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

Good day, ladies and gentlemen, and welcome to Suryoday Small Finance Bank Limited Q3 9M FY '26 Earnings Conference Call hosted by Arihant Capital Markets Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand over the conference to Ms. Juhi from Arihant Capital Markets Limited. Thank you, and over to you, ma'am.

Hello, and good morning to everyone. On behalf of Arihant Capital Markets, I thank you all for joining into Q3 and 9 Months Financial Year 2026 Earnings Conference Call of Suryoday Small Finance Bank Limited. Today from the management, we have Mr. Baskar Babu Ramachandran, MD and CEO; Mr. Hemant Shah, Executive Director; Mr. Kanishka Chaudhary, Chief Financial Officer; Mr. Himadri Das, Investor Relations Head. So without any further delay, I now hand over the call to the management for opening remarks. Over to you.

Thank you, Juhi. Good morning, everyone, and thank you for joining us for the Suryoday Small Finance Bank Limited's Q3 and 9 months FY '26 Earnings Conference Call. On behalf of the entire Suryoday team, I wish you a Happy Basant Panchami. We're happy to know that we are stepping into our 10th year of our journey, taking you through the bank's performance for Q3 and 9 months FY '26. As of December 31, 2025, gross advances stood at INR 11,885 crores, registering a healthy year-on-year growth of 24.3% compared to INR 9,563 crores last year. Disbursements, excluding supply chain finance during the 9 months ended December 2025 by INR 6,230 crores, up 30.2% from INR 4,785 crores in the same period last year. While the broader microfinance industry continues to navigate through a phase of tighter underwriting and asset quality normalization, we are seeing visible signs of stabilization and growth. Growth momentum remained healthy across key segments particularly in inclusive finance, wheels, mortgages, digital deposits and credit on UPI. On the inclusive finance side, disposals have largely returned to earlier run rates with the business now clocking closer to INR 500 crores per month. Collection efficiency continues to improve with the current bucket for the IF portfolio inching towards 99.5%. As highlighted earlier, our strategic shift from the JLG model towards individual lending continues to gain traction. Individual loans now constitute approximately 72% of the inclusive finance book, enhancing customer quality and portfolio granularity. Importantly, close to 99% of our inclusive finance portfolio remains covered under the CGFMU scheme providing strong capital protection during periods of unforeseen industry stress. Vikas Loan disbursement during 9 months FY '26 stood at INR 2,729 crores, reflecting sustained year-on-year growth. The increasing share of new-to-bank Vikas Loan cash loan customer is expected to further strengthen portfolio stability and risk adjusted returns. On the retail asset momentum in both the commercial vehicles and mortgage business continues. The commercial vehicle portfolio grew from INR 1,190 crores in December 2024 to INR 1,609 crores in December 2025, registering a year on growth of 35%. While the CV segment has witnessed some stress earlier, we are now seeing clear signs of improvement in collections, asset quality trends. Our focus remains on building a granular retail franchise, but also selectively scaling commercial equipment in financing and used vehicle lending. The mortgage book, which includes micro mortgages expanded from INR 1,999 crores in December 2024 to INR 2,778 crores as of December 2025, growing by 39% year-on-year. The strategy of focusing on select micro markets and cash flow-based underwriting continues to deliver steady and sustainable growth. In addition, our unsecured business loan portfolio is growing at a healthy and calibrated pace which is now clocking a run rate of INR 20 crores per month with a portfolio cost of INR 115 crores in the MSME portfolio, further strengthening the retail asset mix. On the liability side, our deposit base expanded to INR 12,865 crores as of December 2025, reflecting a year-on-year growth of 32.5% from INR 9,708 crores. Retail deposits continued to strengthen with a share improving to 87%. Our CASA ratio stood at 21.2%, underscoring improving deposit granularity and franchise debt. Digital continues to be a key growth driver for the bank. Digitally sourced deposits now contribute nearly 30% of incremental deposit accretion and continue to bring momentum. This channel has enabled us to acquire mass affluent large pool of retail customers at a significantly lower acquisition cost and with high scalability. Asset quality trends are well within the expected rate as of December 2025, our GNPA ratio stood at 6.6%. the CGFMU cover continues to safeguard the bank's balance sheet, with 100% claim rate on the eligible portfolio since inception. Out of an NPA of INR 501 crores as of December '25, INR 467 crores are receivable under the various cohorts under CGFMU scheme. Moving to financial performance. Net total income for 9 months FY '26 increased by 3.2% year-on-year from INR 1,019 crores to INR 1,052 crores. Q3 FY '26 increased by 16.2% year-on-year from INR 308 crores to INR 358 crores. Net interest income decreased from INR 862 crores to INR 782 crores, while pre-provision operating profit decreased from INR 343 crores to INR 277 crores. Our cost of funds stood at 7.7% as of December 2025, same as a year earlier. The cost-to-income ratio for 9 months FY '26 increased by 73.6% from 64 -- 66.4% in the corresponding period last year. Profit before tax for the period stood at INR 102.2 crores versus INR 148.7 crores in the last year. The bank continues to maintain a strong capital adequacy ratio of 21.9% well above the regulatory requirement of 15%, providing adequate headroom for future growth. On the digital asset side, we will be credit on UPI has the potential to be a game changer for the industry. The product allows customers to start with low credit limits and graduate over a period of time based on repayment behavior and transaction history. Our partnership with Paytm in this space has shown strong early traction with customer onboarding growing exponentially with 2.2 lakh active customers in 1 quarter, along with products such as secured credit cards, digital MSME loans and digital deposits, these offerings are helping us build a fully integrated digital banking ecosystem. Our customer base expanded to nearly 3.7 million as of December '25, compared to 3.3 million a year earlier, representing close to 1% of the Indian households. So our focus remains on serving this base more deeply and meaningfully. Overall, with a largely CGFMU covered unsecured book, a growing base of granular retail assets across CV, mortgages and MHL, a strengthening deposit franchise and robust digital infrastructure anchored the products like credit on UPI and digital deposits, we believe Suryoday is firmly on the right path to building a resilient long-term institution. With improving repayment behavior, disciplined credit process using portfolio stress and improvement in cost to income, we expect the coming quarters to mark a phase of stability and consolidation setting the stage for healthier and more balanced growth in FY '27. Thank you for your time. We'll be happy to take your questions.

[Operator Instructions] The first question is from the line of Deepak Poddar from Sapphire Capital.

Just wanted to understand, first up, I mean, across the industry, we have seen, in general, the gross NPA declining on a quarter-on-quarter basis. But for us, it has increased. So what led to that? And how do we see gross NPA going forward?

So one of the things that we will need to keep in mind is that our entire MFI book is covered under the credit guarantee scheme. So we don't really look forward to quarter-on-quarter write-offs, all of these will essentially get squared off at the time of us making a claim.

Okay. Okay. So basically, because of lesser write-off, I mean, it's still in the books, so it's coming in your...

Correct. And as you would have noted that in Q2, after we got the INR 340-odd crores claim honored by the credit guarantee fund, we did a major write-off at that particular point in time. So our write-offs will be coterminous with the claims that get received by us.

Okay. Correct. Okay. Okay. I got it. And in terms of your PSLC, how do you see fourth quarter -- I mean, PSLC mean -- and what was your PSLC income this quarter, third quarter?

So in Q3, we made about INR 6 crores as against INR 10 crores in Q2. But this year has generally been a very rich year for the PSLC market. On an average, they were trading at around 2.65% versus 1.9% last year. So at this time, it's a little difficult to predict what the market demand will be in Q4, but typically, in the last 2 years, we have seen that there is an active market towards the end of Q4.

I mean you have said in the past as well, I mean, for fourth quarter, generally, your PSLC income would be -- generally tends to be higher.

Correct.

Okay, understood. And on cost to income, I mean you spoke about improvement in cost to income. So any sort of benchmark we have where we want to reach in how much time?

So I think the first code of call for us will be that in the next financial year, we are able to come well below the 65% mark because we would have by Q1 cleared up on nonpaying book in the portfolio. So that's where we start the beginning of the year and then see what kind of improvements we are able to do. But the important point to note is that insofar as our corporate costs are concerned, they have remained more or less at the same level over the last 4 quarters.

Okay. So currently, I think we are doing around 75%, right? So next year, you're targeting below 65%, that's a big jump, right?

Yes. I think with the increase in the paying book, our number will be under 65% would not be difficult for us to achieve.

Okay. Understood. And just one last thing on FY '27, any sort of guidance you can provide in terms of growth and ROAs?

Well, it's a little too early as you can see how the market is evolving, right? But what do we see is that especially in our MFI business, our ex-bucket collection efficiency will be back to normal, which in this industry is 99.5%. So that will be a starting point for us to building for the results of FY '27.

Correct. And what's our steady state credit cost in general, I mean, now since we are going towards normalcy, right, entire industry as such, so...

Yes. So I think with the kind of mix that we have today in our portfolio in the bank, we would want to have a credit cost of not more than 1%.

The next question is from the line of Shailesh from Central Broking.

I have 3 questions. Congratulations on the quarter. So it is encouraging to see that we have seen good balance sheet growth this time around during the quarter. So my first question is on earnings growth. So several peers have reported strong quarter-on-quarter improvement in profitability. largely driven by asset quality and recovery in MFI disbursement, right? So could you outline when we should expect a similar earnings trajectory for Suryoday?

Yes. I think if you look at this quarter, our portfolio grew by around 7%, which translated into an earnings growth of around 20% quarter-on-quarter. As we see it, I think starting Q1 of next year with the entire remaining bad book going out, we will naturally see an uptick in our earnings.

So not fourth quarter or the first quarter FY '27 should be the same as the quarter where there will be substantial jump in the quarter-on-quarter earnings growth?

Yes. So Q4 will certainly be much better than Q3, even where we stand today. And that's largely because of the fact that there has been a steady increase in my paying book. My paying book has increased by around INR 170 crores, INR 180 crores in this 1 quarter itself. So that trend will continue and we see a significant increase in our paying book, especially in MFI in Q4 as well. We had just shared under 99.5% in the ex-bucket collection, and we are very confident that we will be able to reach the 99.5% target beginning Jan.

Yes. So that's a good probability that the fourth quarter profitability and quarter-on-quarter basis can be very good. Okay, fair enough.

Yes, yes. It can be higher than the 36% that we have disbursed.

Yes, yes. That is what I was understand -- trying to understand. Okay. So my second question relates to asset quality. So in line with earlier guidance, there has been a gross slippage, there has been a moderation, right, which you have guided earlier. So can you give the outlook for fourth quarter, how things are shaping up? And also in terms of JLG and individual lending state-wise performances, if you can highlight any material development during the quarter?

So I think one thing that you would have noticed is the shift that we have made from the JLG to the individual loans. Currently, if you look at the disbursements in the MFI book, about 80% is for Vikas Loan. And standing from where we are today, we expect that our slippages will be about INR 100 crores and thereabouts for Q4.

So that would include your JLG, IF and RA, both included, right, less than INR 100 crores?

Yes, yes. That's at the bank level.

Yes, yes, bank level. Okay. Fair enough. And any state-wise, any material development you would like to highlight, any state-wise in terms of whether improvement in performance or anything like that?

Across the board, all the states have really inched up, including Karnataka. So when we say 99.3% inching towards 99.5%, across the board, I think it is closer to 99.5% with no operation of any state being substantially higher or anything -- any state being less than 99%.

Okay. Great. That's good to hear. Sir, my third question is with respect to recoveries. So this quarter around, there has been a sharp drop quarter-on-quarter. So could you help us understand the factors behind this trend? And how should we think about recovery performance going forward?

Which recovery?

Recoveries and upgradations from the GNPA? I think it is only INR 8 crores this time around.

One, the book is shrinking as the percentage of customers which are collecting is going higher, whether the pool was largely -- large accretion, which meant that the upgrades from the recently stripped pool are higher. So the slippages themselves are coming down, the upgrades are marginally coming down. However, our entire focus is to go back and revisit the entire thing. We're adding a lot more collection, people know that there's huge stability which has come in. There is no big slippages happening from the current bucket to various other buckets. The good news is that because of that 1 to 30 collection, 31 to 60 have gone up at least 10 percentage as a percentage of the slippages. So hopefully, at this rate, I think more than INR 8 or from INR 8 crores, likely that in Q4, it will be closer to around INR 11 crores to INR 12 crores across the cohorts, which includes ARC, our write-off as well as our NPA book.

Because the reason I was little surprised was that there was a sharp drop from INR 26 crores in second quarter to around INR 8 crores in this quarter. So I thought I would just take some clarity over that.

Yes. See, Shailesh, any recovery out of ARC does not really get reflected here. And also any recoveries out of the write-offs goes towards the income rather than coming towards upgrades and recoveries here.

Okay. Fair enough. Sir, last question from my side. Could you highlight some of the key developments and early traction in our credit on UPI offering in partnership with Paytm? Any key business developments you would like to highlight?

There has been a large scale up, which is happening, approximately around 1.5 lakh customers is what we are acquiring. The activation usually takes the lag of around 2 to 3 months. The portfolio outstanding, though small, is kind of inching up by around closer to doubling almost every month, 15 becoming 30, 30, likely to become around closer to 50 to 60. There's one large cohort of customer, granular and the average ticket size is currently still less than around about 10,000. The number of customer-wise acquiring is around closer to 1.5 lakhs per month. And we think that by this year end by March, probably around closer to 10 lakh customers would have been approved, of which utilization would be around closer to around 2 lakh, 3 lakh customers.

What would be your AUM, sir, currently?

Very small, at around 30%.

[Operator Instructions] The next question is from the line of Rahul Kumar from Vaikarya Fund.

Sir, can you split the slippages in -- between MFI and non-MFI for this quarter?

Yes. So around INR 105 crores was MFI and the balance is in the retail asset business.

Okay. So this is a gross slippage, which you are saying INR 105 crores?

Correct, yes.

Okay. And what are the monthly trends in these slippages now versus what it was?

I think it used to be INR 60 crores at the beginning of Q1, moved to around INR 30 crores, likely that we will see around closer to INR 25 crores, Jan. And hopefully, if the trend continues, the target is to have less than INR 20 crores, which is used to be what before the entire mini crisis started. So I think we should be back to INR 20 crores and probably a little lesser in the month of March. But the trend currently likely to be around closer to INR 27 crores for Jan and probably lesser than INR 25 crores. And if the trend continues, it will be less than INR 20 crores, around INR 20 crores in the month of March.

Okay. Second question, if I look at the slippages in the non-MFI segment, I think quarter-on-quarter, I see a 40% kind of a jump. What is driving this?

Okay. So just to clarify one correction. So of the INR 155 crores of slippages that we have in Q3, the split is INR 116 crores in MFI and INR 39 crores in the retail asset business. So if you look at the retail asset business on a quarter-on-quarter basis, it's moved from INR 36 crores in Q2, to INR 39 crores in Q3. We have had a few slippages in our lab business, which we are trying to resolve and regularize before the end of the year.

Okay. Okay. Okay. Got it. And correct me if I'm wrong, I think you mentioned the target for Q4 slippages is below INR 100 crores, and this is for the overall book?

Yes, INR 100 crores for the bank as a whole.

Okay. Okay. Okay. And what would be the split in that between this JLG and non JLG?

Yes, so for IF as a whole, it will be around INR 75 crores to INR 80 crores and around INR 20-odd crores or less -- a little less for the retail asset business.

And okay, and the last question which I have is, if I look at our credit cost for this quarter, I think INR 41 crores versus INR 40 crores in the quarter 2, despite our slippages actually reducing from INR 155 crores to -- sorry, INR 200 crores to INR 155 crores?

Yes. Actually, in Q2, we had about INR 24-odd crores of write-back after we received the CGFMU claim, right? So that was a one-off for Q2, which you will need to keep in mind to check the movement.

Got it. Understood. Understood. And another thing you mentioned was the non-MFI slippages will also reduce going forward from INR 40 crores in the last quarter to less than INR 20 crores in the Q4, so what is driving that?

There was one large instance of INR 5 crore plus account in LAP, which slipped on a temporary basis. So that was the created aberration. CD, there was a marginal reduction in terms of recovery, which is back in the last quarter towards the end. So the trend would continue. So given that, we are kind of projecting this. And overall MFI likely to be around shade less than 75%, max 80% and remaining around 20% to 25%, max will be from the retail assets. There was a little bit of slippage there in the micro mortgage segment, primarily due to Karnataka, which is back, 50% of the 4% GNPA in the micro mortgages are paying book, that's month-on-month they're paying, but still continue to be in NPA and which we may not proceed really under surface, and they will get regularized over a period of time, which is not likely to be there quarter 4.

So to summarize it, the micro LAP issue, which was plaguing in Karnataka is driving this resolution and that is driving this reduction in the non-MFI slippages.

The slippage has stopped and the recovery has marginally picked up. But good thing is that 50% of the 4% GNPA in the micro mortgages book, which is approximately crores, INR 550 crores is paying both, this month-on-month, they pay one on installment but probably still have an outstanding of around 2 or 3 installments. So we are reasonably hopeful that we'll get normalized to regular over at least 1 or 2 quarters.

Okay. So what are the monthly trends over here in the non-MFI slippages over, let's say, last few months?

INR 7 crores to INR 8 crores per month. INR 6 crores to INR 7 crores, max INR 8 crores in any of the months. This is what you're saying that the multiplied even at the same run rate, it will be around INR 20 crores for Q4, gross slippages.

Okay. And what was it in the last quarter? I mean, let's say, November, December?

November, December around INR 8 crores to INR 9 crores -- INR 10 crores.

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

I have a couple of questions. The first is on the SME claims. Now that we have a good time line of the slippages and some idea about slippages month-on-month this quarter, when do we expect to make that claim, next financial year? That is my first question. And the second question is on the cost of funds, while the industry has shown a more significant drop quarter-on-quarter of about 25, 30 basis points, we have only had an improvement of about 10 bps. So in spite of the very healthy growth in CASA quarter-on-quarter. So how do we see it going forward?

On the CGFMU multiple cohorts for next year; 3, so we will time it out in terms of first and second and probably even third quarter. But the largest chunk would be claimed in the Q1, which may be around INR 200 crores to INR 300 crores. The rest of it would be timed for Q2 and Q3. As far as the cost of fund reduction, over to KC.

Yes. So up until this quarter, given the kind of growth in the long-tenor retail asset book, we have been trying to raise quite a bit of 5-year money, which today is about 1/3 of our overall deposit book, and which is the reason why you don't see a significant drop in our rates on a quarter-on-quarter basis. even though in time deposits across tenors, we have dropped rates anywhere between 25 to 50 bps. Even our savings account for the lowest bracket we have reduced rates. So at a point in time, we will move to raising money on the shorter tenors in a slightly largest proportion and that will reflect the reduction in our cost of funds over time.

And given that we are sitting on a very healthy sort of credit-to-deposit. ratio compared to the peers. Do you expect to sort of reduce the cost of fund, SA in particular going forward to kind of optimize the NIMS?

See, we are actually reviewing it every month. And for example, in Q3, in all the 3 months of Q3, we have gone ahead with reductions in our TD rates across buckets and somewhat in SA as well, especially the larger ticket SAs, which for us was not making economic sense anymore. And we have indeed moved away from quite a bit of large ticket SA business. So that optimization will continue, the rates will not see a very sharp drop on a quarter-on-quarter basis, but it will continue to reduce over the next couple of quarters.

Consciously, we are focusing that at least a significant -- reasonably significant portion of a deposit specifically linked to the mortgage financing will be higher deposit. So entire last quarter, we continue to pay a marginally higher rate on the 5-year consciously. And that's why there has not been a substantial reduction in terms of 30, 40 basis points. But if we choose to really turn that and in terms of start focusing on the short end of the deposit, overall cost may come down. But given that our margin overall has come down, our focus is to have at least a 20% to 30% of our overall term deposit base in the range of 5 -- year plan.

The next question is from the line of [indiscernible] from VA Capital.

Baskar, sir. I had been observing your bank for the last 5 years, and you were very present in updating CGFMU, the IPO timing was perfect and then moving out of JLG was a very good move ahead of the industry. But somewhere, I feel that operationally, things are lagging behind. I don't know, maybe it is management bandwidth or lack of talent or whatever, I don't understand that because things are not flowing into the numbers yet. And this is what I want to understand what is happening. Are we lacking somewhere in the management bandwidth?

Good question. So as we put it this way, banking, I think, is a little long-haul journey. We're pretty clear even when we really started. That precisely also gets reflected in our taking a hit in terms of PBT, which is quite close to 25% to 30% by going for a cover of CGFMU, and the projected credit losses is not more than 1% and absolutely 99.6%, 99.7% collection at the point of time. So we're clearly conscious of the fact, direction setting generally takes iteration and the reiteration. Fairly confident that I think what we went through in the last 2 years, as you would see the management bandwidth has kind of stayed on which is through the course, we have seen up and then one down. And then as we are recovering, we're very, very clear that we are not really almost an assumption, the future may be worse than the past. We are kind of put our guardrails, which reflects in terms of it will reduce profitability in terms of maintaining an excess liquidity, in terms of maintaining higher than required -- substantially higher than required capital adequacy. But all of it -- what we really kind of are confident now and hopefully will play out quarter-on-quarter in the substantial quarters in the future, is that to have the foundation strong in terms of -- for instance, moving to a JLG to individual, it is not press of a button and say all of us will do individual. MSME, first round was not a success, what we call the T. Nagar loans. We paused. We didn't kind of knock off the product. And when digital railings were very strong, now we have around closer to INR 110 crore book with part of less than around 1.5%. I think all of this now it is time for us as a bank to put all of this in action in terms of, as I would call it, strategic hidden strength to play out and fairly confident that with management substantially in place for the last -- not we have kind of recruited in the last 1 year. It took around 3 years for a complete alignment. I think it is not the superstars who create great performances. It is aligned management team. And fairly confident, I'm just hopeful, fairly confident that this will play out as you would see in quarter-on-quarter, it will be steady. But every quarter, we are planning that is better than the previous quarter.

I think in the previous quarter also somebody mentioned, I think, Himadri mentioned that -- the next 2 quarters and then there would be a decline in credit cost, which will add another INR 50 crores to the PAT. So I don't know if projections are not right or I don't know what is not coming together to give confidence in the numbers.

No, it will. I think you'll see the slippages has come down. For instance, in the slippages, we can kind of provide only 20% of the total recovery, but we provide the entire 23%. So kind of take -- as it really required, 77% is covered by CGFMU, remaining 23%, we have a choice of even raise provisioning only 10% and defer it. We said we'll have to take it, we take it on quarter-on-quarter. So fundamentally, if you look at it, I would rather leave the financial numbers, which is emanating out of it. The slippages from 60% has become, say, 40%, 35%, 35% is now closer to around 25%. Hopefully, we'll be -- we're not saying it will become 0, but around 20%, it's back to where we really started and continue to focus in terms of reducing at least by INR 1 crore every time. And the CGFMU is a time lagged one. So it took around 2 years for the first claim and thereafter, hope by the way in which probably it is projected now, our claims will be substantially higher than the slippages that will happen for FY '27 in the IF book. You will see it playing. I would put it that this quarter, fundamentally, the way we are looking at internally is far, far stronger than the previous quarter, not just by the bottom line numbers, which is emanating out of it, but reduced other income in terms of PSLC, reduced slippages, increase the business momentum and the clarity in terms of what the slippages will be.

So exactly I'm talking about this clarity...

[Operator Instructions] The next question is from the line of [ Ambar from Siana Capital Management ].