Suryoday Small Finance Bank Limited (SURYODAY) Earnings Call Transcript & Summary

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

Thank you, Sravani. Good morning, everyone. Welcome to Suryoday Small Finance Bank Q2 and H1 FY '26 Earnings Conference Call. On behalf of Centrum Broking, I would like to thank the management of Suryoday, for giving us this opportunity to host this call. Today, we have with us the entire top management team of Suryoday Small Finance Bank, represented by Mr. Baskar Babu, MD and CEO; Mr. Hemant Shah, Executive Director; Mr. Kanishka Chaudhary, CFO; and Mr. Himadri Das, IR Head. I will hand over now to Mr. Baskar Babu for his opening remarks, and then we'll open the floor for the Q&A session. Over to you, sir.

Thanks, Shailesh. Good morning, everyone, and thank you for joining us for Suryoday Small Finance Bank Q2 and H1 FY '26 earnings conference call. We sincerely appreciate your time and interest in the bank's performance. Our financial results and the investor presentation are available on our website as well as on the stock exchanges, and I hope you had an opportunity to go through the same. Taking you through the bank's performance for Q2 on H1 of FY '26. Our gross advances stood at INR 11,124 crores as at September 30, 2025, reflecting a year-on-year increase of 18.9% compared to INR 9,360 crores last year. Disbursements excluding SCF during the half year ended September 30, were INR 3,973 crores, up 18.1% from INR 3,366 crores in the same period last year. As you are aware, the industry has been facing multiple headwinds in the inclusive finance that has moderated growth and put pressure on asset quality and profitability. There are green shoots visible in microfinance sector and with improved collection efficiency. On the growth front, the bank disbursements remain healthy across all segments, particularly in Vikas loans, wheels and mortgage business. Notably, the Vikas loan disbursements stood at INR 905 crores in Q2 of FY '26, an increase of 111% on a year-on-year basis. This growth is on the back of the strategies that the bank embarked on a couple of years ago to move towards individual loans as against the JLG model. The mix within the inclusive finance model now stands at 70-30 in favor of the Vikas loan. With the addition of new-to-bank Vikas loans, that's NTB VL as a product offering, the mix is further expected to tilt in favor of the Vikas loans. On the retail asset front, the bank continues to grow at a significantly higher pace both in the commercial vehicle business as well as the mortgage businesses. The CV book has grown from INR 1,047 crores in September '24 to INR 1,564 crores in September '25, and growth of 49% year-on-year. Over the last 3 years, the bank has focused on building a retail franchise. The retail franchise and CV financing business will continue to be one of the main states and we will be scaling up the commercial equipment financing business as well as used car lending business. The mortgage book has grown from INR 1,845 crores in September 2024 to INR 2,555 crores in September '25 and growth of 39% year-on-year. The strategy has been to focused on select micro markets and grow deeper in these markets with focus on cash flow-based financing as against collateral-based financing. Our deposit base has expanded to INR 11,991 crores, a 35.5% increase from INR 8,851 crores in the previous year. The share of retail deposits now stands at 86% as of September '25 compared to 80.2% a year earlier. Our CASA ratio improved to 20.7%, up from 17.9% as of September '24. The bank implemented guardrails early in November '24 on the current bucket collection efficiency on the IF portfolio sourced in the last 12 months has been at around 99.5%. During the period, our GNPA ratio though increased to 5.9% as of September 30, 2025, as compared to 2.9% in the same period last year. The bank as part of the prudent risk management strategy initiated covering eligible loans under the credit guarantee scheme for micro units that is CGFMU since FY '23. We are pleased to inform that the bank has successfully made its third claim in September '25 and has received 100% of the amount claimed of around INR 313 crores. The bank continues to cover the entire eligible portfolio under the CGFMU scheme. The cover has helped the bank to protect the bank's capital during the volatile environment, wherein the industry is facing significant asset quality issues. Moving to our financial performance. Our total income decreased by 2.7% year-on-year from INR 347 crores to INR 338 crores. Our net interest income decreased by 13.9% year-on-year from INR 300 to INR 258 crores, and our pre-provisioning operating profit decreased by 37.6% from INR 127 crores to INR 79 crores on a year-on-year basis. As of September '25, our cost of funds stood at 7.8% compared to 7.6% a year earlier. Our cost-to-income ratio for H1 FY '26 was 72.9% as compared to 61.8% in the corresponding period last year. Our profit after tax decreased 33% year-on-year from INR 45 crores to INR 30 crores. We continue to maintain a strong capital adequacy of 23.4%, well above the regulatory requirement of 15%. Our bank's digital banking strategy has also played out with digitally sourced deposit, crossing INR 1,300 crores and constituting over 10% of the credit deposits of our bank. This channel has helped the bank acquire over 80,000 retail fixed deposit customers, and we are confident that this will continue to a significant growth engine for our bank. The digital channel is extremely scalable with incremental costs required to achieve higher scale being limited. Also, the customer acquisition cost is lower than the traditional channels. For bankers also introduce various products in the digital channel, such as secured credit cards and digital MSME loans. Also during the quarter gone by, the bank has partnered with Paytm and launched the credit line on UPI product. The product has already started seeing scale with the bank having onboarded over 50,000 customers under the program till date. We believe products such as secured credit card and credit on UPI can be a real value addition for our banking customers. Our focus for H2 FY '26 will be on deepening engagement with MSMEs, expanding secured lending and strengthening the Vikas loan franchise by simultaneously accelerating CASA growth through digital-led journeys and broadening our retail base with a sharper focus on granularity. We also want to leverage our smart banking outlet micro strategy to further enhance customer reach and engagement. In parallel, we remain committed to fortifying internal controls, nurturing mid-management leadership and embedding customer-centric design across all our products and services. With improving repayment trends, disciplined credit process and easing portfolio stress, the second half of FY '26 is expected to mark this sort of a steady recovery for us. Setting the stage for stronger growth in FY '27. Our customer base expanded to nearly 3.6 million as of September '25 compared to 3.2 million a year earlier, reflecting our continued focus on financial inclusion. Our mission is to serve our existing base representing nearly 1% of the Indian households more deeply and meaningfully becoming their comprehensive financial partner through initiatives, anchored in trust experience and satisfaction. Thank you, and over to you, Shailesh.

Yes. Sravani, you can open the floor for Q&A.

[Operator Instructions] The first question is from the line of Saumil Shah from Paras Investment.

So if you see our other income, it has gone down considerably from around INR 109 crores to INR 80 crores last quarter. So -- and because of which our PAT has also reduced significantly, and it seems that it has not liked our performance. So I mean, can we know what was the reason for such a drop in other income?

Correct. So there are 2 major drivers there. So one is the PSLC income that we earn on selling the PSL certificates. Last quarter, we made about INR 32 crores of income, and this quarter, we made around INR 10 crores. And this is largely due to the seasonality, right? Most of the PSLC certificates get sold in Q1. The other is that in our investment book, we had a onetime sale on which we had gains of INR 13 crores in Q1 and which is the reason why you see that drop in other income.

Okay. So going forward in the remaining 2 quarters also, PSLC income will be equal to our current quarter income?

So PSL income will be quite muted in Q3. We are likely to see some opportunity again in Q4, which will be possibly similar to the INR 10 crores that we have made this time. The good part is in both the quarters, our pricing remained fairly firm at 2.8%. So to that extent, we can see some uptick in Q4.

And sir, on the ROA guidance, I mean, even in this quarter, we have reiterated that we can do around 1.5% to 1.6% ROA for the current year. But if we see first half, I mean, it's hardly INR 60 crores, INR 65 crores. So for the remaining half, we have to do almost 3x the profit of first half. So is it possible? How confident are we to achieve ROA of 1.5% to 1.6%?

Yes. At this particular point in time, we are targeting to have an ROE of at least around 1.2% as things stand today from here and then improve with some incremental efforts on our side more in terms of recovery from our recent NPA pool, which is likely to give the uptick. So as things stand today, 1.2% is around what we are targeting, which will translate to an ROE of anywhere between 8% to 9%.

Saumil, just to clarify, what we have repeated is that whatever we gave as the guidance last time, we haven't really changed that because we're just mentioning what was given as a guidance. And currently, we are stating where we are.

Okay. So for this financial year, we can do about 1.2% ROA, for the full year?

Yes.

And sir, and on the GNPA and NNPA front, since we have received our claim this quarter -- I mean, last quarter, and we are targeting about 5 gross and 3 net. So I mean, is it possible that we can achieve this 5 and 3 by end of this year because I think now there would not be any CGFMU claims for this year, right?

Again, to repeat, this is what we said 5 and 3. Currently, we have made our claim. The question was in terms of whether claiming in Q2 or Q3, we could have kind of an [indiscernible] and claimed it in Q3. But however, we chose strategically to make a claim in Q2 as the amount was large and we wanted to make sure that our systems and processes are completely compliant. So we did choose to do it in Q2. So at this point of time, as the norm stand, there will be no more claims possible in this financial year unless otherwise there is any change in terms of the CGFMU norms. As you said that, yes, it will not be. But however, our net NPA, including eligible claims will continue to be closer to 0%.

And sir, may I know, I mean, what was the collection efficiency for the month of October?

It's around 98.5% in terms of the overall portfolio, 99.5% in terms of last 12 months originated portfolio, which currently comprises approximately about 60% of the 59%, 60% of our portfolio.

So ex bucket was around 98.5% for October?

Yes. Correct.

But the point that is being highlighted is that the book that has been built in the last 12 months, the ex bucket collection efficiency for that book is 99.5%.

Also equally good apart from the current, is that the -- I think 30% plus on that portfolio, which was built in the last 12 months is just a little shade less than 2%.

Sorry, I didn't get your answer.

There are 2 things. One is the current bucket efficiency, which is, say, 99.5%. But if the 0.5 resolution rate is very low, technically, that would mean that now approximately 4% to 5% of the portfolio also will be in 30 plus. So currently, what we see as a 30-plus portfolio in this 12 months originated portfolio is a shade less than 2%.

And so we have mentioned -- I mean, in our presentation that we are going to raise equity of about around INR 1,000 crores. So I mean, we wanted to know whether this will be below book value. I mean, are we considering it in this financial year to raise INR 1,000 crores?

This is an enabling provision. So we kind of already guided that we are comfortable with the capital adequacy of approximately 20%, a little higher than the regulatory requirement of 15%. So to the extent it is an enabling provision and it is not that we have any plans immediately to raise. And hence, the question in terms of not deciding on the price is not relevant at this point of time.

But sir, anything below book value won't be the right -- as a shareholder, I mean, nobody will like if we raise funds below the book value at least.

We haven't given thought about the pricing for sure. So to that extent, yes, your input is well taken.

The next question is from the line of Deepak from Sapphire Capital.

So just first up, I think we are still maintaining advances growth of 30%, 35%, right? So second half -- I mean, the first half, the growth till now has been in the range of 19%, 20%, right? So ideally, your second half growth will accelerate. That's what we expect now, given we are maintaining 30%, 35% advances growth?

Currently, yes, we're looking at 30%. 2 things: one, the write-off of INR 400 crores which we did last year was also in the books as NPA last year at the same point of time. So to that extent, this is a little shade lesser in terms of a comparison. We have removed on both the side, probably a little higher than around 21%, 22%. So usually, the Q3 and Q4 are expected to be pretty good quarters for inclusive funds. Over the fact was that it wasn't really so last year because of the stress. What we are seeing currently is a slide in the acceleration in the approval of GNPA portfolio, which used to be hovering at around INR 70 crores, INR 75 crores in the beginning of the year to less than INR 35 crores at this point of time, as we see. In terms of the new overdues that are getting added, it shade less than INR 20 crores. So mathematically speaking, that is what will translate at max to a GNPA approval towards the end of Q4, probably starting from Jan and Feb. So given that overall, there has been green shoots and specifically in our VL portfolio, it has substantially improved collections overall, specifically in the terms of the 12-month portfolio. And we also mentioned elsewhere that our preapproved portfolio in our approval limits for inclusive finance stands close to around INR 8,000 crores, around approximately 1 million customers, which also includes inactive customers. So our effort is in terms of making that process quite smooth in terms of doing all the work at the back end and make it comfortable with the customer. At this point of time, our inclusive finance is completely digital with no pen on paper at all. So currently, the run rate in inclusive finance has moved to around approximately INR 415 crores, INR 425 crores. So there is a marginal dip in the month of October. Fairly confident to get it back to close to INR 450 crores to INR 500 crores consistently for the next 4 months -- 5 months.

Okay. So ideally, your disbursement will also improve because I think in the second quarter, it was in the range of INR 2,400-odd crores. So you expect disbursement in third quarter and fourth quarter to improve substantially, right?

Yes, please. That's what we are focusing on right now. I think the heavy load of past due collections has been significantly managed. Our focus right now for second half of the year is originating new business.

And how should one look at on the cost of fund part, I mean it was 7.8% right now. So how should one the cost of fund?

So I think if you look at Q2 stand-alone, it has been quite encouraging because we have been able to reduce our cost of funds across both fixed deposits and SA. In SA at the lowest bucket, we have been able to reduce our rates by about 10%. In the fixed deposits in both the 5-year and 3-year bucket, we have been reduced our rates by about anywhere between INR 0.50 to INR 0.75, so with that in place, our cost of funds on deposits is likely to be lower by anywhere around INR 0.20, INR 0.25 per say for the second half of the year.

So that will directly add to your NIMs?

Yes, please. That's right.

Unless there is a repo cut and the transmission will happen because all our floating loans are directly linked to repo, not to any internal benchmark rates. So to that extent if there is any, that may kind of nullify it on a temporary basis.

Okay. So your yield reduction will kind of nullify your cost of fund reduction in your NIMs you look to maintain or there might be marginal improvement also?

Yes, there will be marginal improvement as we see it from here on.

And in terms of your ROA and ROE, you mentioned ROA of 1.2% and ROE of 8% to 9% that we are targeting for this year, right?

Correct.

So even at the ROA of 1.2%, I mean, you would have to reach a bottom line of around INR 190 crores to INR 200 crores for this year, given we have done INR 65 crores in the first half. So that is left with maybe about INR 130 crores, INR 35 crores. So INR 65 crores per quarter for the remaining 2 quarters. So what will drive the earnings in the second half? I mean, will it be NIMs? Or will it be your other income? You mentioned PSLC will be muted in the third quarter. So just wanted to understand, currently, we are at 30%, 35% trajectory. So what will drive the movement from INR 30 crores, INR 35 crores to maybe about INR 60 crores, INR 65 crores per quarter?

So right now our focus is increasing our paying book, right? So if you look at our MFI business, our paying book is somewhere around INR 4,300 crores, and we would want to increase it to anywhere between INR 4,700 crores to INR 4,800 crores, right? And that's the book where I'm earnings on an average around 25.5% to 26%. So that's one of the drivers. The second, which will be key for us is to be able to focus on the recovery on our recent NPA pool. Now that we have been able to stabilize our flow forwards to somewhere around INR 35 crores a month. Our significant focus will be on being able to recover in the recent NPAs of this year.

So what is the recovery of NPA pool? So ideally you would expect a much lower credit cost, right, in the second half?

Yes. From where we stand today, as we will -- we are expecting that, yes.

So just to clarify, the amount of -- when we get a recovery of the CGFMU covered portfolio, 73% will be returned back to the fund. So to the extent, net, we will retain around 24%. We are kind of staying focused in terms of ensuring at least we collect 20% to 25% of that money which we have claimed. So to the extent our share will be 25%. But overall, there will be a collection of 73% of that will get returned back to the CGFMU.

And just last point, I did not, I mean, understand increasing paying book, what exactly we mean? Sorry for my ignorance. So I'm not able to understand what you mentioned on the increasing paying book?

Yes. See every month, we are adding approx INR 300 crores of our advances, paying book advances. So next 6 months, even if I add the run rate of INR 300 crores, I would add approx INR 1,800 crores in advances. So my growth from INR 11,000 crores, it should be nearly INR 13,000 crores advances. Now that INR 1,800 crores is, I average it out broadly INR 1,000 crores. It will give me for my next 6 months revenue. So this INR 1,000 crore into spread of 17% yield minus your cost of fund of 8%, which is 9%. So if you could give me a INR 100 crores of extra profit -- operating profit for the next 6 months -- I mean INR 50 crores of extra operating INR 100 crores for a full year, INR 50 crores for the half year. So INR 50 crores, that is what KC was trying to say, if my growth in advances, what we are currently having, if we continue that, we will be having INR 50 crores of additional income without any substantial increase in cost. And along with that the credit cost for the half year, whatever we have spent, we are expecting it to be much lower. So advances growth of INR 50 crores and much lesser credit cost would give me whatever you are saying, incremental INR 100-odd crores.

Understood. And do we have excess liquidity also? I mean how much do we have because we got some INR 350 crores -- INR 313 crores, right? So do we maintaining the excess liquidity, which we look to deploy maybe?

Yes. So we have excess liquidity of about INR 1,000-odd crores right now. But over the period of this quarter, it will come down as we basically disburse the new business. So we will be looking to reduce our net liquidity over time in this particular quarter.

Okay. Okay. So that will also kind of will help reduce the drag, right?

Yes.

Yes.

The next question is from the line of [ Arvind Ratan ] from CapitaLand.

I have a couple of questions on the presentation. Firstly, on Slide 8, if I look at the effective yield on advances come down at 320 basis points to about 16.5%. Now I understand part of that is because of the excess liquidity we are holding, the deposits growing faster than advances and the fact that our GNPAs have -- or the noninterest yielding of the book has increased. What -- I'm just trying to understand how much of the 320 bps reversal -- 320 bps reduction in yield is likely to be reversed as we sort of deploy more or the available liquidity as the assets stabilize the quality of the books, the slippages stabilize. Where do we -- where are we likely to sort of stabilize on the yield? That's the first question. And second question on Slide 24, right para, if I look at the retail assets PAR 30 plus, that's been inching up over the last 4 quarters. So while the trend on the IF book is encouraging. But on the retail assets, we see an increasing trend of PAR 30 plus, is something to be read there? These are 2 questions.

So I'll answer your first question. See, on a steady state, so our GNP currently is nearly 6% and which is at a yield of 25%. So that 6% of 25% is nearly 1.5%. So if you technically do a write-off when we get the [indiscernible] money, if I do a write-off, technically, my yield should go up by at least 1.5%. But however, on a steady-state basis, if I have to maintain a mix of whatever we have guided, 45% unsecured and 55% retail, 45% should come at 25% and 55% should come at 12%. So theoretically, the yield should be in the range of 17% to 18%. 17.5%, you can take a steady state kind of yield. So that -- so what you are asking is how much it would be reversed, 16.5% currently, at least technically, it should go up by 100 basis to 150 basis points on upper right. So 17.5% to 18% should be our steady-state yield once we do a complete write-off and the business is as usual.

And on the retail assets of 30 plus, yes, there has been a marginal increase. As you know, commercial vehicle has been going through a little bit of a turbulence, so to say, there's been a marginal pickup in terms of 30-plus probably because of the extended monsoons, d there's has been a little slack and the deferment in terms of GST. Fairly confident, but if we look at the overall portfolio from a flow-through from 30 to 60 plus, it will be moderated. In mortgages, yes, whenever there is 1 or 2 large accounts get into it, there is always an increase of that. But completely from a credit cost perspective, since the underlying assets are very robust and it is all cash flow-based lending, either there is a resolution or resolution either in terms of customer coming back and rolling back in terms of current or in terms of disposal of property. The disposal of property is the last thing really we look at. Hopefully, with that, we will not see the same trend going from 3.1% to 3.2% to 3.6% in the fourth quarter for sure.

The next question is from the line of Ashlesh Sonje from Kotak Securities.

Sir, a few questions from my side. Firstly, on the cost ratios, can you talk about how you think about the trajectory from here on? Let's say, if I look at the cost/income ratio, it is close to 75% today. How do you think about it going forward? That's one.

Yes. So one of the important things to highlight in our cost is that if you consider the corporate costs, right? So they have more or less remained fairly constant, especially in terms of the number of head count that we have in our corporate workforce, right? So there will be a marginal benefit on the fact that from here on as we grow our book, our corporate costs will not proportionately increase. . The other is obviously the fact that there was a drag in the denominator because of the nonpaying book, and that -- and we have now been able to remove. So to that extent, you will see that there is a marginal improvement. We obviously hope to bring our cost to income ratios down in the second half of this year. At this particular point in time, from where we are today, being able to touch 70% along with the CGFMU costs that we have. That will be our first objective.

Understood. Okay. Second one is on the credit side. If I look at the increase in disbursements, I see that there is an increase across segments. Is this coming mainly because you see a much higher credit demand on the ground? How are the rejection rates trending? Can you share some insight on that?

So this is primarily our inclusive finance engine is growing quite robustly. And especially the Vikas loan segment, we have grown more than 100% year-on-year. And we said that we also got quite robust growth in commercial vehicles as well as mortgage. So credit per se, demand per se is, it's a very small size and scale to talk about any market share and industry level growth. So as far as we are concerned, there is enough and more opportunity to keep growing at a much faster rate. So that's not at all a challenge. And what was your second question, sorry?

How is the rejection rates trending?

Okay. So on the rejection rate front, it has more or less stabilized. Earlier, it used to be as low as 27 percentage in microfinance for the new customers. Now it is more or less trending to 35%, 1/3 of the customers are getting approved. So there is a little uptick. But in states like Karnataka and Tamil Nadu, there's still a challenge. So the more customers in the market are in par. So there, the approval rates are still in the range of 25%, 27% range.

And sir, do you see a possibility to take further steps in your savings or term deposit rates from here on?

So we keep evaluating it on a monthly basis. Right now, it's a very dynamic scenario. We try to maximize our opportunity on that count. You would have noted that our MCLR is also coming down on a month-on-month basis, and our cost of deposits have also reduced, especially in July, August and September. So we will continue evaluating that based on the market demand that we foresee.

The next question is from the line of Bhavik Shah from InCred Capital.

My first question was regarding the written-off pool. I mean what will be the quantum of written-off pool? And what would be the aging? And how comfortable are you to kind of -- at what percentage of recoveries kind of do you see over the next couple of quarters from here?

So we have written off around INR 430-odd crores based on the CGFMU claim of INR 313-odd crores that we have received. Large part of it is a book that was built in the last financial year. If we look at historically, we have been making recoveries of around 6% to 7% in our write-off pool and around 15% in our NPL pool. Those trends will continue. We will try to improve it, especially with our focus on recovery from the recent NPA accounts in the second half of the year.

Sir, just to clarify, so out of the 7% that we recover, 23% is what we keep and the balance goes to CGFMU, right?

Correct. Net of recovery expenses.

Understood. And I just wanted to check your comfort level on the PCR as we maintained on mortgages and lease portfolio?

Yes. So given the kind of LTVs that we work at and the assets that we have in hand, we are comfortable with the PCR that we are maintaining at this particular point in time.

The next question is from the line of Rahul Kumar from Vaikarya Fund.

Sir, how much were the MFI slippages in this quarter?

We had a slippage of around INR 206 crores in this quarter as against INR 267 crores in Q1. That is at the bank level. And if you look at MFI, we had slippages of INR 170 crores in Q2 versus INR 237 crores in Q1.

And I think you mentioned something about the flow of -- current flow, which you are seeing in this MFI book? And what kind of recoveries do you see from the Stage 2 or 30 to 90 DPD kind of in the MFI segment?