On Motor Finance, breakeven has happened and growth should come back. As you go away from being captive, will that book match your overall guided growth of 23-25% in FY28 if not FY27?
Yes, we have started to see traction in that business built up on the new credit standards. December disbursement was good and we expect Q4 should also be picking up. Quarter 3 disbursements were 17% higher than quarter 2 disbursements. When we took over the business and merged, it was about 12-13% of the total book which has now come down to about 9.5%. We believe that this book of Motor Finance will grow, but not grow at the same pace as the rest of the Tata Capital book. Over the next couple of years till March'28, between March'25 to 28, we have said that we will grow at about 23% to 25%. Since Motor Finance will grow at a slightly lower pace, that proportion may come down to about 7% to 8%.
Is it that you are gaining market share, or is the market itself growing at 35%-40%?
I think it is very tough to get market numbers on this, but when we talk to leading players in this industry, everybody is showing a strong growth in this business. What also happened, when some bit of people went conservative on the unsecured side, a lot of business did move to the secured side. So maybe that is also helping. These loans are largely taken by self-employed people, people in the MSME segment who are basically using this collateral to draw money at a more competitive price than an unsecured loan. Whenever there is tightening on the unsecured side, you will see a slightly better growth rate happening on this side.
What is the FEMI (First EMI bounce) rates in personal loans and business loans? On housing - what is the LTV and FOIR on prime, near prime and affordable? And on Motor Finance transformation, the used vehicle currently is of Tata Motors vintage and when we talk about new non-Tata OEMs, this would be in commercial vehicles as well as passenger vehicles - can you clarify?
When we talk about Motor Finance, we are referring only to the commercial vehicle business. When we say that non-Tata proportion for quarter 3 for new commercial vehicles is about 19%, it is all about commercial vehicles and not PVs. Used vehicles as a proportion of Motor Finance was about 30% and we have tried to increase that proportion on incremental sourcing and we were close to about 45%-47% in quarter 2. In quarter 3, there is some moderation on that because we have seen a better demand in new vehicles consequent to the GST reduction and some going down in demand in used in October-November, which is again picked up in December. Going forward, we will increase the proportion of used commercial vehicle in our total disbursements. We have not stated FEMI numbers, product-wise, but FEMI numbers have been coming down over the last 14-15 months. We had tightened our credit policies and increased the number of checks which have helped us in getting the credit quality better, which is now showing in terms of lower slippages. On slide number 24, we have stated collection efficiencies for different products. Collection efficiencies for personal loans have also been inching up as well as for business loans. Sarosh Amaria on LTV: LTV depends on what is the size of the loan, but on an average, the LTV is below 60% on most of our loans. In the prime segment, it is slightly higher, but in the affordable segment as well as in our home loans, our average LTV is 62%. Home equity, average LTV is around 45%. Affordable business LTV is 57%.
Just one follow-up on used vehicles - is that presently also Tata Motors OEM used vehicles? And is the FEMI now in single digits?
Actually, even when Tata Motors Finance was doing used commercial vehicles, they were agnostic to the brand. Used vehicles is agnostic to OEMs. On FEMI - I will have to get back to you. I don't have it ready in front of me, but I will try to get back to you.
I see that there is an increase in the home loan Stage 3. Which segment is this coming from - the affordable piece or the prime home loan?
In the home loan, there has been a very marginal increase of around 2-3 basis points. On the rounding off, it shows an increase. We have not seen any stress in the home loan portfolio. Slippages also have been very minimal and well controlled. The housing book is very robust in asset quality. It's just a very marginal 2-3 bps increase on the rounding off, which has taken to 0.8%. Rajiv added: actually because of rounding off to one decimal point, it is showing 10 basis points, but it is significantly lower than that.
In the Motor Finance business, you have about 5300 employees. Could you give a function-wise breakup - how many are in sales, credit, collections and so on?
We will give you the breakup. Approximately 83%-84% are in sales and collections. Sandeep Tripathy added: Operations is roughly 11%. So, together sales, collections and operations would constitute roughly 95%.
On credit cost guidance of below 1% - if we look 1-2 years from here, motor finance credit cost will improve, but there will be some pickup in home finance. From which other segments do you see a turnaround that will take credit cost to under 1% at the aggregate level, especially when you are guiding 23-25% growth?
If you look at the credit cost in quarter 3 for us is about 1.2%. When we look ahead, our stated objective is to be at around 1% on our credit cost. The reduction from here will come from two areas, one on Motor Finance and the other on retail. And retail, more it is on the unsecured side, which we are already seeing a decline. As we have mentioned, quarter 2 was lower than quarter 1, quarter 3 is lower than quarter 2. So, the reduction will come from both Motor Finance and retail unsecured.
On the CV cycle - some commentary suggests growth is bouncing back after years of muted demand. Are you experiencing growth returning or is it still mixed?
No, clearly we are seeing growth returning. The GST cut was a significant cut, brought down vehicle prices in a big way and that is also brought in viability for a lot of vehicles. We are seeing good demand on both medium, small as well as on the heavy side. For used, that was a little muted in this quarter because when the GST cuts happened, for used there was some uncertainty - those prices logically should have gone down, but people were holding on. So, for a month or two there was some subdued business on that side, but it has started to pick up again. We saw this momentum building up in December and we are seeing the same momentum continuing in January.
On loan against property, what is giving you confidence for such high growth in this business?
We have seen this business for a very long period of time within Tata Capital - for about 14-15 years and the team which manages this business has over 22 years of experience. As long as you have got your valuations right and you have funded it based on the cash flows which the borrower has, and not relied only on property as security, this portfolio has continued to deliver. We are not seeing any increase in delinquencies or any challenges on bounce rates happening in this business. We have got vintage data on ourselves plus the people who have seen this business for a much longer period of time. We have got a dedicated credit team for this business and that is what gives us confidence.
Is this similar for SME loans as well, where you are getting almost INR10,000 crores in the last two quarters?
SME business always has been strong in Q3 and Q4. This year it got a major boost in Q3 post the GST cuts. Our supply chain business is also a part of SME business and it has seen a huge spurt during this period. Quarter 2 became muted because though GST cuts were announced, they were announced from a later date. So, quarter 2 became more muted. Quarter 3 over quarter 2 looks even more stronger because quarter 2 was muted and quarter 3 was very good.
There is a spurt in corporate loan book. Are these episodic facilities? Does it have any implication on margins?
Actually what we try to do in every business is to ensure that we don't chase growth for the sake of margins. While we do pass on the benefits of what we see coming to us in terms of lower cost of funds, we have certain minimum spread targets for each business and average targets for each business, which we ensure are met. So it is not at the expense of margins, but we felt that there were opportunities and some of these opportunities were also arising because of some spurt in demand happening on account of GST cuts. Our approach is to be well diversified. We want to be and we are strong players in each segment. We don't consider any business to be the most important and others around it to serve as the next in line business. Each business for us is very important.
How do you see the company balancing expansion with asset quality? What opportunities do you see in digital transformation, customer experience and financial inclusion? How will Tata Capital differentiate itself against peers in the NBFC space?
For us risk comes first and that's embedded clearly in every business leader's mind as well as how he or she will be evaluated. We will never chase volume at the cost of asset quality and this will be our strategy going forward too. If we find in any segment there is a challenge, we will pull back, set things right rather than chase growth. We will not try to use denominator as a means to lower ratio. In terms of digital transformation, digital is key to what we've been doing. In the past few years, we have digitized all asset journeys for ourselves. We have embedded digital in every function within the organization. Going forward, the bigger benefit to us will come from this early adoption of AI and Gen AI which we have done.
With profitability improving and investments in technology underway, how are you planning to build on this success while keeping margins healthy and ensuring financial strength and efficiency?
We've made deep investments in expansion of our branches and digital assets three years back. We've seen the benefits of that coming into our operating leverage. Cost-to-income ratio across businesses has been coming down on YoY and sequentially also. We have stated guidance of 33%-34% cost-to-income ratio by FY'28, which is in radar across all expense lines and business lines. As we expand our products and digital journeys, we have a very robust mechanism of making sure that we budget for IT costs and differentiate between run the business and change the business spends. We also look at optimizing each spend in terms of whether it brings in customer efficiency and operational efficiencies.
Third quarter had tailwinds from GST rate cut and festive season. Are there any segments in vehicle financing or consumer durables where you have seen things tapering off in December and January?
GST benefits were a big plus in Q3 and that momentum in certain areas is continuing while there is some moderation in the other areas. Consumer durables is not a segment which we are present in or have any significant presence. We are there in financing the supply chain of consumer durables and that seems robust for us. As far as the vehicles are concerned, we are seeing strong demand continuing in PV, we are seeing strong demand continuing in commercial vehicles. We have seen some amount of moderation in two wheelers which is happening in terms of sales. In tractors, we don't have any significant presence. I do believe that two wheelers, PV as well as CV will continue to be strong in Q4.
The strength in asset quality typically seen in Q3/H2 seems absent. What is your view? Are things improving on the macro front which would help asset quality improvement?
In fact, we have seen a very strong quarter in terms of asset quality. Look at asset quality from few data points. Gross NPA is just one indicator which is a function of assets which have moved to Stage 3. You should also look at how the proportion of assets is in Stage 1, Stage 2 and Stage 3. If you look at it, you will notice that the proportion of assets in Stage 1 have grown and within that we have seen a much better growth on ones which are at 0 DPD. So consequently, it is leading to lower credit costs. On a consolidated basis, in one quarter our credit costs are down by about 10 bps. Excluding Motor Finance, they are down by about 20 bps. The missed payment rates have also improved in Q3 over Q2. So, collection efficiencies are also showing a better trend.
So the confidence in unsecured business is pretty much there, right? The trend of acceleration in unsecured business should continue?
Besides slippage, the trend on disbursements has improved. There is a lag always between seeing that impact on AUM. So, that impact on AUM will become visible in the next few quarters and as the AUM grows, because disbursements precede AUM growth and you will see AUM growth happening in the subsequent quarters and as and when that happens, you will see the gross NPA ratio also dropping.
How is the margin profile of Tata Housing business? When AUM growth is 30%, total net income growth is around 29%. Are you not seeing competitive pressures given you also have a prime book where rate transition is also there?
You are absolutely right. There is competitive intensity in this business and more so in the prime business. What we have seen over the last two quarters, Q2 and Q3, our margins have been stable at similar levels. We did get some benefits of a lower cost of funds, but they have actually got translated into them being passed on to the set of borrowers. We have seen stable margins in this business. Competitive intensity remains high, but the market continues to grow and there are opportunities to lend. We are investing a lot more in the affordable market and also looking at expanding our distribution in those markets. We believe even if there is competitive intensity, we should be able to retain or improve margins. Sarosh Amaria added: the growth is not just in prime, but also we are focusing on affordable as well as micro-housing.
On the personal and business loan which is put together close to 9-10% of the book, how are you seeing the incremental business momentum and how is the asset quality panning out?
Look at slide 16 of our presentation - we have stated here the momentum which we have seen on disbursements. We had gone conservative in this business last year where we had slowed down and made our policies tighter, more so in personal loan as well as micro-finance business, because that's where we faced more stress. However, we started seeing things improving from Q2. So, Q2 was better than Q1, Q3 was better than Q2 plus all early indicators of the new business booked over the last 15 months were showing better metrics which gave us the confidence to again invest in distribution and grow our business. Parallelly, we also have seen slippages go down. We are clearly seeing improving trends on quality as far as slippages are concerned or bounce rates are concerned and we have been able to build momentum for growth.