Kunal Shah · Citigroup
Firstly, with respect to growth, you indicated mortgages and SME growing slightly slower. But festive appears to be quite strong and everyone seems to be quite constructive on the growth. Are there any other segments you would be worried about in terms of pulling back on the growth side because new businesses are also scaling up well? Or is it only on account of these 2 product segments that we are revising the guidance lower? And rural B2C now starting into green will also contribute? Secondly, with respect to asset quality, stage 3 is moving up. Would it be fair to assume that larger part of this flow is from stage 2, maybe net number is quite small? GS3 increase is all across segments -- so that's largely the only flow-through which is there?
Rajeev Jain: Both these contribute to 31% and 14%, 45% of the balance sheet. The other businesses are picking up the slack. The guidance reduction is restricted to contribution of these businesses, and their slower growth is meaningfully being made up by other lines of businesses -- gold loans, car loans, LAP, growing healthily. Rural B2C moving to green will also contribute.
Sandeep Jain: Last year quarter 2 also saw GNPA sequentially go up. There's a peculiar situation -- 231 days month in quarter 2. Since we have recognition of stage 3 and GNPA on a number of days, customers at the edge (88, 89 days overdue) cross into 90-day position in September quarter. So vs a normal quarter where you see 3 months of GNPA flowing in, in Q2 you see 1 additional month -- creates 18 to 20 basis points of additional GNPA formation in the quarter.
Rajeev Jain: Correspondingly, there is a benefit that appears because of fewer number of days in fourth quarter.
Sandeep Jain: Last year same time GNPA was 1.06%; currently 1.24%. Out of this 18 basis points, captive 2-wheeler 3-wheeler (in rundown mode) contributes about 12 bps of additional GNPA formation. MSME contributes another 6 bps. Other than that, all other businesses have held their performance on Y-o-Y and sequential basis.
Rajeev Jain: Sequentially is purely number of days. Year-on-year, it is principally on account of 2-wheeler and MSME.
Sandeep Jain: The overall formation of stage 2 and stage 3 put together was just about INR 162 crores for the quarter, one of the lowest in a very long time.
Jay · Nirmal Bang
(a) On MFI lending, we see 217% growth year-on-year. Do we expect that the pain in the industry has peaked out or is plateauing? (b) On tractor financing, can you give the split between used and new? (c) Do we have a partnership with the OEMs? How does the partnership work? (d) On MSME lending, we see GNPA growing up significantly. Is it because of regional rainfall issues highlighted by peers?
Rajeev Jain: We are too small in MFI -- balance sheet is only INR 1,750-odd crores. We're not the right people to comment on whether the worst is over for MFI. Our portfolio is at 99.22% current (Sandeep clarified the 9.22% number to 99.22%). We continue to tread carefully knowing what's happening in the industry.
On tractor: Total book is INR 1,000 crores -- not material. We were very clear the mix is to be 75% new and 25% used. Our portfolio modelling says for us to deliver minimum hurdle rate of return on equity in tractor finance, we need a 75-25 mix.
On OEM partnerships: It's a B2B business. We work closely -- they are mostly very regionally dominated players. We work with all of them. We are in 400 towns (per Harjeet Toor), predominantly North and West dominated. Building out, too small as yet, but promising.
On MSME GNPA: As we outlined in first quarter, we are seeing incipient stress. It's across the board. It's not regional in nature. We have cut business by 25%-odd and hoping that the worst is behind us between March and June, and it can be in growth mode from there on.
Piran Engineer · CLSA
(a) On rural unsecured / rural B2C: you used to give data on how many customers are 3PL and above and how it was higher than history. Are the fundamentals also improving in terms of overall leverage? (b) On captive 2-wheelers (1.5% of book, 9% of loan losses): so 9% of this INR 2,200 crores credit cost number? What would non-captive be -- just want to get a sense of the difference in credit cost?
Rajeev Jain: Across businesses, we have cut 3PL to prior to '19-'20. It has meant a reasonable growth dilution but it's one single univariate variable that's helping improve portfolio performance. In rural B2C the number is below 1% (less than 1% of customers with 2PL). In urban it would be 3% or 4% -- 4.8%. We have cut business. This number used to be 13% a year ago, 13% and 3%. We've gone hammer and tongs after it -- it's showing benefit.
This is on incremental -- since February. The book churns. Our behaviorialized maturity of the book is 20 to 23 months. We track vintage performance -- 3 MOB, 6 MOB, 9 MOB. We started taking very drastic actions across portfolios from February. We're seeing 3 MOB, 6 MOB, 9 MOB all improving significantly.
Sandeep Jain: After a long time we have revised the management assessment from yellow to green for rural B2C. The granularity with which we are building the rural B2C business and significant improvement in vintage performance in the last couple of quarters -- we are quite excited to rebuild and grow it faster.
On captive 2-wheelers: Yes, 9% of the INR 2,200 crores credit cost. Non-captive (open market) is now equal size to captive on AUM. 97.8% current. We are very clear it has to be at lower than 1/3 of the loss of our captive.
Sandeep Jain (on open-market 2W): While vintage will play out, 1.5-2% balance sheet contribution, same is contribution for loan losses. Eventually likely 1.5x of portfolio contribution because the business operates at higher credit cost vs organization level, but significantly better vs captive 2-wheeler.
Viral · IIFL Capital
(a) On cost of fund guidance, we have lowered our cost of fund guidance for the full year by around 5 basis points. Does this set up the stage for 5 to 10 bps margin expansion? Is the cost of fund guidance taking only 100 bps of rate cut? (b) On gold loan, from a medium-term perspective, you have executed fantastically -- scaled up the book in a market that was duopoly or 3 players at max. Over a 2-3 year horizon with entry of large NBFCs into this segment, in scenarios where gold prices keep going up vs flat vs down, how do you see this market evolving? Also, in scenario where gold prices don't go up or even go down, how does the market grow given volume growth is hardly there?
Sandeep Jain: I would love to have NIM expansion, but the best assumption at this point suggests we will rather hold NIM at the current level. Idea is to pass on the incremental benefit to customers. We have seen 27 basis point improvement and passed on the entire benefit to customers in current quarter -- as a result NIM came in flat versus Q1.
On rate cut assumption: Yes, we are not privy to any further rate cut formally or informally. We have taken only 100 bps. Even if there's a rate cut in December or February, given proximity to year-end, won't have any material impact -- 7.55 to 7.60 guardrail probably remains same.
Rajeev Jain: Benefit will flow in next year, not in the current year. Yes, there will be a benefit then.
Rajeev Jain (on gold loan): Three scenarios -- prices go up further (good), remain flat (good), go down (in COVID it went from INR 55,000/10g to INR 45,000, you do fire sale -- nature of the business). Adjusted for that, this portfolio could be -- we're at INR 12,000 crores, will end this year at around INR 16,000 crores plus/minus. We just signed up significant expansion -- INR 27,000 to INR 30,000 crores by March '27. From now till March '27, virtually 900 more branches coming, plus 500 of existing branches converted to gold loan branches. As FinAI gets deployed, branches will be rendered surplus -- staffing becomes free. So a cost centre becomes profit centre. We track leading competitors and generate similar ROEs.
On flat/declining gold price scenario: Apart from per-branch efficiencies, 40-45% of the business comes from existing customers digitally -- 40-45% of monthly disbursals (INR 1,700-1,800 crores monthly) come from the app. It's a moat -- 75 million customers on the app, 45 million MAU. We don't have branch coverage; as we multiply branch coverage, the number multiplies. It's a coverage issue, not a franchise momentum or digital infrastructure issue.
Avinash Singh · Emkay Global
(a) On softness in other operating income -- is it lower recoveries from written off accounts or lower marketing fees? (b) On FY'27 credit guidance: I understand captive 2-wheeler going out and gold/new vehicle increasing helps. But is there some risk -- now your customer franchise is close to INR 12 crores, you go further deeper, then in each business line you may be going to a more marginally riskier customer. Is that understanding wrong, or will you see some impact because you are going deeper in each product segment?
Sandeep Jain: The other operating income, as you called out, is on account of flattening of bad debt recovery number. As COVID period write-offs got cleaned up through recovery process over last 3 years, the overall bad debt recovery number has started to plateau out. That's why other operating income hasn't seen the kind of growth we've seen in past.
Rajeev Jain: We had also guided that in the current year...
Sandeep Jain: That's overall fee and other income put together. We've guided for full year that between NII and NTI -- the entire fee revenue pool (fees and charges plus sale on assignments etc) -- all together will see 13-15% growth in current year. We are holding up to the guidance.
Rajeev Jain (on going down the curve): We keep reiterating risk-first. As scale grows, complexity grows, our understanding improves. We don't believe we will grow at the cost of increasing risk. The franchise is very large -- we are 13% of number of loans in India on a monthly basis but only 4% of the balances. So we can pick and choose what we feel comfortable with from risk and margin standpoint and continue to grow for foreseeable period. The 9% gap between 4% balance share and 13% loan share is the share of wallet to target. That's the differentiation -- continued mining.