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

Ladies and gentlemen, good day, and welcome to L&T Finance Limited Q3 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. We have with us today, Mr. Sudipta Roy, Managing Director and CEO; Mr. Sachinn Joshi, CFO; and Mr. Raju Dodti, COO; and other members of the senior management team. Before we proceed, as a standard disclaimer, no unpublished price-sensitive information will be shared during the call. Only publicly available documents will be referred to for discussion during interaction in the call. While all efforts will be made to ensure that no unpublished price-sensitive information will be shared, in case of any inadvertent disclosure, the same would, in any case, form part of the recording of the call. Further, some of the statements made on today's call may be forward-looking in nature. A note to this effect is provided in the Q3 results presentation sent out to all of you earlier. I would now like to invite Mr. Sudipta Roy to share his thoughts on the company's performance and the strategy of the company going forward. Thank you, and over to you.

Thank you so much. A very good morning, everyone, and thank you for joining us today. I'd like to wish all of you a very happy and prosperous new year on behalf of the entire leadership team at L&T Finance. Today with me on the call are our CFO, Mr. Sachinn Joshi; and the senior management team of L&T Finance. Today's call is divided into 2 sections, taken sequentially by myself and our CFO, Mr. Sachinn Joshi, who will be talking about the overall business metrics and financial performance at length. Post our commentary, we'll be happy to take questions on the call. Before moving on to the highlights of the quarter, I'd like to give you some flavor on the macroeconomic scenario and the sectoral outlook. The global backdrop remains uncertain at this point in time as possible policy pronouncements in the U.S. cloud visibility of outcomes in global trade and financial markets. In the meanwhile, strong growth momentum and high policy rates in the U.S. continue to drive flow of funds towards the U.S. dollar assets and adding pressure to the financial assets in the rest of the world. Sharp shift in external landscape has triggered tighter liquidity conditions and currency volatility in domestic financial market as well. In the meanwhile, delayed government spending, mixed demand signals and credit squeeze has hit the GDP growth momentum in the domestic economy. Slower urban consumption and moderate investment activity has only partly been offset by rural recovery, leading to a sharp dip in growth during the second quarter of FY '25. Government's first advance estimate of real GDP highlights, have tempered pace of economic activity in FY '25 at 6.4% annual growth, well below the 8.2% growth in FY '24. Acknowledging the headwinds to consumption demand and private investment in the economy, RBI has also revised down its real GDP growth projection for the current fiscal year. RBI has revised up its inflation projection highlighting the challenges of bringing down the headline inflation to target level in the current fiscal year. While headline inflation has seen some moderation in November and December, as improvement in mandi arrival of vegetables and bumper kharif harvest help ease price pressure on volatile components, core CPI inflation and WPI have seen some uptick, indicating broadening of the inflationary pressure on the economy. High inflation level and delayed government spending has hit the disposable income available with the consumers for discretionary spending. Urban consumption has shown signs of fatigue with the exhaustion of pent-up demand, while rural consumption, despite gradual improvement, remains inadequate to offset the urban drag. Unexpected weather events, depreciating currency and worsening of geopolitical conflicts constitute major upside risks to the expected moderation in inflation levels going forward. Hence, monetary and fiscal policy interventions to support consumption are key to a sustained growth recovery in H2. In the quarter ahead, we expect rural recovery to continue and hope for uptick in urban demand as inflation levels drift lower. Some of the squeeze in economic momentum is always reversing in Q3 FY '25 and fiscal support has picked up as well. With further fiscal and monetary support expected in the upcoming budget announcements and monetary policy announcements, we keenly watch for these early green shoots to turn into strong growth drivers in the coming months. I would like to share that despite the challenging operating environment in the microfinance sector, our diversified franchise has enabled us to achieve the highest festive quarter disbursements of INR 15,210 crores, a growth of 5% year-on-year, and we have been successful in sustaining the trajectory in line with Lakshya 2026 goals. Our retail book now stands at INR 92,224 crores, a substantial growth of 23% year-on-year. The numbers reflect the strong execution engine aided by a proactive portfolio management and prudent risk management that we have put in place over the last couple of years, and we will continue to bolster the execution bias in every initiative we take. Many of you have attended our Investor Digital Day in November 2024, along with R.AI.SE '24, our AI BFSI conference, where we showcased several of our technology initiatives, some of which could be transformational when successfully completed. I'm pleased to share that the progress on these initiatives during the last quarter has been satisfactory. Our next-gen credit underwriting engine, Project Cyclops, was extended to 100% of dealerships in 2-wheeler finance and was also launched for the Farm Equipment Finance business. In our pursuit of innovation and fostering partnerships within the lending landscape, we established a strategic partnership with Amazon Pay to develop cutting -- credited -- cutting edge credit solutions while also extending PhonePe partnership to personal loans, thereby delivering a seamless digital lending experience to our customers. Additionally, we launched Knowledgeable AI, KAI, an AI-powered chat bot that revolutionizes the home loan experience. Furthermore, as announced in the Investor Digital Day, we have commenced work on Project Nostradamus, a first of its kind, AI-driven automated portfolio management engine. We intend to release the beta version of this new technology engine in Q2 FY '26. As we look ahead, we remain dedicated to driving innovation and enhancing our offerings to better serve our customers. Now I would like to provide an update on our quarterly performance against the Lakshya 2026 goals. The first milestone was to achieve retailization of greater than 95%. I'm pleased to share that we have surpassed this target with 97% retailization at the end of this quarter. We had earlier set ourselves a retail book growth target of 25%. However, given our outlook of the business environment in different segments, we have consciously chosen to slow disbursements in segments where risk reward was not in our favor. Consequently, our retail book growth for the quarter stood at 23% year-on-year, a growth rate that we are satisfied with, given the current circumstances. Specifically, as delineated in Slide #30, you will observe that quarter 3 FY '25, our RBF disbursements were calibrated downwards to INR 4,599 crores, while simultaneously, in other business segments such as farmer finance, housing finance and personal loans, we have maintained growth trajectory based on our confidence in our new generation underwriting capabilities and the market potential. In particular, we have skewed our sourcing efforts towards unloading more prime customers who, in general, exhibit credit resilience during downward credit cycles. In line with this, in the 2-wheeler business, 69% of our disbursement in the month of December 2024 was to the prime segment, a number which has jumped to 75% plus in the elapsed timeframe in January 2025. Thirdly, this retailization thrust had to be credit calibrated with the goal of retail GS3 below 3% and NS3 below 1%. I would like to inform that while the quarter witnessed an increase in slippages owing to macro challenges in the RBF segment, the retail GS3 and NS3 levels stayed close to the threshold levels. The corresponding console asset quality metrics in this quarter remained healthy with GS3 at 3.23% and NS3 at 0.97%, which is below the Lakshya threshold of 1%. The fourth and last milestone on ROA front, we have moved from tracking retail ROA to console ROA in the range of 2.8% to 3% as per our original Lakshya 2026 targets. Our consol ROA for quarter 3 FY '25 stood at 2.27%, down 26 basis points year-on-year, which is a mix of 2 factors. First, the compression in inventories on account of a conscious calibration in RBF business and an increase in credit cost during the quarter. I would like to highlight that our credit cost over the past 12 quarters have been in the range of 2.6%, thereby displacing predictability across cycles. We remain confident that in accordance with the initiative towards sourcing better quality customers and investing in next-gen underwriting platforms like Cyclops along with the improvement in macroeconomic environment, will help us resume our journey towards delivering that 2.8% to 3% ROA. Now I'd like to quickly run you through to the key highlights of our performance in quarter 3 FY '25. We recorded a consolidated PAT of INR 626 crores in Q3 FY '25. Despite a calibration in RBF disbursement, the retail disbursement for the quarter stood at INR 15,210 crores, registering a 5% year-on-year growth, driven mainly by robust performance exhibited by the Farmer Finance, housing, personal loans and SME segments. Retail book for quarter 3 FY '25 stood at INR 92,224 crores, up 23% year-on-year. And consolidated book grew at 16% year-on-year, reaching INR 95,120 crores in quarter 3 FY '25. Our 5-pillar strategy continues to be central to our road map to the future. We continue to granularly execute the 5-pillar strategy, details of which are available from Slide #12 to Slide #28 in the investor presentation. The year had a challenging operating environment with certain macro events like prolonged heatwave, severe floods in several states and temporary slowdown of government expenditure and grants due to general elections, leading to an increased credit cost for the rural group loans and microfinance business portfolio, thus warranting a case for utilization of the macro prudential provisions created during COVID, which was in FY '21 and FY '22. We estimate based on current trends that before utilization of macro prudential provisions, the total credit crossed in the rural group loans and MFI business will be in the range of INR 950 crores to INR 1,000 crores for the full year FY '25. In light of the above, the Audit Committee and the Board have approved the utilization of an amount of INR 100 crores out of the macro prudential provisions in quarter 3 FY '25. Our advanced estimate of the macro utilization in Q4 is in the range of INR 300 crores to INR 350 crores based on a peak credit cost on the roll forward book of Q4 FY '25. With the abating of the macro events and the early green shoots of stabilization of collection efficiency in December '24 and Jan '25 till date see being slightly better than the same time last month, we anticipate an improving collections efficiency trajectory for the rural group loans in the MFI portfolio during Feb and March '25, thus signaling sustained recovery trends in this business. Our analysis tells us with the onset of MFIN 2.0 guardrails from April 2025, will ultimately lead to the recovery of the credit profile of the sector, albeit at a marginal cost to growth. These norms would be value accretive for participants with high-quality franchises. As asked by many of you in our earlier calls, we have endeavored to give you detailed portfolio cuts on our RBF business in the investor presentation. You may please refer to Slide #16 to 20 and Slide #35 of our investor presentation for the same. We are currently evaluating adopting the CGFMU credit guarantee scheme in certain geographies and segments to optimize the unforeseen event risks in the RBF business. We will be in a position to provide greater details around this in the subsequent quarters. As mentioned earlier, we would now like to give a brief update on the 5 pillars of execution that we had enumerated over a year back and continue to be in implementation mode against the same. Customer acquisition. We are continuously working on deepening the customer acquisition funnel, both horizontally as well as vertically. And in the last quarter and this quarter as well, our focus has been on new customer acquisition, albeit with the necessary credit adjustments to maintain future portfolio quality. Accordingly, there has been a calibrated channel optimization in 2-wheeler and rural finance business vertical with sustained focus on better quality and under-leveraged customer acquisition. Hence, we added a total of 5.8 lakhs new customers during the quarter. Further details around customer acquisition and repeat share are available on Slides 13 and 14 of the investor presentation. Sharpening credit underwriting. Our proprietary credit engine, Project Cyclops that was operationalized in quarter 1 FY '25 has been extended now to the tractor business and which is currently live with 24 scorecards and having been scaled to 100% of the 2-wheeler dealership where it is currently live with 18 scorecards, showcasing encouraging results with net 0 plus reduced by 120 basis points in the 2-wheeler portfolio over a 4-month period when benchmarked to the non-Cyclops portfolio. Cyclops will be implemented for the personal loans and SME business loans in the coming quarters. Futuristic digital architecture. We have spoken at length on our technology initiatives at our Investor Digital Day and granular details on our technology initiatives have been provided for each line of business. Our biggest technology initiative for next financial year will be operationalizing Project Nostradamus, a state-of-the-art, first in industry, AI-driven automated portfolio management engine. Brand visibility. We continue to focus on our brand building with Jasprit Bumrah as a brand ambassador for L&T Finance products. Having successfully concluded R.AI.SE, India's premier AI-themed event in the BFSI sector, which saw more than 8,000 registrations and reached an engagement level of 3 lakhs. We participated in the India Bike Week 2024, where the unveiling of the LTF Zoom 2-wheeler loans took place. As we move ahead, you will see a set of integrated marketing campaigns and targeted branding exercises in the upcoming quarters. Capability building. On the capability building front, I'd like to inform you that the regional business head structure was further strengthened during the process with institutionalization of periodic reviews and processes. Additionally, we worked upon capacitizing and upgrading our infrastructure at various branches across the country while also opening an integrated technology, operations and data science facility at Mahape, Navi Mumbai. On the employee initiatives front, we continue to work around performance and productivity with the introduction of integrated employee scorecards and took several employee engagement measures during the quarter, details of which have been provided in Slide #28 of the investor presentation. As part of our strategic growth map, we are committed to building a well-diversified asset profile, minimizing concentration risk on any single line of business. With that end goal in mind, we remain committed to growing our existing and new lines of business while also looking at synergistic opportunities. Amongst our new product initiatives, our team has been successfully scaling our Micro LAP warehouse receipt finance and supply chain finance products. In the Micro LAP domain, as we shared in our Investor Digital Day, our existing distribution is being leveraged to upsell this secured high ROA product to the cream of our RBF customer base. The Micro LAP asset book has crossed the milestone of INR 300 crores in Q3 FY '25. Some of you may recall in our Investor Digital Day, we had recalled -- we had called out a book size of INR 214 crores for this business, expecting growth, albeit on a low base. Similarly, our warehouse receipt finance business housed under our Farmer Finance vertical also has shown encouraging initial traction. This business, which operates on a first of its kind, completely paperless journey and digital workflows driven through a network of 25 branches and presence in 80 mandis has achieved cumulative disbursements of INR 350 crores in FY '25 YTD. Lastly, our supply chain business housed under the SME vertical was launched in Q3 FY '25. And while it is still early days, we are optimistic that this business too can scale significantly and profitably. I will now request Mr. Sachinn Joshi, our CFO, to take you through the financial updates.

Thank you, Sudipta. As always, I'll be walking you through the financial performance of the company for the quarter. Consolidated NIM plus fees stood at 10.33% versus 10.86% for Q2 FY '25. Of course, this was on account of conscious shift in the disbursement and book mix due to a challenging credit scenario in RBF. Consolidated PAT for the quarter stood at INR 626 crores. Healthy quarterly disbursement, retail disbursements were seen INR 15,210 crores, which are up 5% year-on-year. Our retail book stands at INR 92,224 crores. This is up 23% on an year-on-year basis on the back of healthy retail disbursements during Q3. Our consolidated book stands at INR 95,120 crores, which is 16% up year-on-year. Consolidated ROA stands at 2.27% which is down 26 basis points year-on-year. And consolidated ROE correspondingly is down -- is at 10.21%, down 1.14% year-on-year. Coming to retail businesses. Let me start with Rural Business Finance. The business registered quarterly disbursements of close to INR 4,600 crores. This is down by 16% Y-o-Y, the trajectory aided by prudent disbursement strategy. The book size reached INR 26,231 crores. It's down 1% quarter-on-quarter, but up 14% year-on-year in Q3. Coming to Farmer Finance, the disbursement stood at INR 2,495 crores in third quarter, up 23% year-on-year, better than average monsoon and festive season demand resulted in a double-digit growth. This led to the book size reaching INR 15,075 crores, reflecting a growth rate of 9% year-on-year. On the urban segment, urban finance segment, which comprises 2-wheeler, personal loan, home loan, LAP businesses. It saw a 21% year-on-year jump in overall quarterly disbursements. As a result, the overall book size increased to INR 43,957 crores in third quarter, translating into a 31% year-on-year growth. The 2-wheeler business registered a quarterly disbursement of INR 2,414 crores, which is down 5% year-on-year, partly due to strengthening of the documentation and credit guardrails taken by us during the quarter for sourcing of better quality credit-tested customer and shift towards prime customer base. The book size increased to INR 12,676 crores, which was up 21% year-on-year. On the personal loan front, we achieved disbursement of INR 1,642 crores, translating a growth of 94% year-on-year with the book size at INR 7,820 crores. This book has increased by 22% year-on-year. During the quarter, double-digit growth in this segment was led by scale-up of fintech partnerships and expansion of physical distribution through the DSA channel, with focus on salaried prime customers. Our large partnership business has already started meaningfully contributing to our origination volumes. It was around 12% of the overall disbursements done during the month of December, up from a mere 2% -- 3% contribution in September 2024. On HL LAP, we achieved quarterly disbursement of INR 2,475 crores. This was up 24% year-on-year, and the book size stood at INR 23,461 crores, an increase of 41% year-on-year, while maintain a pristine secured portfolio performance. Coming to SME finance. Our Q3 FY '25 disbursement stood at INR 1,249 crores, up 29% year-on-year. The book stood at INR 5,817 crores. The growth in business volumes were aided by building additional channels to diversify the existing sourcing funnel. Let me now hand over the call back to Sudipta to make his closing comments.

Thank you, Sachinn. In conclusion, quarter 3 FY '25 has been a challenging quarter for the entire industry. Our teams have worked extremely hard to deliver a reasonable outcome for us. We are cautiously optimistic that the worst is behind us, and we are hopeful going into our annual business planning exercise for FY '26 that we'll be able to continue delivering on our promises of asset growth, profitability and ROA. I thank you all for the patient hearing. We now open the floor to questions.

[Operator Instructions] The first question comes from the line of Sanket Chheda with DAM Capital.

Congrats on a pretty good set of numbers, more so on MFI front, where we have been meaningfully better versus peers. So my query was on the one of the notes to accounts, wherein we have [ mentioned about INR 250 crores of provision ] reversed to P&L account as you mentioned. But when we see the credit cost ex of the overlay also, it seems that the benefit has not been taken into P&L. So has that been reserved for the SRs that we would have received against this ARC sale? Just a clarity on that is what I would request.

Sanket, there was a disruption in between. We lost majority part of the question. So for the benefit of others on the call, can you repeat the question once again?

So, sir my question was regarding the ARC sale related notes to accounts, wherein we have mentioned about INR 250 crores of provision reversed to P&L. But when I see the credit cost ex of overlay also, it doesn't seem that we have taken that benefit. So is it that we have reserved that INR 250 crores, which was available for the reversal against the SRs that we have. And once that SRs get monetized, that's the time when it will be reversed on P&L?

Yes. Thank you, Sanket. Thank you for asking the question that, there have been some queries on this. You are right. Actually, as per the Ind AS accounting, we cannot take whenever transfer of assets happen to ARC. The provision reversal is just a routine item, which comes as a credit. But 85% of whatever asset goes to the ARC comes back as an investment on the book. So in this particular case, INR 250 crores got first credited. It got reversed to the P&L. And then the same amount of provision was created when the SRs were created on the book of the 85%. I will just enumerate the exact chronology and the numbers that have been shown over there. So INR 776.37 crores was the principal outstanding of the loan transfer. This was the cost. The EAD against this was INR 815 crores. And this INR 815 crores of asset got actually sold at a gain at INR 833 crores. So about INR 18-odd crores of gain was made on this. And when -- this 75% of this INR 833 crores was actually booked as an investment, which comes to INR 708 crores. So against this INR 708 crores, we have, first of all, adjusted the profit made on this because that also cannot be taken to the P&L. So INR 18 crores was adjusted and the INR 250 crores, which was reversed to the P&L was also adjusted against this. So totally, INR 268 crores has been adjusted against the INR 708 crores of SR value. And the net carrying value in our books as of 31st December stands at INR 440 crores. So what -- because both are -- the assets on the loan book also is being accounted through the FPTPL route and the investments are also accounted for in the same way, you can't see the actual provision which has been made, which has actually got subsumed into the financials. Maybe by when we do the 31st March full-fledged financials, this will be visible. But yes, you're absolutely right that there was no credit taken and adjusted against the credit cost. This is just a setting of just getting reversed from loan book and getting again adjusted towards the SR, security receipt, which has been booked in the books. I hope it clarifies.

Yes, sir. And this was a real estate account, right?

That's right. That's right.

Next question comes from the line of Digant Haria with GreenEdge Wealth.

Two questions, Sudipta. First is that you mentioned that our -- in tractor and 2-wheeler, we have significantly reduced the risk by going more towards the prime segment. So when I look at your provisioning, even if I remove the whole microfinance-related provisions of INR 170 crores this quarter, we are roughly at a run rate of say, INR 400 crores, INR 450 crores of provisions for the quarter for the rest of the business. So do you think that the benefits of this whole moving towards prime and this better underwriting, all of this is already showing in the provisions number or the credit cost can still go down further in the non-MFI part of the business? That's my question one.

Okay. So yes, Digant, in the sense that the full benefit of all the work that we have been doing is still not visible because it's a gradual process. You have a legacy portfolio or -- at a particular credit profile and you have this new portfolio coming in at a lower credit cost trajectory. Obviously, the new portfolio has to build and the old portfolio has to wash out for the entire benefit of this to be visible. So I would reckon that it will take a couple of more quarters for this to be fully visible. It is not fully visible yet. However, when -- internally, when we monitor the credit performance of the new portfolio vis-a-vis some parts of the legacy portfolio, that is already visible to us, but it will take a couple of more quarters to fully fructify.

So just to add in terms of numbers, if you recall, in the previous quarter, we had made a mention that there were a couple of steps taken, especially on the farm portfolio, we had stopped the repossession at 90 plus. And there will be an impact on account of this through the roll forwards for a couple of quarters. I think by Q4, that impact should get over. So one is on the farm portfolio, this is the impact. On the 2-wheeler, the Tier 2, Tier 3, Tier 4, those kind of cities, the impact which you saw in the micro loan piece, we talked about the rural, there was some impact on account of heatwave and all across the country. So 2-wheeler also, after Sudipta has come in, we have already changed the strategy and started moving towards prime. And as we speak, I think 49% to 50% of our book now is prime. The impact of -- on the credit cost will start because as this book starts seasoning, you will start seeing the impact coming into the P&L. And I think 2 to 3 quarters is what perhaps we will take to see the complete benefit of the pristine quality of the 2-wheeler book, which is being built now.

Yes, and Digant, if you see, we have put in 2 additional slides this quarter in the investor deck, which is Slide #23 and Slide #24, where we have given an index representation of 2-wheeler portfolio bounce. And you will see that our 2-wheeler portfolio bounce is already at about -- on an index basis at 84% in December 2024 compared to 100% index in December 2023. So it is also trending down. And if you look at our sort of net non-starter farm equipment finance business, which is basically the number of people who bounce their first EMI, right, that is at 25% level compared to the same number in December 2023. That means in December 2023, 100 people bounced the first EMI. In December 2024, only 25 people bounced the first EMI. So we put this as an index form just to sort of demonstrate the better quality portfolio that we have been focusing on building. I mean how some of it is showing up in the leading indicators, which is the bounce rate. We consider bounce rate being the leading indicator of credit quality, and that is currently trending well. Obviously, this over a period of a couple of quarters, will find its way into the credit performance because as the new portfolio builds with these better credit parameters, that should obviously translate into lower credit costs.

Perfect. Perfect. Second question is, Sudipta, on this whole -- this NIM plus fees guidance, we have it in the corridor of 10% to 11%. But now let's say, see, we have done quite well in microfinance versus competition or versus what the general sector is. But that also -- maybe next 2, 3 quarters, the growth may not be as strong as it was in the past. So obviously, that fees and the fees plus interest income is highest in that division. How do we compensate that given that we are seeing more growth in the LAP home loan portfolio, which are obviously at much lower IRRs. So how does this whole trade-off work for the next 12 months? And then is the INR 100 crores of extra OpEx that we saw in this quarter related to collection efforts in microfinance division?

Yes. So I'll give you the first -- the answer to the OpEx question that's very straightforward. The fact is that this being the festive quarter, we had certain festive-related spends. Secondly, as you are aware, and we had informed last one is that we have actually -- we beefed up our collections workforce. So that has got an additional component of expense, plus there were certain technology-related expense during this quarter because we have been operationalizing Cyclops across all our lines of business. So these are the 3 primary main drivers for some of the increased OpEx that we have seen this quarter. And so on the NIMs plus fees, yes, there is no easy answer to this. This is a journey that we have told that we are going to travel. And obviously, the sort of the ongoing credit challenges in the microfinance sector obviously does not help us sort of -- so that does not smoothen the journey for us. Obviously, there are a couple of things to this. First and foremost thing is that we have to increase our fee base. We are working on increasing our insurance penetration. Right now, yes, we do insurance only at origination. However, we have a full insurance distributor license right now. Now we can sell through the life cycle. That team is building. We are putting together a technology platform for the same. So we are hopeful that over the next couple of quarters, some more of those fee revenues will come in. In terms of growth, we are trying to grow our slightly higher yield secured business. For example, our Micro LAP business, though albeit on a small base, we are trying to grow it. We already have 80 branches we are going to grow it much more in the next couple of quarters. You can see that personal loans have been growing quite well. Personal loans on a quarter-on-quarter basis has -- on a year-on-year basis has grown by about 94%. Our large partnerships are scaling up well. And one of the things we have noticed is that in terms of digital delivery, sometimes you can sort of work on increasing your interest yield without losing too much of expense on that. So we'll work on some part of nullification through our personal loans growth. And we are hopeful that even though certain markets of the -- in the RBF business, JLG business, there is stress, there are certain virgin markets where actually you can safely grow. And I can give you an example. There are certain -- some markets that we have ventured into in the last couple of quarters, new markets like AP and Telangana. Our collections efficiency is 100%. And we continue to sort of judiciously deploy our branches there. We are focusing on Western UP where collection efficiency trends well. We are focusing on Western Maharashtra where collection efficiency trends well. So we are finding those pockets in the JLG business where our collection efficiency is trending well and where we can do safe non-leverage business. So it's a tight balancing act. And I do believe that it will not be easy, but we will try to definitely be within that corridor. Obviously, there is one large sort of part wherein if a possible RBI rate cut or a couple of cuts were to come next year, that will probably ease the challenge a little bit, but we cannot obviously count on that completely. So overall, a couple of irons in the fire, and we will continue to work towards sort of that trajectory.

So Digant, just to add in terms of the overall modeling, yes, we -- last quarter, we had mentioned that it could be in the range of 10.5% to 11%. But directionally, just like to your earlier question, we were talking about how we are moving more towards prime. So what would happen directionally is over a period of time, maybe the NIM plus fee, it may actually be slightly downwards. But at the same time, the OpEx plus credit cost also will move downwards. So the ROA, which is if you're actually derisking yourself or bringing down the risk, you will find that the ROAs will overall adjust. So this whole ROA tree would possibly move left where you will have -- you will see that the 10.5% to 11% may actually come down slightly. But at the same time, you will find that the operating expenses because the productivity levels would increase and the overall OpEx as a percentage of the book as well as credit cost as a percentage of book on account of the steps being taken may move downwards, thus actually impacting the ROA only positively. So we will still stick to over a period of time, the ROA directionally to be in that corridor of 2.8% to 3%, but all other numbers may the percentage terms, they may actually change for the better because we will have a much stronger book which may be slightly lower yields, but coupled with steps which we will be taking, as Sudipta mentioned, there will be other line items of fees and all which will get added. There will be new businesses or products that we may get into over a period of time, which we will start working on the next full year business plan. And we may possibly come back to all of you at the end of -- when the results for Q4 come up.

[Operator Instructions] The next question comes from the line of Kunal Shah of Citigroup.

Yes. So firstly, maybe if you can just highlight how much has been the write-off, particularly on the 2-wheeler and PL because outside of MFI, also, we are seeing a slightly higher stress out there. And still, in terms of the growth in PL, that seems to be quite aggressive. So would we look at pulling back growth at any point in time because of the higher delinquencies in PL?

Kunal, I'll take the PL growth question, and then Sachinn will give you -- take the rest of the part of the question. See, PL, we are very clear that we will not do PL to any leverage segment or any non-prime segment. Our growth in PL primarily is coming from prime salaried segment. So if you see our DSA, we do 99% salaried in our DSA channel. If you look at large partnership, our target in large partnerships is towards prime salaried. In fact, some of the metrics are absolutely clean in this business. So we are very, very clear that our PL scale-up will be very, very risk calibrated. See, on a percentage terms, it might seem high. But from an actual quantum perspective, we are still doing about INR 550 crores to INR 600 crores of PL a month, which is not very, very large. So we are gradually scaling up this business. And the metrics are currently absolutely okay as long -- and we do believe that as long as we do prime salaried business with a sharp eye on both aggregate debt burden as well as unsecured exposure, overall metrics, we should be fine. And we are implementing Cyclops for PL also this quarter. Parallelly, SME and PL Cyclops we're implementing this quarter. So as PL and SME Cyclops get implemented this quarter, the unsecured business will -- I believe, will be run in a far, far more safer fashion.

Kunal, Sachinn here. Yes. On the write-offs, usually, we don't give these numbers. Last quarter, we gave the number as an exception. But the overall write-offs, like we mentioned on the call previously, is a function of -- it's a technical write-off, right? Because any asset which gets provided up to 100%, there is a pool of assets which are taken up for writing off in the book. But at the same time, that does not mean that business stops the efforts on collection of the thing, right? So yes, RBF, you have seen that the roll forwards have been happening. And out of that pool, last quarter, we had given -- we had specifically clarified that the whole write-off was not RBF. All I would like to say is that it is distributed amongst products. So it is not one business where the write-offs are very high. About INR 300 crores, I can share for the micro loan piece is what we wrote off. And rest, all the businesses have been almost equitably done.

Yes. So more in terms of the credit cost, not particularly write-off. But if you have to look at it like credit cost is very clear this time in terms of how much MFI is contributing. And maybe you indicated that from the wholesale side, there seems to be like 0 impact, no recoveries and no provisioning during the quarter. So how would be the breakup there between, particularly 2-wheeler, tractor and consumer loans?

See, on the Digant's question, we already responded to this. That for a couple of quarters, farm, 2-wheeler and PL will see some challenge. And thereafter, you will start seeing things changing for the better. Because whatever challenges we have faced in the first quarter, are not restricted just to rural business, right? I mean, the election time as well as the heatwave, all this led to liquidity going out of the market, led to a situation of overleveraging and there has been an impact across businesses. The most was felt, of course, in the micro loan market. But the other businesses have also got impacted to a level. Plus, at the same time, we have been directionally moving ourselves more towards prime and all. So like we called out in the last quarter, it will be 2 to 3 quarters of some pain, which will be -- and it is not just one particular business. What I -- what we would like to highlight is, it's not one business, which is going through a major turmoil or anything. It's just that certain key activities, like farm on account of repo stoppage, 2-wheeler because of some challenges in certain states are the reason why the credit costs have been slightly on the higher side. So even...

No, the reason was the repayment rate in 2-wheeler was quite high, okay, if we look at it INR 2,400 crores of disbursements and portfolio staying flat, so that suggests a very high -- maybe the rundown rate. So just wanted to check, is it like a relatively higher credit cost and write-off in 2-wheeler, which is particularly leading to that? So primarily, that was the question.

No, no, no, that is not the case. The write-off have been -- as I've mentioned, across all the 3, 4 products, they are distributed. So no specific major hit in one particular product...

Sir, rundown could be on account of?

See, yes, Kunal, if you would recall, we had started sort of the prime movement in 2-wheeler journey sometime last year, right, in September of last year when we started moving in towards the prime of 2-wheeler. So actually, some part of that, actually, if you look at the our portfolio, 49% of our 2-wheeler portfolio is prime, right, which is basically half of our 2-wheeler portfolio is now prime. And on an incremental basis, as I said, in the month of January, almost 75% of the through-the-door disbursement in 2-wheeler is prime. So around April and May, we saw some spike in 2-wheeler delinquencies along with -- which is a contiguous product along the microfinance business. But we saw also stabilization of the same around August, September, we saw stabilization around the same. And the downward trajectory continues, and which is also demonstrated by the portfolio bounce rate sort of index representation we have given in Slide 23. And we are very, very confident that whatever credit costs that we have seen happen in Q2 and Q3 in the 2-wheeler business will -- is on a sharp downward trajectory over the next couple of quarters.

Kunal, just to add, I was just looking at the numbers after you gave the breakup of 2-wheelers. What has happened, this was a festive quarter. And there is a trade advance book we -- usually advances are given to the dealers. So there is a trade advance book, which has reduced by INR 350 crores, close to. So that is 1 impact because of which you are seeing that. That is specifically for this quarter.

So that's perfect, yes. So I think trade advances unwinding is leading to that.

Yes, yes.

Next question comes from the line of Mahrukh Adajania with Nuvama.

I had a question that lenders plus -- 3 plus lenders is around 7%, and then 4 plus is around 2.5%.

It is -- 2.5% is only...

2.5% is LTF+4, if we take the entire block, LTF+4 up to whatever, it's the whole block is 4%.

Yes. So if you just take LTF+4, which I guess is 2.5%, correct? Not 5%, 6%. And then if you take LTF+3, that's 7%. So basically, you have a gap of 5%, 5.5%, which will have to convert by April 1. So your call on peaking of credit cost is driven by the fact that this 5.5% will reduce to near 0? Or how do we think about it?

See, Mahrukh, on this, you have to look at that, that it has been resolving itself quite well from 10% in quarter 1 FY '25, it has come down to 7%, right? So you can see that on an average -- on a quarter basis, average has been 1.5% resolution on an average on a quarter basis, right? And the collection efficiency on this pool is also at 98.7%, the collection efficiency. The collection percentage efficiency is not extremely bad on this. Now one of the things that we have to keep in mind that from April 1, the MFIN overall INR 2 lakh leverage guideline comes into play, which has more of an impact on disbursement actually rather than an immediate followthrough impact on repayment capability of the customer, right? So what we expect is that this number, which is there, that 4% and that 2.5% to orderly wind down over the next couple of quarters. Anyway, we have pushed in about additional 900 collectors on the ground. And one of the focus of those additional 900 collectors is to focus on the geographies where collection intensity is needed. So that effort is already continuing, and we are reasonably confident that this 7% plus 2.5% number will be reasonably wound down over the next maybe max 2 to 2.5 quarters.

Got it. But basically if the run rate is 1.5%, then it would require 3 quarters to wind down or it does not work that arithmetically...?

See one of the things that, Mahrukh, you have to keep in mind that the entire portfolio is not bad. The 7% portfolio as a 98.7% is close to 99% collection efficiency. So a majority of the part of the portfolio is good. So there is -- we need not panic on the portfolio that is good. A small part of the portfolio has stress, right? And the focus should be on that small part of the portfolio.

Got it. Okay. Makes sense. And then just one clarification on the SR provision. So the reversal and the additional provision that accounting is done through the same line, right, of provisions?

Yes, yes. That's right, that's right.

Next question comes from the line of Saurabh Kumar with JPMorgan.

Sir, just 2 questions. One is on the microfinance portfolio. Number one, what's the write-off policy? And just in terms of number of customers, what will be the collection efficiency, like how many of your customers are fully paying right now?

On the first part, like I mentioned earlier when a question was being asked, so write-off policy, actually, once any asset is fully provided to the extent of 100%, it is -- it qualifies for a write-off, and the write-off is more like a technical write-off for us, because after the write-off also, the efforts do not come down. The write-off policy, specifically on micro loans, the provisioning of 100% is the moment it crosses 90 DPD. For all the other products, it all depends on the ECL model has been built in where the 100% provisioning happens based on a particular DPD. The actual write-off in the books happens -- basically the finance takes a call on when the technical write-off has to be done in the books, like I mentioned earlier also. But the effort on account of write-off should not be linked to the fact that we will stop pursuing those customers in terms of collection. So we also have reasonable collections happening out of the assets, which have been written off.

So if you can just detail, sir, micro finances are 90 days, 100%, where will personal loans and where will two-wheelers be to reach 100%?

Sorry, can you repeat that?

Microfinance, you provide 100% at 90 days. When do you provide 100% on PL and on two-wheelers?

No, this is a ECL model. So it's pretty -- it takes -- I will have to check on that. On the other piece, which you talked about, on the -- whether it really is relevant on count, it's not relevant. What is important is actually how is the customer levered, and that we have already shared. During our Digital Day also, we clearly mentioned a portfolio that we have how levered it is. Ours is the least levered book that we have.

Sir, my limited question was your fee includes overdues. So basically, what I was trying to get is, essentially, all the customers, which are paying on time, so the balance will be basically part paying or nonpaying, and that basically creates your overdue risk. So I just wanted to know if your collection efficiency is 99%. In terms of customers, how much will it be? Is it 97%? Is it 98%?

Yes. So in terms of see collection efficiency, first, it does not include overdues. We report 0 DPD collection efficiency. And in terms of the number of customers, it is 99.22% is correct, right, so...?

And including overdues?

Yes, yes. 99.22%, in terms of number of customers.

Next question comes from the line of Nischint Chawathe with Kotak Institutional Equities.

One was on Project Cyclops. You said that Cyclops is implemented in 2-wheelers and we are now looking at implementing it in personal loans and SMEs. So I mean, I was just curious, why would you sort of scale up the book just as yet, right? You probably implement Cyclops and then kind of scale it up.

Yes, so just to think, Cyclops we have already implemented in 2-wheeler 100%. And in tractor, it is implemented. It is live. We are scaling up the number of dealer coverage slowly. The SME and personal loans, we're in advanced stage of readiness to deploy. And the current sourcing that we are doing, we are very confident of the current quality of sourcing. We're only doing absolutely super-prime salaried customers where the net non-starter number is as low as 40 basis points. So this is not the number that we normally give out, but I'm giving out the number because you asked the question. In December, on our new salaried sourcing, our net non-starter number was only 40 basis points.

No, so does it mean that after implementing Cyclops, you'll probably go towards slightly one segment lower or something of that nature?

No, no, no. See, the thing is that, see, Cyclops is designed in such a way that it targets a target PD. So once we put the PD, then the customers who qualify in the portfolio mix towards that PD is only what will go through. We are at any point in time not saying that it will help us go towards a more riskier mix. So that is not the -- in fact, one of our guiding principles of our personal loans business is that we will do our personal loans business with a majority salaried profile, right? That will be the profile of our personal loan business. Cyclops helps us to sharpen the credit outcome in that segment even further. Cyclops, I'll tell you in terms of it's -- the maximum benefit for Cyclops will come in case of our two-wheeler business and the farm business and the SME business primarily because this business has a large content of customers who are new to credit and a large customers of content who are thin bureau, right? So the way the Cyclops is constructed, it helps actually underwrite NTC and thin bureau much better, right? Whereas in personal loans, we are actually going for customers with a little thicker bureau track. So probably the alpha on Cyclops on personal loans will probably be of an order of magnitude slightly lower than that we are seeing in the two-wheeler business or in the farm business. So on the personal loan business, it's age-old experience that is driving the current sort of growth momentum. And though on a percentage basis, again, I'm repeating myself, though on a percentage basis, the number might look large, but on a real absolute amount basis, INR 550 crores of qualified salary personal loans a month is not really a very large number.

Got it. I mean, since we are on this maybe as a one-off, can you share the yield and ticket size in personal loan segment?

Average ticket in personal loans is just INR 2.5 lakhs, and the average yield is about 17%-odd.

Got it. Just one more curious thing. Any specific reasons for change in Chief Risk Officer?

Actually, we have already put the...

So the departure of the -- for better opportunities necessitated a change.

Okay, got it. And just one last data keeping question. You mentioned that you added 900 collection officers in the micro loans business. So what is the aggregate number as we speak?

See, in micro loans business, the guy who sells is the guy who collects. Overall -- just a second, I'll take this. Overall, everyone is a collector and everyone sells, but specifically in terms of collection it will be about 2,500 people dedicated. So there are 2 things. In our micro loans business, we have the normal regular 1,200 -- sorry, for collections, 1,200 additional for collections.

Got it. So basically, we have the normal kind of microfinance employees who are collecting. In addition to that, you have...

Another hard bucket collection team.

That's around 1,200, which we have put up for the first time, right now?

That's right. We have added to it. We had it, we have added to it.

No, that's what I'm saying. How much did you have? And how much have you added? That was my question.

So overall addition of people in the micro finance team has been about 900. Now some of them have been deployed in the regular course of work. Some of them have been added to the hard bucket collections team. The reason -- for example, let's take this example. In a micro -- in a meeting center, you currently have 5 people. These 5 people are servicing 1,000 accounts. So on average, accounts per collector is 200. We wanted to bring down the accounts per collector in a meeting center. So what we did is with the 900 people that we added, some portion of the 900 people went to our regular meeting centers such that our accounts per collector comes down. Our account per collector came down from 560 to 480. And a small portion of the 900 was deployed to the hard collections bucket team. Is my answer understood?

I think this helps. Yes. Perfect. I think we understand the magnitude of how people have been deployed. Got it and all the best.

Next question comes from the line of Abhijit Tibrewal with Motilal Oswal Financial Services Limited.

So my most questions have been answered. Just 2 questions that I had. First thing is, Sudipta sir, in MFI, from what we have put out in our presentation, your peak credit costs are likely going to come in 4Q. So first thing is, can you explain why is that -- now why I ask this is what we have said, if you actually provide 100% on MFI loans after they are 90 DPD and maybe technically write them off. And if your collection efficiencies are incrementally getting better in December and January, then why is it that our peak credit costs should come in the fourth quarter?

Yes, Abhijit, let me take this. So usually, the credit cost comes with a lag of a quarter because whatever the -- we have already disclosed the collection efficiencies the way they panned out in October, November and December. From 99.43%, it came down to 99.26%. Finally, it ended with 99.39% in December. So when the collection efficiency comes down, which was the case for 2 months, October and November, there will be roll forwards, which will actually keep happening and also the roll forwards happening out of the previous quarter customers. So whatever roll forwards finally happen, net of the collections because the collection effort is still on, right? Those will ultimately lead to a credit cost panning out because the moment these customers move to 90-plus bucket, we will have to start providing for it. So as we are seeing a sign that December has actually improved vis-a-vis November, we have said that there is -- we believe that what may happen, assuming that this trend continues in Jan, Feb and March, the collection efficiencies as they start improving, the roll forward will slow down. And hence, in the first quarter of next financial year, the roll forwards will slow down compared to quarter 4. So on relative terms, we have mentioned that quarter 4 may turn out to be the highest in terms of the credit cost.

Yes. So the vintage flows tend to get bunched up because you have stabilization efforts continuously going on. And then so some customers get stabilized, some customers roll forward for 1 month and then roll back. So this process continues. And typically, what happens is retail portfolios, most of this, when the deterioration starts within a period of a time, they tend to get bunched up at one particular point of time where across a couple of months, you see high credit cost and then the curve shifts downwards. We expect that the peak of this curve will happen sometime between January, February and March. And that is why the advanced estimate of macro utilization that we have given for Q4.

So Abhijit, just one more piece. We are all aware of the one more guardrail, which is to be implemented by MFIN, which will be effective 1st of April. We will have this -- and this is going to be across the industry. We already responded to one of the questions earlier that we will have to wait and watch how this guardrail impacts because the impact is going to be across the whole customer base in the industry. So we'll have to wait and watch on that. Again, the players who have least levered customers will be benefiting out of this compared to customer -- companies who have high levered customers in respective buckets that we have shared in our presentation. So we will have to see what will be the impact of that. But barring that, if the trend continues, if the December trend continues into Jan, Feb, March, then what we mentioned would prevail.

Got it, sir. And just a follow-up on that, given that we are still looking forward to this MFIN guardrail implementation from April and whatever you just highlighted, can there be a scenario that this MFI stress or MFI credit cost, which we think will peak out for us in 4Q, can spill over to the next financial year as well?

So see, the guardrail initially was supposed to be implemented from 1st of January. So pushing it to 1st of April is going to only support all the industry players, and it will also help customers figure out ways and means of making repayments and getting alternate sources available.

Yes. So let me add to that. See, we can't crystal ball glaze as to what will happen, right? But the fact is that given the fact that in general, the kharif arrivals have been good. There is reasonable amount of liquidity, which is building up. The rabi sowing has been very, very good. So we expect that in month of March and April, when the rabi crop comes, it will also be reasonably good, which will augur well for the liquidity. We expect that there will be a soft landing, but we will have to wait and watch. As Sachinn said, the players with the better franchises will benefit because they have the less non-levered customer. So the disbursement impact on repeats, et cetera, will not be impacted that much, especially for their exclusive customers. And I would like to point out that we have a very high proportion of exclusive customers our Pragati customers who are again relatively non-levered. So we are hopeful that the entire industry will have a softlanding post April. And -- but we'll have to see how it pans out.

Got it. And just one last question. Because you just mentioned the better franchises. So just trying to understand in the past, even in our presentation, we have called out that we picked up this leveraging early and which is where maybe we slowed down or maybe we didn't go after leveraged customers. Just trying to understand, I mean, over the course of these last 6, 9 months, have you had a chance to understand if our model in rural business finance or MFI, is it different from the other peers, which has helped us deliver better asset quality outcomes than the industry?

See, I think I cannot comment on what others have. But I will say some of the underpinnings of discipline that we follow and which obviously is up to the investor and the analyst community to analyze and benchmark with others. One of the things that we do is that, obviously, we do not rely on third-party origination of MFI loans, right? All our MFI loans and JLG loans are originated by our own people. We have a very close connect with the village distribution that -- on ground. The second thing which we have is that, obviously, we have a very, very tight leverage. And as I've told earlier, in the -- from January itself, we started tightening our leverage conditions and started letting go of some portion of the repeat. The last thing is -- the third thing is that we have a very strong RCO network and a branch process vertical who goes and every loan that the field level officer books, there is a second level check. And out of the second level check, there's a sample of third level check. So actually, it almost goes through a 3-level check before the loan is granted. The second thing is that some of the discipline that we have been following for many, many years. For example, if a particular meeting center dips below 98% collection efficiency, we immediately stop disbursement there and focus collection there. Now this is a hard guardrail. That means in a meeting center, if collection efficiency were to drop between 98%, the app freezes for those field-level officers. Even if they want, they can't onboard a single loan in that particular meeting center. And then the focus entirely shifts towards collections. And last but not the least, we have extensive data analytics for geo selection and expansion. We only go in areas where we think has got less non-levered customers then we can get nonleveraged customers onboard. So -- and the last thing is that we also -- because we understood that the industry was getting slightly leveraged, we said that we will invest in a channel that gets nonleveraged and fresh customers, which we call our FSO channel or fresh sourcing officers channel. Now we have a reasonable amount of people in about -- approximately 1,000 people, give or take, a couple of 50 or 100 here and there, where we have approximately 1,000 people, which we call fresh sourcing officers whose only job is to get fresh non-leveraged customers and to get it to villages that are nonpenetrated. So in a way, the business has been structurally designed to go after non-leveraged customers. And wherever there has been instance of leverage, the business has been structurally designed to take a pause before business starts again. This provides an automatic in-built what I call a speed governor mechanism, right, wherein you are not allowed to speed up in an area where you have sort of worrying asset quality, whereas in areas where you have rather non-leveraged assets or opportunities sitting, the organization is designed to speed up on that areas, albeit safely, right? So in a way, it is for the entire investor/analyst community to benchmark and see whether this sort of practices of ours has helped us sort of keep us relatively in a straight path during this trying period. And only time will tell as to who are the ones who have better franchises and who are the ones who do not have.

Next question comes from the line of Chintan Shah with ICICI Securities.

Congrats on good set of numbers. Sir, so firstly, just continuing on the insurance piece. I think we mentioned we increased the share of insurance fee in the overall income. So currently, what would be the total percentage of insurance income in the total fee income pool?

Can I have that number? If you don't have that. Just give us a couple of seconds. Do you have -- if you can give us -- I don't have the number handy instantly, so.

Sure. And on the margins front...

Insurance fee -- insurance as a percentage of average book would be about -- roughly average over the last 3 quarters would be about 1%.

1%?

Yes.

Okay, okay. Sure. And sir, on the margins front, I think we mentioned, given the rate cut, there would be some benefit flowing over there. So in terms of our fixed book also largely what percentage of the book would be fixed in nature entirely almost?

Yes, except for home loan, all the other pieces will be fixed only.

Sure. And sir, on the PL part, I think you mentioned we have a ticket at INR 250,000 and a yield of 17%. And so what would be the tenure -- your average tenure also for these loans typically?

About 30 months, about 30 months. See, we are in the business of prime PL. We do not do STPL or anything like that. Absolute prime salaried PL.

Sure, sure. And sir, just lastly, to dwell up on the ROA piece again. So I think for quarter, we reported 2.3% and we are gradually looking at 2.8% to 3%. So given that our yields will contract and similarly, the credit cost or OpEx would contract and resultant benefit on ROA. So how does that ROA move from 2.3% to 2.8%? So more benefits come from the income piece or the OpEx piece? And on the leverage, then what would be the optimal leverage that we would be targeting?

Chintan, I think it's slightly premature talking about because these couple of quarters are an aberration, right? We have spoken earlier about the ROA trajectory that we wanted to move on. Now there is some shift which is happening. There is some impact specifically which has come up. So I think 2 to 3 quarters you will have to live with this aberration, which would mean, as I mentioned earlier, the 2.8% to 3% is what our target targeted ROA. Now this was part of our Lakshya '26 strategy. If there are going to be a few challenging quarters, maybe it will move a couple of quarters down the line. But directionally, we still want to achieve that. We will be working -- as I mentioned, we will be working on the business plan for the next financial year and also a long-term plan for the next 5 years. We will -- if there is a change in this, as part of those discussions, we'll come back. But at this point of time, we are still fixated on the fact that 2.8% to 3% is directionally what we are looking at. It may just -- if there are a couple of quarters which are challenging, it may just move ahead by a couple of quarters. That's it.

Sure, that is helpful. And just last thing on the leverage part. So what could be the optimum or best leverage we could be looking at?

Debt equity of 5:1 is what we would like to be at. But there is -- we are right now at 3:4. So as a AAA, I don't think we would want to go beyond that at this point and the leverage will be 6 then.

Next question comes from the line of Abhishek Murarka with HSBC.

Congratulations for the performance. So just in terms of markers, trying to look at all the conversation that has happened so far, looks like GS2, at least gross stage 2, that should start showing improvement or at least that should not increase going forward, right? Because GS3 might go up or write-offs might go up, but forward flows into GS2 should not happen. And also looking at your net non-starters and the bounce rate you have shared for 2-wheeler farm, it looks like things should improve there. So ideally, GS2 should not increase from here. Is that a correct understanding?

See, it will all depend on we -- specifically for micro loan, as we mentioned, that we have seen some green shoots. We have seen some improvement coming up in December, right? But I think we have to wait for a couple of months more to see whether directionally it is panning out. So at this point of time, we would not really want to commit that Stage 2, nothing will be there because there are various businesses and all these businesses are in a -- sort of in a transition. So there is part of the book which has moved towards prime. There is part of the book which is still from the earlier the -- before the strategy was changed. So at this point of time, I would just like -- in case you are asking this question from a modeling point of view, I would say that you should continue holding on to the assumptions because we will still need some kind of visibility coming out of this challenging time, which I think is 1 or 2 quarters away, post which we will be more -- we can possibly talk more firmly on how Stage 1, Stage 2, Stage 3 would really pan out. But we believe the credit cost and all, all would be in line with last 1 or 2 quarters.

Okay. No, I was just trying to understand the direction of NPA and therefore credit cost to try and understand why it would remain elevated for 2 quarters when you're showing good numbers on bounce rates and net [indiscernible].

Yes, yes. Because the seasoning takes time, 2-wheeler and farm, as Sudipta mentioned, the -- only the 2-wheeler book and that too over a period of a few quarters has moved from 0 to almost 100% over -- on Cyclops. Farm, we have just begun. We are yet to start off on the PL. So -- and then SME -- so till the time this whole transition does not happen, you will -- we cannot pinpoint that this particular quarter -- it will be business by business, right? Maybe 1 year down the line, once every product moves on to Cyclops, then we will be able to say firmly that, yes, now the transition has been over and the credit cost now will follow a particular trend. But till that time, I think -- and then we also have a challenging time on the micro loans front, where we have a INR 26,000 crores book. So I think all these factors are leading to a situation where it will be difficult to specifically say the challenging time will -- on the other businesses, the credit cost has been slightly elevated for various reasons pointed out earlier. So I think you need to give us a couple of quarters and then you should start seeing. So H2, which is quarter 3 onwards, you will start seeing the impact of Cyclops in terms of the benefit which flows on to the credit cost line.

Yes. See, Abhishek, what I would like to add to what Sachinn said is that all the leading indicators of the work that we have been doing are looking good. So we are satisfied with all the leading indicators. And we have put certain index representation of some of those leading indicators in the analyst deck. As I said earlier, the portfolio washout and the replacement -- or the replenishment of the portfolio with better credit fundamentals takes -- typically takes a couple of quarters. A couple of quarters means 4 to 6 quarters. So obviously, we are about 3 quarters into the journey. It will take for another 2 to 3 quarters for the full -- some headline impact to be start being visible, which, as Sachinn said, takes us to about latter part of Q2, early Q3 of FY '26, right, when you will start seeing the real impact of that. The current macro situation does not help us also, right? Because the current macro situation makes us also -- sort of adds a lot of noise into whatever we are seeing, right? So I would like to add to what Sachinn said is that for us, this is a marathon journey. It's not a sprint, right? And we are very satisfied with the progress that we have made on the journey. The building blocks are more or less in place. What we are doing is that now we are in process of optimizing those building blocks, which have been put into place. So my only request would be that we should be a little patient and give us a couple of more quarters for that benefit to build out in terms of numbers.

Next question comes from the line of Subramanian Iyer with Morgan Stanley.

So on micro loans, you have given a lot of texture on asset quality and that there are a few imponderables. But I had a question on micro loans beyond this current asset quality cycle. So how are you looking at loan growth structurally? I mean, because of the changes happening at an industry level, do you see that loan growth here is going to be structurally lower than what it used to be in the past? And also, are you expected to reduce loan yields given that the regulator had also been making comments on this all through last year. So essentially, looking at structural growth and profitability beyond this current cycle, your thoughts.

Yes. Thanks. One of the things is that I do believe that -- and this is a business -- and this is my personal opinion, industry opinion might vary, right? My personal opinion is the safe speed of this business is anywhere between 15% to 20%, not more than that. So the industry probably for the last couple of years have been driving this business at 40% plus growth rate, which obviously has led to some -- is sort of part contributory to this asset quality sort of challenge that we are seeing in this. So I do believe that after the MFIN guardrails come into being from -- full MFIN guardrails come into being from April, the industry structurally will have to adjust itself to -- if I were to use the old English proverb cutting the coat according to the cloth, right, which will mean somewhere between a 15% to 20% growth rate on an annualized basis. And I think that's a safe growth rate. So I do believe that on the longer term, this industry will settle between this growth rate. The second thing which I think is on the yield side, we have already sort of tempered down some of our yields. And if you see and if you go to our website, our yield differential is from 16% to 23%. The absolutely credit qualified fourth cycle customer -- non-leveraged fourth cycle customer end up getting a low rate of 16%, whereas most of the new customers coming into the fold will get a rate of 23%. So the average yield is closer to -- a little shade lower than 23% because we have a portfolio stock, et cetera, which is priced at 24%, which was our previous yield. Our average yield still remains high. But over a period in time, this is the sort of the interest range that the industry will move towards. So -- yes, so some of the super normal yields that we might have seen in certain sort of franchises, probably those will get tempered over a period of time.

That was a very clear answer. Just one more question. What is your guidance or, say, your view on retail loan growth for you in FY '26?

I can't really crystal ball gaze and say that what should be the retail loan growth. By Q4, we'll be able to -- see, we are guided by the Lakshya goals of 25% plus, et cetera. But again, what I have said is that we will exercise caution and wherever the risk required equation is not in our favor, we will choose caution over growth. This is a very clear philosophy that we are following, and we will follow this philosophy. So what we will need to see is that how the collection efficiencies for all lines of business pan out in this quarter, Jan, Feb, March, which I think will be a quarter of stabilization for the entire industry. And probably a much more clearer guidance is probably we should be able to give in some time at the end of Q4.

Yes, I think we should be -- we would have by now -- by then finalized the business plan as well.

Yes, finalized the business plan as well.

And also the growth rate would differ depending on the business we are in. For example, personal loan, SME, are younger businesses, will grow at a larger pace, whereas the mature businesses will grow perhaps at similar lines, barring MFI which is one piece, which we will have to look and figure out what kind of growth we can consider. We need some more clarity on that.

Next question comes from the line of Wuzmal Handu with Goldman Sachs.

Just one question from my end. You spoke about the near-term pressure on NIMs plus fee on account of the change in mix that you see right now. Just wanted to gauge your thoughts on when do you anticipate this trend would stabilize for your book? And then eventually, when do you potentially see operating leverage playing out?

Yes. So NIM plus fee, already we responded to this. I think depending on how -- when the rural business loans piece actually stabilizes, and which perhaps we believe that one more guardrail, which is being implemented by MFIN will come into play from 1st of April. So we still see 2 to 3 quarters of turbulence at the market level, okay, at the industry level. But we would like to state that we are still better off. So the impact may be lower is what we believe. We will have to wait and watch on this because this is a large -- significant portfolio on our books as well as the fact that we are moving more towards prime is also adding to the change that we anticipate on the NIM plus fee, which may come slightly on the lower side, but that should actually get compensated or more than compensated by 2 things. One is the increasing productivity and the lower effort on collection cost because that's a significant part of our operating expenses as well as the reduction in the credit cost, which we hope will start getting factored into our P&L from H2 next financial year. So 2 to 3 quarters is what we believe that we'll have to continue with this, and then we will start seeing the positive impact of it.

Ladies and gentlemen, that was the last question for today. We have reached the end of question-and-answer session. I would now like to hand the conference over to Mr. Sudipta Roy for closing comments.

Yes. Thank you, everyone, and thank you for your participation. As I have said earlier, us, along with the entire industry is going through a little bit of a trying times, if I may use that word. But I think this is not a very protracted like deep valley downturn that we might have seen earlier. I do believe that this particular downturn, especially for the overall industry is -- and I'm not speaking only of the microfinance business, but speaking of other asset lines also, is a much shorter duration cycle that we might be seeing. And we remain hopeful that the shorter duration cycle will probably see a bottoming out sometime between quarter 1 and quarter 2 of next year. And then probably because the deleveraging has happened quite a bit as per data available with us. So I do believe that things probably will get on to a normalized trajectory sometime at the end of quarter 2 or starting quarter 3 of next financial year. So with that in mind, we remain focused on building all our capabilities. Even while we are going through some of these sort of on-ground challenges, we have not stopped for a single day in sharpening our tools of execution such that when things become normal, we are able to race much faster than others and take a share of the market opportunity which is available, obviously, in a risk-calibrated fashion and deliver those returns for our shareholders. So thank you so much, and wish all of you a great quarter ahead.

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