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

Ladies and gentlemen, good day, and welcome to L&T Finance Limited Q1 FY '27 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; Mr. Raju Dodti, COO; and other members of the senior management team. Before we proceed, as standard disclaimer, no unpublished price-sensitive information will be shared during the call. Only publicly available documents will be referred to for discussion during the 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 While all efforts will be made to ensure that no unpublished price-sensitive information will be shared in case of any inadvertent disclosures, the same would, in any case, form part of the recording of the call.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 Q1 results presentation uploaded. 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, sir.

Thank you. A very good morning, everyone, and thank you for joining us today for the Q1 FY 2017 Investor Call of L&T Finance. Joining me on the call today are our Chief Financial Officer, Mr. Sachinn Joshi, our Chief Operating Officer, Mr. Raju Dotti, along with other members of the senior management team of LT& Finance. Similar to our previous earnings calls, today's discussion will be divided into 2 sections. I will begin by sharing my thoughts on the macroeconomic environment our business performance during the quarter and the strategic priorities under Lakshya 2031. This will be followed by our CFO, Mr. Sachinn Joshi, who will take you through the detailed financial performance for the quarter. Post our commentary, we'll be happy to take questions on the call. Before we delve into the highlights of the quarter, I would like you to give you some flavor the current macroeconomic scenario and sectoral outlook, which becomes important given the volatility in the geopolitical arena and the impending worries of an uneven monsoon, coupled with the impact of El Nino. Over the past few months, the global economy has had to navigate geopolitical uncertainties, nonstock fluctuations in energy prices, disruption to supply chains and changing trade dynamics between major economies. While these developments have introduced a period of volatility, India's macroeconomic fundamentals have continued to demonstrate resilience. The economy has performed better than expected throughout the year while posting a growth of 7.8% in the fourth quarter of FY '26, supported by healthy government capital expenditures, improved infrastructure creation and resilient private consumption driven by a recovery in rural demand. On the demand side, private consumption aided by discretionary spending has remained resilient so far, supported by both rural and urban demand. Structural reforms favorable financial conditions and the government's thrust on infrastructure spending have aided investment activity and bodes well for sustained demand strength -- sustained strength in demand conditions. The market is exhibiting strong credit growth momentum as some sectors like macro finance have emerged from a prolonged period of contraction, and most of the sectors see a healthy uptick of consumer demand. Strong growth impulses are reflected in credit momentum as well that has picked up in recent months. Tailwinds from regulatory and government measures introduced in FY '26 are expected to support credit demand going forward. On the rural front, the progress of the Southwest monsoon has remained an area of close attention for the entire financial services industry. For the season began with some regional variability and intimated rainfall patterns, we are encouraged by the gradual improvement in monsoon activity over the last past few weeks, with 70% of the country reporting normal or higher rainfall in July. Rainfall in the first week of July 26 was 48% above the normal level and cumulative monsoon deficit till 10th July 26, had reduced to 14% below the long period average. Monday arrivals of [ rabi ] crops are running 8% higher and government procurement for creek crops has seen a massive search. I'd like to call out that the market concern we have seen regarding offset of El Nino and its projected impact on the monster. The L&T Finance team has extensively traveled in rural geographies in our core markets over the last few weeks, and we see normal economic momentum. While the onset of the monsoon was slightly delayed, economic and agricultural activity remains strong and current reserve levels are sufficient to sustain normal agricultural output and hence, protect rural cash flows. We remain hopeful that rainfall will continue to catch up during the balance of the season supporting agricultural output, rural cash flows and overall consumption. Encouragingly, rural demand indicators continue to remain resilient, aided by healthy government spending continued infrastructure investments and sustained focus on the rural economy. We are confident that the Brazilian domestic demand and coordinated policy support will provide the wherewithal to withstand the adverse impact of such uncertainties. Coming to this quarter's highlights, I'm pleased to share that L&T Finance has delivered another strong quarter of profitable and quality led growth. During quarter 1 FY '27, we recorded our highest-ever quarterly consolidated profit after tax of INR 92 crores, representing a growth of 29% year-on-year. Our consolidated book crossed another important milestone reaching INR 129,634 crores, reflecting a healthy year-on-year growth of 27% with an ROE of 2.48% and reflecting a growth of 11 basis points year-on-year. This has been achieved on the back of robust quarterly retail disbursements of INR 23,852 crores, up 36% year-on-year with contributions from all our lines of business, demonstrating the continued strength of our diversified retail franchise. The significant trust in our disbursement momentum year-on-year has been a result of a continuous focus on building granular distribution channels, our ever-expanding branch footprint expansion of our digital acquisition capabilities duly supported by our AI-powered next-gen credit administration framework project cycles and our continuous focus on strengthening risk guardrails allowing us greater confidence on quality underwriting. In the last call, I had emphasized upon our trajectory of bearing of credit costs on account of implementation of structural trade policy measures in our businesses and the realization of positive dividends from the early implementation of Cyclops in 2-wheeler SME and farm businesses. I'm pleased to inform you that consequently credit costs moderated to 2.5% reflecting another quarter of sequential improvement of 10 basis points, supported by our continuous focus on strengthening credit administration, collections excellence and AI-led portfolio management. A strong growth of 29% year-on-year in total income with a PPOP growth of 35% year-on-year was largely driven by a sharp focus on managing yields across businesses fee improvement and official liability management. Stable interest fees at 10.47% despite a competitive operating environment further demonstrate the resilience of our business model. This has resulted in our ROE improvement to 2.48%, while ROE increased to 12.71%. While these numbers are robust, I would like to emphasize that we could have grown even faster. However, given the volatility in the economy, we chose prudent or aggressive expansion, maintaining our emphasis on responsible growth, disciplined underwriting and superior portfolio quality. We proactively tightened our credit guardrails during the quarter, deliberately letting go of about INR 1,000 crores to INR 1,200 crores in potential disbursements foregoing a few percentage points of additional growth to firmly protect our asset quality. It is important to note that through our Lakshya 2031 asset growth target is 20% plus CAGR over the 5-year period. whenever the market and credit conditions are conducive, we would use that opportunity to grow our asset book in a risk-calibrated way at a faster pace than Lakshya goals as has been the case during this quarter. However, we will never compromise grit for growth as articulated in our risk first a first resources. I would now like to share an update on our Lakshya 2031 goals, which marks our pivotal leap from transformation to delivery. As many of you would recall, during our last earnings call, we formally launched Lakshya 2031 our 5-year strategic road map that marks our transition from institutional transformation towards sustained delivery. I'm pleased to state that we have begun this journey on a strong footing. While our profitability metrics continue to improve quarter after quarter, our immediate focus remaining on maintaining consistency and execution. We recognize that Lakshya 2031 is a 5-year journey and therefore, our endeavor remains focusing on delivering sustainable growth while steadily improving credit cost, profitability and returns for the course of this strategic plan. We have set ourselves a book growth CAGR -- a book growth target of CAGR of 20% plus over the luster period. As explained above, I'm pleased to report that we are tracking well in line with this target achieving a robust 27% growth in Q1 FY '27. This was supported by strong disbursement momentum across all our lines of business, secured as well as unsecured products with a 26% year-on-year growth in personal loans of 41% year-on-year Cyclops-powered growth in two-wheeler finance segment, a 24% year-on-year growth in rural business finance, a 22% year-on-year growth in housing loans, a 23% year-on-year growth in SME finance disbursement and 11% year-on-year growth on pharma finance disbursement. Notably, one of the most important developments during the quarter has been the continued collection efficiency normalization of our rural business finance portfolio to precrisis levels, which has given us the confidence to resume the growth trajectory of the business, all bets within the MTM guardrails and our proprietary risk and administration frameworks. We have started the work of implementing Cyclops in our RB book vertical and is expected to complete before the conclusion of FY '27. Across our urban business lines, we continue to maintain our sharp focus on sourcing undiscovered prime and prime plus customers who exhibit strong credit resilience. This disciplined approach has led to our prime customer share in our two-wheeler finance disbursement, steadily increasing to 90% for quarter 1 FY '27. Our journey towards building a prime dominant urban portfolio that focuses true resilience across business cycles continues unabated, formerly underpinned by a robust credit and risk administration frameworks. Secondly, on the credit cost front, we'll endeavor to drive credit costs down to a level of 2% or less during the Lakshya period. Over the last few quarters, considerable effort has grown gone into strengthening our underwriting framework, collections infrastructure and portfolio monitoring capabilities. The continued moderation in credit costs and improving asset quality during the quarter provides us confidence that the structural interventions are delivering the intended outcomes. Additionally, we have commenced participation in the central government's credit rate schemes, namely CG FMU and CGTMSE to create an incremental fee for select cohorts of our rural business finance and SME portfolios and shield the balance sheet from cyclical volatility. We believe that there is still a significant headroom for further improvement. As our newer portfolios continue to season and our proprietary led underwriting and portfolio intelligence engine mature for the we expect our asset quality to strengthen progressively over the coming quarters. This remains one of the most important levers for improving our profitability metrics under Lakshya 2031. Our return on assets target remains in the range of 3% to 3.2% for FY '31. Against that, we recorded an ROA of 2.48% in quarter 1 FY '27 versus 2.37% in the corresponding quarter in FY '26, also up 11 basis points year-on-year. We remain committed to working on achieving the 2.8% ROI threshold in quarter 4 FY '27 as communicated earlier. Against the Lakshya '31 ROE target of delivering a return on equity in the range of 16% to 18% by FY '31, ROE increased to 12.71% in quarter 1 FY '27 from 10.86% in quarter 1 FY '26. As we look ahead, we have identified 3 key strategic objectives for FY '27, namely: number one, driving cross-sell and upsell; number two, productivity enhancement; and number three, embedding tech DNA across the organizations. These capabilities are critical to achieving our short-term and long-term business targets while building sustainable capabilities for future growth. LTF has one of the largest customer franchises in the BFSI sector in India, totaling to 3 core customers, and we see significant opportunities to deepen relationships with this large available pool. Cross-selling remains a major focus area for us under Lakshya 2031. We are trying to reinvent across traditional cost-selling approach through the use of a proprietary multi-agent frameworks, which will help us identify, originate and fulfill cross-sell workflows to leverage the large customer base. We will give more details on this later during the call. Secondly, we continue to drive productivity enhancement across all our lines of business, primarily focused on frontline employees to customized productivity dashboards. Third, in line with the strategic objectives of embedding AI-empowered tools and processes, we have taken the task to inculcate a tech DNA in all parts of the organization to build a future-ready workforce. This would entail identifying AI champions across the organization to help proliferate the use of applicate directly into every idea activities. As I've highlighted in previous quarters, the strategic investments in proprietary tools spanning hardware, software and market-leading talent we've been foundational to how we sell, underwrite, collect and operate. This strategy objectives are central to our structural evolution into a risk-first tech-first AI-native multiproduct retail financial of choice. At the start of our Lakshya 2031 journey, our objective is no longer to be merely an AI-enabled lender. Our aspiration is to build India's leading AI native retail financial services institution. What differentiates our approach is that we have consciously invested in building proprietary technological capabilities. Rather than deploying isolated AI use cases, we have architected an integrated intelligence platform that spans the entire lending life cycle from customer acquisition to underwriting to portfolio management, servicing collections and customer engagement. This was articulated as our technology vision statement during the Investor Digital Day in November 2024, and we have continued to execute the envisions architecture in a disciplined cash. Today, 2 years later, we are pleased to share that our technology platform is powered by 1,000-plus technology and data sense professionals who have built an in-house deep exact around customer intelligence, create intelligence, portfolio intelligence and service intelligence. The same has been built out on an open API and micro services-based architecture, leveraging 100-plus proprietary scorecards, 7 alternate data channels and unified customer data governance platform. The first leap of faith in this journey was architecting project cycle ups our next-generation AI-powered 3-dimension underwriting engine, which now serves as a prime example of effective technology driving growth and building resilient credit quality. Cyclops has now been operating for 2 years in our 2-wheeler business has underwritten a portfolio of more than INR 12,000 crores and consistently outperforms industry risk benchmarks by a wide margin. To illustrate performance of Cyclops in our 2-wheeler portfolio has been outlined in Slides 13 and 14 of the investor presentation. Projects like jobs is also live in our firm personal loans and SME businesses and exhibiting excellent headline incomes. We'll make those outcomes public as and when we cross the seasoning threshold of 24 months. We intend to take Cyclops live in our rural business finance and margin businesses during FY '27. Nostradamus is our second proprietary tool completely built in-house to enable enterprise-wide portfolio intelligence. Nostradamus is currently live in 2-wheeler and personal loans in EBITDA mode, and we intend to implement this for our RBF, SME and farm businesses in FY '27. This platform is already delivering measurable outcomes in predicting and containing portfolio risk at a granular micro market levels in our 2-wheeler finance business, enabling our business teams to undertake automated stress testing generate real-time collection actions and proactively identifying emerging portfolio risk significantly earlier than traditional monitoring payments. Our new initiative is to rapidly democratize AI across the organization. Rather than limiting our capabilities to a central technology function, we are embedding intelligence directly into day-to-day workflows of our operating teams through a growing suite of proprietary AI -copilots. Our flagship underwriting copilot, Helios, has already processed approximately 39,000 underwriting files and materially reduce turnaround times across SME finance and home loans. Online, our conversational portfolio management's copilot built on project sames has already serviced more than 3,000 business queries, enabling faster portfolio insights for our operating teams. ShigraM has automated more than 4,000 mortgage legal trials across 11 vernacular languages, while our mortgage policy and pricing assistant today services more than 200 business queries every day across 15 Indian languages. During the quarter, we also launched Argus, and had powered short straining engine for SME Finance, further strengthening our risk management capabilities. Please refer to Slide 16 of the investor presentation for further details. Another significant milestone during the quarter has been the rollout of Canyon, our proprietary AI-powered loan origination system for gold finance. Built entirely in-house in under 4 months, Project Canyon combines more than 16 integrated systems, over 60 APIs, 12 business services into a scalable architecture capable of nearly supporting 30x future business growth. More importantly, nearly 60% of its code base has been generated using AI-assisted development tools, demonstrating how AI is increasingly transforming not only our lending decisions but also the way we engineer technology itself. The platform's embedded agency system, Ginni, together with the context of our asset capture and microservices architecture is already enabling faster turnaround times and superior customer experience while providing the flexibility to rapidly respond to future regulatory and market changes. Please refer to Slide 17 of investor presentation for further details. As I mentioned earlier, I'm pleased to announce our next agentic AI-based service and cross-sell perform, Hercules, which is being built completely in-house. The platform is designed to deliver hyper-personalized customer experience at that scale. At its core, Hercules leverages a central data repository to build a comprehensive customer goal and record. This unified data feeds into an advanced AI decisioning layer utilizing predictive analytics and propensity models to dynamically generate precise next best offers. Here, we are integrating agentic AI into our core orchestration led to autonomously manage lead identification origination and fulfillment while executing the hyper-personalized engagement through all of our customer touch points, our planet app, whatsit journey or outbound voice spots. By unifying our lead management and loaders systems into this intelligent omnichannel ecosystem, Hercules will significantly elevate service excellence, drive operational efficiencies and maximize cross-sell velocity across our entire portfolio. We are targeting rollout of this platform by Q3 FY '27. To support the exponential growth of this in-house AI capabilities, we are investing in our own private cloud build-out. Crucially, the strategic transition to an open source private cloud will be 70% cheaper than relying on hyperscaler clouds over a 5-year token cost of ownership. Total cost of operation. Concurrently, to support our intensive ML and AI workloads, specifically for running open source LLM and SLM packages, we have initiated the design and procurement of hyper performance server augmentations. Moving forward, we are aggressively prepared for massive cloud consolidation, targeting the migration of workloads from public to our internal private cloud infrastructure starting in Q3 and Q4 of FY '27. By continuously strengthening this foundation and infrastructure, we are unlocking 3 critical outcomes for the organization; driving sustained growth, ensuring improved credit quality and achieving significantly reduced OpEx. Please refer to Slide 18 of the investor presentation for further details. We believe that these capabilities will progressively improve customer acquisition, strengthen portfolio quality and reduce operating costs and enhance operating leverage over the coming years. As our AI models continue to mature and our proprietary data ecosystem expands, we expect technology to become an even stronger competitive advantage for indifference. We firmly believe that this AI native operating model will also become one of the defining competitive advantages of L&T Finance under Lakshya 2031. I would like to give you a brief update on the scale-up of our gold loan business. Following the successful implementation and acquisition and integration of the portfolio last year, our focus has been on rapidly expanding our distribution footprint. During the quarter, we expanded our Wolf finance network to 343 branches, adding more than 200 branches since the acquisition. The business has grown to a book size of approximately INR 3,800 crores, registering a growth of over 180% year-on-year. On the footprint expansion front, our speed to market remains exceptional. Following the launch of 200 branches in FY '26, we are now working on deploying 500 new branches in FY '27, accelerating our velocity to 1.4 branches addition day. I will now request Mr. Sachinn Joshi, our CFO, to take you through the financial updates.

Thank you, Sudipta. As always, I'll be talking all of you through the financial performance of the company for the quarter. Consolidated NIM plus fees for the quarter stood at 10.47% versus 10.22% for Q1 FY '26 and 10.47% for Q4 FY '27. Consolidated PAT for the quarter has gone up by 29% to INR 902 crores. Quarterly retail disbursements stood at INR 23,852 crores, up 36% year-on-year. Retail book stands at INR 127,535 crores, up 28% year-on-year. Our consolidated book stands at INR 129,634 crores, up 27% year-on-year. Consolidated ROE stands at 2.48%, up 11 basis points year-on-year. Similarly, consolidated ROE at 12.71% is up by 185 basis points year-on-year. Talking about retail businesses. Let me start with rural business finance first. the business registered quarterly disbursements of INR 6,961 crores, up 24% year-on-year, mainly on account of improved collection efficiency and sectoral trends. The book size reached INR 32,493 crores, up 22% year-on-year in the first quarter. Pharma finance vertical, the quarterly disbursement stood at INR 2,453 crores up 11% year-on-year. The book size reached INR 17,514 crores, reflecting a growth rate of 11% year-on-year. This segment, which comprises 2-wheeler, personal loans and mortgages, we call it Urban Finance, saw a 57% year-on-year jump in overall quarterly disbursements, INR 10,787 crores in all. As a result, the overall book size increased to INR 6,615 crores in the first quarter, translating into a 32% year-on-year growth. The 2-wheeler business registered quarterly disbursement of INR 3,006 crores in the quarter, up 41% year-on-year. The book size increased to INR 15,068 crores, up 22% year-on-year. With 90% of June '26 2-wheeler disbursements in the prime segment, we continue to prioritize high-quality growth and optimize risk-adjusted returns. In the Personal Loan business, we achieved our highest-ever quarterly disbursement of INR 4,380 crores. translating into a stellar growth of 126% year-on-year with the book size of INR 6,917 crores, an increase of 80% year-on-year. In the mortgages loan business, we achieved quarterly disbursements of INR 3,401 crores, up 22% year-on-year. The book size reached INR 3,630 crores, an increase of 20% year-on-year. In the SME business, quarterly disbursement stood at INR 1,567 crores, up 23% year-on-year. the book stood at INR 8,884 crores, up 28% year-on-year. The growth in business volumes was aided through an increase in direct sourcing and an existing strong network of distribution channels. In the gold loan business, the quarterly disbursement stood at INR 1,092 crores, up 26% year-on-year. The closing book reached INR 3,829 crores at the end of the quarter representing a significant growth of 182% year-on-year. Let me now hand over the call back to Sudipta to make his closing remarks.

Thank you, Sachinn. In summary, we are satisfied with our performance in quarter 1 FY '27, where we are focused on relentless execution. With a significant investment made across technology, engineering capability, area infrastructure, branch expansion and talent, we are expecting operating leverage to play an increasingly meaningful role in improving profitability, improving operating efficiency, which, together with lower credit costs will be an important driver of ROA and ROE expansion over the Lakshya 2031 period. Thank you all for a patient sharing. The floor is now open to questions.

[Operator Instructions] The first question comes from the line of Kunal Shah with Citi Group.

Yes. Thanks for such a detailed presentation and the opening remarks, particularly touching upon the entire AI initiatives. So a few questions. Firstly, in terms of the NIM plus fee. So overall, it's still sustained at 10.47%, but there has been a decline in the earnings if we really look at it, while other income has actually gone up. So what are the components of it? Any impact of excess liquidity, which would have been there? If you can just highlight what is leading to that kind of a deviation and the fee income and the sustainable trajectory? The second question is on growth. So particularly on the personal loan side, the growth has been quite strong. So if we can highlight some guardrails and the profile that we are keeping in mind just to ensure that asset quality out there is sustained. But at the same point in time, we have seen some slower disbursements on the SME and gold loans compared to that of last quarter. So is it something where you indicated that you have let go of some disbursements were there in these 2 particular segments, yes, to the other questions.

Okay. Kunal. Thank you for your comments. Let me first take up the NIM plus fee related point. This is Sachinn here. So we can see clearly that the NIMs have reduced by 24 basis points from 8.8% in Q4 to 8.54% in Q1 FY '2y. The yields, if you look at have actually gone up by 1 basis point, but our debt equity has been rising, which is leading to interest costs going up by 25 basis points. Actually, WACC is up just 3 basis points between the 2 quarters, moving from 7.17% to 7.20%. But debt equity, which was 3.73x has gone to 3.97x, about 0.24x higher. One reason is, of course, increased borrowing to fund the growth. And the other reason is also due to the geopolitical situation being a bit difficult on account of par in Iran. We had maintained slightly higher surplus liquidity of close to INR 4,200 crores. The overall liquidity was INR 13,000 crores plus. So the net result has been a reduction in NIM by 24 basis points. However, what is worth noting is that this surplus has been deployed in various instruments on which we have also earned an income and which has been booked under the head fee and other income. So when you look at the NIM compression, you should actually look at in totality, and that's the reason we always request analysts and investors to actually look at the metric of NIM plus fee and other income, just to make a comparison, which has actually remained at exactly the same level. It's a coincidence, but previous quarter also, it was 10.47%. This quarter also, it is 10.47%. So there is this other income actually includes small surpluses which were deployed, the income is coming in the fee and other income. Correspondingly, the interest cost is part of the NIM. So that's the reason you see this is different. I hope I have answered the question.

Yes. And the fact is there is no element in the other income? No, that as to recoveries or something which is there or maybe...

So Kunal, the ARCs, we keep -- actually, there is a fee, which is paid to ARC. But there are some times when we have small incentives and also other income nothing really worth talking about, let me put it.

Okay. Thanks, Sachinn. Kunal, on the growth question, personal loans continue to go well. and that is primarily because the sort of the thorough and disciplined execution of our implementations with the digital partners. Now you see we have now got 4 digital partners, which is primarily credit GPs, phone pay as well as Amazon, and these are the main large ones. We have a couple of smaller ones as well, but there's 4 large ones. Now what happens is that we have been sort of working on smoothening the digital journeys and sort of removing friction from our workflows consistently quarter after quarter. And because these are platforms which have a large number of customers, and we tend to focus on salaried customer. Our objective is to build a large salary personal loans book, right? So we focus on our salaried customers and with a largely frictionless optimized channel, as and when the visibility of our loan programs increase across the platforms, the volume tends to grow. Now we have been adding partner after partner and optimizing this partner's velocity. So it has continue to grow. And we have been embedding Cyclops now into these journeys, right? And the fact is that Cyclops also has been embedded to many of these digital journeys. And so we are very, very confident of the credit quality that is coming through. First thing, which I mentioned was that our focus is only on building a salary predominantly, so we do loans to salary record as well, but our focus is building on predominantly salaried book in our personal loans business. We have strong guardrails. Cyclops has been implemented. The credit parameters on the personal loan business, what it was 1 year back vis-a-vis what it is right now, there is a significant improvement. And the fact is each and every parameter with every credit parameter with every passing quarter is tending lower and becoming better with every passing quarter. So as of now, we remain satisfied with the trajectory of this business. Yes, you have seen some heavy growth in percentage terms because of the base effect. Last year, quarter 1 FY '26, our disbursement compared to the disbursement, our disbursement has grown definitely. But again, that is attributed to a much lower base. As the base grows larger, the percentage growth rates will reduce over the next couple of quarters. However, we remain committed to growing this business in a risk-calibrated fashion. On your question on SME and gold loans, yes, SME, we have been cautious during this quarter primarily because we were cautious about the fallout of the West Asia war on a certain business lines as well as certain sectors. So we have been cautious and we sort of on our own cut disbursements in some of the SME sort of cohorts. So we have done that. Gold finance, again, SP139876362 April was a month in which the new RBI quadrants came into effect where assessing customer base tier loan demand became mandatory as per RBI guidelines. And it is not only us the entire industry saw an impact of adjustment to these new guidelines. As a result of that, we heard on the side of caution, just to make sure that we are completely compliant with the RBI guidelines. So just like across the industry, some of the origination volumes fell saw a fall in our origination volumes in the month of April. However, there has been continuous improvement in May and June, and I expect the gold loans business to have a normal growth trajectory in Q2 FY '27 because the period of adjustment in learning in Q1 FY '27 is behind us. So I hope that answers your question.

Next question comes from the line of Shreya Shivani with Nomura.

Congratulations on a good set of numbers. Sir, first question is on the personal loan book itself. What I can see is that obviously, Cyclops was embedded into this in '26, but your Nostradamus is only getting implemented in this quarter, right? Just wanted to understand how much -- I mean I understand the control you would have had a underwriting level, but without the monitoring AI engine, what kind of confidence do you have with the book you're underwriting? If you can give some color around -- not in the terms of salary nonsalaried, but in terms of what's the ticket size of the book that you've been putting out through these platforms. My second question is on the tractor business. Any color on the slightly slower trend over there? Were we cautious? Are we taking geography-wise because you've mentioned monsoon, some states may have reservoir benefit, et cetera. Other states may not have those reservoir benefit monsoon is lower, we may get hit. And third is on the cost of funds in terms of what can -- what are we going to do going ahead? I understand the first quarter, we were piling up liquidity, et cetera. going ahead, what will be our strategy? And how much release or lower cost of -- how much decline in cost of fund can possibly happen through the next 3 quarters? Those are my 3 questions.

So I'll take the first 2 questions, first 2 parts and Sachinn will take the third part. So on the personal loans business, yes, Nostradamus has got just implemented. First, average ticket size on our personal loans business remains between INR 2.6 to 2.8 lakh. So I can confirm that we do not do small ticket personal loans. We are not in that very, very small ticket lending business. out of which our large partners, which is basically our large digital partners have a significant part of the origination in which with every large digital partner, we build individual scorecards. So it's not that one scorecards for all originators. We look at the data and the cohort of customer, each partner has, and then we build those core cards accordingly. And then we also cherry pick some of the customers from this particular cohort and then shore offers. So in a way, we underwrite the customer, 300 the customer and then also under the customer when the customer goes to the digital journey just to make sure that our digital sort of acquisition is in a whole very, very high quality. Yes. Nostradamus has just got implemented, but the fact is that we have been seeing dropping risk levels in our personal loans business because of the tightening of the credit card is. See, one of the things which we have done is that if you look at our personal loans origination or persons origination, maybe 4 years back was 50-50 self-employed and salaried. Right now, it is largely salaried. So as a basis of that pivot, the credit parameters on our personal loans business has sort of improved continuously over quarter after quarter. And now with Cyclops, and on top of that, the monitoring to Nostradamus, we are very, very confident of maintaining a both headline outcome, credit quality on our personal business. In fact, our gross nonstarter in personal loans business is lower than 3% right now. That means for the number of customers who we -- probably , we will end to 100 customers only in the first couple of months, only about customers bounce their first checks. And again, net non-starters is much, much lower. In fact, we are sort of tracking the lowest net non-starters in our personnel business in the last couple of quarters as of this month. So we remain very, very confident on the trajectory of our personal loans portfolio, and we will grow it in a risk-calibrated fashion. And now that Nostradamus as well as cycles are implemented, we are extremely sure that this will prevent us from biting off any sort of unnecessary risks in this business than what is warranted. On the tractor business, you remember that quarter 1 in general is a little soft quarter for the tractor business, barring the month of June, when prior to monsoons, the disbursements takeoff. However, this quarter, as you know, that monsoon was slightly delayed. So we saw some delayed takeoff in tractor volumes in the month of June. Like towards the latter part of the June in tractor volumes started ticking up as the rails finally, right? But we will see good impact of the tractive volumes in the month of July and August as the monsoon keeps on spreading. So overall, in the tractor business, the risk numbers also remain very, very stable. The net nonstarter in the tractor business also keeps on going down. And we are happy with the sort of risk to risk trajectory of the tractor business. So I hope I have answered that particular first 2 parts of the question. Sachinn for the additional part.

Okay. On the third part, on the interest rate scenario, I think it's changing by the day. Frankly, the macroeconomic environment keeps changing and the liquidity required to keep changing. So what we had done is at the end of this quarter, first quarter itself, we had brought down the liquidity surpluses to about 9,000 levels, INR 9,000 crore level, which is the norm for us. But there is no assurance that things will really be continuing to be normal. So depending on the situation, we will keep either increasing or maintaining the same levels as in the earlier quarter. But what the overall impact should be seen in terms of how Reserve Bank of India has actually assured that there will be enough liquidity, which will be kept in the overall system. And if that is the case, then I think the interest rate especially the overall yields will not spike. And if there is no sudden spike, we would be in a position to continue borrowing through the -- through various instruments like DSL as well as borrowing through the other domestic financial institutions. We have taken the -- got the rating for mobilizing funds internationally, but I think this is not the time currently. But yes, diversification is also possible in case the situation becomes favorable -- as far as second quarter is concerned, we believe that directionally, it may move up by 5, 7 basis points. Frankly, we'll have to wait and watch the situation over the next few months. But on an aggregate basis, FY '27, I think, may go up by about 4 to 5 basis points on an overall basis. So really actually go up from 7.3% for FY '26 To maybe about 7-point -- anywhere between 7.3% and 7.4%. That's what we are currently and we taking.

[Operator Instructions] Next question comes from the line of Avinash Singh with Emkay Global Financial Services Limited. .

One question on your ROE, ROE journey in Lakshya 2031. Broadly, it expect kind of ROA to improve 60 basis points year on a pretax basis, 80 basis points a person. Now what was the journey, I mean, how do you see the contribution from credit cost and OpEx to come because, by and large, it seems given the asset mix, the mean plus fees already where it should be. So I mean, how do you see -- I mean, this 80 basis point kind of improvement to come from? I mean, of course, when HR gets kind of realized early that will really something. But rest I mean, if you can explain that, okay, how this 80 basis point expansion in PBT is going to happen? And particularly that in the backdrop, if at all, there is going to be something from the insurance regulator on the commission part because you insurance commissions or maybe healthy kind of post of your fee income. So that's first question. And second, if at all, I mean, at this juncture, what you're reading on an impact, I mean, if at all, going to be on your bar portfolio growth and asset quality. I know it's too early. And I mean rains have been kind of improving your timing your assessment so far?

Okay. I'll take the second part of your question first, and then we'll come to the first. So see, I've been traveling around quite a bit for the last 2 months, right? And frankly, I see nothing wrong in the economy. In fact, I was in Jabalpur about 3 weeks back. And wherever I went, in fact, a particular 2-wheeler dealer, which is also one of the largest open dealers in Jabalpur itself. He has had a record May and June. He just doesn't have stocks, right? I travel to rural areas also roll area, things are okay. It's not that we could see any significant headline risk emerging. Yes, rains are delayed, El Nino is supposed to lead to a sort of lower-than-average monsoon that is what is projected. But the fact is that if I look at until time of July, in fall is only about 14% sort of deficient. Now the IMD projection is about 10% deficient. And if I look at what we have done is that we have also very carefully projected the reserve stocks all across the country. And because of 2 back-to-back good monsoons, before this year's monsoon, I think the reserve levels are at an acceptable level across the country, right, barring a couple of locations in South India. The reserves across the country at an acceptable level. So I do believe that even if we have a 90% monsoon, things are going to remain quite okay. Things are not going to fall out or break suddenly. And you want to understand one thing, the micro finance industry has come out of a major asset quality cycle. The micro finance industry has deleveraged from our peak book size of INR 4 lakh, INR 40,000 crores to about INR 3 lakh, INR 33,000 crores right now, right? So the industry has deleveraged INR 10,000 crores. And you always remember that during a crisis period, your underwriting rates go up. So the book that you generated during the period is obviously a much higher quality. So typically, after any asset quality cycle, you typically have 18 to 24 months of Goldilocks period where you really do not see any emerging services. In fact, in the microfinance industry, in spite of whatever worries, et cetera, have been there I believe that it will be a pretty normal year and I do not see any emergence of pockets of risk anyway. The industry is being responsible. The industry is adhering to the min guidelines the number of customers with more than 3 loans outstanding, I think, is lower than 5% as of now, right, in the industry. So overall, the industry has deleveraged. So I think no worries on this out, right? So -- and whatever our travels have told us that the economy is robust, the economic activity is robust, and I expect that to continue in spite of a lime monsoon can be a little support. But in spite of that, things will continue as normal. The tractor business, again, there might be localized insurances, but overall, we expect us to have a reasonably normal year. And you would note that we had Tractor business is the second business, we implemented cycle of software 2-wheeler. So tractor business actually has been operating on cycles for almost 18 months now, right? And the headline results like 2-wheelers that we see or cycle of generated tractor portfolio is quite good. And in fact, we had the first half yearly collection cycle that went through on the cycle of generated portfolio and the outcome is quite good, right? So overall, we are reasonably confident that even if El Nino, et cetera, marginally impacts the rain form. It will not have a very large impact on our portfolio, and we are sufficiently well capacitized to handle it. Because of our prudent generation as well as all the collections framework that we have already existing in most of the areas.. On your question on ROA and ROE trajectory, yes, we need to improve about basis points. We are currently -- from whatever point we are currently there, we need to about 80 basis points to get into that luxe threshold of 3% to 3.2%. Now around that, I do believe that 20 basis points will come from the disappearance of the drag of the ASC portfolio, and that will happen over a couple of years from now. Many of the assets are resolving but it's another 2- or 3-year journey for us. So 20 basis points will come from there. I do believe that about 30 to 40 basis points will come from efficiency and credit cost as well as credit-related costs, which I call the cost of credit administration, specifically collections cost, et cetera, and all that stuff will come from. So that is where it will come from. Some might come from business expansion as well, right, a small bit on from business expansion as well, and that is how it will stack up. And we're reasonably confident about achieving this and by disciplined execution, we have been executing in a disciplined mention so far, and it is our commitment that we'll continue the similar close disciplined execution for the next 5 years during the luxury trajectory as well. Thirdly, on the question on insurance, et cetera, yes, we are aware of these developments. But I'd like to point out that it is not only for us. It is for the industry. And I do believe that the insurance industry, along with the regulator and as along with the end consumers of the insurance products, which is the BFSI industry, right? We'll come to some acceptable solutions and outcomes on this. That is also the reason that we have kicked off the build-out of our payments business because as you know, payments can be a large fee revenue generator, but it will continue to build for us, right? So it will be at least 2, 2.5 years before significant payment revenues, fee revenue on the payments business are visible on our balance sheet. So it is in a build-out phase. We are cognizant of some of the headline outcomes that might happen because of that because of sort of regulatory norming. And as a business, we have factored that in into some of our plants and we will respond accordingly. But however, I'd like to point out that it is more of an industry issue and it is not an issue for antenna. Sachinn, you would like to take...

I think if there is any further question on this, ROI issue, then I can maybe talk of this. .

No thanks. Very clear.

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

Just 2 things. One is my last question just articulated. What are the levers for ROE improvement where you spoke about 20 bps coming from earth drag of the ARC portfolio, I think another 30, 40 basis points when you spoke about improvement in credit costs and decline in administration. So just trying to understand, I mean, will this also include some improvement that we will see mix over a period of time. I remind you talking about scale, building in some efficiencies. But the fact that you can continue to invest. We are building this cross-sell engine that you spoke about in the opening remarks, you are, I think also building your private cloud now, which you mentioned over a period of 5 years is better or is more efficient. So on the OpEx split, if you could just explain how is the trajectory looking like? And the other thing that you just mentioned, sir, is that you kicked off your payments business. So just trying to understand, overall, whatever we've seen of the payment business until now, it's not really been a business which has been accretive to ROE for most organizations still now. So are there pockets where you're looking to operate where burn in the payments business will be much lower? And the other thing is, until now, we see most of corporate at least NBFCs that knowledge that they're using in the pine business as a funnel for our customer acquisition. So if that is the case also for us, for which business is the payments engine will flat as a customer acquisition ends. Those are my 2 questions.

Thanks,. The first question, again, on the ROI, obviously, we are trying multiple things at once. I will say it's like executing on all fronts. One, obviously, very important is the cross-sell engine primarily because, as you all are aware, the acquisition costs of customers of selling products or deepening relationship with existing customers is probably 1/4 or 1/5 of acquiring a new customer. So in terms of acquisition cost, obviously, it is value accretive. Obviously, from a risk perspective, also selling to our noncredit salon customer from a risk perspective is also value accretive because it helps us predict the credit cost outcomes form with far greater degree of certainty than getting a new customer of the street. So from both sides, it's more value accretive. And secondly, obviously, OpEx. OpEx is not limited to cost of credit or credit administration, many of the agency frameworks. For example, let's take this example. Our underwriting co-pilot or, for example, the legal coopetition, right? Average time to underwrite sort of -- or in not underwrite to interpret in case of a micro lab business to interpret into the title reports and the titles and do the property title searches could take anywhere from 4 to 8 hours, right? Now with chagrin, that is down to 30 minutes to 1 hour, right? So like this, many of the tools that we have, for example, in our mortgage co-pilot enables our sales guys to answer the query using their own from generation on the tool, right, rather than try to call back someone in the call center and try to get an answer to that query, right? Or for example, in our collections businesses or our self-care rates in high board-driven sales cure rate is almost high as like 40% right now, especially in the 2-wheeler business, our sales rate has gone up from 10% to 40%. Now we are not using any human names to do this call. We are only using machines, right? So overall, we expect that some of this technology sort of deployment will reduce the need for headcount, though head count need to finally do the sale on ground, especially in the high touch and field rural businesses will remain, but I do believe that a large proportion of our urban businesses will see efficiencies in head count as well. over a period of time, I see a normalization in head count cost as well. It will not be very sharp in the next couple of years, maybe in the next 2 to 3 quarters, it will not be very sharp. But as we move into in FY '29 and FY '20, the impact of all these sort of implementations will be visible in our head count attrition as well. So in a way, it will be over the board across the organization, the private cloud that we talked about. Now see, it's a shot of -- again, it's a leap of fit, as I talked about. We are trying to build much earlier because the fact is that we have been trying to push the air envelop much, much earlier than many other organizations. The cost issue that comes with large high usage is also very, very well upon us. So the fact is that because we have understood that this is something that we need to address at the beginning stage itself. Otherwise, it might end up doing all the good that you want to do. From an OpEx standpoint, we are starting to move towards building our own private cloud. However, can we run Tier 1 applications on 5 clock? Probably the answer is no. But can we run our TSC and Tier 2 applications on our private cloud, probably the answer is yes. But again, it has to go through a period of reliability testing a period of operational effectiveness before we can sort of say it a success. Overall, we are trying multiple things in multiple fronts. We are not leaving any stone unturned maybe out of that 80% will be a success, 20% like not success. But however, we are very confident that the 80% error success that trajectory of ROE improvement that we have committed is more likely to happen over the Lakshya 31 time frame, right? And we are very, very committed to it. In terms of the payments business, yes, I understand the payments business on its margin if you're trying to build a payments business as a business Solar's business, at times, it might not be value accretive. We have people with deep payments expertise within the organization. I have done payments myself for 25 years of my career. So I really understand this business very, very well, right? And so our focus will be on parts of the payments business that are more value accretive, right, from a fee point of view. And we will slowly provide more color to it as we go forward. We tend to build a payments business, which is agency in nature because we have a lot of expertise on the AI front, especially on Agency that our engineers are now building. We have decided to leapfrog the entire sort of normal payment and move into agent e-commerce. And we do believe that the movement to agent e-commerce will unlock certain revenue dimensions that are not yet there to explore by the industry on which, yes, it is our thesis. Now the question is, we are trying to implement the thesis. The thesis implementation might be a great success. It might be a partial success or it might be a failure. We really cannot put our finger on it and say, but the fact is that given the experience that we are reasonably confident of success. So overall, over the next couple of quarters, we'll slowly start working on this business. And see, our business is not to burn money to try to get customers. There are certain organizations who get CapEx on UPI, et cetera, burn money and try to get customers. That is not our model. our model is to independently go first and foremost in to our own customers. And because we do not have a payment stack at this in point in time, there's an OpEx drag that we have trying to posited payments to our customers. Now first objective is to eliminate that OpEx drag by doing that thing ourselves in-house, right? The second thing is to intelligently build solutions through the agent e-commerce model, where our customers as well as some maybe new organization customers, might find benefit in those agent e-commerce solutions and sign on to us in terms of the services that we provide. And last but not the least, we will test it there to on no developed areas, especially in the prepaid payments area, where we are very, very confident that there are revenue pulls lines, especially in the feed front, which can be tapped very, very effectively by the organization. So payments will be a step-by-step build. It will not be all Russian build. It will be a careful, calibrated build, which we'll continue to build for the next 3 to 4 years because this is something that we are committed to in long term as goal for diversifying fee revenues, and this is something that we will deliver during the Lakshya '31 period. I hope I answered your question.

Yes, you've answered my questions, sir. And I wish you and your team the very best.

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

Congratulations on the quarter. So just firstly, on personal loans again. So I just wanted to understand, okay, who are the key competitors and how this Restack versus peers? If you could help on that? And secondly, what differentiates us on the personal loan front, whether it is asset or customer experience and the sorting would be digital-only, I assume. So yes, that's the first question on PL. And secondly, on AI investment. So could you just elaborate on your AI investment. So what is the current run rate of AI-related costs? And what portion is variable based on the usage? Yes.

Yes. Okay. So on the personal part, our key competitors is actually everyone else in the BFSI sector. right? Who does prefer personal loans, they are our operators, right? Now there are models of operation, right? There are certain organizations, especially the large banks who operate on their own customer base, right, and through the DSA channel, right? For us, we operate on our own customer base to the cross-sell to our credit season in our customers. We also operate marginally through DSA. If you see our DSA volumes, our DSA volumes are only 10% of our overall volumes. But the fact is that a large portion of our origination is to the digital partners who have a very large pool of customers as well as they are far more amenable to digital processes. They allow very fine customer selection primarily because they see a large amount of the customer data, right? And so they are able to give us a far more nuanced underwriting approach, especially on a joint scope development with target loss rates. So I exactly know what is the customer underwriting and what is the target loss rate. And the scale-up has been primarily because of digital journeys and friction sort of removal across all our channels. Our average yield remains at about 16% and plus, though there are certain channels which deliver -- I mean, because we operate across the spectrum, our DSA channel will probably operate at a far lower rate, right? Because DSA channel, we do prime salaried. So our DSA channel will operate between 12% to 13%. Some of our deal channels will operate at Overall, our weighted average yield in the personal loans business is about 16% plus is our weighted average in the personal launch business. In terms of the AI implementations now see, there are a couple of parts, right? The fact for example, there are core builds. For example, the core bill would be would be like a machine like Cyclops or a machine like Nostradamus, right, which uses -- probably doesn't use agency care on a query basis in, for example, Nostradamus use agent-based query system, but the core of the machine is built using machine learning, where actually you do not have taken costs that much. But the fact is that you run that machine and you have continuous model upgradation costs. Overall, we have spent roughly about INR 38 crores to build Cyclops. And overall, we have spent roughly about INR 28 crores...

INR 33 crores, Nostradamus and INR 37 crores for Cyclops.

But the fact is that we are still in the process. For example, as I said, for micro finance as well as the mortgage and Nostradamus will be -- Cyclops all implemented this year and also will be implemented for other lines of business apart from personal loans and two-wheeler. So the cost on that continues, right? Overall, our token consumption we had given out some token consumption in the last part of last presentation, I think if my memory serves may write 240 crore tokens was the consumption last quarter. Now obviously, we are on Google Cloud, and we are completely a Google Cloud GCP Suite user. So obviously, we have a sort of a preferential deal with Google on usage of some of the AI tools though we use Claude Cloud for using some of our coding. See, right now, the -- right now, I would say probably we can come back off-line saying that what proportion of our total Clause cost is, variable AI cost. We can come down offline because I don't have that exact number available with me today. However, our overall IT cost is between about INR 100 crores to INR 120 crores a quarter is our overall IT cost trajectory, right?

To add the Cyclops, Nostradamus and all these new projects that we are working on, the total amount taking into account the previous year capitalization also is around INR 102 crores at this point. And there is some work in progress with the work in progress, which is there for the projects which we are currently working on.

So I hope that answers it.

Yes, that answers, and probably I connect off-line for the fixed and variable portion.

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

Yes, am I audible?

Yes, you're audible.

Congratulations for the quarter. So my question is on this wholesale NPA. So this is a quarter where after many quarters has gone up a bit. although it's a small amount. But the question I have is, one, if I look at the wholesale book of INR 2,000 crores, how should we think about the health of that book going forward? Second is, in your guidance of credit cost coming down, have you factored any NPA coming from that book? And if not, then does that lead you to sort of rethink your guidance? And if you can share some color on the remaining book. I know it's small, which is INR 2,000 crores. But just at any kind of color on the health of that book will be used?

Abhishek, let me take this, Sachinn. We see the GS3 small increase that you are referring to is actually part of a settlement that we have already done and what it to be taken has been already factored in. So it is -- there is no further increase. It's actually transitioning between the 2 quarters. That's the reason why it is appealing as GS3 but you will see the same amount actually not getting knocked up in the next quarter. As far as the other assets on the books are concerned, they are all standard assets. So we do not really expect any hits coming out of that. On the ARC resolution, we already spoken about in the previous quarter, but let me just add the positive side of it. The PCR on the SR, the security receipts, when we started off on this resolution process was 58%, and that has now actually gone and increased to 68%. And the reason for that is that as per the RBI regulations, till the time all the assets domicile with an ARP till the time, all the assets do not get resolved any receipts out of resolutions of the other assets need to be actually kept as part of that ARC results. So whatever resolutions are yet to happen, this goes and adds to that buffer. So 10% increase, it still shows that there is a substantial buffer, which has got created, which is actually not required because we do this mark-to-market on a regular basis. But we have that money, and that's why we are very confident that once the resolution starts happening, ARTC, you will start seeing these credits coming into the P&L and our assurance has been that we will not take it to the P&L, but we will utilize them to create macro potential provisions. So I think that should give enough comfort to all of you.

Sure. So that is on the SR part. In the existing wholesale book, it's all standard, but guidance of credit -- in your guidance of credit cost, have you factored any slippage from this book? Or it is purely just the retail movement and you're not -- this book is too small and it will run off.