Q1 VF stress + Q2 Cobrapost gone.

Vehicle credit cost is running at 2%, higher than peers and historical levels. What is the cause - any specific geography, OEM or subsegment giving pain? And what is the rationale for moderation - is it growth-led or underlying cash flow improvement?

Vehicle finance Stage 3 has stabilized at 4.17% (vs 4.1% Sep and 3.89% June), Stage 2 has come down 30 bps from 3.96% to 3.61%, and early default and nonstarters have come down significantly in Q3 with further improvement expected in March quarter. NCL has come down from 2.2% in Q1 to 2.1% in Q2 to 2% in Q3, and while elevated, the trajectory is improving. The first two quarters were impacted by rains and lower capacity utilization, but with GST rate cut driving vehicle demand, deployment and capacity utilization are improving.

Is the early starter/early delinquency improvement a factor of underlying cash flow improvement or a factor of growth, given disbursement growth has been strong this quarter?

Early default pertains to the first 6-12 months of the book and is nowhere related to the denominator effect since it tracks individual customer behavior in the first delinquency bucket. The improvement reflects increasing collection efficiency, which has been seen in January as well. This trajectory will be maintained in vehicle finance, and similar benefits are appearing in CSEL.

Is this improvement across OEM and across geography?

Across OEM, across geography, across the type of product, new and used.

Vehicle disbursement growth has been very strong this quarter, partly pent-up demand. How do you see overall disbursement growth going ahead?

Things are looking better than Q3 in this quarter so far, with 60 more days to go, so Q4 will be better than Q3 in terms of overall disbursement and across all businesses. SME and CSEL were slightly behind in Q3 versus the prior year because they had given up some portfolio, but disbursements are now up across segments.

Home loan credit cost has gone up - any one-off out there? And on CSEL, where should credit cost stabilize compared to current 6.4% given improvement in disbursements and stress having peaked?

Home loan saw a one-off quarter in NCL because the team contracted with an ARC and gave up INR65 crores of Stage 3 from the non-SARFAESI pool, with an NCL hit of around INR35 crores for the INR65 crore book. Income line was elevated by INR23 crores from the deal so net P&L impact was small and ROA stayed at 4.2%; an additional INR5-6 crores of extra provision was created. Going forward, ARC routes will be used selectively when collection confidence is high, but this approach will continue. CSEL NCL trajectory is moving in the right direction - 6.7% in Q1, 7% in Q2, 6.4% now - and is expected to fall further in Q4 with disbursements scaling back to prior levels.

There was a sale to ARC during the quarter, and we had taken the provisioning knock of INR35-odd crores on that transaction. Is that the right interpretation?

INR65 crores of assets were sold and as per IndAS, you write it off in the book and the income comes in income line. Provision carried gets reversed and the net impact is around INR35 crores in the NCL line. Vellayan added that this represents 65 bps of the 1.1% NCL, so without this it would have been 0.45%.

In the M&HCV segment, demand is migrating towards large fleet operators tapped by banks. How is it in LCVs and SCVs - is this a risk you foresee for these segments also?

Chola slowed HCV disbursals over the last 2-3 years, so when cost of funds came down it began acquiring more HCV customers; industry grew 20% but Chola HCV grew 56%. In LCV, Chola was already high, so growth tracks the market closely; in SCV the market grew ~16% and Chola grew 28% in this high-yield book. LCV is more SRTO and less fleet, while HCV is more fleet and less SRTO, and this structure will continue.

With Amazon and e-commerce players needing last-mile distribution, do they end up outsourcing to smaller transport operators? Wouldn't this segment also formalize over time?

E-commerce players prefer to contract with people that have larger fleets, and you do see some people getting into fleet, but the percentage that has gone to fleet in these LCV/SCV businesses is much, much less than heavy commercial vehicle. Heavy commercial has always been larger fleets, while LCV/SCV is only the e-commerce segment that demands large-level formalization from their supply base. Ravindra added that EVs being purchased by large operators is the area where bank-NBFC mix could shift.

On yields - SME yields over the last 9 months have been the same as March 25 despite 100 bps repo rate cut, and LAP yields are higher than pre-COVID. How have you sustained yields in these segments?

In both situations, it's a business mix issue. On LAP, post-COVID Chola introduced small LAP with higher rates and the business mix is helping sustain yields. On a like-for-like product, yields are coming down, but mix changes are consciously used to maintain blended yields. Ravindra added that small LAP now contributes ~20% of LAP disbursements (~INR8,000 crores volume) and SME has introduced high-yield Micro Term Loan; Pankaj noted that equipment finance growth at higher rates also helps.

What is our current FEMI rate in personal loans?

FEMI used to peak at 3.90%, but over the last 3 months it has come down to 3.1-3.2% types. FEMI is never an indicator for any metric because it requires NACH registration with the bank, so while it has come down, it is not a good leading indicator from past experience.

Vehicle finance asset quality trends look inferior to peers - lower QoQ drop in credit cost, higher YoY trend, higher net accretion to NPAs. Why is your customer segment finding it difficult to repay versus peers - any customer-specific or vehicle-type colour?

Chola's vehicle mix is distributed across all segments unlike peers more skewed to used (which has not deteriorated as much), so SCV/LCV plus tractor portfolio deteriorated due to monsoon deficit and capacity utilization issues over the last 2 years. Stage 2 has come down from 3.96% to 3.61% and Stage 3 has stabilized at 4.17%, with early default and nonstarters declining first before improvement flows to Stage 3. The portfolio is distributed across geographies and products with no concentration, so there is no specific market or product causing the elevated metrics.

In affordable HL, INR65 crores principal was sold to ARC, yet GNPA has come down only from INR376 crores to INR358 crores - meaning slippages here too. Any specific or geographic colour?

Only the non-SARFAESI pool has a slight increase in delinquencies, which are addressed through legal means. It is not about any specific geographies - in fact, infant delinquencies are coming down everywhere, and Q4 will see further reduction. NCL will be maintained at 0.5% going forward.

Two cyclones hit Southern India in November-December - what has been the impact on vehicle finance customer base, and is there stress that can show up in 4Q numbers?

South zone collection across all metrics has done well over the last 4 months, including January despite the heavy holiday calendar with Pongal and Makar Sankranti. There has been no significant pressure or stress from cyclones - impact has been very, very marginal with no notable hit on vehicle finance book in South zone.

On growth outlook for non-vehicle book - we backed out from fin-tech and are scaling up direct digital and consumer durable. How much time will it take to set up infrastructure in these 2 segments before growth kicks in - is it 3-4 quarters away?

CSEL has two segments - DSA/DST business at INR700 crores per month and CD/digital lending at INR300 crores per month, totaling close to INR1,000 crores per month versus the peak of INR1,200 crores. Q1 of this year was only INR2,000 crores so even at INR1,000 crores per month, Q1 next year would be INR3,000 crores showing significant growth. Corrective measures have been taken to remove three lower-quality segments while still growing diamond-quality DSA/DST disbursements 25%+ from Q1.

In digital and consumer durable INR300 crores - majority would be digital since CD infrastructure takes time, right?

Digital is INR100 crores, Samsung tie-up is around INR150 crores, and INR50 crores is open-market CD - so CD is INR200 crores and digital is INR100 crores. CD is higher than digital and is only going to go up. Vijay added that the Samsung Finance Plus platform infrastructure is already set up, so distribution is enabled across the country with no time lag for customer acquisition.

But you will be looking for more tie-ups in CD, right? Samsung must be your first?

We already have about 9 tie-ups and have broadly covered about 75% of the entire mobile market, and we are working on distribution on the open market platform for CV. Vellayan added that Chola has just moved out of mobile into household appliance segments as well, so this will grow in different tiers over time - mobile first, then non-mobile household appliances.

Within vehicle finance, used vehicle prices saw good demand with replacement cycle kicking in. Which subsegment is seeing demand pickup, and what is the extent of used CV price decline - any asset quality concerns?

After the GST reduction, there was a lull for 15 days before market correction - the initial spurt was in M&HCV at retail operator level, then ILCV took over. In M&HCV used, the initial movement was in the haulage segment, and from January traction is coming up in the tipper segment as contracts are released. SCV is more or less BAU. Ravindra added that drop in used vehicle valuation is hardly 5% and the quality of used vehicles coming to market post-November has improved as fleet operators replace - used business is up from December and likely to grow further in Q4.

How long do you see this replacement cycle playing out - over the next few quarters or just 4Q?

New vehicle sales were lulled for 2 years and only now started picking up in December, with January peaking on commercial vehicles while passenger remains stable. Used vehicle disbursement is driven by the new commercial vehicle sale, so if HCV/LCV grow at 10-15% in units, the GV value translates to 20%+ growth in used. This can continue as long as new vehicle sales continue.

Cost of fund trajectory - given limited reduction in G-Sec rates over the last 3-6 months, how should we think about cost of funds and consequently margins ahead?

There has been no tightness in liquidity but also no significant rate reduction. The mix is partly fixed rate borrowings, so there is still steam to reduce on NCD market borrowings and MCLR bank borrowings - another 5-10 basis points cost of fund reduction is expected in next quarter, which should largely flow through to NIM. Beyond that, NIM increase needs to come through business, with Q4 NIMs always being higher historically due to better collection-driven other income.

Margins guidance - if NIMs are 8% now, can they go to 8.1-8.2% next quarter? How should we think about NIMs in FY27 and what is incremental cost of funds?

Q4 NIM should be around 8.1% and we should end the year shade less than 7.9%. We expect to hold this level into next year to a large extent unless there is some drastic increase or macro issues, with no further reduction expected beyond current levels.

On SBPL business - net credit cost has been moving up for past few quarters; do you see risks to growth and are you comfortable with this credit cost level? On LAP, will spreads/margins hold despite rate cuts? And in affordable housing, should disbursements growth pick up again?

For SBPL, credit cost in Q3 may look higher but it has reached a peak with no more increase expected. Two zones have already started improving in December and January - this will reflect by Q4 end and definitely show stabilization in Q1, with credit cost subsequently going down. Ravindra added that SBPL is entirely non-SARFAESI so resolution takes 2-3 years and ARC sales may be done from time to time; PBT ROA stands at 7.3% and will continue.

On LAP business, will spreads and margins hold largely despite rate cuts because of mix change?

LAP margins are up 20 bps YoY primarily due to product mix - higher interest products are expanding and Tier 3/4 geos are also helping sustain yields. NIM will be in the same range and Q3 opex of 1.8% (YTD 1.7%) will be range-bound at 1.7-1.8%. Overall ROA impact should be at most 10 bps.

In affordable housing segment, should we start to see disbursements growth picking up again?

Home Loan has had a good quarter and the team has always maintained the AUM growth will be around 28-30%, which we see continuing for the next 2 years.

GNPAs in HL (adjusting for ARC), SBPL and SME are increasing. What gives confidence in growing these segments? In CSEL when GNPAs were rising you slowed growth - why are you continuing to push growth here despite increasing GNPA?

In HL, LAP, SBPL and SME, Stage 3 customers are split into SARFAESI and non-SARFAESI - SARFAESI cases get resolved because the underlying property is appreciating, so there is no point losing money unless there is a property issue. Non-SARFAESI takes 2-3 years which is why Chola did the HL ARC deal; steady-state HL NCL is 0.5-0.6% with PBT ROA 4.5%, LAP at 3.7-3.8%, SBPL at 7%+. In SME, the term loan book is mortgage-backed and corporate SARFAESI takes ~1.5 years because customers contest longer; results have started in December and Q4 onwards better Stage 3 and NCL reduction is expected.

From March 24 to now, asset quality has only deteriorated. What is needed for substantial asset quality improvement, given seasonally weak first half next fiscal? And on noninterest income - any initiatives to improve fee income?

Out of 8 business lines, only 2 have high NCLs - Vehicle Finance (entirely macro-driven) and CSEL (partnership business plus traditional unsecured affected by industry-wide multiple-funding issues). Quarterly NCL of around INR900 crores combined will start reducing significantly because vehicle capacity utilization has improved meaningfully and Stage 2 is coming down. Cyclicity in Vehicle Finance is expected to resolve over the next 3-4 years with cycles being 4 years up and 1-1.5 years down, while seasonality remains; CSEL partnership book has come down from INR3,000 crores to INR600 crores and will be eliminated next year, with traditional CSEL NCL trending toward 5%.