Capital Small Finance Bank Limited (CAPITALSFB.NS) Q2 FY2026 Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Capital Small Finance Bank Limited Q2 and H1 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sarvjit Samra from Capital Small Finance Bank Limited. Thank you, and over to you, sir.

Thank you, Iqra. Good morning, everyone. I'm Sarvjit Samra, Managing Director and CEO of Capital Small Finance Bank. Thank you for joining the Capital Small Finance Bank Limited earnings call. The results and investor presentation have been uploaded on the stock exchanges, and I hope you have had the chance to go through the same. Joining me today in this call are Mr. Munish Jain, our Executive Director; Aseem Mahajan, our CFO; Raghav Aggarwal, Chief Risk Officer; Sahil Vijay, Head of Treasury and Investor Relations; Bharti Babutta from the Investor Relations team; and our IR advisers, SGA. Let me begin with an overview of the operating environment before moving to our performance highlights. India's economy continues to expand at a healthy pace with real GDP growth for Q1 financial year '26 at 7.8%, led by strong private consumption and sustained government spending. Growth momentum for the full year is now projected at around 6.8%, up from the earlier estimate of 6.5%, reaffirming India's position as one of the fastest-growing major economies globally. Inflation remains well under control with headline CPI at 2.1% in August '25, easing significantly from last year's levels. The moderation in food prices and the recent GST rate rationalization are expected to further support purchasing power and consumption demand, particularly in semi-urban and rural areas, which are our core operating market. We are witnessing early signs of festive season pickup with Diwali-related spending and improved rural cash flows driving higher demand across retail and MSME segments. This has directly supported credit growth and deposit mobilization across the banking system, including for us at Capital Small Finance Bank. On the monetary front, the RBI maintained the repo rate at 5.5%, adopting a neutral stance to balance growth and inflation. Liquidity conditions have improved meaningfully over the last quarter, and we expect this to support a stable to softer funding cost trajectory going forward. System-wide credit growth has moderated slightly, but momentum is expected to pick up post festive season, led by retail and small business lending. In this context, the broader banking system has some pressure on net interest margin as deposit repricing caught up with asset yields. However, we believe margins have largely stabilized, and as funding costs begin to align with the softer rate environment in H2, the margin outlook appears more balanced. For Capital Small Finance Bank, this environment plays to our strength. Our deep presence in semi and rural market, retail-oriented secured book and granular deposit base position us to well benefit from the ongoing consumption recovery and improving liquidity conditions. Now turning to our quarter 2 financial year '26 performance. The quarter was marked by strong deposit mobilization, healthy credit offtake and stable margins, reflecting the strength of our core operating model. Total deposits reached INR 9,317 crores, up around 20% year-on-year, with CASA at 33.9%, highlighting the stability of our retail deposit franchise. Gross advances stood at INR 7,907 crores, growing around 18% year-on-year, supported by healthy disbursement activity across mortgage, MSME and agriculture segments. Disbursements during the quarter rose to INR 805 crores, up 36% year-on-year, aided by festive demand, improved business sentiment and strong rural cash flows. Asset quality remains stable with gross NPA at 2.70% and net NPA at 1.38%, reflecting continued prudence and strong recoveries. Net interest margin was maintained at 4% and profit after tax stood at INR 35 crores, up 5% year-on-year, supported by steady operating performance. Our focus remains on profitable secured growth, strengthening our branch level productivity and deepening relationship with existing customers while expanding our footprint across high potential semi-urban locations beyond Punjab. We are confident that with a supportive macro backdrop, including benign inflation, GST-led consumption boost and strong festive momentum, we are well positioned to sustain healthy growth in deposit and advances in the second half of the year. With that, I will now hand it over to Mr. Munish Jain, who will take you through our quarterly financials and operational highlights in detail. Thank you.

Thank you, Mr. Samra, and a warm welcome to all of you. Let me now share the highlights for the quarter and 6 months ending September 2025. As of September 30, 2025, our gross advances stood at INR 7,907 crores, reflecting strong and consistent credit expansion, translating into a year-to-year growth of 17.7%, sequential growth of 6.3% and YTD, that is a 6-month growth of 10.1%. The same is in line with our growth guidance of 20% plus for FY '26. Advance growth continues to be primarily driven by the secured segment, with 99.2% of the loan book secured, in line with our retail focused and risk-conscious strategy. Notably, 89% plus of our deposits of our portfolio, excluding the corporate loan, is collateralized by [indiscernible] property or bank FDRs, demonstrating our continued emphasis on maintaining a high-quality, well-collateralized and risk-mitigated credit portfolio. The average ticket size of our portfolio stands at INR 17.1 lakhs, reflecting our continued focus on granular and well-secured lending. Our loan book remains well diversified across sectors that have demonstrated resilience across multiple credit cycles, ensuring stability and balanced growth. As of September 30, 2025, the agriculture sector remained stable at 30% of our portfolio. Mortgage segment constituted 26% against 27% at the end of the Q1 FY '26. MSME and business loan increased to 23% from 22% at the end of the Q1 FY '26 and corporate loan remained stable at 14% as of September 30, 2025. The same is in line with our prudent and risk optimized growth strategy. Importantly, excluding home state of Punjab, our growth trajectory remained even stronger, with advanced growth at more than twice the overall bank growth rate at year-on-year basis outside the home state of Punjab, demonstrating the deepening strength and increasing traction across our newer operating geographies. Out of Punjab advanced portfolio constituting 23% as on September 30, 2025. Fresh disbursement for the quarter stood at INR 805 crores, registering a robust 36% year-on-year growth. For year-to-date, that is for the 6 months up to September 30, 2025, the total disbursement stood at INR 1,671 crores, reflecting 24% growth. This sustained momentum underscores the continued strength in demand across our key lending segments and effectiveness of our focused business approach. The MSME and the business segment remain the primary growth driver, grew by 11% on quarter-on-quarter and 33% on year-on-year basis, followed by LAP within the mortgage, which grew by 6% on quarter-on-quarter and 22% on year-on-year basis. The overall mortgage book grew by 4% on quarter-on-quarter and 16% on year-on-year basis. Despite challenging operating environment marked by floods impacting the northern part of the country, asset quality improved marginally during the quarter. Gross advances stood at 2.70% as of September 30, 2025, down by 5 basis points from June 30, 2025. Net NPA stood at 1.38% compared to 1.39% a quarter back. The SMA 1 and 2 as on September 30, 2025, stood at 4.42% against 5.47% a quarter back and 4.96% a year back, highlighting our prudent credit risk management, effective recovery efforts, indicating stable portfolio performance. The write-offs remained almost nil during the quarter. Credit cost for the quarter stood at 0.2%, broadly in line with our historical levels, reaffirming the quality and the resilience of our portfolio. Our deposit base crossed INR 9,317 crores, registering a strong 20% year-on-year growth, underscoring the continued trust of our customers and the strength of our retail deposit franchise. The bank was calibrated deposit growth owing to the low CD ratio and high leverage ratio. Following the rate cuts earlier this year, we have accelerated the deposit mobilization and has grown deposits by 12% during H1 FY '26. The focus remained on granular core and retail-centric deposits. CASA ratio remained healthy at 33.9% with average daily CASA for the quarter was 34.8%. We believe that the marginal decline in the outstanding CASA is temporary and primarily attributed to emergent cash withdrawals following the flood situation in the north part of the country. Notably, the average ticket size of the saving bank account has increased to INR 47,000 against INR 42,000 a year back, indicating a stronger retail liability franchise. Additionally, deposits outside home state of Punjab grew at 3x the overall deposit growth rate of the bank on a year-on-year basis, reflecting the deepening liability franchise and increasing traction across our newer operating geographies. The average credit-to-deposit ratio improved to 81.5% in Q2 FY '26 from 80.9% in Q1 FY '26, with outstanding CD ratio as on September being 84.9%, reflecting efficient fund deployment and balanced growth across advances and deposits. Now moving to profitability. During the quarter, the impact of interest rate decline has been fully reflected on advanced portfolio, while the benefit of deposit repricing is yet to be completely realized. The NIM for Q2 FY '24 stood at with the 2 decimal points 4.04% against 4.1% in Q1 FY '26. NIM is expected to show some improvement in H2 FY '26 aided by [indiscernible] reduction and more significant improvements in FY '27 with a continued decline in our deposit cost. The average deposit tenor of us is 12 months to 15 months. Noninterest income remained strong at 0.9% of average total assets during Q2 FY '26. Operating efficiency has started improvement trend, with OpEx as a percentage to average asset improved to 3% against 3.3% in Q2 FY '25. The cost-to-income ratio stood at 61.7% in Q2 FY '26. The same reflects our sustained focus on cost optimization, process efficiencies and operational discipline. Pre-provision operating profit, PPOP, rose to INR 51 crores in Q2 FY '26, making a 6% growth on a year-on-year basis. Profit after tax stood at INR 35 crores, up 5% year-on-year, supported by healthy operating performance and disciplined cost management. Return on assets improved to 1.3% during Q2 FY '26 against 1.2% in Q1 FY '26. The ROA was 1.4% in Q2 FY '25. The growth is supported by consistent profitability trends and prudent balance sheet management. Our capital adequacy ratio remained strong at 24.2% with average liquidity coverage ratio for the quarter stood at 234%, reaffirming our strong liability position and liquidity position and providing ample headroom for our future growth. As of September 2025, our branch network stood at 199 across 5 states and 2 union territory, further strengthening our presence, particularly in rural and semi-urban markets, which continue to be our key growth driver. The [indiscernible] branches accounted for 77% of the total branch network and contributing 74% to the deposit base. We have achieved the branch milestone of 200 count as on date, and we have initiated partnership-led lending with FLDG framework and appropriate risk cards, targeting high-yielding secured lending opportunities with the selected NBFC partners. To sum up, H1 FY '26 reflects business growth trajectory, a period of disciplined, consistent execution and the ability to withstand temporary margin pressures and natural calamity impact while setting the stage for stronger performance in the period ahead. As we look ahead, we plan to organically grow our secured loan book at the rate of 20% plus for FY '26 and double our advance book over the next 3 to 3.5 years, that is by FY '29. We aim to expand our footprint from 199 branches by deepening presence in contiguous states and intensifying penetration within the existing markets with a goal -- with a medium-term goal to grow our branch network by 1.5x in the next 3 to 3.5 years, that is by FY '29. We expect NIM expansion supported by continued decline in deposit costs on repricing, coupled with acceleration of the CD ratio. We intend to continue improving operating efficiencies to continue improving the ROTA in each of the coming period, and ROTA expansion in the coming year with a target to make it 1.6% plus, with ROE of 15% plus by next 3 years, that is FY '29. Saying all this, we're being a banking company and growth is contingent with the macroeconomic outcomes. We continue to stay deeply committed to create long-term value for our stakeholders while contributing meaningfully to India's growth story through responsible banking, customer-centric innovation and sustainable financial inclusion. With that, I would now request the operator to open the floor for Q&A session.

[Operator Instructions] The first question is from the line of Shubham Selvadia from Tikri Investment.

First of all, congratulations on a good set of numbers. Sir, I have a couple of questions. One is regarding the recent floods in Punjab. So sir, since we have a 30% of exposure in agriculture loans, so do we expect bad loans or losses in loan recovery due to floods? And the second question is regarding the NIM guidance. Sir, so how much NIM are we expecting to maintain by FY '25 -- sorry, FY '26?

[indiscernible], if you pick up the question number one about the flood situation. Yes, the Q2 is marked by flood situations in the north part of the country and some of the segments, some of the geographies in Punjab are quite affected. We being a prudent banker and a lender in the agriculture from last more than 2 decades, we understand this type of scenarios. And accordingly, if I share that our lending to the geographies which are near to the river beds are very, very [indiscernible]. So as such, the impact of the flood on our asset quality was very, very muted, and which is visible through the numbers that despite the flood situation in the North part, which has affected around 25% to 35% of the geographies within Punjab or rather particularly 3 to more districts within Punjab. Our asset quality continued to remain strong, and we improved the GNPA, though marginally from 2.75% a quarter back to 2.7%. And we just not improved the GNPA. There is no write-off during the quarter and the write-off is almost nil during the quarter. And we have also improved SMA-1 and SMA-2 to sizably to the SMA-1 and SMA-2. So this thing is demonstrating -- this thing is typically in line with the portfolio strength, which we are trying to demonstrate. Going ahead, we are not witnessing any credit quality constraint given this flood situation, and we look forward for a better outcomes on the credit quality as we move forward. As far as the NIM is concerned, as we're just discussing about the fact that in Q2, the complete impact of the interest rate decline has been reflected on the advance portfolio, whereas the benefit of the deposit repricing is yet to be bome. Since our average maturity period of our term deposit is 12 months to 15 months, so the repricing benefit will be coming -- started coming from the H2 and more particularly Q4 and with the higher benefits coming in the next FY '27. We are also expecting some benefit coming up from the CR reduction, which will be fully implemented in H2. So with all this thing. So our NIM was 4.2% in FY '25. We believe we have a reduction. And I believe "if we are not seeing any further rate cuts or the rate cuts remain muted. " So we believe that the NIM has -- which is 4.04% for Q2, we are looking to see upward trajectory now on in the NIM trajectory. And we expect in H2, we're looking to see an improvement in the NIM to the Q4 FY '25 number, that is 4.1% and slightly -- maybe slightly around 4.1%. And years to come, we are looking forward for a continued expansion towards 4.2% and then taking it above to the 4.2% to 4.3% levels. So going ahead, we are presently seeing NIM expansion to be panning out with the deposit repricing benefit on the deposit repricing when getting matured.

The next question is from the line of Aditya Mundra from Mytemple Capital.

are you able to hear me?

Yes, Aitya, you are fully audible.

Sir, what will be our ROA guidance for this year? I think it was around 1.4% last quarter. So does that remain intact?

In the last quarter, we were giving a guidance that it will be 1.4% in Q4.

Q4, exit, okay, ROA?

Q4, we are talking about the exit ROA. We said that was the guidance, which I recalled correctly as per the last word. So we have improved the ROA from 1.2% to 1.3% in Q2. And we look forward, we are sticking to the guidance of around 1.4% in exit ROA for the current year. So we are expecting ROA to further improve from present level of 1.3% from Q2. More growth will be coming in Q4. Q3, we will be seeing a muted growth in the ROA. But yes, there may be slight -- since our ROA is around 1.3%, and we measure it typically with a single decimal. So in a single decimal, so the full impact is not getting visible each of the quarter. So -- but yes, we will be seeing a slight improvement in Q3, but more better improvement, we will start seeing from Q2 -- Q4 FY '26 and FY '27 onwards.

Okay. Sir, second question is, sir, I think this time also, again, there is some muted growth in the agriculture side as well as mortgage loan side. And the NBFCs, I think the corporate loan side, especially the NBFC continues to grow. So how can -- how do we see that? Like how do you expect the agriculture -- or when do you expect the agriculture loan and mortgage loan to come back on because those are our core business advances. So how should one target for that?

Aditya, if I talk statistically, in Q2 FY '26, our business loan grew 11% quarter-on-quarter. Our agriculture loan grew 6% quarter-on-quarter, our mortgage grown 4%, and within the mortgage, LAP grown 6% quarter-on-quarter, whereas corporate loan grew 5% on quarter-on-quarter. So our growth both from MSME, LAP, agriculture during this quarter has beaten the corporate loan growth. And also our consumption loan has grown 4%. So typically, I can see during the quarter, we got a contribution from our core pillars that is MSME, LAP within the mortgage and agriculture. So the growth rate for the quarter is quite balanced. And accordingly, if you look into the composition, our MSME and business loan composition has improved.

So sir, year-on-year, the corporate loan growth was much higher because that was the last year's -- last quarter's contribution?

Yes, that is the last year's growth. So -- but if you look into the Q2 performance, Anand -- Aditya, the growth is typically coming more from MSME, agri, LAP then the growth from the corporate loans.

And we are seeing this trajectory to be maintained going forward, like agriculture, MSME, LAP should outperform the corporate?

Yes. But yes, we need to be mindful that Q3 may not be a high agriculture growth period since it is a cash flow period for this. But overall, from the -- if we talk about the year position, it will be the same position what we are mentioning.

Okay. And sir, are we planning to get into co-lending with other NBFCs with some kind of FLDG cover?

Aditya, co-lending is not an opportunity which is available with the small finance bank under the regulatory framework. But we are looking forward we have already initiated -- we had already initiated partnership-led NBFC arrangements under the FLDG and with the respective guards for the secured lending opportunities with the selected over NBFC partners. So we just initiated in the current quarter, that is quarter 3 FY '26. And the co-lending is the opportunity which is presently not available to the small finance banks.

Yes, I meant the partnership-led lending only. I use the wrong word. But partnership lending with other NBFCs in the secured segment, which would essentially mean mortgage loan as well as MSME trading and other business loans. Am I correct?

Yes, that's right. That's right. We have already initiated and we have teamed up with a few of the NBFCs already and looking forward for starting the same in the current quarter.

Sir, till now, I think all our sourcing was done in-house only, if I'm not wrong. So any particular reason we are seeing the need to do that? What is the thought behind it? And what will be the exact model? Like how will the NBFC give us the loan, they will source it and how will we pay them? Or what would be that structure?

So typically, the basic objective of getting into the NBFC-led lending is to explore more in the new geographies, specifically the geographies in which we have a not a thick presence, but a thin presence. could target the same set of customers what we are targeting. Here, we will be having a control on the underwriting. Our partner will be helping us in sourcing and identifying the right target. Within the policy framework, within our credit policy framework, we will underwrite, but that partner will be responsible for the credit risk. So both his payouts as well as we will be getting an FLDG cover for any eventualities. So the model is typically targeting the new geographies where we have not a thick but a thin presence to target our MSME set of customers and mortgage set of customers.

And ultimately, they will source it, the entire loan will be in our books. The FLDG cover will be guaranteed by them. That's how it will be...

Yes, it will be in our book. It will be in Capital Bank book.

And we'll be taking some security deposits from them for the FLDG?

Yes, yes, that will be the case.

The next question is from the line of Pritesh Bumb from DAM Capital Advisors.

Just 2 questions from my side. One is on other income and one is on OpEx. So our other income intensity was slightly lower, if I look at trends and what happened in Q2. How do you see that going ahead? And on the OpEx as well, it looks like a very tight control despite some of the branch openings which are there. How do you see that as well shaping up in 6 months and FY...

Pritesh, if I take up the first question, that is the other income. Our other income during Q2 remained at 0.9% basis our total assets outstanding basis, which was also 0.9% in last quarter, Q1. There was -- despite the fact there was complete absence of the treasury earning. If you look into Slide #17 on our presentation, you will see Q2 FY '26, our other income, there was no contribution of the treasury earning. And despite that fact, over value term, our other income was INR 23.7 crores against INR 23.4 crores a quarter back, which have around INR 1 crore of the treasury contribution. So we are continuing to improve the other income over the period to come. And we are -- this is showing the core strength that we have -- our other income is typically in the permanent nature type of income, which are sustainable income. If we compare it with the Q2 last year, so all the income segments have been growing, except the one segment that is the [indiscernible], that is typically because of the repricing, which happened last year, October quarter because of the changes in the insurance industry segment, specifically in the life insurance. So -- but over value basis, we have continued to have a growth. So other income, we are seeing a comforting growth, and we are confident of carrying forward what we are targeting as we move forward. On OpEx is concerned, during the quarter, our OpEx as a ratio of the assets were 3%, which was 3.3% a year last year Q2, and it was also 3% in Q1, despite the fact the branches are getting opened. So we are discussing -- we are already discussing also and now we are reiterating. We believe with increase in our scale and since our higher side systems, that is middle management, our processes have already been placed and those investment has been done to support the next current year and maybe next 1.5 years growth. So we believe that our OpEx, there will -- with the branch opening, the OpEx increase will be limited to the specific branch expense rather than the cross the system expense. So with the growth in the business, with the top line growth, we're anticipating over a medium-term basis, there will be a further improvement, which will be visible in the OpEx as a ratio to the total assets. So these are the 2 points I'd like to mention. And the current quarter, if you -- that particular trend has started getting visible. Despite the fact our net interest income has not grown rapidly given our NII, NIM impact because of the asset repricing versus deposit repricing lag. Our cost-to-income ratio, we continue to maintain at a similar level of around 61%.

Sure. And lastly, just wanted to check in next 6 months or next 2 quarters, how much cost of funds benefit you envisage basically looking at your repricing, which get happen?

Pritesh, over majority since our maturity period of our term deposit is typically 12 months to 15 months. And deposit decline come around February to May. So that was actually rate cuts, which has actually happened. So our majority of the benefit will be flowing to Q4, some portion, and majority will be in FY '27. So in Q -- H2, we will be seeing some benefit coming in cost of deposit, not very, very significant, maybe 5 basis points to 10 basis points. That is the maximum benefit we can envisage in H2. But we will be seeing a larger benefit, which will be coming in FY '27 when our deposit repricing will be coming in a larger base. [indiscernible] reiterating, our maturity period of our term deposit is 12 months to 15 months. So that was the basis of that particular guidance. But we will be getting some benefit from the CRA reduction and also this deposit repricing, maybe in a smaller portion of the portfolio. And advanced side, it has already been done.

The next question is from the line of Gaurav Prohit from Systematix Group.

Am I audible?

Yes, Gaurav, you are fully audible.

Congratulations on a good set of numbers despite the challenging environment. I just had one question. So third quarter typically is a seasonally weak quarter for your loan growth, and you are retaining your loan growth guidance of 20% plus, right? So does this imply that fourth quarter number will be somewhere across like around 8% to 9% based on my [indiscernible].

Gaurav, if we look into the present situation in H1, that is H1 FY '26 over FY '25, our 6 months growth is 10.1%. So we have given guidance of 20% plus, so which means we need to grow 10% on FY '25 for Q3 and Q4. And so the growth number is completely in line or rather we can see positively biased on upward side from 20%. Q3 historically is always a lower advanced growth period for us. Over the last couple of years, we are working hard to bring down the seasonality trend and to have a growth in each of the quarter. Giving a complete split between Q3 versus Q4 is difficult task at this point of time since we will be dissecting a lot of things. But our endeavor is to have a minimal delta between Q3 and Q4, but we are very confident to maintain and rather surpassing our 20% growth target, which we have given, and we are maintaining our growth target guidance of 20% plus for FY '26, and we are completely in line to take it further.

Perfect, sir. That is very comforting. One question on the NBFC account that slipped in the last quarter. Any update you have on that? Do you want to share...

This quarter, we -- if you look into our percentiles, however, despite the fact our NBFC MFI portfolio has reduced from INR 72 crores to INR 62 crores outstanding. Now it is almost 0.6% of the total portfolio, our net NPA has reduced. We are able to have a good amount of cash recovery in those NPA accounts. So we are confident that we'll be able to get more recoveries in Q3 and Q4. So -- and I believe the pain point -- majority of the pain point from that event has already been passed through. Now we are looking forward to recover as we move forward. Q2, we've actually recovered those NPA accounts of more than INR 50 lakh.

The next question is from the line of Shreyas [indiscernible] from Namura.

I wanted to ask that the corporate book, the share of corporate book in total loans has grown, and we have seen that MFI book has not grown. I wanted to understand this NBFC book under corporate that we have grown, what are the sectors that we have seen a lot of traction in?

[indiscernible], if we just -- I'm reiterating, our corporate book during the quarter remained static at 14% at the beginning of this quarter and the end of this quarter, this remained at 14%. So we have not improved -- increased the corporate growth. The corporate book grew 5% quarter-on-quarter against 6.1% of the overall portfolio growth. And if we look into the split of the corporate loan book, our corporate loan book is primarily to the NBFCs who are in the secured lending platform. And that we talk about the rating cut over rating cut of this particular portfolio, A and above ratings of the NBFCs are constituting around 50% of the portfolio, A- and above constituting 70% of the portfolio, and we have only 7% of the portfolio, which is BBB- and below. So we are very, very conscious about the quality of the NBFC in which we are lending, and the landings are typically to those NBFC partners who are in onward lending for the securities. It may be mortgage, it may be MSME or it may be gold or it may be sort of [indiscernible].

Understood, sir. The second question was on understanding the situation in Punjab because of the floods. Can you highlight what has been the understanding currently? And what were the difficulties that you faced? How much was the affected region? And what were your affected region and affected portfolios?

Shreya, last quarter, Q2, we've seen a flood situation in the north part of the country and Punjab being also being an affected state. Within the Punjab, if we look into the affected districts were the few districts like District of [indiscernible], District of Guraaspur, Taranaran, some portion of Amritser and a slight portion of Patiala. These are the typically more affected districts, or I can say the districts which are on the sides of the river banks. So those were the effected geographies. And we, as a [indiscernible] are being in the landing in the agriculture for now more than 2 decades, we understand this risk and our portfolio on the river bank landing is [indiscernible]. On a percentile basis, it may be less than -- it will be in the single digit or a lower single digit. So -- and also those particular farmers, we are typically having the 2 type of land holding, one near the river bed and then one will be away from the river bed so that we have a diversity available within our portfolio. So consequently, despite the impact the flood had, if you look into our portfolio, gross NPA has reduced, SMA-1 and SMA-2 has reduced. This flood is the [indiscernible] area, which has affected the Punjab and our whole sympathy with the affected families. But given our historical learnings and with our historical experiences being an agri lender, we are always conscious about this particular type of eventualities since we have seen the natural calamities of 2016, earlier also. So we are very conscious and we are very -- we make our best effort to ring-fence from these eventualities as we move forward. So our portfolio -- factored portfolio is in this lower single digit, and that's the reason it is not giving us such a worry. But just again reiterating our full support and sympathy to the affected families.

Right, right. Another question was on the -- on a hypothetical question, sir. Let's say, RBI cuts 25 basis points in the next monetary policy meeting, what could be the potential impact on the margins, if you can highlight, please?

Shrey, after the last 100 basis point cuts by the Reserve Bank of India, we have worked to minimize that particular impact. If you look into our portfolio, if you look into the Slide 8 of our portfolio, our presentation, you will see our home loan book is around 12% now, which was typically 14%. Home loan is directly related with the floating rate. So -- or in the -- on the other way, if I said, our fixed loan book, which was 39% in 2024 is now constituting 48% of our total portfolio. So we are trying to go away from this interest rate environmental change. Our fixed rate book is now 48% of the total book. And with the interest rate cuts coming, the biggest impact which come immediately implementation is on the housing loan. So our housing loan book now constituting around 10% to 12% of the portfolio, which was around 14% to 15% with that conscious choice. So just till that time we are not seeing any upward interest rate regime coming or the stable upward interest rate regime coming, we are conscious about this. So with the next interest rate cuts, so we will be seeing a lesser impact on us on our margins since our deposit repricing is 12 to 15 months from the last period. So even if a cut comes in Q3, our deposit will be repriced over maturities and repricing will be at the revised deposit rates. So the impact will be very, very muted, if any cut coming in Q3 current year or even Q4 current year.

Understood, sir. Another follow-up on that was, how does -- what is the portion of our MCLR book? And how -- so can a bank like us, can we control the MCLR going down? That is cut in MCLR, can we control that? Or is it formula based that it has to be -- it has to go down?

Firstly, I will take your second question, that is what is the MCLR calculation methodology. MCLR is typically dependent upon the variables, which call the cost of funds, which is a formula driven, but it has an element of cost of equity, which is dependent upon each of the participants equity betas -- so there is that leverage available, which will be different from different entities, maybe different for UCBs and different for SMBs. So there is one lever which is available for entities like us within the cost of funds. The other 2 levers are typically -- the OpEx is typically on the OpEx, which is other than the non-allocable OpEx. So that is another lever available within that, but that's an internal policy and structure based. And also your expected return. So what is that return on equity you are expecting, or return on assets, or internal return on equity you are expecting. So there are some levers available in MCLR, but it is purely formula driven, and that is the way it has typically happened. And if I come back to the first point, as I said earlier, we are typically having 52% floating rate. Within this, over majority of our deposit, majority of the thing now is MCLR linked. Over EBR linked, within this 52%, if I talk about the total portfolio, it happens to be around 12% to 13-odd percent, which is EBR linked is 13% of the total portfolio. Out of 52%, 13% is EBR and 39% to 40% is MCLR. So which is giving us a better comfort now as we move forward because with the last rate cuts, MCLR has also come down. With the present rate cuts, there are certain cushions available, which will be helping us to maintain it.

That is really helpful, sir. Also just one data keeping question. The slippages that we have seen in quarter 2 of INR 31 crores, can you give the bifurcation among segments where these slippages are coming from?

If I talk about firstly, the slippages, the slippage during the Q2 is 1.84% on a percentile basis with an upgrade ratio of 1.2%. So in Q2, we have against 1.9% slippage in Q1 with an upgrade of 0.76% in Q1 current year. So we have reduced the slippage percentage and improved the update number. And this particular slippage, the lion's share of the slippage has come from the agriculture given the flood situation, but that value is not significant since I said our factored portfolio is low. So out of a total slippage of INR 31 crores, more than 50% of slippage has come from the agriculture piece. And if you... That is the way it has happened in the Q2.

Right, sir. And on the -- lastly, on the expansion strategy out of Punjab area, how on track are we about that? Can you explain a little bit?

Presently, we are 200 branches, out of which if I say 164 branches are in Punjab and 24 are in Haryana and 4 are in Rajasthan. But going ahead, the 28 branch expansion, which are in the pipeline, we'll be taking this number, Haryana number from 24 to 33 branches and from 4 branches in Rajasthan to 9 branches. This is I'm talking about the present expansion, which is going on. But going ahead, we have planned for the next 3 financial years that 30% -- more than 30% of the branches are going to be out of Punjab. And where we want to take our number of 200 to 1x of the number, that is 1.5x by 2029. So the branch count we expect to grow to 300 by financial year '29 with 30% branches out of Punjab. And we'll add more states to [indiscernible] also. UP is already in the pipeline and the next -- in the medium term, we'll be adding other states as well.

The next question is from the line of Ashwini Agarwal from Demeter Advisors LLP.

A quick question. This partnership model of lending that we are trying to follow outside of the core operating area and targeting similar type of loans that you currently do. Could you tell us a little bit more about it? What geographies are you looking at? And if you can share the names of the partner lender partners that you expect to work with?

Ashwini, first of all, if I take the point number one of the question, we are presently targeting more of the Rajasthan and some portion from Gujarat. So these are the 2 geographies, maybe some portion from Madhyaapradesh. So these are the 3 geographies which we are planning to target through this partnership-led model. I just tell you the structure of the model. It will be -- we will be -- the credit policy will be over and what sort of customer segment we want to target, what sort of the collection -- collateral efficacies we want and what sort of the -- how the credit assessment will be done? That is the need of the credit will be assessed. So the partner will be responsible for origination, servicing and recovery. We will be responsible for underwriting and also for ensuring the hygiene of that particular customer with overall technological integrations. So partners' payouts will be dependent upon the quality of the portfolio in addition to the quantum. So his variables, his payouts will be purely linked with the performance of the portfolio [indiscernible] sourced. In addition to the payouts linked with the quality of the portfolio, there will be -- additionally, we will be taking for each of the buckets, say, we identified for the first 6 months, a partner want to build up and value for us, we will be taking a fixed percentage SF and FLDG, which will be used against that all of the portfolio-related risk, which will be remained with us till the maturity of that particular segment of the portfolio. So we are typically keeping a complete ring-fencing and safeguarding to ensure the same, and that will be purely in the operating geography where we have not a thin presence, we have a limited presence out there. We have a thin presence out there. That is the point number one. Point number two, telling the name is as per my agreement, I am restricted to have, you can say, the name sharing. But one for assurance perspective, we are partnering with the high-rated NBFCs who are working with us and rather to whom we are working as a lending partner. So we have a relationship with those [indiscernible] for a period -- long period, and we have seen the various cycles of the lending with them as an in-book lender for them. So we are very, you can say the careful. We are very careful in selecting the partner and rather than just financials, we have been in their book as a lender for a sizable time so that we can review their performance of the portfolio in much more detailing as a lender so to give us more comfort. So which we are picking up out of our NBFC corporate loan book. So those are the persons who will be getting eligible for us for this type of partnership opportunities.

And what do you think would be the size of this sort of partnership book, let's say, in 2 to 3 years from now as a percentage of the total loan book?

Ashwini, this will be dependent upon -- so we -- I'm not saying that we'll be going to be overdependent on this particular thing since we have a very, very strong franchise and which has a capacity to generate our own distribution. Say, hypothetically, if I talk about FY '26 -- or no,FY '27, say, hypothetically, I said I want to make a disbursement, I would say, INR 4,000 crores to INR 5,000, total disbursement of INR 4,000 crores to INR 5,000-odd crores. I believe I will be eye maybe around 5% from this channel in the begin way, maybe coming year. So we are not looking for a high thing. But yes, we want -- we believe, but it has a high scalable opportunities so that we can review, put in the respective risk controls then scale up. But overall basis, starting maybe from 4% to 5% of the distribution -- annual distribution or disbursements to taking it to around 10% to 15% of the annual disbursement is what we are internally targeting for.

The next question is from the line of Ravi Naredi from Naredi Investments.

Sir, it is good you have 0 exposure to microfinance, but still MFI is INR 62 crores and NPA 14%, so what is the reason?

Sir, typically, we are typically staying away from the direct MFI, but we had a very handful of the NBFC MFIs who we have lended and this particular NPA, which has come from that particular piece is in the last quarter. And these are not the first tranche. These are the lending to the gentlemen or the company, which maybe we have landed in the third tranche or the fourth tranche. So in which that become NPA because of the market scenario. But the value being very [indiscernible], if you look, you will appreciate out of the INR 62 crores. Our lion's share of more than 50% of the present outstanding portfolio is to the NBFC MFI, which is A+, A rated and above. And excluding this NPA accounts, so we are not seeing any challenge in our NBFC MFI portfolio, and that is very, very smaller portfolio now. So that was because of some challenges, which those MFI segment has seen over the last 6 months. But current quarter, there was no negative development or whatever happened, it was in the first quarter, and we have provided for that also in a significant way.

So according to you, we will receive 100% payment in due course, right?

I believe whatever we have not provided for. We believe we have provided for whatever is the anticipated loss from the NPA. What we have not provided for, we will be recovering lion or a larger portion out of the same, if I talk about from the position as we see as on date.

Okay. Sir, our advances 18% year-to-year, while our profit after tax rise only 5%. So I want to know reasons of lower growth in profit?

Sir, the reason is only attributable to the NIM compression. Our NIM, which was typically 4.2% because of the sudden interest rate decline of 100 basis points spread by the Reserve Bank of India. And in the banking, the impact of the same has completely translated to the advance portfolio, where on the deposit portfolio, the impact will be visible on the repricing. And the repricing...

Understand. You were replying an earlier question also. Sir, cost-to-income ratio is 61.7%, and we are planning 100 more branches in next 2.5 years. So it remain elevated for more in next 3 years?

My view, Ravi, we will be improving it. If you look into the OpEx to the asset ratio, our OpEx to asset ratio in Q2 is 3%, which was 3.3% last year Q2. So rather than just looking into the cost to income, if you look into the OpEx to the total outstanding over the asset ratio. So we are targeting a 1.5x of the branches over the next 3, 3.5 years, whereas we are talking about 2x of the business. So we are talking about more of the revenue and less of the cost centers. So I believe we will be seeing a positive impact on our OpEx.

The next question is from the line of Satinder Singh Bedi from I[indiscernible] Limited.

I think great in this quarter. My question was regarding this growth. So we've got all the fuel to grow faster, okay? We are a small-sized bank, okay? So we can actually capture market share. Our capital adequacy is very high at 24%. The average LCR is 34%. Your cost credit deposit ratio is also very healthy. So what's holding us back from growing at 25% or thereabouts, which is what actually banks 5, 7 larger small finance bank [indiscernible] of about a 25% growth despite about a 10x bigger size, okay? So what is it that okay is holding us back? And how can we scale it to the next level?

Sitanderji, we are a gross hungry and growth ambitious organization. If we look into our history, we were growing at a 23% CAGR despite the fact we have 2 muted years, that is a year in which we raised the capital because of the lack of the capital. But if you look into the going forward, as per the stated guidance, which we have presently coming up as part of the presentation, we'd like to make over 2x over the next 3, 3.5 years. So current year, if you talk about the current period also, in current quarter, or current H1, we grew 10.1% 6 months on March number. So current year, we are on track for 20% plus growth rate, and we intend to accelerate this growth percentage in each coming year. And we are understanding the opportunity available in the market, but there was a lot of noise about the asset quality if you look into the FY '25. So we are not that effective, but which make us caution in FY '25. Now in FY '26, we are all out for the growth, and we'll continue our growth momentum. Current year, we have given a guidance of 20% plus, which we are very, very confident. Next year, we will keep on accelerating our growth -- growth percentage in each of the year. And on a 3-year trend basis, we've given a guidance of 2x. So that is what we are targeting, and we are completely in for a rightful and growth.

Right. Second was regarding 1.6% ROA in FY '29. So you've effectively got 3 levers. You have the net interest margin lever, which you talked of that, some of the benefits will flow through anyway because of this [indiscernible]. Second is the noninterest income. Our noninterest income relatively is quite low and that probably flows out of the smaller portfolio of products and services that we have. So it would help to understand what is our vision in terms of rolling out more products and services so that our noninterest income as a percentage of average assets could go up? Because if we have to reach 1.6%, then -- and OpEx is your third lever, which obviously, while you indicated it has come down, you've done a good job of it. But since we are going to grow, so it might materially -- it might come down from, okay, 62% to maybe 55% over by FY '29. But still to achieve 1.6% you'll have to have noninterest income go up. So understanding what is our vision on that [indiscernible]?

If we talk about the levers for -- or rather the bridge between 1.3%, which is Q2 FY '26 versus 1.6% plus FY '29. So we're looking forward for a bridge of 0.3% between these 2 line items or rather I will say not 0.3%, I will take it 0.35% to 0.4%. So though we are giving 1.6%. First of all, the bridge, if you look into the bridge available, firstly, the NIM. NIM in the Q2 is 4%, whereas I believe over NIM with the 86% to 89% of the average CD ratio, which we intend to make, we want to have a 86% to 89% CD ratio over the period to come. So with that type of thing, the NIM levers should be 4.3% plus. So we have a 30 basis points lever available within the NIM segment only, minimum 30 basis points lever available. So -- including the benefit which will be benefit with the deposit repricing. So we have a good lever available. Second lever which is available is the OpEx. OpEx, if we look into the cost to income is 61%. And if I look into the OpEx to the assets, this is 3%. If I estimate, if I take your word only, [indiscernible], that is 55% cost income, then it will translate into 20 basis points lever in the [indiscernible] from the OpEx. If I just take 55% only, if I take it maybe say 57%, there will be around 15 to 17 basis points lever available from the OpEx to the [indiscernible]. So these 2 levers are typically 50 basis points lever which we are just talking about. Yes, there will be a tax implication also, which will be eating up something, and we are looking at 0.2% on credit cost, we are projecting to be on a safer to 0.3%. So we have to keep a buffer of 10 basis points for the additional credit cost and some tax implication. So with that thing in sight, so we are presently having a noninterest income of 0.9%. And yes, we will keep on adding the product as we evolve. If you look into our noninterest income, the noninterest income, which was 0.6% in FY '23 improved to 0.8% in FY '24, improved to 0.9% in FY '25 and presently is also sitting at 0.9% despite the fact there was a complete absence of the treasury. So if we had slight portion of the treasury earning, Q2 was a special quarter in which despite the interest rate cut announcement, the yield or the fixed income, there was no earning opportunities. But now the earning opportunity seems to be coming up. So with that thing, we believe our noninterest income on a medium-term basis shall be moving towards from 0.9% to 1% to 1.1%. To achieve this number, we will be keep on adding the products basis over target customer segment, which is the middle income group customer segment. So we are quite open for all the products which is needed by our customers. So the levers available are the threefold. I will say the largest lever is the NIM lever, second largest lever is the OpEx lever and the third lever available is the noninterest income lever. So if I include these 3 levers and subject -- and give a discount to the enhanced credit cost, and then make a tax implication of 25%, the arbitrage, the bridge between 1.3% to 1.6% plus is -- we will be finding that levers are much more than that value.

Yes, you're right. You're right. So you need to increase by 34 bps from the current 1.26 becomes [indiscernible] and providing for the credit cost -- so any. Okay, I understand till '29 now, but any plans to be reversal 5, 7 years down the line or do you intend to stay [indiscernible].

Mr. Bedi, we are ambitious. And when you see a next level available, it keeps you more on the toes. So we intend to be and want to be a universal bank, but with a strong footing. I will not be trying to give 5 year, I believe, is a longer period. I believe we should be aiming for a universal bank before that. But giving it a time line now will be too premature. Just let's be stabilize as a small finance bank, let we have a stronger balance sheet, diversified and consistently and a sustainable performing balance sheet. But I believe 5 years is a longer period. We internally are more ambitious than this and want to achieve it more earlier than this.

The next question is from the line of Jay Mistry from [indiscernible].

I just had one data keeping question. So could you please share the disbursement mix for 2Q FY '26?

I missed [indiscernible].

Am I audible now?

Yes, the voice is a bit broken. You just come again, please?

Could you share the disbursement mix for 2Q FY '26?

Disbursement mix, I'm not having it very handy. I may ask my IR team to keep it with them and share it with you. But broadly, it is typically having 30%, 40%, 35% to the MSME, around 20% each to the mortgage and agri. So typically, if I talk about this, I just got the number. It is 19.2% to agriculture, 30% to the MSME, 23% to the mortgage, 20% to the NBFC in large corporates and remaining to the other consumption lending.

Ladies and gentlemen, due to time constraint, this was the last question for today. I now hand the conference over to management for closing comments. Thank you, and over to you.

I would like to thank everyone for being part of this call. I hope we have answered your questions. If you need some more information, please feel free to contact our Investor Relations team or SGA, our Investor Relations advisers. Appreciate your time. Thank you once again, and have a good day.

Thank you, sir. On behalf of Capital Small Finance Bank Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.