29/09/2020

UDS-Biz

Growing Your Income

Edited Transcript of INBF.NS earnings conference call or presentation 3-Jul-20 10:59am GMT

NEW DELHI Jul 21, 2020 (Thomson StreetEvents) — Edited Transcript of Indiabulls Housing Finance Ltd...

NEW DELHI Jul 21, 2020 (Thomson StreetEvents) — Edited Transcript of Indiabulls Housing Finance Ltd earnings conference call or presentation Friday, July 3, 2020 at 10:59:00am GMT

Ambika Fincap Consultants Pvt. – President & Director

Batlivala & Karani Securities India Pvt. Ltd., Research Division – Research Analyst

Thanks, Steven. Thanks, everyone, for joining this call. We welcome the management of Indiabulls Housing Finance to discuss Q4 FY ’20 results. From the management team, we have Mr. Gagan Banga, Vice Chairman, MD and CEO; Mr. Sachin Chaudhary, Chief Operating Officer; Mr. Mukesh Garg, Chief Financial Officer; Mr. Ashwin Mallick, Head Treasury; Mr. Ramnath Shenoy, Head, Investor Relation and Analytics; Mr. Veekesh Gandhi, Head Markets; and Mr. Hemal Zaveri, Head Banking. I now invite Gagan to share the key details of the results. Over to you, Gagan.

A very good day to all of you, and welcome to quarter 4 and full year FY ’19-’20 earnings call. Firstly, I would like to sincerely apologize for the delay in starting this call due to an overrun in the Board meeting caused by some technical glitches, the issues that we all face working from home.

I hope each of you and your families are doing well and are safe. The world today is facing an unprecedented challenge in the form of COVID-19 crisis, which has adversely impacted business operations globally. Slowly and steadily, we are now moving towards resumption of normal operations. One is hopeful that a vaccine will be developed soon, and we can put this surreal, but instructive episode behind us and move ahead.

I request you all to keep handy the earnings update sent across to you a short while ago. Also kindly bear in mind that most of us are hosting this call from home, and therefore, we request that please restrict your questions to high level questions only. Granular numbers beyond the ones detailed in the earnings update or on this call, if required, can be taken directly from the Investor Relations team by e-mailing them.

The NBFC/HFC sector has been under acute stress for almost 21 months now, battling through liquidity crisis and a crisis of confidence generated by the IL&FS default and now the economic disruption caused due to COVID-19. Our experience from handling previous such trying circumstances have taught us that maintaining healthy capital and liquidity are the best defense towards such times, and our efforts over the past 21 months have been focused towards this end. It is also a testament to the resilience of the NBFC sector that it has survived despite practically no regulatory forbearance through what can only be described as a stress test that is worse than any stress that could be modeled in theory.

To put the housing finance company business and related risks in perspectives, I quote Mr. Deepak Parekh, Chairman, HDFC, from his letter to their shareholders. He said, “It is important to recognize that unlike other loans, the underlying value of land is always there as security in loans given by housing finance companies.” At Indiabulls Housing, our underlying loans, both retail and developer, have properties or built up homes or land, et cetera, as collateral for practically all the loans, and this will cause a huge distinction in the behavior of our loans compared to other asset classes as all lenders, banks, both public sector as well as private, NBFCs and HFCs handle the evolving situation.

Now moving on to numbers. If you can please refer to Slide 3. Our loan book has shrunk further to INR 69,676 crores. Total revenues for the year came in at INR 13,103 crores (sic) [INR 13,223 crores], while revenue for the quarter was INR 2,954 crores. Our normalized PAT for the year was INR 2,904 crores. And after adjusting for 1% provisions of INR 700 crores created from the P&L, the PAT stands adjusted to INR 2,200 crores. For quarter 4 fiscal ’20, our normalized PAT was INR 841 crores. And after accounting for the provisions mentioned earlier, the adjusted PAT was INR 137 crores.

Please refer now to Slide 4, where we have provided a reconciliation of the profits. The pandemic has hit the economy hard, throwing a lot of challenges for households and businesses alike. Many salaried individuals have either lost their jobs or have had to take pay cuts. Small and medium enterprises are amongst the worst affected, with most of the businesses coming to a total standstill during the lockdown. Just when the real estate market was showing signs of resurgence a few months ago, the pandemic and the consequent lockdown has led to total demand destruction. Migration of laborers and skilled workers back to villages led to a complete halt in the construction activity of under construction projects, which is now reviving. While the lockdown has now been partially lifted, as per our estimate, it will take at least a couple of quarters for the economic activity to get back to pre-COVID levels. With this distressed background in mind, and keeping in mind that we have generally extended secured loans backed by properties, the management of the company decided to take an extremely conservative and prudent approach towards provisioning in order to strengthen the balance sheet to effectively tackle any and all potential future contingencies.

The company has created additional conservative provisions of INR 700 crores, representing 1% of our loan book through the P&L, and another additional INR 1,798 crores of provisions from its gain on fair valuation of holding in OakNorth Bank of INR 1,802 crores, which have been routed through the other comprehensive income as required by IndAS.

I shall explain this in some more detail. In November 2015, Indiabulls Housing had invested USD 100 million in U.K.’s challenger bank OakNorth Bank, acquiring a controlling stake of 39.76%. After a partial stake sale and various equity funding rounds undertaken by OakNorth Bank, including the last round in which GIC of Singapore and SoftBank had come, IBH’s current holding in the bank now stands at only 15.71%. As a result of the reduction in effective holding and consequent loss of significant control in OakNorth Bank, our stake in the bank will now be considered as an investment on our balance sheet rather than the bank being considered as an associate as was the case before.

As per IndAS guidelines, this investment will now be mark-to-market, and therefore, the fair market value of the investment in OakNorth, amounting to INR 1,802 crores, will now be recorded under OCI in net worth. We have utilized this very gain from the OCI to create additional provisions of INR 1,798 crores, approximately the same amount, through the OCI route. Such routing is consistent with our past practice of recognizing fair value gains and realized gains through the OCI. When we had migrated to IndAS 2 years ago, we had adopted this practice, and we are continuing with the same practice.

What the management is extremely mindful of is that while there is underlying value of mortgage collateral backing each loan, we are also aware that the real estate sector will take its own time to get repaired. The real estate prices will have to reflect current market realities. And while these price adjustments will help developers offload their unsold inventory and improve their cash flows, we have to protect the balance sheet through this ensuing period.

If you now refer to Slide 5. Combining the INR 700 crores of provisions for COVID-19 through the P&L and the approximately INR 1,800 crores of provisions taken through the OCI, the total provision buffer has now been showed up to over INR 3,740 crores, which is 5.4% of the loan book, 218% of gross NPAs as of March 2020. It is to be noted here that having created the extra provisions this quarter, the company has now effectively reached a status of net NPA 0 and carries INR 2,391 crores of extra provisions to tide over any contingency arising out of COVID-19 and also to negotiate the macro headwinds that the real estate sector is facing.

Please now move to Slide 6. The last 3 months have been the best since September 2018, almost 2 years ago, in terms of the funds we have raised. We have raised a total of INR 9,494 crores through various institutions, including INR 1,275 crores of 5-year term loans, INR 1,230 crores of bonds of maturity greater than 3 years and INR 5,120 crores of bonds and loans of between 1 and 3 years. I’m extremely happy to tell you all that even during the lockdown we were able to securitize developer loans and generate INR 1,870 crores of long-term monies co-terminus with the loans. This was a big achievement as we were able to complete what is usually a logistically cumbersome exercise coordinating across multiple locations to achieve this. This is also a reflection of the underlying quality of the developer loans where despite loans being under moratorium, investors have come in and refinanced/securitized our loans to the tune of almost INR 2,000 crores of net liquidity to us.

Along with the retail sell down, securitization of loans has always been a core element of our business model. While we have been saying this for many years and have been consistently the largest sellers of mortgage pools in the country, the industry, the regulators and the rating agencies have now recognized the importance and criticality of these transactions. Credit rating agencies, which, in our experience, were originally skeptical of securitization as a fundraising program on an organized ongoing basis that could support housing finance companies have now turned around and have started appreciating it as an important source of raising funds, both for liquidity as well as asset liability matching. Even the regulators have realized the importance of securitization and organized sell down programs and have worked to deepen this very important market as is evidenced from the recently proposed new draft guidelines on securitization and sale of loan exposures.

The draft guidelines of RBI are, in fact, quite evolved and will definitely give a further boost to this market. The reduction of minimum holding period for securitization of RMBS loans to 6 months from the earlier 12 months will result in an increase in the supply of assets eligible for securitization. Removal of minimum retention requirement for sale of loan exposures will help generate greater liquidity for the originators for the same quantum of asset pool. We expect sell down — portfolio sell-downs to contribute an increasingly larger proportion of our funding mix going forward, as is also detailed in our new business model, which I will be sharing again with you. All of this also comes at a happy juncture. For us, as an asset-light business model is central to our growth plans.

Please now turn to Slide 7. Our net debt-to-equity remains low at 4x. At 27.1%, our total capital adequacy is very comfortable. Our book spread is at about 280 basis points, which yields at 11.58% and cost of funds at 8.79%. Our cost-to-income ratio at 16.2% — is at 16.2% and is projected to continue to trend even lower through fiscal ’21 and beyond despite the reduced loan AUM. I will later touch on the various initiatives taken by the management to continue to reduce the cost income ratio and be a leader on this particular aspect. Our NPA levels are moderate with gross NPA at 1.84%. Total provisions of INR 3,741 crores on balance sheet represents 218% of gross NPAs. Extra provisions represent 3.4% of loan book.

If you now refer to Slide 8, where we have shown our ALM. The ALM is shown on a cumulative basis up to each bucket. As on March 31, 2020, IBH had on balance sheet liquidity of INR 13,410 crores in the form of cash and liquid investments, which is 13% of our balance sheet, over 2x times the level of liquidity our peers carry. We are positive across all buckets. In fact, we will have positive net cash of INR 10,686 crores at the end of the first year. The ALM takes into account — it takes into account the EMIs impacted for the period March ’20 to August ’20 due to the moratorium extended to our customers. Our detailed 10-year quarterly ALM is in the appendix slides of the earning update on Slide 20. We have no negative mismatch in any bucket and are already fully in compliance with guidelines issued by RBI on November 4, 2019, which permits 10% to 20% mismatch in various time buckets.

The RBI on 27 March, 2020, announced a COVID-19 regulatory package, wherein it allowed borrowers to avail moratorium for installments falling due between March 1, 2020, and May 31, 2020. In May 2020, the RBI extended the moratorium for further 3 months that is up to August 31, 2020. In line with the RBI’s guideline and as per policy approved by the Board, the company has extended the benefit of moratorium to all eligible customers, retail as well as wholesale. As at the end of June, about 20% of IBH customers had availed of the moratorium. Customers are being continuously educated on the economics of the moratorium and the proportion of customers opting from moratorium has thus declined from the peak of 35% to the current around 20%. Collections have effectively doubled from April to May and again from May to June.

The early trends of July are also extremely encouraging. The company has made requisite loan provisions for the loan book under moratorium as part of the overall provisioning done by the company. The company has also looked to achieve operating expense rationalization, as I had mentioned earlier. We continue to work in a scenario where we expect ourselves to be a leader on the cost/income ratio and continue to trend it down. And this can only be achieved by continuous cost optimization across all expense overheads.

The senior management has taken the lead in reducing operating expenses. Our Chairman, Mr. Gehlaut, will not draw any salary in fiscal ’21. I myself have taken a salary cut of 80%, and my other senior management colleagues have taken a salary cut of up to 50%. Total monthly operating expenses of the company have reduced from an average of approximately INR 70 crores per quarter, that is roughly about INR 840 crores, INR 850 crores per year, down to only about INR 40 crores per quarter or roughly around INR 480 crores per year.

With the exception of a few strategic positions, all incremental and replacement hiring has been frozen till September 2020. Rents of all current branches have also been renegotiated. And riding on the digital platform that we had created for ourselves, which is the e-home loan platform, we have been able to meaningfully rationalize our branches. This has all been achieved while still trebling our collections workforce from roughly 600 people to 1,700 people.

To summarize fiscal ’20, we have demonstrated the quality of our underlying loans by a reduction of loans by 40% or INR 45,226 crores since 2018. That is a whooping INR 45,226 crores in a liquidity scenario, wherein theory liquidity was abundant, but risk aversion amongst banks and lack of liquidity amongst nonbanks skewed the refinance market to this very limited high-quality assets. And in this environment, we were able to get rid of INR 45,000 plus crores of assets. We were able to refinance and securitize during lockdown, as I mentioned, INR 1,870 crores of developer loans, again, demonstrating the quality of underlying exposures, which are all heart of time prime — town prime assets and continue to be attractive even in stressed times for the real estate industry. This comes on top of around INR 18,000 crores of total refinance/gross repayments that have been achieved on the wholesale book. These are gross numbers. We’ll have to also make disbursals for continuing with construction in the various construction finance projects.

Through the COVID period, moderate moratorium availed by retail borrowers, the numbers of which I have shared, sell down or developer loans, and most importantly, overall maintenance of asset quality has demonstrated the strong base available to the company to grow from as and when the market and sentiment improves and one is able to take rational credit decisions.

On liquidity, the company has raised INR 9,494 crores, representing 12.5% of our liquidity in a span of just 3 months, and those also 3 months of lockdown in the country. We have maintained our liquidity buffer steadily through the course of the last 21 months, even which were sort of representative of the worst phase for NBFCs.

Even though capital ratios are strong, and the company has continued to maintain capital adequacy well north of 20%, we have today requested the Board to approve a further capital raise of up to $300 million, which will come in handy through this period of uncertainty. We are engaged with certain investors, and we will come back and inform both the Board and our shareholders in quick time as to how we intend to move forward on this transaction. We are quite hopeful that this $300 million transaction, we should be able to conclude in the course of the next couple of months itself. In order to battle ready itself for the huge growth opportunities, the company has also expanded its scope of co-origination relationships. And we will be announcing formally a new co-origination relationship with a private bank for our LAP business over the course of the next 3 weeks.

To further institutionalize ourselves and prepare for the next 10-year opportunity, we already have very eminent people on our Board, such as the former Deputy Governor of Reserve Bank of India, former Supreme Court Justice, former Director General of Police. We have also inducted today, Mr. Siddharth Achutan, who is the former senior partner at Deloitte, and he will continue to support the company and advise us. You will also continue to see further addition at the Board level over the course of the next few weeks as we prepare for our annual shareholders’ meeting.

Over our — over the course of the last few calls, which have happened in the stressful period, I have taken the liberty of often speaking to you informally. I strongly believe that failure isn’t fatal, but failure to change can be. We don’t wish to avoid change because we are avoiding mistakes or rationalizing our past actions in our head. Without failure and mistakes, I do not know how do we learn. But having learned a lot from all the mistakes that we had made and the realities that dawned on us over the course of the last 1.5 to 2 years. And in order to make our new reality better, we boldly embrace the winds of change and focus on our new business model. The crisis of the past 21 months have made us realize that the HFC business will now have to go through a cyclical shift wherein chunky balance sheets and high leverage will have to make way for leaner balance sheets by following an asset light model of business.

We have detailed, again, the business model on Slides 10 and 11. And while we have shared these with you, it is an opportune time to dwell on the new business model. In retail loans, we will originate home loans and MSME loans, which we can then securitize to banks and other financial institutions. As I mentioned earlier, IBH has always been 1 of the largest sellers of mortgage pools. There are quite a few slides in our earning update, which are dedicated to the performance of these pools over years. We have ongoing sell down relationships with 25 banks and financial institutions. The new RBI guidelines on securitization are expected to give a big leg up to this pool of capital. And I personally expect new investors to also come in besides banks.

The second part of our business will be co-origination of developer loans with real estate focused investment funds and PE players. As they say, every cloud has a silver lining, and the silver lining in the liquidity crisis faced by NBFCs and HFCs is that we’ve all looked to monetize our wholesale assets to generate liquidity. And in the process, we’ve sparked the interest of some large PEs and alternate investment funds, who are now actively looking to invest huge sums of monies into the Indian real estate sector, as is evident by the transaction that we have concluded. We have detailed the financial mechanics of this model on Slide 11. Similar to co-origination of retail loans, IBH will retain 20% on its balance sheet, while 80% will be on the investors’ balance sheet. IBH will get to keep all the processing fee, including the investors’ 80%. And additionally (technical difficulty) we will also earn some spread.

The RoA for this business on a sustained basis will be around 7.1%, and the RoE will exceed well past 20%. As we tread this path towards an asset-light model, over the course of the next 2 to 3 years, IBH book will come to comprise of approximately 90% granular loans with the balance sheet growing in single digits and AUM growing in high teens to early 20s. The new business model will earn us an RoA of about 3%, which at a steady leverage of 1:5 will work out to an RoE of 25%. It will obviously take us some time to get to a leverage of 1:5, and we are currently comfortable with 4. With the capital raise, we will go lower. But in due course of time, as the granular loan book further increases, we will probably in 3 to 4 years get to a leverage of — a peak leverage of 1:5, where we can generate a peak RoE of around 25%.

To conclude, I now quote from a note I read recently from a domestic mutual fund, which read, “Over the past 21 months both debt and equity markets have been too pessimistic about the NBFC franchise. However, NBFCs have turned out to be far more resilient than what they were thought to be. Locked market for more than 21 months has cost them heavy, but most of them have survived without any regulatory backstop. NBFC ALMs are now better matched, and most of them remain well capitalized. Various liquidity support measures from RBI as well as the government have helped them tide over the liquidity crisis. Fear of a sudden default by any NBFC has also been taken out with RBI special liquidity scheme announced earlier this week. NBFCs have thus passed the big test. It is time for all stakeholders to now embrace them.”

As far as IBH is concerned, our strategy of ensuring no ALM mismatch, conserving capital through controlled growth and maintaining high liquidity on balance sheet in spite of a high negative carry has paid off. This is despite criticism around shrinkage of loan book. The company is now a lot more nimble footed, being smaller and agile. And in times of crisis, small is the most beautiful. IBH has also gone through deep scrubs from all the regulators as well as numerous auditors due to sectoral issues as well as specific targeting, which was done to us, and we have come out unscathed.

The company is — sees no consequential impact of the RBI’s new proposed guidelines for HFCs. We are now looking forward to get back to AUM growth in the second half of fiscal ’21 through our new asset-light business model.

On this note, the IBH management team is now open for questions. And we would like to remind you again that most of us are at home while we host this call, and therefore, we request that you please restrict your questions to high-level strategy questions. Granular numbers beyond the ones detailed in the earnings update or on this call, if required, can be directly asked from the Investor Relations team through e-mail. Thank you so much. And again, sincere apologies for the delay. We are now open to questions.

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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 Harsh Agarwal from Deutsche Bank.

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Harsh Agarwal, Deutsche Bank AG, Research Division – Head of Asia Credit Research [2]

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I’m assuming your managerial practice has taken a break because of COVID. But listen, 2 quick questions for me. One was quite a sharp decline in your number of employees in FY ’20. They have gone down from 8,500 to 5,500. I can imagine, given the, I guess, the new business model. So I’m assuming this is a permanent reduction and kind of cost savings. So as to say, you don’t expect to kind of get the employees back post-COVID so to say, right?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [3]

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We believe that given the digital initiatives taken by the company and the fact that we will be more Tier 2, Tier 3 and Tier 4 located in terms of new sourcing, we will require fewer employees. We are also bracing for a slow and steady scale up before we get back to the kind of numbers which we used to do, which was around INR 3,000 crores to INR 4,000 crores of retail disbursements in a month. So we believe that it will take us time, and we will continue to add people. Over the course of the second half of the year, we expect month-on-month to add people as the disbursals pick up. But I don’t think that we will need to add people in calendar year ’20, assuming that we are growing at the expected rate October onwards. My sense is most of the hiring will only happen now in fiscal ’21, we should be able to achieve our — sorry, fiscal ’22, FY ’21 numbers were pretty much the same workforce.

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Harsh Agarwal, Deutsche Bank AG, Research Division – Head of Asia Credit Research [4]

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Got it. And Gagan, 1 more question just quickly. So Sameer’s stake in the company has gone up from about 21.5% at the end of December to about 22.9% at the end of March. This is — this increase, I’m assuming has happened purely through on market kind of acquisitions of shares by him?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [5]

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Yes, it’s actually gone up a little further. He has got some more share. So it’s more closer to 23.5%. And yes, it is through creeping acquisition. His interest would be to be just short of 25% and continue to acquire at whatever opportune time.

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Harsh Agarwal, Deutsche Bank AG, Research Division – Head of Asia Credit Research [6]

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Got it. Okay. Let me come back in the queue because then I had a couple more questions.

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Operator [7]

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(Operator Instructions) The next question is from the line of Abhiram Iyer from Deutsche Bank.

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Abhiram Iyer, [8]

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Yes. So could you please throw some light on the sale of developer loans that you made recently to Oaktree? If I’m not mistaken, there were around INR 2,000 crores of loans that were just been sold. Is there a plan to sell more in the future? And what were the prices at which these were sold down?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [9]

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Yes. So the quantum of liquidity that we have received is in the ballpark of INR 2,000 crores. The structure is such it has 3 components to it. There is a component of liquidity that we received immediately, which is what I have detailed. There is a second component of the monies that will go additionally into the projects since most of these projects are under construction projects. And that quantum is roughly similar. It is around INR 1,600 crores that has been carved out and will additionally go into the project. The structure is that our loan gets repaid. And there is a junior and a senior NCD. The senior NCD is roughly 45% to 50% of the original loan. And the junior NCD is the balance. The senior NCD and the junior NCD together has a mortgage created over the underlying property. So both are secured by the mortgage. The waterfall is such that the senior NCD gets paid earlier and then the junior NCD gets paid. The customer continues to pay the same rate that he was paying to — for the loan. And therefore, there is no extra cost which comes either to the customer or us. The only thing that happens is that our residual cash flow will now happen after the senior NCD has been paid. So that’s the broad structure, which is there. There are at least 3 other parties that we are talking to, and we hope to conclude meaningful transactions through the course of quarter 2 fiscal ’21 also. In total, my expectation is that through this route we should be able to between now and December be able to generate at least $1 billion of liquidity.

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Abhiram Iyer, [10]

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Got it. Sir just adding on to another question here. What’s — right now, what’s the percentage ratio between developer loans and retailer loans in the portfolio?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [11]

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It will be about 80-20.

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Abhiram Iyer, [12]

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80-20. Let me get back in line.

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Operator [13]

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The next question is from the line of Craig Elliot from NWI Management.

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Craig Gregory Elliot, NWI Management LP – Co- COO [14]

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Good evening. Thank you for your time, and congratulations on dealing with this unprecedented challenges in a good way and particularly with the capital market success. A couple of questions. One, on the capital market asset liability maturity, which you put forth, I noticed that the timing bucket in the 1 to 3 years is probably the one that’s “the tightest.” When you consider various scenarios, how do you think about kind of scenarios and how you might respond, particularly related to dealing with the interest and maturities out through that 3-year time bucket?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [15]

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So as we look at the asset liability maturity, we take a rather stringent view. We do not — we expect that there would only be outflows. And other than contracted customer inflows, there are no other customer inflows. As we have demonstrated in perhaps the worst market environment and peak risk aversion, we’ve been able to raise almost $1.5 billion over the course of the last 3 months or so. So I think the worst in terms of liquidity is well behind us, it’s not for the whole sector. And from here on, refinance has become bar for the course. Whatever course correction had to be done in terms of — at our end, where there were specific instruments that we had to run down, we were able to run them down in a very, very stable manner without causing any sort of an issue. And these were short-term instruments, which were as large as $2 billion, $2.5 billion, which have been completely repaid. As I shared with you, even after 1 year, despite whatever moratorium we have given, we expect to be sitting on $1.5 billion of cash. This is without assuming any further inflows from refinance, et cetera.

In terms of ballpark, what we’ve raised in the last 3 months is ballpark of what we have to repay over the next 10 to 12 months. So that’s the kind of currency we’re being able to achieve. On the ALM now, I’m quite comfortable and happy. I think where we are sitting in terms of — on an absolute basis with the cash, et cetera, we are extremely well placed. We also don’t factor in significantly or massively discount sanctioned and undrawn lines. Those are a further backup. So the more subjective answer to your question is that, a, there is no incremental line of credit that we have factored into this; b, we have not factored in prepayments, which were a very steady feature till February of this year. It’s only from March to about June that they kind of reduced, but towards the end of June, they again picked up. So all of that has not been factored in. This ALM has a lot of buffers.

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Craig Gregory Elliot, NWI Management LP – Co- COO [16]

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Excellent. Understood. A quick question on the business. Number one, post moratoria, how do you see the rate of NPLs developing? Sort of what’s the “real” underlying trends in NPLs you might expect to see?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [17]

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That’s an extremely, extremely difficult question to answer. We don’t know the quantum of real job losses and how people will come back. While I hear and see that migrant labor has started returning, and I was reading a news report that from the states we generally send and migrate labor to larger centers such as Mumbai and Delhi, et cetera, the trains — the reverse trains are packed for and there are no tickets available for the next 1 month. So people are obviously coming back, and if they come back, then construction activity recommences. So — but there are yet enough uncertainties which will play out, which is why there is a steady ask from the industry, including from stalwarts such as Mr. Parekh, that as far as developer loans is concerned there should be an opportunity given of being able to do onetime restructuring.

From early trends that I see in terms of reversal of moratorium, as I shared, from an early number of about 1/3 of the customers seeking moratorium that is now down to just 20%. Collections have doubled month-on-month from April to May and May to June. And in the first billing cycle of July, which land yesterday on the 1st, the numbers were extremely encouraging. So all in all, I’m not perturbed by the situation. But that said, given the uncertainties, we have chosen to create these provisions so that these provisions take care of any exigency, which comes along, and management can continue to focus on getting back to growth, which we expect should be our area of focus starting October.

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Craig Gregory Elliot, NWI Management LP – Co- COO [18]

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Got it. And then your 25% RoE, which you’re targeting maybe 3, 4 years out, that’s really based on also being able to ramp up leverage. Prior to that, what is your range where you think that business sort of gets “back to normal” or back to a steady state, maybe not up to that 25%. It’s something that feels more like a normal, healthy business part of the cycle? And this is my last question.

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [19]

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Yes. My short-term goal would be at the expense of RoE and at the expense of moderate dilution to build as many buffers as we can. If I go back to the playbook of 2009 and how one emerged out of the crisis back then, the playbook was similar. We did raise — we did a small QIP at that time. Given our size, that was much more than sufficient of USD 150 million. And that gave us both growth and confidence capital to then put in place the foundation for a journey which went on for the next 8 to 9 years. My sense is that to run with a slightly lower RoE through fiscal ’21 and ’22 is okay as long as one is creating the right kind of base. And therefore, one is extremely keen to do this capital raise and God willing one will also pull this through. And I think through fiscal ’22, we should be back to about mid- to high-teens and through fiscal ’23 get to that 20% kind of a level. That’s the trajectory that one expects. But at this point in time, since we are coming — since we are right now tackling unprecedented times and over the course of the next few months we would be continuing to tackle through unprecedented times, it is best to have the right kind of buffers. And fortunately, there are shareholders existing as well as new investors who are engaged. So I’m quite positive on this.

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Operator [20]

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Next question is from the line of Amit Agarwal from Elara Capital.

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Amit Agarwal, [21]

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Just 1 quick question. So given the new reality of the COVID-19, is there any change in your plans for that $50 million bond buyback that you had announced and you were awaiting RBI approval as well?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [22]

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No, the RBI has not approved our proposal, and they’ve asked us to not do the buybacks. So, therefore, that is off the table. And that really — in terms of giving confidence to the investors, the bond investors was our intent at that point in time. So it’s not a question of $50 million of liquidity. That’s not going to move the needle at our end. But what we would definitely want to do is continue to give confidence. And I think the best confidence is if a franchise is receiving fresh capital, and if you look at trends in terms of what we’ve been able to achieve over the last 6 months of the year or over the last 3 months of the year, I think the liability franchise is chugging along quite well. More importantly, it is the diversification of this, so while the typical capital market kind of investors, which are mutual funds, et cetera, are still not really active as far as NBFC paper is concerned beyond 2 to 3 names, and we are not part of those 2 to 3 names. But whatever depth and width that we could get in terms of investors in all the large Indian banks to invest in our paper, we’ve been able to successfully do that. We also, in our peer-rated category would have garnered most of the monies. So that is also an encouraging sign on the liability franchise. So overall, I think on liquidity, we are doing quite well. We obviously would like to do even better. And for that, I think, as I mentioned earlier, equity would be a good thing. The other thing that we have also done is set out a formal mandate for the stake sale of our investment in OakNorth. And that formal mandate is out. Progress is — very material progress is being made with certain key investors. And I’m hopeful of getting that also behind us in a very, very short timeframe.

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Operator [23]

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The next question is from the line of Saurabh Kabra from Nippon Mutual Fund.

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Saurabh Kabra, [24]

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Sir, I just have 2 questions. One is what would be the liquidity position as on June end?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [25]

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June end, so we would continue — as a matter of principle, continue to maintain around 15% to 20% of our loan assets. And that number has been maintained every day and would have been — has been maintained as of June end or as of today. So we will be somewhere between 15% to 20% of our loan assets. It will be a number well north of INR 10,000 crores.

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Saurabh Kabra, [26]

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Okay. And in terms of moratorium, how much percentage of customers would have availed moratorium in the April and May cycle? And how has it changed in the June cycle?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [27]

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So as I detailed in my comments, the number started at about 35% and has declined to about 20%.

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Operator [28]

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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) – Associate Director & Senior Analyst [29]

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First, one clarification, the moratorium numbers of 35% and 20%, these are for the retail business?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [30]

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Yes, that’s correct. These are for the retail business.

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Nischint Chawathe, Kotak Securities (Institutional Equities) – Associate Director & Senior Analyst [31]

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Sure. The second 1 was on Slide 11, you have this — the data on partnership with FPI on the developer loan book. Now I think it says that sharing of losses is on a pari passu basis. So I was wondering whether it’s a senior subordinate kind of a management or is it a pari passu arrangement?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [32]

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No, it is — sorry, I couldn’t understand your question.

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Nischint Chawathe, Kotak Securities (Institutional Equities) – Associate Director & Senior Analyst [33]

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So the point is the arrangement that you have with FPI on the developer loan side, so is the risk sharing on a pari passu basis?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [34]

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Risk sharing is on a pari passu basis. There is no — just the cash flow, as I detailed, is on a — so they will have priority on cash flow. There is no other credit enhancement that has been provided to them.

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Nischint Chawathe, Kotak Securities (Institutional Equities) – Associate Director & Senior Analyst [35]

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So the way it works is that the initial cash flows will go to the investors?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [36]

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To the senior bondholders.

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Nischint Chawathe, Kotak Securities (Institutional Equities) – Associate Director & Senior Analyst [37]

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And then eventually, when it comes to sharing of losses it is equal, is it — I mean, can you just clarify that?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [38]

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Yes. So in simple terms, as far as these transactions are concerned, the answer is generally — the question is, generally, is there some sort of a credit enhancement or a guarantee provided by us, there is none.

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Nischint Chawathe, Kotak Securities (Institutional Equities) – Associate Director & Senior Analyst [39]

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Sure. Okay. And just 1 last thing. The — about 20% odd RoE guidance for FY ’23 that sort of factors in around 1/3 of loans on balance sheet and 2/3 outside balance sheet, is that the right reading?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [40]

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Yes, that’s right. But again, as I said, RoE for me if fiscal ’23 has to become ’24, that is not that much of a needle mover as to how we look at things. We are quite confident of the business model being able to achieve scale, and therefore, being able to get there. What one is really focused on is right now and how we tackle over the course of the next 3 to 6 months. And therefore, getting all kinds of moats around us using whatever capital structures we can create, whether it is stake sale or equity raise or whatever, we will focus on that, and then we can focus on getting to 20%. This 20% is within the realm of possibility. And the 1 thing that we have done quite well is on a very sustained basis ramped up RoE till the time that the NBFC crisis did not start. Subsequent to the NBFC crisis started, starting we very early on itself said that the go-to structure for us is going to be securitization. I have at least on 2 to 3 occasions over the course of the last 5 to 6 quarters indicated that for us the strategy is small is beautiful, which we have delivered on. We have reduced the loan book by over INR 45,000 crores, which is not a small number. We think we are pretty much now at the bottom of the deduction that we had to do. And once the credit environment is better, and my team is able to take rational credit decisions, as I’ve indicated, one is hopeful that from the second half we will be able to start growing again. But these are less of pressure points. The more important thing is stability, solvency and liquidity.

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Operator [41]

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The next question is from the line of Abhiram Iyer from Deutsche Bank.

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Abhiram Iyer, [42]

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Yes. Sir, adding on to a previous question, I just wanted to know what — so you mentioned that you raised around — over INR 9,000 crores of funds in the last few months, could you give us an indication of what rate these funds were raised at?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [43]

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These will all be raised at between 8.75% and 9%.

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Abhiram Iyer, [44]

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Okay. Got it.

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [45]

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This is outside of the developer loans refinance. The developer loan refinance has happened at the coupon, which was the underlying coupon of the loan.

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Operator [46]

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The next question is from the line of Nishid Shah from Ambika Fincap.

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Nishid Shah, Ambika Fincap Consultants Pvt. – President & Director [47]

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Congratulations, considering the circumstances, you guys have done very well. I have 2. One on the PIL, that was fine. When is the next date? And when do you expect a resolution on that?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [48]

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Yes. To the best of our understanding, the matter is infructuous. As we have also shared in the past through our exchange filings, the Supreme Court of India on a very similar matter to what is being dealt with in the PIL has already called the matter infructuous because both the case which had come up in front of the Supreme Court as well as this PIL had only 1 prayer, which was that someone should look into our books. All regulatory agencies, which are relevant to us, have looked into our books. Several of them have also filed affidavits in the courts. And therefore, the court and none other than the Supreme Court itself said that if the prayer was that someone looks in, they’ve looked in, filed an affidavit, the affidavit is clean, the matter becomes infructuous. I believe if the High Court has given an opportunity to hear the matter, it will also rule much in line with what the Supreme Court has done. Last time, it was not allowed to hear and simply time was taken by the other side. Unfortunately, then the lockdown happened and the courts have not sat. As and when the court sit, as of right now, as per the schedule put out by the High Court, the date is 29th of July, but the lockdown has been at least extended in Bombay. I’m not aware of what and how the courts in Delhi are dealing with matters and if they started doing normal hearings or are they still doing just urgent hearings. So if all is okay, then it will come up to be heard on 29th of July. From our perspectives, all the scrubbing that had to happen, both related to this PIL as well as all the skepticism that comes around when such an event happens, all that scrubbing has happened. And the fact of the matter is that the first to react would be lenders since it’s their money at stake. And the proof of the pudding is that those — despite so many months having gone past, 10 months have gone past, the lenders continue to support and support in how, and the proof of the pudding is in front of you. So as far as I am concerned, the PIL is sort of an infructuous matter now.

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Nishid Shah, Ambika Fincap Consultants Pvt. – President & Director [49]

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That’s very useful. And it will be important for the PIL to be dismissed by the Delhi High Court for us because we have gone through so much of pain over the last 12 months. My second question was on the dividend payout policy. This quarter, we have not paid dividend. What’s your thought on the dividend payout policy?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [50]

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So for us, our shareholders are extremely important. And therefore, dividends is something which is the way that we have historically rewarded the shareholders for supporting us. The times are extremely uncertain, and the management thought that at this juncture, it is important to create as large provisions as possible to sit on liquidity to create capital-led moats. One of the single biggest strength of Indiabulls historically has been our high capital levels, which have helped us in the past and continue to help us through this crisis. So till the crisis is not over in terms of stability around COVID, predictability around earnings, et cetera, does not come back, I would imagine that the Board will advise management to refrain from dividends. RBI has anyways advised banks to also refrain from dividends for the time being. So we would be guided by all of these inputs. On a longer-term basis, the dividend payout policy stands at 50%, but as I said a short while back for right now it is not about RoE or dividend payouts or anything else, it is all about stability, which comes through liquidity and solvency and maximizing capitalization levels, which is what we will focus on.

I’ll just take 1 more question. It’s quite late in the night. So — and we are anyways always available for any follow-ons that you may have.

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Operator [51]

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We will take the last question from the line of Sanket Chheda from B&K Securities.

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Sanket Chheda, Batlivala & Karani Securities India Pvt. Ltd., Research Division – Research Analyst [52]

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Yes, sir. So my question was on LTVs, what would be the highest LTVs that you would provide on the normal retail housing loan?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [53]

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On a normal retail housing loan, we would be guided by regulatory limitations. I believe, on a very small ticket, housing loan, we can go as high as 85%, if I’m not mistaken. So that would be the highest. But the portfolio would be on an average somewhere between 60% and 65% of — 60% and 70% of LTV for the home loan portfolio and under 50% on the LAP portfolio. These are LTVs as are calculated at the time of sanction. Subsequently, the portfolios generally amortize and loans come down, and therefore, LTVs further improved. So what I’m saying is LTVs at the time of sanction and not the current LTVs, which would have an impact of amortization. And on the flip side, they will also not have an impact immediately of whatever price correction would have happened. So we would be somewhere in a similar range since amortization and price correction one can assume would be about the same.

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Sanket Chheda, Batlivala & Karani Securities India Pvt. Ltd., Research Division – Research Analyst [54]

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Okay. So the — for — say for about more than 80% LTVs, how much portfolio will be there?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [55]

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Will be very small. Otherwise, mathematically, you can’t achieve on a granular portfolio LTV mix of 60% to 70%.

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Sanket Chheda, Batlivala & Karani Securities India Pvt. Ltd., Research Division – Research Analyst [56]

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Right. And sir, on the moratorium thing, you said that 20% is on the retail piece, so the developer piece?

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [57]

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Would be about 70%.

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Sanket Chheda, Batlivala & Karani Securities India Pvt. Ltd., Research Division – Research Analyst [58]

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Would be about 70%. Okay. And 1 last question, in the opening remarks, you mentioned about raising — you raised about INR 9,000 crores in which you said INR 5000 crores consist of some bonds and loans. So how much of that would be bonds and loans? How much loans will be left? You mentioned term loans frequently about INR 1,200 crores to INR 1,300 crores, but in that INR 5,000 crore fee, how much is…

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Gagan Banga, Indiabulls Housing Finance Limited – Vice Chairman, MD & CEO [59]

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We’ve raised around INR 2,000 crores of bonds. A little over INR 2,000 crores of bonds.

Thank you so much. Apologies, again, for the delay. And thanks for all the support that you’ve given to the company. I hope all of you and your families stay safe. Good night.

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Operator [60]

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Thank you.