with Moneycontrol, CA Abhay Bhutada, MD of Poonawalla Fincorp, said the company was building a strong retail franchise based on a “conservative and calibrated approach to risk management and strong asset quality.”
This financial year, factoring in the third wave, the company expects to see double-digit growth thanks to its huge liquidity, 8,000-plus staff, 300 branches and digital-first approach. Edited Excerpts:
This is the first quarter for your NBFC after the name change to Poonawalla Fincorp, How significant was this quarter for you from a rebranding perspective?
The renaming and rebranding has been done in a record span of time and we have strengthened the senior management across different functions. We continue to build a large talent pool to drive the overall risk culture in the company.
We have shifted our focus to the consumer and small-business loan segment and discontinued a few non-focused products. The new loan products are loans to professionals, which we were doing in Poonawalla Finance. Additionally, small-ticket LAP, Merchant cash advance, a co-branded credit card, machinery loan and consumer durables will be rolled out in subsequent quarters.
Most of the infrastructure to launch new products is ready at Poonawalla Fincorp and we will be able to launch these products rapidly in the coming quarters. The reason behind the acquisition was to scale up, as a few of these products are phygital products from the scaling aspect, like loan against property (LAP), housing, etc.
In a record span of time, we have implemented a new-loan origination system, loan management system, and a customer relationship management platform with optimised websites, as some of these capabilities were lacking in Magma.
Around five to six strategic alliances and corporate tie-ups are in the pipeline to strengthen sales and have technically zero cost of acquisition and a huge business opportunity.
We intend to build an efficient liability franchise where robust liquidity is available. Our leverage is just 1.3 and there is no need to raise additional capital for the next four-five years — unless we reach a Rs 50,000 crore loan book, the current capital is more than enough. We have a vision to reach 3x of current AUM by 2025 and net NPA will be less than 1 percent in March 2025.
With these building blocks, we are on the way to build a strong retail franchise based on a conservative and calibrated approach to risk management and strong asset quality.
In the next 3-4 years, CAGR will be anything between 25-30 percent.
What kind of impact has the second wave of Covid-19 had and are you concerned by asset quality and collections? What is your full-year target for NPAs?
Collections are showing signs of improvement; July collections are at 98 percent of the pre-Covid level. By March 2022, the GNPA will be less than 3 percent and net NPA will be less than 1.5 percent. We are expecting an upgrade in credit rating, which is expected soon after the rebranding, capital infusion and change in business model. The GNPA and NNPA will be better in Q2, Q3 and Q4 as compared to Q1.
AUM growth is flat. Was it only due to the second wave or also because of realigning your internal processes and segment focus?
We were realigning most processes and now we have launched new internal systems and new products. This month onwards we have started aggressive disbursals. Covid will be there for some time and we can’t predict it. At the same time, we are confident with our previous experience at Poonawalla Finance, where we had only 3-4 cases zero plus DPD in personal loans, because our first-time NACH collection was at 99.5 percent in the personal loan and professional loan segments.
In business-loan collections, we were close to 95 percent. So, in spite of Covid, there will be double-digit growth in the current year. Whatever we want to implement from the people and technology perspective will be completed in the current quarter. We will launch multiple products in Q3 and Q4.
What is the quantum of restructuring you have undertaken?
Restructuring happened due to the market conditions, mostly due to the rural sector and as April-May was a washout. We are carrying a provision coverage ratio of 51 percent on gross stage three assets, which is more than enough and industry best at this point of time.
The total restructure book was only Rs 850 crore as on June 30, which is around 5.9 percent of the total AUM. Out of that, Rs 510 crore was in the zero bucket. However, for the purpose of asset classification and provisioning, we say Rs 709 crore is the level of total restructured assets, classified under stage two.
We are carrying one of the highest provisions of 21 percent on our restructured book. We picked up only marginal restructuring in the current quarter and are not expecting any major restructuring considering current trends.
The restructuring done last year shall move out of the restructuring bucket upon completion of one year as per regulatory guidelines and we have been very selective while providing restructuring to eligible borrowers and created an additional provision. It would be incorrect to look at this portfolio together with NPAs.
How is your current portfolio composition and which segments will you focus on more?
As of now 15 percent is pre-owned cars, 10 percent is business loans, 32 percent is mortgage, while discontinued business is 43 percent. At the same time, we will focus more on professional loans, small-business loans, micro LAP and secured LAP. At the moment, unsecured is less than 10 percent of the total book; 97 percent of the book is secured largely by collateral or guarantee cover. Zone-wise also, we are fairly diversified in all four regions.
How is your liquidity position and cost of borrowing?
We have a strong position of around Rs 3,238 crore as surplus liquidity as on June 30. Apart from that we have more than Rs 625 crore in unavailed bank limits available. We have started repricing the cost of these loans, which is under process and incremental borrowing is at sub-7 percent.
We will always be in the top three in terms of incremental cost of borrowing. As for existing high-cost borrowing, we have started repricing and overall it will take 12-18 months to come to the sub-7.5 level. At exit level we will cross 7.9 percent in Q4FY22.
Can you share your perspective on strategy with respect to co-branded cards and co-lending?
In co-lending, we will go with select NBFCs only with an FLGD (first loss default guarantee) model and with a similar mind-share. We will focus on short-term lending products and build a strong liability franchise.
In terms of pricing, we will be able to match the bank rate and be at par on day one. We are building a strong system for co-lending and will be launching it in Q4. In the past, we did good tie-ups with a few fintechs in Poonawalla Finance. So, we carry the learning and techniques around integration for co-lending.
Ninety percent of the co-lending will happen in the secured segment. Most of these NBFCs are regional and into the secured segment with a track record of more than 10 years and good collections infrastructure. All of these players are AA- rated, mid-size and from different regions.
As for co-branded cards, we are launching three variants. Most salaried people and business customers will be the key target. We will get a good upfront fee-based income out of it and are going to issue one million cards over the next five years.
We will be cross-selling to existing customers and the pre-approved customer base.
Digital is going to be your key focus, what is the unique roadmap here?
Our vision is to be a diversified technology enabled NBFC focusing on risk-calibrated growth with customer-centric approach. In a record 2-3 months’ time we implemented the entire LOS, LMS and CRM, fully integrated with the 100 percent digital journey across our unsecured product loans to professional/small-business loans and personal loans.
From sourcing to disbursement it is 100 percent paperless, similar to what we were doing in Poonawalla Finance.
We will always be one of the top 2 NBFCs in terms of pricing and competitiveness, but at the same time turnaround is key. From day one we are competing with the top four private banks and the top four NBFCs and are best in class when it comes to turnaround.
We have also built a digital journey for channel partners and are ready to integrate. Data science and analytics is being used across functions specifically in underwriting, portfolio monitoring and collections. All of this will help in better asset quality, better collections and ultimately impact the bottomline.
What are your plans for the housing finance and insurance subsidiary?
Considering the valuation of other players, we can see value-unlocking happen and strong growth with the current AUM at around Rs 4,000 crore. We have infused Rs 500 crore in the last quarter and the net worth is around Rs 1,000 crore. It is our hidden gem, which will give extraordinary valuations going further. At Poonawalla Housing, too, we have started raising funds at sub-7 percent.
The value unlocking will be mostly through an IPO in 2025 and cross Rs 10,000 crore in AUM in the next four years.
With regard to Magma HDI General Insurance, we have one of the highest claim-settlement ratios in the motor segment in own damage. And we are among the top five, with the least customer complaints. There’s an average 18-21 percent CAGR seen in gross written premium since FY19. From Q1FY21 to Q1FY22, growth is almost 35 percent as compared to the industry average of 14 percent.
Going further, we will focus more on health insurance and tie-ups under bancassurance.