Q1 VF stress + Q2 Cobrapost gone.

Within just the qualitative assessment of what explains the increase in the vehicle finance NPLs? On the one hand we are seeing rural inflation being lower, but income levels of the truckers or freight charges not being up to expectations. What really explains this stress in the vehicle finance segment?

In vehicle finance two things are important - vehicle capacity utilization and how the economy is doing. In Q1 industrial production is down vs last year and the early arrival of rain has impacted capacity utilization in many markets, so operators struggle to pay the first EMI and customers in zero bucket move to first bucket while some Stage-2 borderline customers move to Stage-3. If the early rain ends by mid/first week of September, then good agriculture growth and festivals starting late Q2 should bring good results from Q2 itself, otherwise improvement comes from Q3 onwards.

What about other segments when everything is gone up QOQ - the LAP, the home loans, the personal loans, CSEL everything?

LAP, HL, SBPL and mortgage-based SME lending were at rock-bottom NPA levels (LAP NPA fell from 6% in 2022 to 2%) and normalization is now happening in line with our prior commentary, with NCLs in the projected ranges (LAP 0.3-0.5%, HL 0.6-0.7%). Resolutions take time - SARFAESI in LAP takes about a year and HL/SBPL non-SARFAESI arbitration takes 2-3 years - so there will be a slight increase but NCL stays range-bound. The pressure points are vehicle (gone up from 1.9 to 2.1) and CSEL where the Fintech book is being run down at high NCLs - both are expected to get sorted by year end with Q4 onward looking better.

On credit cost - for the full year 1.4%-1.5%, should we expect this to be similar or slightly lower next quarter and a meaningful improvement in 2H? And on growth, was surprised with the degrowth in home loan disbursement; we were expecting 15-20% full year growth so the ask rate is 20%+ for the rest of the year - do you maintain that or is there change at the lower end of the bandwidth?

In housing loan we said this year we are not expanding so disbursement growth will be lower while asset growth will be 30%, and asset growth is at 30% level; Q1 disbursements were slow due to housing registration process changes which should normalize in Q2 and Q3, but full-year HL disbursement will be around 10% as we focus on OPEX reduction. On overall NCL, last year we did 1.4%; if rains end ahead of time we get a small benefit in Q2 otherwise Q2 stays at similar level, with reduction coming up from Q3 onwards. If rural economy and industrial production improve, we close near last year's number; otherwise take a 10 bps increase over last year conservatively.

And CSEL and overall growth then for disbursement for FY'26?

CSEL is dragged because we cut Rs. 1,500 crore quarterly disbursement from the Fintech partnership book and almost Rs. 500 crore from low-ROTA supply chain finance and SME products, which would have added Rs. 2,000 crore taking us to 10% growth. The strategy is to focus on traditional CSEL, increase CD and in-house digital lending, with better asset and disbursement increases visible from Q4 onwards; gold loan was recently started and the initial start is very good with some benefit expected.

And so that the credit cost or that 1.4% to 1.5% - that's on total assets or the loan assets?

Yes, that is the way we calculate, and we are not going to change the calculation, so it will be on total book assets.

After a long time I have seen urban branches growing up to around 9% of branches - is this reclassification or a change of strategy? Second, given hope of a better second half, how are we budgeting for OPEX, schemes and payouts to employees especially in vehicle finance, and what discussions have we had with top OEMs?

The 75 gold loan branches that opened up are in the urban market and that is why urban penetration increased - there is no change in strategy, 90% of branches remain in tier 3, 4, 5, 6 with new gold loan branches initially in tier 1 moving to tier 2, tier 3 over time. On payouts, Q2 always sees high costs but we are improving productivity, financiers are curtailing OPEX and other businesses are not expanding new branches, so even with gold loan branch expenses our overall OPEX came down to 2.9% versus 3%, and we want to keep it at 3% level in Q2/Q3. With manufacturers we are engaging closely as their concerns about volumes mean they want to work very closely with us, helping our market share improve in segments.

What is our strategy in terms of selection of branches for the new businesses like CSEL, SBPL, SME - how do we go about looking at a location and saying we will co-locate this branch with our VF branch in this particular location?

All branches across all segments, whether new or old businesses, are co-located mostly. SME is more in tier 1, CSEL in tier 1/2/3, and SBPL more in tier 3/4/5 - it depends on the product and type of customer. Most of the branches are co-located with vehicle finance branches.

On vehicle, you said 15% growth is possible if economy picks up. Beyond things not in our control, are we trying to gain market share by working with OEMs beyond our top two or three? And within vehicles can you give some color around what is weaker - new or used or particular segments? Second, on margins, when do we see large benefits in cost of borrowings - 3Q or 4Q? Yield this quarter was muted, what was the quantum of interest income reversals? Last, on overall growth - in unsecured MSME (CSEL), SBPL (micro-LAP), industry-wide weakness has started; would you slow down in those segments and would that lead to growing at the lower end of guidance?

Benefits have not flown in much in Q1 on cost of funds because the bulk of repo rate reduction came at the fag end; 50% of bank borrowings are EBLR linked so full benefit comes through in Q2, while MCLR-linked benefits will come more from Q3 onwards as banks have not yet given the entire benefit. For the full year we should see roughly a 20 bps improvement on cost of funds, of which we may give away 5-8 bps in floating rate book yield reductions, leaving around 12-15 bps net NIM impact purely from cost of funds.

On overall growth and segment-level views on weakness in unsecured MSME and SBPL - would you slow down in those segments? And within vehicle finance, what's weaker?

Across segments the economy is slow due to early rain and lower industrial production, expected to improve in the second half. Our SMEs are purely mortgaged (SBPL, SME, LAP) - only CSEL has a much smaller unsecured business loan; secured SME NPL increase was projected and will be resolved through SARFAESI/arbitration so we are not slowing disbursements there. We were the first to cut the Fintech business and have stopped it completely, plus we are cutting low-ROTA supply chain finance; in vehicle finance we are growing well above industry across product lines (HCV +9 vs SIAM -6, two-wheeler +16 vs -6, three-wheeler +15 vs flat) except tractor and construction equipment where we deliberately keep pricing/share.

If we look at Q1 performance, was it below our expectations given the environment? Internally what initiatives are we taking - have we made credit filters more stringent or enhanced collection capabilities in any segments? And on overall growth of 20-25% guided, given disbursements where do you see the overall growth settling - lower end of 20% or below, and any measures to prune or boost growth?

Calibration of underwriting and collection is a continuous process that improves in tough times - in CSEL we cut number of inquiries and reduced trade business loans in Q4 last year itself, marking certain markets as negative for repayment, while vehicle finance is continuously improving underwriting models. We have said this is a year of collection, not disbursement, so we are working to keep first-bucket collection strong and roll-forward rates lower, with benefits flowing from Q3 onwards. On growth, we have been discussing 20-25% but will try to achieve at least 20% without fail; at 23% now, only deterioration would push it down to 20.

There are many other NBFCs and banks that have two-wheeler, three-wheeler, and unsecured retail asset quality worsening. Isn't it just monsoon or is it over-leverage of retail people - retail asset class topping out structurally on leverage? How do you assess this differently from seasonal versus structural?

It is more seasonal and also related to the economy of the country which is currently slightly slow, both put together impacting NCLs and NPLs. It is likely to improve from Q3 after better results come up mainly in the rural market and after the agriculture growth status shows up.

Historically we have been counter-cyclical - whenever we saw early stress signs we pulled back, e.g. FY25 in two-wheelers. Are we now actually seeing structural underlying environment improving and being counter-cyclical again to gain market share aggressively in vehicle finance? Second, on non-vehicle side where we are smaller as a lender, we are seeing worsening stress - does that mean we will pull back on growth there? And on margins, mix change adverse on asset side and have we passed on any incremental rate cuts on fixed rate products like vehicle finance?

On fixed rate we have not started passing on, and even if that happens it will be more on the marginal book and not on the existing book. On the floating rate book, that book is growing better - LAP and HL AUM growth is above 30% so they still have a lot of growth and funding will continue. As we move on, in the near term we should benefit more in LAP because BT-in will be more if rate reductions happen both from our side and the market.

On counter-cyclical growth strategy in vehicle finance and pulling back in non-vehicle stressed segments?

Two years back we cut tractor and two-wheeler funding ahead of time after observing two consecutive bad monsoons, but now monsoon has been better year-on-year so we are focusing more on the products we paused, which shows up in our disbursement growth versus industry's -5% to +7%. In unsecured SME our share is hardly anything - it is in CSEL which is 7% of book and very small, so we don't have a problem and don't want to increase significantly there. In CSEL we are increasing CD and in-house digital lending, the traditional Rs. 500-600 crore disbursement remains the same, we tightened credit norms for second/third loans last year, and from Q4 of this year CSEL NCL will further go down.

Just one clarification on the comment Arul sir made - on the NIM benefit of around 15 bps from here, does this take into account the benefit of the CCD conversion which will come on NIMs?

It is at 7.5%, so when it gets substituted by similar loans on conversion - it's not that when we are growing, we are borrowing more than Rs. 1,000 crores every month so they would get subsumed in that. The Rs. 2,000 crore getting converted into equity will give a very marginal benefit but on overall Rs. 1,74,000-1,75,000 crore borrowing side it may not move materially.

On credit cost guidance - taking the higher end of 150 bps, Q1 started at 180, Q2 around 170, so H2 needs to go down to about 120-125 bps. The pace of seasonal improvement first half versus second half this year seems much better than last year - is that the magnitude of seasonality and macro improvement we should expect?

Last year we started from 1.5% and ended at 1.3% in the last quarter with average of 1.4%, so this year we are starting from 1.8% and that is why we are saying we might end at 1.5% (150 bps); reduction will come only from Q3 onwards. Q2 is still affected by monsoon - if rain ends in the first week of September, there could be slightly better results. The trajectory of NCL starting from 1.8% can either be 1.8% in Q2 or 1.7%.

On the 15% vehicle finance for the full year - is that loan growth or disbursement growth? And how about the overall disbursement growth this year?

Asset growth is at 18% level and we said asset growth will remain at 18% level; as of now disbursement is at 7% which will go up to 10-12% in this financial year. Overall company disbursement growth for the year is expected to be around 10% (clarified by Vellayan Subbiah as full-year growth).

In tractor specifically, the industry has been fairly optimistic in terms of growth because of rainfall being good - so why is it that there are higher NCLs in the tractor portfolio?

Higher NCL is actually because of the old book - the Stage-2 for tractor has improved.

Many players are highlighting stress in vehicle finance segment - some say UCV, some say new retail CV - but from our perspective we have been gaining market share. Just wanted to understand your strategy of why to gain market share when there is stress and Q2 is looking weak, and how will we ensure we are onboarding quality customers and not getting into a cycle?

In vehicle finance we have tightened the underwriting norm and are working more closely with manufacturers - working closely with manufacturers gives us first right of rejection (best quality customers), and tightened underwriting models raise the rejection rate so even with rising market share you get good quality customers. Two years back we paused because rural economy was slowing, but as of now the rural economy is improving and will improve further after the monsoon ends, helping us maintain quality going forward.

Just a clarification - so you are saying our rejection rate in vehicle finance currently would be higher than two years back, and we are still gaining market share at this point?

As far as all these products like small commercial vehicles are concerned, we have tightened our credit policy so the filtration is going in at the customer acquisition stage itself. Plus when you are in the first right of refusal at major counters where we are not active across, that is helping us in acquiring the best of best customers - we are not running after them.

So basically we are gaining market share at the dealer's point and not by expanding distribution - how should one look at this?

Both - both are happening. Distribution has continued to be there as we mentioned in the past that our resident locations have gone up to 700 towns where we will open up branches in time to come, and the network has more than 1,613 branches.

On asset quality in vehicle finance space given elevated stress for a few consecutive quarters - how has the loss given default trended across product types of commercial vehicles, used vehicles? Anything different versus historical trends?

LGD is at the same level as now - there is no change in LGD. Loss on sale on the asset whatever we repurchase is 32% to 35%, varies from product to product.

On growth - if this slowdown were to sustain in Vehicle Finance, are there any other levers you could pull to meet your AUM guidance of 20-25% or the lower end 20% growth guidance? How are you thinking about it?

Our perspective has been that we have the opportunity because of the overall portfolio to see if other businesses can fill up some of that gap. So if vehicle finance continues to be muted in the second half, then we will obviously look at mix of other businesses like LAP, home loans and some of the other businesses to manage it.

On the MSME versus commercial vehicles or vehicle finance overall - we see profitability trends in MSME have improved while that for vehicle finance has come off. So what is it that you are seeing differently in SME versus vehicle finance space - are we going down the risk curve there or how should we think about it?

The main lever between them is that all MSME businesses are secured, asset-backed MSME has lower NCL with SARFAESI benefit and those are appreciating assets. In vehicles it is a depreciating asset, so when you repossess NCLs are high and we are at higher NCL levels which is dragging the ROTA of vehicles. OPEX is also higher in auto ecosystem versus SME ecosystem because the ticket size in SME is much higher than auto.

In CSEL, how much is unsecured business loan? Can you give thoughts on ticket size, geography, customers where you are seeing stress - anything specific to note? And how much of CSEL is partnership-based and by when does that run off?

CSEL partnership is Rs. 2,500 crore, balance is between CSEL business loan, personal loan, professional loan, CSEL CD and D2C - everything is unsecured. The entire CSEL is unsecured. So that's 7% of overall book.

Outside of the partnership business, are there any particular pockets of stress or is it across all these different segments? And how much is the CSEL business loan?

The CSEL business loan has slightly higher NCL than expected, which is why we started cutting down the number of inquiries and reducing existing-loan second/third loans in Q3/Q4 last year, while disbursements are at the same level as earlier (around Rs. 500 crores). CSEL business loan is almost Rs. 7,000 crores. The problem in CSEL business loan is across the country with no concentration in a particular geography - it is around 5% of the Rs. 7,000 crore book where customers have multiple loans.

When I see your vehicle finance slide, the assignment part for this quarter is just Rs. 6 crores, it was Rs. 9 crores last quarter and has been coming off. What is the plan - are you looking to assign more vehicle finance going forward, or is this a product you don't want to do?

We have not been doing assignments for a long time and only of late some demand came from one specific bank wanting LAP book; given our long and large relationship we have started doing some assignments over the last two quarters, restricted to LAP. We don't want to go around seeking assignments especially in vehicle finance or other products - in vehicle finance we do a lot of securitization which is not shown greatly because it comes as part of borrowing.

In your products, do you see cross-sell opportunity synergies of cross selling your products to the same customer, and are you looking for the business from a customer lens or from a product lens? And how do you benchmark yourself in terms of technology with your peer group within NBFCs, specifically the top NBFCs?

Cross-selling within vehicle finance is happening - around 25% of disbursement comes from existing customers (vehicle customer going for second loan or commercial vehicle customer going for car/two-wheeler loan). Cross-selling across divisions (LAP against vehicle finance or vice versa) is not happening - it is happening within the division only.

Follow-up on cross-sell and shift to customer-based lens?

From an analytics perspective we have started looking at the propensity of customers - taking each of our customer datasets and looking at their propensity and interest in buying other products that we would start cross-selling. So we are definitely making that transition from product-based views to a customer view, and that's a shift we are beginning to make.

On technology, how do you benchmark yourself?

I think we have the best IT team. Most of the loan origination systems are internally developed, we are relying on the LMS being supplied by a very top-notch IT company, and all other subsystems are also developed internally.