L&T Finance Limited (LTF) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the L&T Finance Holdings Q2 FY '22 Earnings Conference Call. As a reminder all participant lines will be in the listen-only mode [Operator Instructions] Please note that this conference is being recorded. We have with us today Mr. Dinanath Dubhashi, Managing Director and CEO; and other members of the senior management team. Before we proceed, as a standard disclaimer, some of the statements made on today's call may be forward-looking in nature, and a note to that effect is provided in the Q2 results presentation sent out to all of you earlier. I would now like to invite Mr. Dinanath Dubhashi to share his thoughts on the company's performance and strategy of the company going forward. Thank you, and over to you, sir.

Thank you. A very good morning, ladies and gentlemen, and a warm welcome to everybody who is attending this call. A very special quarter for us. We have done extremely well across all business metrics and also well on our way of achieving the milestones, which were outlined by us in our Lakshya '26 strategy. In the annual meet that we held in May '22, I had shared with you our strategic plan of Lakshya '26 and its underlying goals. Post that, the market scenario has changed considerably. In fact, if I can say, even drastically, whether in the country or even globally and that events happening as we speak. We are witnessing new inflation highs in different parts of the world, tightening monetary policies, geopolitical conflicts, increasing interest rates, everything. Amidst all these changing macro variables, I mean, there are some very positives like demand growth in India, for example, especially in rural are very good. Amidst all these changes, I can probably say that L&T Financial Services has emerged out quite strong in terms of not only its quarterly performance but also the direction it is taking towards Lakshya '26. Lakshya '26, in short, is about making LTFS a top-class digitally-enabled retail finance company. Within this goal, we aim to pivot from a product-focused organization to a customer-focused approach by creating a Fintech@Scale. And I believe we are doing it quite well. Starting, we're changing the organization structure, which we spoke about in our last call. And that has actually brought a lot of focus on various segments and has worked very well. The last time we have met after the end of Q1 FY '23, I had expressed the confidence that as we traverse on the path of the strategic plan, we will show enhanced performance while continuing to improve our offering to our customers. We demonstrated that in the first quarter, and I believe that we have demonstrated it yet again now. What do we aspire in Lakshya '26? In fact, what do we stand for? We want to become a top-notch NBFC catering to rural, urban mass affluent and aspirer segment and to the SME segment. We will do this by using digital and data analytics to the hilt for creating a creditworthy pool of customers who can we retain firm, cross-sold, upsold various products with the ultimate goal of delivering top class sustainable ROE. That's the ultimate goal. An effective way to achieve this goal is to become Fintech@Scale. And quite a few slides in our investor presentation are dedicated to this. The foundation of this for the same has been laid and nurtured over the past 6 years. LTFH has performed -- transformed into a significant player and created a right to win in its product offerings. Importantly, this has been achieved on the backbone of digitization and tremendous use of data analytics across the product life cycle. We have also supplemented it by streamlining on our servicing franchise. With the insuring database that we have created, we initiated to cross-sell loans and created a digitally native product, consumer loans and in other products, we are using this cross-selling for retaining our existing customers and upselling to them. Digitization for us is not a onetime effort but a constant effort towards process excellence. This form is actually the Phase 1 of our Fintech@Scale architecture that deals with product, process and service excellence. As an indicator, a small indicator, servicing handled through self-help channels. Last time I have shared that 58% of the total servicing happens to self-help channels. The rest was through branch and call centers. Within a quarter that has increased to 71%. The rest being through branch and self-help channels. 71% is quite an industry benchmark frankly. Even the best in the industry are around the same level that we hope to improve even further from here as we go forward. Phase 2 as it slowly unfolds, and we are making small beginning through our apps. We look forward to understanding the customers' needs. It is our firm understanding and the firm belief that a customer does not come to us for availing the loan. The loan is a secondary product. He or she comes to purchase an asset or for a particular need, any need, asset or any other need, whether it be a tractor, two-wheeler, livestock, home, setting up a small business, anything. We would want to weave L&T Finance loan offerings as a seamless proposition in this asset purchase or business process. This means that understanding the customer need is essential to hedge ourselves firmly in their minds. And we believe that this will enable us to create a suite of offerings by understanding the needs of the customer and thereby creating what we call Fintech@Scale. This is expected to be facilitated by a deep digital engagement ecosystem built on self-initiated customer journeys. Now we have captured it briefly in our investor presentation the way we are going. We have captured Phase 1 and Phase 2. Phase 1 is something that I would say, yes, it's always a work in process, but we are there. And Phase 2 is something which we are making small beginnings. It is in, right now, conceptualization stage where we are making some small beginnings in terms of app and using the IT knowledge available in the group, we are developing something quite exciting. And we will be in the -- over the next year or so, we will be unfolding that slowly. Now allow me to move on to the highlights of the quarter. Strong business momentum, and we have said we have promised that we will maintain at least a 25% CAGR in retail book, and we will achieve 80% retailisation by 2026. And you know at the same time last year, we were around 43%, 44%. What have we done this quarter? We have achieved highest ever quarterly retail disbursements. In fact, quarter after quarter, we have been achieving new highs. And for the first time, retail disbursements are about INR 10,000 crores now, which is 15% Q-on-Q growth and 84% Y-o-Y growth. Accepting that Q2 last year, though was not in the middle of pandemic, but still we were recovering independently. Accepting that, but still a 15% Q-on-Q growth also, we have achieved. This is special as we have been successfully posting highest-ever quarterly retail disbursements, quarter after quarter for the last 3, 4 quarters. Another significant achievement in our retail book for the first time has crossed INR 50,000 crores milestone. It now stands at INR 52,000 crores around, which is 27% up Y-o-Y and more healthily, a 9% Q-on-Q growth, which gives us tremendous confidence of achieving the growth targets of Lakshya while keeping the portfolio quality good. We are marching steadily in the direction of retailisation with now retail portfolio mix at 58%. As I said, up from 47% last year, same quarter and 54% last time. Margins, in fact, at a time when cost of funds is going up, we have been able to not only maintain but actually increase our NIMs plus fees to 8.43% from 8.23% last year -- last quarter. So how has that happened? Certainly, #1, the WAC increase. I've been always sharing that when the cost of funds was low, we kept the CPs low and kept locking into medium- and long-term borrowings at that point of time. And that is working well. Our quarterly WAC is up by just 6 basis points from last quarter to 7.33%. And another thing, which is working well for us is the mix change. So yes, we have been able to pass on some increases, no doubt. But more importantly, as retail products increase, which are higher margins, it is working well for the overall margins. As we go ahead, interest cost will certainly increase. There is no doubt. Through our ALM strategy, we believe that our cost will increase less than proportionately than the market increases in interest rate and by our product mix change and product strengths, we will be able to definitely maintain our NIMs plus fees at very healthy levels. As far as asset quality is concerned, GS3 remains just around 4%. It has reduced slightly from Q2 and quite substantially from -- reduced from Q1 and quite substantially from last year. NS3 now starts at -- stands at 1.85%. And I would like to point out that our retail industry now is once again below 1%, that's 0.88%. So that's where we are moving, as you know, our Lakshya goal is below 1% NS3 total. And by 2026, most of the book will be retail anyway. And this retail industry being at 0.88% works extremely well for us. Now last time, I had indicated that by Q2 end, the impact of OTR will be largely over for us. So now just mathematics, just dates other than housing, which is a secured product, all other products where OTR was, the moratorium was 6 months. So 6 months after billing or actually 3 months after the billing starts, everything either would be collected or will become NPA. That has happened in Q2. Accounts are largely either collected fully and closed or collected partly and these customers are paying now well or they've become NPAs and how fully provided a written-off. So for us, I can confidently state that the impact of OTR on P&L now is largely over. Accounts which have moved to 90-plus buckets are fully provided for. We have used about INR 422 crores from our management overlays to provide for this. That is all. But more importantly, as a indicator to show that we believe that it is over, from our P&L, we have created INR 64 crores of management overlays once again. So it actually shows that we believe that the trough is over and credit costs are now firmly trending downwards. As on September 30, we carry now INR 1,096 crores of management overlays over and above GS3, ECL provisions and standard asset provisions. With the planned growth in retail portfolio as a part of Lakshya '26 we believe that we -- as you know, you remember that before COVID, we had the strategy of slowly creating and building good management overlay. We will continue with that as we go ahead. So big message here, large effect of Lakshya -- of OTR is over. And what you will see from next time onwards is a more steady state credit cost trending downwards. Last update before I get into the details, will be on mutual fund divestment. As you would all would have known and read, we have received -- we have entered into a definitive agreement to sell our mutual fund in December '21 [ 2H ] with HSBC AMC. SEBI has recently given an NOC for the proposed change in control of LT -- L&T investment management and the merger of teams. With this, we are on track of closing the transaction in quarter 3 FY '23 itself. As I've always said, capital gains received from the deal will be primarily used for strengthening the balance sheet. With all this, with excellent growth, with NIMs plus fees at very healthy and increasing level, credit costs reducing PAT for the quarter at INR 406 crores is up healthy 81% Y-o-Y. A more satisfying number for me is retail, which is the future of the company. The ROEs now are again close to 13%, 14% and on the way upwards hopefully. With this, now we will deep dive into the numbers and try and give some color to it. As far as retail businesses are concerned, I have mentioned earlier that we have now -- we have registered highest ever retail disbursements. Before I move to the performance of respective businesses, let me discuss with you the broader macro updates and especially rural outlook. As you already know, the business decisions we take at LTFH are greatly influenced by the inputs of our Chief Economist team. In fact, many of you received detailed reports that our economics team brings out on all relevant variables that have a decisive influence on rural cash flows. Variables like rainfall penetration, water reservoir status, existing irrigation cover, sowing status of kharif and rabi, mandi prices, mandi arrival, rural wages, inflationary trends, et cetera. I mean there are a lot of variables. Please go into it. It enables us into -- it enables us, what I call, to do pinpoint bombing. So we can actually take pin code-wise, district-wise decisions on which product where to grow. And also, it serves early warning signals,for increasing maybe collection efforts somewhere or doing some special collection drive somewhere, and that works extremely well for us. The broader movement of macro variables in the rural economy is there to be talked about. The mood around rural outlook is now quite buoyant. And early signs show that demand has already popped up in rural India. FMCG companies, for example, have been witnessing good growing demand across the board in Q2. But more importantly, as far as rural cash flows are concerned, elevated crop prices, robust mandi arrivals have definitely contributed to a strong rural cash flows headed by higher export demand and wage growth across most of the regions. Going forward as well, rural cash flow prospects are expected to further brighten on back of several positive cues such as, first, elevated crop prices and crop realization in upcoming quarters, especially for the rabi crops. As you already know, government has already declared increased MSPs for the rabi crops. Overall water storage position across most major reservoirs is very good and the soil moisture has improved substantially. Overall, area under tariff has been good and bright prospects are already seen by rabi sowing. And of course, there has been an increase in the NREGA wage rates. At the same time, there are some downsides as well. Rainfall has been uneven. And especially in some top states like UP, Bihar, Jharkhand, West Bengal, rainfall has been lower than normal, certainly, which would lead to lower-than-expected production of key kharif crops, especially in these states. And as I already said, our analytics takes that into account while looking at our disbursement and collection positions. But more importantly, these are states which are reasonably well covered by irrigation and the water reservoir levels are quite good. Late rainfall has been good. And everywhere across the country, the prospects for rabi crops are good. And early trends of the festival season are actually extremely good. The Puja holidays were very, very good for some of the commodities we finance, like tractors, 2-wheelers, et cetera. And we are expecting a very good Diwali touchwood. All in all, rural demand is expected to stay buoyant in the second half and definitely perhaps also in H1 FY '24. And as far as we are concerned, I'm sure that the resilient rural demand in different geographies and our strength presents a good opportunity to grow our retail businesses. So let me talk about individual businesses now. Let's first rural Business Finance, which were previously known as Micro Loans. Micro Loans actually subsumed in the rural business finance. This business, which enables sustainable livelihoods at the grassroot level has shown strong disbursement trend and has recorded its highest ever quarterly disbursements at about INR 4,400 crores, and the book has now crossed INR 15,000 crores. This growth is aided by our focus on strategic initiatives, like repeat customer conversion for 0 DPD customers. Exclusive customer loans, like customers who are exclusive only with L&T Finance and don't have any other lender. See, the new RBI guidelines,and the ensuing reporting has actually enabled us to take all these calls, have all this data. Our deepening geo presence, best-in-class turnaround time, and of course, completely data-based credit algorithms. I mean as I have always said, we have been always been the proponent of database credit algorithms in this business, which was traditionally, you know people form groups. Our people are judged on the ground. We have moved away from that completely. Some of you have tooled with our Investor Relations department, has seen the app in work, it is WIP, getting better. But it enables us to take a very credit-based, stringent credit decisions as we go ahead. And that actually, with the growth, it gives us confidence of the credit quality as well. According to the new RBI guidelines, we have started the digital app, which measures income. And early indications are that just about 1/6 or so of the loans are actually qualify as micro finance being the family income being less than INR 3 lakhs, which means that around 85% of our loans, our disbursement go to comparatively higher income groups, where lending can happen using very advanced credit metrics, and most importantly, opens up tremendous opportunity for cross-selling more products selling at excellent credit cost. As we go ahead, we'll use that, also launch new products and sustain the momentum in this business as we go ahead. As far as farmer finance is concerned, which admittedly right now remains as tractors and our tractor implements finance. And we are slightly late in launching our other agri inputs loans for various reasons. Let me not get into to that right now. We have a well-diversified footprint in farmer finance with a vintage of now more than 17 years, and we are among the leading financiers in this segment. With more than 200 branches across 21 states, we disbursed a little more than INR 1,300 crores in this quarter, which was 14% higher Y-o-Y and the strategy remains the same, focusing on preferred OEM dealer strategy, enhance customer service and improve customer retention and of course, dominating counter share. So as I've always said, market share, we believe, is a derivative. We don't aim for a market share. We choose dealers and aim for counter shares and based on data analytics and that moves to this market share. We disbursed about -- for customer retention, we have actually in this quarter, disbursed more than 7,500 units for repeat customers during the quarter. And almost 97% of our total business was now done through our digital sourcing model with best-in-class TAT, of course, that's [ analytics ]. That's rural. As far as urban finance is concerned, if we take all products together, that is 2-wheeler consumer loans, home loans, LAP, we saw a 80% Y-o-Y growth in disbursements resulting in a close to 30% increase in this book. Talking about 2-wheelers, we have done our highest-ever quarterly disbursements of INR 1,700 crores, up 38% Y-o-Y. Market share has increased to about 12% against 11% last quarter and 2 products of our -- which are very good products, are actually taking increasing share of our disbursement, what we call Sabse Khaas loans and second is what we call VIP loans. So Sabse Khaas loans is what we target towards cash customers. As you would know, 2-wheelers is one vehicle segment, where the finance penetration is a little above 50%. Most other vehicle segments, it is above 80%, 85%, 90% also. 2-wheeler is about 50%. And as you would also remember just about 4 years back, it was in the 30s. So various [ plays ], I think -- we have been one of the pioneers, have launched products for converting cash customers to loan customers. Sabse Khaas loans is one of them. VIP loans is ability to customers who are higher category of credit, which have proper income proofs, giving them loans at [indiscernible] better LTV and with much, much better credit. I mean, very simple, even just the bounce rates of this customer is less than 1/3 of normal customers. So these 2 products have worked well. And along with deepening geography, it is helping our growth rate. We will continue to maintain strong focus on customer value and building preferred dealer OEM relationships and very clearly use this to continue to increase our volumes in 2-wheeler segment and maintain our position among the top 3, 4 all the time. We have continued -- as far as consumer loans is concerned, we have continued to grow this, which is our first digital native product. And you've seen the growth of this product. We have now achieved a monthly run rate of INR 400-plus crores during this quarter with total disbursements of around INR 1,300 crores. We have increased our customer funnel. You would remember that this product was primarily cross-selling to our existing customers. Now out of the new disbursements, just about 50% comes from existing customers and loyalty. The remaining is from new partnerships with the aggregators, prospections, getting -- analyzing prospect lists and going for those customers, insta loans through our apps. So all this is now forming also increased funnel as we go ahead. So we are seeing this book growing very well, and the book quality holding quite well. From having a book size of just around INR 1,100 crores same time last year. Now the book size is close to INR 4,000 crores. The festive period is further anticipated to bring high demand in Q3 for this and bodes well for the growth of this business as well. Retail housing for a long time, I have been talking little defensively about this segment. Though we still remain small, we are now growing quite well within this and also expanding our business just from salaried to SENP to again slowly increasing LAP. We have an excellent team in place now, and this business is now growing quite well. So we are building -- we are witnessing excellent growth momentum during the last couple of quarters. The focus has been on slowly moving from just salary to other categories also. That's slowly increasing the profitability of this business. We believe that we are progressing steadily on this path with disbursements now reaching INR 1,100 crore in the quarter. You would remember just about 1.5 years back, we were just above 300 and 350 odd in the quarter. This is up now almost 20% quarter-on-quarter. We remain focused on enhancing our disbursement volumes through strategic measures like geographic presence, solid DSA partnerships and increasing customer retention. I'm sure that with the current focus on increasing disbursements and improving asset quality, this business will grow bigger with time. SME, which is the latest baby, latest product offering, whose pilot was launched in Q3 last year, about a year back, and now witnessing a steady uptick in Q2. So our total disbursements in this quarter reached now about INR 200 crores, with the volumes for September itself, retouching around INR 90 crores. So as you would see, the next quarter can be even double of this, and we can grow at a similar pace as we go ahead. We are building good value proposition, good digital journey is here. We know we are competing against some very, very good competitors here. But then the market is quite big, and we believe we can make good impact in SME segment as well. We have now opened up. More locations are operationalized from 17 locations, up from just 2 locations in the file. As far as Wholesale business is concerned, in line with our Lakshya '26, we have followed a strategy of reducing capital allocation to wholesale lending. This led the wholesale book registering a degrowth of about 14% Y-o-Y. Within that in Infra, we continue to follow an asset-light model, albeit with reduced capital allocation and focus primarily on excellent customers, only top-class customers. Real estate, we are obviously not doing any new sanctions and focus mainly on project operation and getting our returns. So after I believe I know it is a little long, but I thought I should give you color, not only on the numbers, which you can read it from the presentation, but how we are achieving. As far as retail collections is concerned, we have witnessed best-in-class collections in Q2 FY '23 across retail businesses. Led by company's consulted efforts, field efforts, analytics-led prioritization and use of propensity based data analytics to channelize our resources. Overall, collections are up and collection efficiencies across businesses have trended extremely well and are back to pre-pandemic levels, and we are now giving all those charts in our presentation. Even in our Wholesale businesses, collections are as per plan, and the wholesale entire book has reduced by close to INR 6,000 crores Y-o-Y. Higher real estate collections were registered during the counter -- or during the quarter on account of increase in project resolutions and we got something like INR 850 crores as principal repayments and prepayments in the real estate segment. That brings us that complete more or less the asset side. Liability side, I already talked about quite a bit in detail. So yes, interest rate is definitely going up, but we have got an excellent franchise. Our strategy of knocking in with medium- and long-term funds, going for -- aggressively for priority sector loans. And now, the latest baby there is sustainability linked loan. We raised a further INR 250 crores in this quarter, bringing that book to about INR 450 crores. which admittedly is small, but that has great potential with the strides we are doing in our ESG, we are quite confident of building that good franchise for raising sustainability-linked loans. As far as asset quality, I will just summarize by saying asset quality is quite steady with GS3 at 4.02%, NS3 at 1.85%, retail NS3 0.88%, with continuous improvement in collections. And with the impact of OTR now largely behind us, credit costs have started showing a significantly downward trend from this quarter onwards, and we expect the strength of downward movement of credit costs to continue as we go ahead. In summary, our established business strengths with highest quarterly disbursements with higher NIMs, normalized collections, reducing credit costs bore well for us. Having spoken about the quarter, let me quickly summarize the 4 pillars of Lakshya '26. The 4 pillars were sustained and -- sustained profit and growth engine, demonstrable strength in risk management, Fintech @ Scale and future growth through ESG. I believe the numbers and the detailed explanation, talk about the first 2. Let me talk briefly about the third and the fourth. As Fintech@Scale has helped us to continue on our path to become a customer-focused company from a product-focused one, a few initiatives that I would love to either talk that we have introduced or on -- I would like to report progress. The first is PLANET App, basically our customer facing app, which was soft launch during the last quarter of FY '22 and has had a steady pickup. We now have about 7 lakh downloads, which is up from 2 lakhs last quarter. While the application initially was limited to onboarding and servicing customers till Q1 last year, we have opened it up now for disbursement of especially consumer loans and we have achieved disbursement of about INR 126 crores in Q2 exclusively through the app. So that's -- it's a small number, but considering that the app is new, it encourages us. And while servicing more than 7.5 lakh customers through the app, so we want the headache of somebody calling up, customer's headache of calling up call centers, branch, et cetera, to go totally. The application is available both on App Store and Play Store, and the company expects to continue scaling it in the coming quarter to make it a full fledged and reimagined customer engagement engine. We launched our WhatsApp channel for customer servicing in Q1. And now that is now slowly moving to even business acquisition channel. So I demonstrated it to you who attended our annual meet. That time, it was completely servicing. But now slowly disbursements have started through that for consumer loans. And so we have now WhatsApp based disbursements, giving immediate credit decision. So while the disbursements remain very small since it is absolutely in pilot right now, we expect that it scales up as quarter-on-quarter. Leveraging data analytics for customer retention being the third initiative. The company continued on its path of actively working towards leveraging its INR 7 crores plus database developed towards course of these businesses across years. At present, 47% of company's disbursement in rural business finance and 28% in farmer finance are driven by cross-sell offers generated by the company. Our consumer loan book are close to INR 4,000 crores, is largely driven by loans through our retail loyalty customer base. In addition to this, based on our data analytics, the company is also working on identifying and addressing pockets of currently untapped potential across customer segments, and we will be launching additional initiatives and products around the next quarters. Let me now speak about the fourth pillar, which is ESG. I'm happy to share that during this quarter, we continue to move steadily on our path of achieving carbon neutrality. We have set a target of 10% reduction in carbon emissions for the whole year. I'm happy to recall that in the first half itself, we have achieved that already. We have also demonstrated our commitment to human rights by signing the WASH Pledge developed by the World Business Council for sustainable development. There are other first in this quarter as well as far as our ESG is concerned. We instituted an inclusion and diversity program in LTFH, which we want to establish as a strong indicator of our commitment towards inclusivity in the organization. Furthermore, we also developed a sustainable loan framework with us now raising INR 225 crores in form of sustainability-linked roles in this quarter in addition to INR 200 crores raised in Q4 of last year. Lastly, I would also like to share with you that our commitment towards sustainable growth was recognized by the industry at last, and we received some prestigious awards like the Mahatama Award for our ESG initiative in the quarter under review -- second quarter, which we believe is a testament to our commitment. With this, I would just like to say that the performance during this quarter with multiple consumer offerings in pipeline, with strategic steps taken on various fronts, we believe we are well in line for our objectives of Lakshya '26 or hopefully to achieve them even before '26. The objective is being 80% retail book, more than 25% CAGR in retail book, NS3 of less than 1% and ROE between 2.8% to 3%. And we are now slowly showing the march towards that. I thank you all for patient listening. I wish you -- I know I will open up with questions, but wishing you a very, very happy Diwali to all of you, your families, colleagues, everybody. Thank you.

[Operator Instructions] The first question is from the line of Rikin Shah from Credit Suisse.

Happy Diwali to you and the entire team. Thanks for the opening remarks and opportunity to ask the question. I had 3 questions. First one, while your consumer loan is completely a digital native product, the SME loan product seems to be the channels for them, both seem to be traditional as well as via the digital app. And given that both these products are growing rapidly from a very small base, I just wanted to get a better understanding of the target segment, ticket size and yields in these 2 segments? That's the first one. Second one is on the fee income. While the NIMs have expanded, led by the retail growth and the mix change, the fee income has gone down sequentially. Given that the retail disbursements are picking up, is there more to -- is there any further color on the weakness in the fee income and the outlook from here? And thirdly, the question is on the real estate. Out of the total loan book of INR 9,000 crores plus post, we have this INR 2,100 crores of gain from the mutual fund. And if I recall correctly, INR 300 crore of over lay provisions that we carry, what would be the total provision coverage on the real estate book? That's all from my end, sir.

Okay. I will answer the first two. We are not giving product-wise provision coverages. And I think now disclosure norms are continuously being strengthened. So I'm not sure I can give up numbers which are not there in the investor presentations on the call. So let me answer the first two, which are more descriptive in nature. So first, the route. So consumer loans, the credit algorithms on the entire product, entire customer segment really can be digital in a way, can be completely data-driven. And hence, not only credit, but the entire process, including documentation, KYC, everything can be digital. And that's why with that conviction, we kept and it's not as if there were no requests on the business to have it physical and all, but we kept that as a conviction. SME, on the other hand, we have 2 segments. So one is SAP -- SEP that is self-employed professionals, where we are now targeting first to start with chartered accountants and doctors. And then there is SENP, which are small businesses, okay? So right now, to be very, very frank, the SEP, the chartered accountants and doctors, is what we believe can be completely digital. It is centralized credit, digital. There is still an aspect of personal discussion in it. So in a way, even if it is completely digital -- completely, I would say, non-paper I don't call it totally digital because there is a human intervention of a personal discussion. We have to get a lot more confidence in our database, scale, et cetera to let go of personal discussions. Some competitors, especially, I would say, the marquee NFBC is quite old in this, and I am aware that they do certain segments without personal discussion, and hats off to them for the expertise they have built over the years for this. We are pretty new. And hence, my credit department still feels the need of a personal discussion for SEP. As far as SENP is concerned, while the onboarding is digital, it is completely assisted digital and the documentation required as well as the credit appraisal factory visit legal, technical, all this are completely physical at this point of time. So this business being digital totally is, in my belief about a 2-year runway, we will keep making small moves towards that. But not, I would say, hedonistic or a stupid push for that somehow I want it digital against where the market is. So we will not be, I would say, just unreasonably going wanting to go digital in this. The market is still quite physical in this. One by one items we are getting as far as digital is concerned. Like, for example, if the customer shares particular codes with us, we can access his tax record, GSK records. We can access his bank records. Many of these things. Even if his financial statements are physical, there are softwares, as you know very well to convert it to digital and analyze. So various aspects, we will keep digitizing as we go, like, for example, PD now, personal discussions, in many cases, we do video clips. Now if I can call it digital, yes, but it is not truly digital, right? I mean it just replaces somebody going there and doing a PD. So it is more better for TAT, but it's still a PD. I can call it for -- just for claiming digital, I can say digital, but it's not truly digital. GeoTAX, for example, we know every customer is GeoTAX, which is good, which is a good digital movement in that direction. But to answer you, frankly, for SME, SENP SME especially, to move to totally digital, I see for us, I don't want to speak for the industry, it's a 2-year period. Perhaps what we will move for is the lower ticket sizes. We will go first, and then what we try to do is keep it 100% paperless that scanned at the DSA and we process. So no paper flows in the company. That's what we try to do. To answer your ticket size answer, the average ticket size for consumer loans is around -- new earnings -- 1.4 lakhs for consumer loans. And for SME, it is around 25 lakhs. Does that answer your question?

Yes, sir, it does. And just on this point, while I'm not sure whether you will be able to talk about the yields, but on a qualitative basis, would the yields be largely in line or higher or lower than our retail loan book yield of 15%, 16%?

Around that, around that, around that, largely in line with that, around that, both the products.

Okay. That answers the first question.

Fee income, fairly simple answer. Some part of the fee also comes from wholesale disbursements. So as wholesale disbursements have reduced, significantly. The fee income related that, that has also reduced. So that absolute fee income has reduced, #1. Secondly, as we have reduced our the liquidity. And what -- it is actually a negative carry. So the cost of funds has also gone down and other income has also gone down. So actually, PAT will go up because of that because that income is negative carry, if you understand. So it is fee and other income [indiscernible], and that other income includes interest on liquid balances that we carry. So even if that has come down, the cost of funds, that interest cost has reduced more then. I have already said, your real estate question, I wouldn't be able to answer.

Fair enough.

The next question is from the line of Kunal Shah from ICICI Securities.

Yes. Happy Diwali. Yes. So firstly, in terms of the cost, okay, when we are rolling out the retail products and launching the [indiscernible] products. If you can just explain in terms of the cost of acquisition, how we are faring compared to that of the other players? And how would we ensure the retention, okay? Because maybe you might acquire the customers, but most of these segments are very competitive. And then we tend to lose it out to, say, some of the other banks and NBFCs as well. So how do we try to balance both in terms of the cost of acquisition retention? And where do we see the overall OpEx to assets with the scaled up retail products? Yes.

Excellent question, excellent question. I will answer this 2 ways. One is cost of OpEx. And second is acquisition cost specifically, right? So overall OpEx. So if you see overall OpEx, yes, it is higher than what it used to be maybe 2 years back. Right now, very, very important thing is the investment that we are doing in new branches, in digital and growing. And in our calculation, close to around 4% of cost to income is investment, okay? And the rest is steady state cost. This will continue even perhaps a large part of next year as we grow branches as we put more people in growing, especially SME and home loans. So SME and home loans right now are in growth phase. So naturally, every product will be at a nice steady state, making a lot of money for the company. This is how every company will have to grow that there are cash cows and then there are starts, which will be hopefully tomorrow's cash cows. So investment is going into these products. A lot of investment is going into IT, digital. Our commitment is by '26, majority of our products should be IT enabled. I think if I'm not mistaken, you traveled with our team everywhere and you saw some of the apps that are working. And that will continue, Kunal. That will continue as we go ahead. So we are not too worried about the overall costs now. This, we believe, will bring more than its stead in terms of income as we go ahead. But all the time, right, we launch new products, new businesses, there will be a phase of investment in those products [indiscernible]. So most of the branches that these new businesses happen at the same locations, no doubt. But it will also mean investment in people, then the branches will not be enough then you are seeing some of the microfinance branches. Obviously, you can't do home loans from there. So those kind of investments will happen. So we are in that phase right now. Overall, the plan for the next 3 years shows operating costs trending well as we -- more and more products get into more mature stage. So that is #1. #2 is acquisition. Generally speaking, we keep our acquisition cost within the range of the processing fee that we earn from the customers. So we try to see that, that doesn't become negative. Now why do -- are we saying try to see is, there will be various periods, various seasons where we will invest that we will maybe reduce the processing fee a little bit. So we will be a little bit negative there or in new products that we launch like in home loans, SMEs. Maybe initially, we have to part a little bit more for DSS. And as more and more of these products we move, two things will happen. As volumes grow, those fees will come down, #1. #2, as we slowly have our own channels because initially any business, initially, it will be DSA lead. And then as you put your -- get your own sourcing mechanism, the percentage of DSA and on sourcing will change. And last but not the least, when cross-selling and top-up kicks in, this third item, proximity-based selling, that cross-selling top of, et cetera, will also come. Now every product moves in this direction, where the DSA portion or even though 2-wheeler or tractor doesn't have a DSA, they have dealers right. So only micro loans actually is a business where we don't have to pass on our acquisition cost. But in all other businesses, we have to pass on our acquisition costs. So it works on these 3 principles: first, try and make acquisition cost lower than processing fee and use your speed, your servicing to make sure that the customer sees value in paying the processing fee. So that is #1. But acknowledging that in certain new products that won't be possible, but that also consider it as an investment. And then as we go ahead reduce that, pass on and also increase the percentage of own sources. And then lastly, increase the percentage of cross-sell and topsell, [ off sell top-ups ]. So that is how the business will grow and keep getting more and more profitable. Does that answer your question?

Yes. And if we have to put out a number in terms of OpEx to assets, particularly on the retail side. So where do you see it eventually maybe currently, it's around about 4.4% and it's been in that range. . But maybe DSA also, there is a lot of competitive pressure given dealer payouts, and we are still at the lower end. So do we see that this might inch up closer towards 5%or 4.75% or so as we try to scale up?

No, no. Going up with out of question No, no, no. So this is also perhaps more because of our SME and housing. So two things will happen in the next 2, 3 quarters, and volumes of SME and housing increase, that portion will move up. And with micro loans farm increasing, it will go down. So the weighted average actually I see remaining steady for the next, let's say, 4 quarters because of this. And as then these other 2 products also, will start trending down from there.

Sure. And secondly, in terms of core NIM. So even though maybe we are highlighting that it's largely because of retail. But if we look at the core NIM and retail that's been down, may be when we look at it, it's including the fee income, it's a down almost like, say, 24-odd basis points. And wholesale is something maybe wherein NIMs plus fee has actually gone up by 17 basis points. So how much do see it sustainable because see when we look at it on the retail, there is hardly like 10 bps kind of an improvement in margins and most of it are also fixed rate products. So there wouldn't have been entire repricing and there is benefit of the deployment of liquidity as well. So where do we see this NIM plus fees sustaining?

Okay, Kunal, frankly if you are commenting at 10 basis points, 15 basis points, I won't be able to give you answer because every quarter, it can certainly move 10, 15 basis points. I mean it will depend so much on product mix and things like that. The statement I made was -- so by the way, I don't know which number you said it has come down because our retail NIMs have actually gone -- just NIM, core NIMs have gone up, both Y-o-Y as well as Q-on-Q. The numbers that I see from 9.85% to 9.95%.

9.95%, yes. I was referring to NIMs plus fee, so that is still down from 11.57% to 11.3%.

We are being conservative in recognizing some cross-selling income at this point of time. Some developments in the industry regarding insurance companies, et cetera, we have been very conservative in recognizing that. I will be able to say only that. But NIMs, for example, 10, 15 basis points here and there every quarter, I may not be able to comment on what we believe is 2, 3 things will work, right? That Micro Loans are growing well, so which is a higher NIM product. SME and consumer loans should grow up from now. And then home loans growing. But yes, hopefully, the higher NIM products are growing more. That is the first aspect of that. Credit cost -- I mean not credit cost, interest cost, yes increasing, but not increasing like the 50 basis points of repo rate, et cetera, increasing less than that. And most importantly, even the fixed rate products, most of our fixed rate products are 2 years loans. So with a duration of just about 1 year. So they also cycle down quickly, right? So the only thing which we will have to consider is competition, whether competition will allow us to pass on in each of every product or whether we choose to pass on or keep interest rates same and grow earnings. Those points will be taken strategically. So frankly, with the NIMs that we have, the strong NIMs, say it was 9.5%, for example, at 9.5% NIM, if I get a choice of increasing volume and sacrificing NIM by 20 basis points or increasing volume less and keeping NIMs in, I will take the first choice any time because the absolute NIMs are so high. So I will grow volumes more and maybe reduce NIMs a little bit. So the strategic direction I would like to give is we are confident of maintaining good levels of NIMs plus fees, whether it will trend 5, 10 basis points up, down in the current interest rate scenario, I will be not only daring but foolish to predict over the next couple of quarters.

Yes. Sure, sure. Got that. Okay. Yes. And once again, wish you happy Diwali to you and your team.

Yes, wish you the same, Kunal.

The next question is from the line of Nischint Chawathe from Kotak.

Just one question is, while everything looks good on the [indiscernible] and we clearly see collections improving, et cetera. Why do you have almost a INR 500 crore kind of a write-off in the quarter?

That's easy. See, it's like this. The entire OTR book, not entire, whatever moves, we have 2 choices that either to show GS3 and 100% provision or to write it off, so only the GS3 number changes, right, because the provision 100%, the NS3 numbers will not change. So let me at least write off and get the tax advantage. So it's a financial decision.

And this would be...

[indiscernible] 100% provided. For business, it is neutral. And write-off doesn't mean we give up efforts to collect. So either we keep at 100% provision and collect or write-off and collect. So business-wise, it means the same. It is a financial -- very simple. This INR 550 crores. If you would have written off, the GS3 would have been higher by INR 550 crores. The PCR would have been higher because they were 100% provided and NS3 will be the same.

No, the point I was trying to make is that there is almost INR [ 556 ] crores kind of credit cost for the quarter. Now if your overall provisions on the balance sheet have been stable then this is a write-off that is in the P&L, right?

No, no, no. So don't look it like that. The overall credit cost actually without taking -- let's just take a step back and gross up this INR 422 crores that we took from the overlays, right? When it comes to close to INR 1,000 crores, which you can say that INR 1,000 crores is same as last quarter [Foreign Language], right? But this INR 1,000 crores includes INR 422 crores of flows from OTR, which is now over. So it is not going to come next quarter. So without OTR flows, this INR 1,000 crores will be around INR 550 crores, around INR 570 crores. And this OTR flow is not going to be there for next quarter. It's over, because everything has flown now simply by dates, 90-plus [Foreign Language]. Everything maybe whatever add to the loan. So, I'm finished. So that is the way to look at this. So whichever way, this pocket, that pocket, the way is very simple. INR 550 crores is credit cost this quarter, which is only going to trend down going ahead. That's the conclusion.

So this is basically one time OTR thing, which is [indiscernible]...

Exactly, exactly. That's what we have said, I mean, committed.

And what would have been the standard of the ECL on the balance sheet?

This year. That is Stage 1, Stage 2 total plus OTR. We have given that number -- we've given that number in the presentation.

Okay, okay. because -- okay [indiscernible]...

Console is 2.1%. For retail, it is 2.4%. Stage 1 plus Stage 2 plus OTR, standard.

The next question is from the line of Abhijit Tibrewal from Motilal Oswal.

Sir, I've joined the call a little late. So in case it's repetition, please let me know. I can look at the transcript. Sir, first question is around the capital gains that you are expecting from the sale of your AMC business. . Wanted to understand -- though you have given a brief commentary in the presentation, I wanted to understand what proportion -- I mean, firstly, what is the capital gains that you are expecting from this transaction? And what proportion out of this will be utilized for macro-prudential provisions. And I mean, will the remaining be kind of kept on the balance sheet for growth capital? That's the question I wanted to understand.

The pricing, we have already told how much it is. The total is about --we have given -- we have sold it for USD 425 million and plus cash and the surplus cash should be another USD 100 million, around that area. Now it depends on many things. We were initially expecting the transaction to close in October end. So we have taken a cover up to that. We are now revising the cover. So what is the rate of cover, exactly when will be the date, rupee dollar. So I mean, at least the rupee dollar is depreciating. So at least we are [indiscernible]. I don't know what happens to the rest of the world. But we will finalize the first of all amount. I mean, this is the consideration in dollars. The exact amount in rupees, I'll be happy if somebody can predict the dollar rupee rate because especially we have to renew the cover at the end of this month. Otherwise, I would have told you the exact rate at what we have covered and all those things. But -- so that's that. And the exact proportion of that, what I will use for various -- if I had to disclose it now, I would have disclosed it in the presentation. So very clearly, it is something that we will -- the Board will take a decision once there is hatch. And then we will immediately communicate.

Got it. Got it. Sir, the second question that I had...

Primarily, it will be used for strengthening the balance sheet.

Okay. Got it. Got it. Sir, second question that I had was that multiple times in the opening remarks and a few of the participants earlier asked, please emphasize the pain from the at least unsecured OTR book is now behind. When you kind of look at, I mean, your [ ROE ], I think I mean the biggest line item which kind of keeps moving or is the most volatile is credit costs. So given that you also suggested to the last participant that credit costs now start to moderate, I mean, what could be a steady state kind of a credit cost for the kind of franchise that we have now from, let's say, in the next year onwards?

It was 3.5% for this quarter. We expect it to start coming down and go below 3%, hopefully, by the end of this year or around 3%, maybe not below, but close to 3% by the end of this year.

And then from next fiscal year onwards, should be more in the range of 2.5% for the full year?

Let's hope, let's hope. Let's hope. The business has the capacity of reducing this further, let's hope.

Perfect. Sir, my last question is, I mean that while we guide under the Lakshya plan that we would endeavor or target a 30% kind of a loan CAGR in retail. Can you also help us think through how should we look at the wholesale book? I mean, because time and again, there'll be maybe articles and we have also kind of suggested in some earnings calls that we plan to do something on the real estate business and the infrastructure segment. So how should we think about -- what are you trying to do in these 2 particular wholesale segments, real estate and infrastructure.

Okay. Real estate segment very clearly, we have stopped doing any new sanctions. We are concentrating on 2 things. One is completion of projects and getting the repayments. And various presentations that we have done before shows the progress that we have done over the last 1 year. And even this quarter, we collected about INR 850 crores. Simultaneously, we are also looking at various partners who can come with us with a priority structure for getting into -- for new projects because even though we are not doing any new sanctions for completion of projects, we have to put out money, right? So we are actually looking at partners funds, especially who will come hopefully on a portfolio or at least asset by asset, coming with a priority structure. We will not disburse any further. They will disburse the priority loan, complete the project, then as the cash flows come, they will take their money first and then we will get over money. So, a structure to exist, obviously, with our loan remaining current all the time. So that's obvious. And so that's the structure we are looking at in real estate, and that we have been very, very clear. Infra is -- we were -- actually, we are looking that we are taking as a for a part time because we believe that the business has good potential to grow. It doesn't perhaps putting more capital into it doesn't fit in our overall ROA promise that we have given. And hence, we are limiting capital. So one way, the ideal is to get a partner into this business, preferably a majority partner for this business. Efforts are on there. And as some people come and discuss with us at various times, there will be media reporting, so that can't be helped, we can't control that, that will happen. If that happens and why I am saying if, it's in a rising interest scenario, obviously, people's interest will vary naturally. If interest rates were steady or coming down, by now, there would have been tremendous interest. But as interest is going up, it is very natural that people will be wary to take up a large book, especially. So that efforts are on. And when we see a fruit, we will obviously come to you. In the meanwhile, as you know, we have a very strong sell-down engine. And as we become more selective in further underwriting and to start selling down more aggressively, the capital towards this business will reduce. We will reduce capital towards this business while protecting the franchise, which hopefully can be sold. So that's the overall strategy. And that is why I'm not talking about the overall book, et cetera, because wholesale book, I don't want to give a trend. It will trend down by how much, how fast. We will see in the next 2, 3 quarters. I want to only talk about the retail book, the way it will grow. By the way, we have not promised 30%. We have promised 25%, but we have shown a 9% Q-on-Q. So probably this year, it maybe 30%.

Understood, sir. And if I can squeeze in just one last data keeping question or you can let me know if you already published it in the presentation, what is the quantum of the OTR pool that we have of now? And you used to give out a slide where you used to publish the absolute quantum of standard asset provisions on Stage 1 and Stage 2. So if you could please share that with us.

So we just told that Stage 1 and Stage 2 is about 2.1% absolute quantum. Absolute quantum is what? About INR 1,800 crores total.

[indiscernible]

[indiscernible]. Okay. So around INR 1,800 crores, so that comes to around 2.1%. Stage 1 plus Stage 2 plus OTR, so that's the number. And I already published it on the call. That is #1. #2, largely, the OTR remaining now is housing. That's about it. Total housing...

[indiscernible]

Yes, around INR 650 crores odd of housing, that's largely one remaining large part of it will open up actually next year. And that -- sorry. Sorry. Housing is INR 884 crores, INR 900 crores. And a large part of it, around INR 600 crores will open up next year. However, it is fully secured. We have tested security of everything. And there, we are quite confident that big costs will not come. It will be in steady state. Specific numbers, I just don't have them by heart, so I have to refer to -- thank you.

Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Mr. Dinanath Dubhashi for closing comments.

Thank you. Thank you once again, ladies and gentlemen. Excellent questions. I would only like to once again express the confidence that not only the quarter is good in all aspects: growth, margins, cost, credit cost, excellent growth in ROE. NS3 for retail, reduction in wholesale. It is all happening according to plan, but various measures we are taking. Various tools we are using, launching, various initiatives we are taking, products, digital makes us tremendously confident that we will be able to follow up on this app and improve it quarter-on-quarter as we go ahead. And the Lakshya '26 objectives, I'm beginning to get confident that we will be able to actually prepone achievement of these objectives as we go ahead. So on that note, thank you. Thank you for being patient. Thank you for your continued support. We will, of course, be available for an investor meet, et cetera, that you guys arranged. My IR will be available. Myself will be available as we go ahead. And before we end, wish you all very, very happy Diwali. This Diwali is for us the first Diwali which comes without any shadow of the pandemic. So wish you all a very happy healthy Diwali. God bless us all. Thank you.

Thank you. On behalf of L&T Finance Holdings Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.