Utkarsh Small Finance Bank Limited (UTKARSHBNK.BO) Q1 FY2026 Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '26 Earnings Call for Utkarsh Small Finance Bank, hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Renish Bhuva from ICICI Securities. Thank you, and over to you, sir.

Yes. Thank you. Good afternoon, everyone, and welcome to Utkarsh Small Finance Bank Q1 FY '26 Earnings Call. On behalf of ICICI Securities, I would like to thank Utkarsh's management team for giving us the opportunity to host this call. Today, we have with us the entire top management team of Utkarsh, represented by Mr. Govind Singh, Managing Director and CEO; Mr. Pramod Kumar Dubey, Executive Director; Mr. Sarjukumar Pravin Simaria, CFO; Mr. Amit Acharya, Chief Risk Officer; Mr. Vivek Kashyap, Head, JLG, Sales, Micro Banking; and Mr. Sourabh Ghosh, Head, Consumer Banking. I will now hand over the call to Mr. Govindji for his opening remarks, and then, we'll open the floor for Q&A. Over to you, sir.

Thank you, Renish. Thanks always for hosting this call. Thank you very much, all the investors for taking time to join this call. Thank you, everyone, for taking the time to join us for our quarter 1 FY '26 earnings call. The first quarter of FY '26 commenced amid the impact of 2 pivotal forces. First, the full-scale implementation of MFIN Guardrail 2.0 from April 1, 2025; and second, the lingering impact of elevated delinquencies carried over from FY '25. You're aware, Guardrail 2.0 introduces caps on borrower leverage -- level leverage restricting microfinance customers to no more than 3 lenders. While this framework is essential for long-term portfolio help, it did impose a temporary pause in the nascent recovery of collection sentiment that we had observed even in FY '25. The immediate effect was that our overdue buckets remained elevated longer than we had anticipated initially, reflecting both the guardrail adjustment process and the residual stress embedded in the portfolios. While JLG business headwinds are there, our non-JLG portfolio sustained good momentum, growing 39% year-on-year and 2% quarter-on-quarter. The moderation in overall loan growth book was driven almost entirely by the contraction in our JLG book, which declined by 7% during the quarter. Conversely, the share of secured loans within the overall loan book increased to 45% as on June '25 from 35% as on June '24 and is likely to increase further. On the liabilities front, total deposit registered a marginal decline of 0.4% quarter-on-quarter. However, we delivered 18% year-on-year growth in total deposits, driven by strong traction in retail term deposits, which grew by 34% year-on-year and 10% quarter-on-quarter, while our CASA deposits increased by 22% year-on-year, resulting in improved CASA plus RTD ratio of 74% as on June '25 from 67% as on June '24. During quarter 1 FY '26, we intentionally calibrated deposit accretion to align with our moderated disbursement run rate and maintained a strategic focus on achieving sustainable and consistent deposit growth, driven by a well-diversified and granular low-cost retail deposit portfolio. The bank continues to enhance the digital and fintech capabilities through both direct initiatives and strategic partnership, contributing to a higher deposit mobilization and cross-sell opportunities. We maintained a strong presence through our general banking branches across the top 100 centers of the country, predominately located in metro and urban locations. With our newly launched branches getting matured and ramped up, we remain optimistic about margin improvement and overall business scalability with strategic focus on improving product per customer, higher wallet share, customer 360-degree perspective and digital enablement. Aligned with our strategy, our CD ratio declined to 83% as on June '25 against 93% as on June '24. And after netting off refinance borrowings from advances, CD ratio declined to 76% as on June '25. In line with RBI repo rate cuts, we have trimmed interest rates for savings as well as for retail term deposits, these calibrated actions are expected to drive a gradual reduction in our overall cost of funds. With respect to JLG loan book, we are cautiously starting a path towards long-term stability over short-term expansion. As we continue to focus more on collections, it has slowed down loan disbursement, resulted in a decline in JLG loan portfolio by 7% during the quarter, though the said NPA slippages reduced during quarter 1 FY '26. We are working on back to basics programs, imparting training to newly inducted frontline staff about central meeting processes and new customer acquisitions, implementing stricter screening processes and greater client connects. Through a more disciplined lending approach, we are already focusing on streamlining the portfolio growth. While the impact may likely to persist for some time, the business is expected to stabilize in the next few months and better collection efficiency is anticipated by then. We are significant -- we see significant growth potential in micro banking business loans, MBBL, considering the large base of JLG borrowers and our MBBL penetration level of less than 5%. MBBL portfolio grew by 29% year-on-year, comprises 10% of our MB loan book, focus on graduating better profile JLG customers with great -- with good repayment track record. This portfolio is behaving much, much better on collection efficiency and asset quality. Accordingly, MBBL portfolio is expected to grow faster and faster henceforth. We are seeing healthy traction in our non-JLG loan portfolio with our deepened focus on secured asset businesses. MSME loan portfolio expanded by 46% year-on-year to INR 4,001 crores, optimizing disbursement yield, which improved by more than 150 basis points over the same quarter last year. Within this, we are also seeing steady growth in Micro LAP portfolio, wherein disbursement yield is around 18%. We see good growth potential for this product in our geographies and give our strong franchise. Housing loan portfolio grew by 30% year-on-year to INR 929 crores. Disbursement yield also improved by more than 40 basis points over the same period -- same quarter last year. CE and CV loan book increased by 17% year-on-year to INR 1,179 crores. Within this, we are focusing on increasing share of used vehicle loans. Its disbursement share increased to 30% for quarter 1 FY '26, which was around 5% during quarter 1 FY '25. We are strengthening our presence in BBG lending. Entire portfolio is secured against immovable collateral. This book grew by around 48% year-on-year. We are seeing much better traction on cross-sell on both sides, asset products, that is MSME, housing and the Micro LAP through our liability-focused GB branches and deposit account for our asset customers, essentially more products per customer. The overall gross loan book registered moderate growth of 2.3% year-on-year, primarily impacted by a sharp decline in the JLG portfolio. However, we expect JLG disbursement to improve in the next few months. Also, good growth is expected in MBBL portfolio. Additionally, we foresee a continued healthy trajectory in the non-microbanking segment, which largely comprised of secured loans, including high-yield products. We also -- we expect better loan book growth for FY '26. In terms of risk diversification, we also registered with CGFMU for credit guarantee coverage on our eligible JLG and MBBL portfolio with effect from January 17, 2025. Accordingly, an incremental JLG and MBBL out disbursement from then onwards are getting covered under credit guarantee. This cover will further de-risk our JLG and MBBL exposures. We continue to build and deploy higher collection force, also establish a specialized call center focused exclusively on overdue accounts and implemented stricter oversight of field of processes, ranging from center meeting discipline to effective monitoring and supervision. We continue to split large MB branches to maintain better control. With the help of these measures, fresh NPA accretion will decline meaningfully in the next few months. Nonetheless, the carryforward stress translated into a net loss of INR 239 crores for quarter 1 FY '26. For us, FY '26 will be a pivotal year for operational and financial optimization with a strategic emphasis on improving asset quality first while scaling up our focus and profitability-driven businesses along with the superior customer experience. Despite the losses, our capital adequacy ratio remained at 19.6% as on June 30, 2025, comfortably above the regulatory threshold. Looking ahead to shore up our capital base, we have already embarked with equity fundraise initiatives, planning to raise capital in the next few months, depending upon the capital market conditions and investor appetite. Concurrently, we have also secured all requisite statutory approvals on the proposed reverse merger of the holding company with the bank. With these approvals in hand, we are now examining the optimal sequencing of petition filing with NCLT application in tandem with the equity raise. Our surplus liquidity position stood at almost INR 3,900 crores as on June '25, which is higher than our usual liquidity requirement, and LCR ratio of 239%. We don't have any short-term borrowing on our balance sheet. We are also undertaking a business transformation project to make our technology, architecture and business processes future ready for our growth plans. While the medium-term disruption from guardrail implementation and elevated carryforward stress pose challenges, it has also highlighted the strength of diversified franchise, prudent risk management and deep customer connect, through decisive actions, strengthening our correction framework, optimizing funding cost, shore up capital and scaling up digital and secured lending initiatives, will gradually lay a solid foundation for sustained improvement in asset quality and a steady balanced growth delivery for months ahead. Thank you once again. And now we open this discussion for question and answers. Thank you.

[Operator Instructions] The first question is from the line of Jai Chauhan from Trinetra Asset Managers.

So, sir, I just have 2 questions. One, like management provided optimistic guidance for Q1 FY '26 recovery, but the results showed further deterioration. So what went wrong with the projection? And how reliable are your current recovery timeline?

Sorry, can you just repeat? Yes, we couldn't hear properly. Can you just repeat your question?

Yes, sir. So I was saying that the management provided optimistic guidance for Q1 FY '26 recovery, but the results showed further deterioration. So like what went wrong with your projections? And how reliable are your current recovery timelines? That was my question.

Yes. So in case of -- I mean, I think we are referring to especially the JLG because that is not -- there is no impact on the other -- any other portfolio. In case of JLG, there was one more point of Guardrail 2.0 of MFIN, which got implemented on 1st of April. And I think the industry also expected that there may not be much impact. But in first 2, 3 months' time, we saw there was a higher impact, more than anticipated. That may be true for overall -- the JLG overall portfolio. So there -- when initial guardrail came from MFIN, they put 4 lenders cap. And from 1st of April 2025, they changed this to 3-lender cap. Because of that, we saw some more, you can say, slippages or a little elevated credit cost during this quarter. And you must have seen that, that is -- more or less that is industry phenomena. I think anticipation was that it will not have that much impact, but the impact -- actual impact was a little higher than what it was there. You must be aware that guardrail, they started from the 1st August 2024, and first tranche was August, then in January 1, 2025, some more changes, and final changes happened from the 1st April 2025, and they had a little more impact. And -- I mean, that's mostly the reason. We don't expect any such thing to happen from MFIN or any of the regulators, whatever was to be done, that has been done, and we have seen the impact so far. And now I think -- of course, it's a matter of time, but that's in recovery, it should have started happening from here.

Right, sir. Understood. And sir, my second question was like the collection efficiency has collapsed, right, from 96.2% to 82%. Like what specific operational changes are being implemented to restore this discipline and improve collections?

So there has been a small change or a small reduction in the overall collection efficiency for sure. Even in the X bucket, there are some decline. And as we mentioned in our opening remarks also, I think customer connect and, all the overdue customers are -- we are able to connect all the overdue customers through various channels, right from our own business team, which goes to field. Then we have the large collection team of more than 800 people. That is a collection team. And then, we have also through the call centers, we approach these customers. So I think the -- you can see the efforts have been intensified now, and that is also causing some decline, where we are not able to do disbursement to that extent because entire focus is right now on the collections part as far as the JLG is concerned. So we have initiated a lot of new things. And the tracking and supervision part has also been improved. We have got a lot of teams, which are in place at the regional level and zonal level, which is -- which we're able to track the customers as well as the clients. So I think we have initiated a lot of things as far as the overall collection is concerned, and that certainly should yield results in days ahead.

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

Sir, just wanted to understand, first, on the provisioning part. Now, you mentioned that we have seen the impact, and going forward recovery you expect to start happening. So how should one look at credit cost going forward? I mean, on a -- currently, I think we had about INR 411 crores kind of a provisioning. So how should one look at in coming quarters?

So as just mentioned with the interventions that we are doing in terms of collection, in terms of headcount, in terms of bucketing focus, I guess, the quarter 2, by and large, will be the similar type. But quarter 3 onwards, we should see a drop down.

Okay. So from third quarter onwards, we expect some decrease in credit cost.

Yes.

And is there any timeline by when we can expect some kind of normalcy? I mean, by when we can expect normalcy in credit cost?

So as CFO mentioned that, we are certainly seeing a reduction in the overall pain, what we can use the word, but giving -- I mean, normalcy will -- can happen once our regular collections reaches 99.5%. I'm talking the X bucket. And -- I mean, currently, as on date, it's very difficult to pinpoint. But as you mentioned, next 3 to 4 months' time, we should be able to reach that level. That is what is our estimate right now.

No. Reach that level in the -- means you are talking about normalcy level in 3 to 4 months?

Yes. So normalcy will have 2 things; one, our -- the X bucket collections being on a regular basis at 99.5%, that is one thing, and maybe 99% upwards, in fact, that is what should happen. Plus, in terms of disbursement, obviously, now the disbursement will not be the type of disbursement, which used to happen earlier. But disbursement where we are able to -- our portfolio doesn't degrow and portfolio grows, that is what we expect. That is the second part of -- second leg of the overall normalcy. Again, that is -- again, our anticipation is around 3 to 4 months from now. Hopefully, we will not degrow, and the...

So by fourth quarter -- I mean, on a conservative side by fourth quarter one can expect some normalcy to resume, I mean, in terms of credit cost and in terms of growth?

Yes, in both terms, I think collection, credit cost, what you mentioned as also portfolio stability and portfolio starting not declining and growing, in fact, towards the quarter 3, and I think that is what we can expect quarter 3 end and quarter 4 beginning.

Quarter 3 and quarter 4. And now in the third quarter, 1 month has been passed, I mean, July month, so how has been the collection efficiency in micro banking, I mean, which has reduced to 82% as of first quarter? So how do you see your collection efficiency as on -- I mean, in last 1 month?

So we had seen almost -- entire last 4 months, even June and July, we have seen almost a similar type of trajectory as far as JLG business is concerned. It has not gone down, but at the same time, it has not improved significantly also. I think it's almost the same trajectory that we have seen during July, which was there in the month of June, almost on the same line.

And not gone up also -- I mean, at least not deteriorated and not improving much.

Correct. Correct. You're right. Yes.

Okay. And how should one look at growth for this year? I mean, we expect a single-digit kind of a growth, muted growth this year because of all these issues we are facing?

So growth, as I mentioned, we -- because of -- a little uncertainty still remains there in JLG. We are not able to give any specific guidance. And JLG, because we have seen degrowth in the portfolio, so -- I think you also asked about the normalcy or when disbursements start picking up, or some assessment we have done, maybe I can give a better guidance on the non-JLG part. Non-JLG, we are sure about or certain about 30%-plus growth as per our non-JLG book is concerned other than JLG. JLG -- I mean, right now, giving a specific guidance on the growth of JLG will be difficult, but non-JLG around 30%-plus is what we can guide to the investors.

Okay. And just one last thing from my side, now you have started -- you mentioned you have started the CGFMU coverage. So how much percentage of portfolio currently we have? And how much we intend to cover over the period?

So as far as intention is concerned, we will cover the entire portfolio. I mean, it's a matter of time. As and when new disbursement happens, this gets automatically covered, almost close to 95%-plus because it's only the direct agriculture, which is not covered. And normally, for JLG, direct agriculture is a very small portion. Indirect agriculture, anyway covered. Even most of our micro-banking business loan is covered under that. So whatever is the new portfolio we are creating from middle of January, that is getting covered automatically under this. I may not have the exact details of how much is already covered, but whatever disbursements are happening from the middle of January under JLG and under MB business loans, they are getting covered under the guarantee scheme.

[Operator Instructions] The next question is from the line of [ Henil Shah ], who is an individual investor.

While I do acknowledge that there is stress in MFI, but looking at our bank, this has been much bigger even. So how -- can we expect profitability in FY '26 or it is a loss year for the SMEs?

I think right now very difficult to talk about this part unless we see the -- what do we say, this -- the JLG portion getting normalized, as you mentioned, it will take some time. So currently, it's very difficult to anticipate the year as far as the profitability part is concerned. We will require some more time. Maybe when we come next time, based on quarter 2, we'll be able to give a better guidance as far as the profitability and the JLG overall growth is concerned for this financial year.

Okay, sir. And second question, sir, our operating -- can we expect operating profit to increase or it is in line -- similar range for the next couple of quarters?

So operating profit by logic in terms of disbursement, and which I was just mentioning about, 30% growth on the non-micro banking. So there are 2 factors -- 3 factors that will lead to better operating profits. One, the growth in the non-banking -- non-microbanking portfolio at a higher yield that should increase your operating profit. Two, your cost of funds are likely to come down. We have already reduced our rates on term deposit and our savings account. We've already seen 20 basis point cost coming down on both of these from previous quarter to this quarter. So the cost of funds should lead to further improvement in terms of the operating profit. And in terms of cost, we are steady state. We have done all the platform development. I guess, what then is incremental inflation increase in cost, so stability in cost with higher disbursement should see improvement over next 3 quarters, the PPOP or the operating profit. So that is absolutely the execution plan.

The next question is from the line of Harsh, who is an individual investor.

Can you just update on the fundraise process? What is the quantum and...

Harsh, can you please be a little louder?

Can you please share an update on the fundraise process, what is the quantum and what are the timelines that we are expecting?

Right. So if you recollect, we mentioned last time, we have already taken approval from the Board and the shareholders for a fundraise of INR 750 crores. I think we will intensify the engagement with the potential investor. We are hoping to do that, if not this quarter end, maybe early month after that. That's the timelines we're looking at. We're just waiting for the results, and then, now we will intensify the discussions.

[Operator Instructions] The next question is from the line of Sagar from Spark Capital.

My first question was related to provisioning. I wanted to know what kind of provisions are we -- what is the PCR that we are holding in our MFI portfolio?

We will be holding, I think, about 62% in MFI, and -- do you want to answer that?

Yes, yes. So the overall...

Sir, 62%?

Yes. Overall, it is 59%. Out of that, overall unsecured is around...

CFO just mentioned.

Yes, that is right sir.

62% is the PCR for the MFI portfolio, you're saying?

Correct. Overall, the bank leverage is 59%, and for JLG, it's around 62%.

So is it safe to assume that in the next 2 quarters, we are -- we will be required to do further provisioning because of the accretion of NPAs? Because as far as my understanding goes, the -- you will need to provide higher for the unsecured slippages, right?

So already the process is that we provide 40% in the first -- on NPA rate itself in the case of JLG. So that's why it is already higher on -- it's some higher percentage. Obviously, based on the collection, I mean, we'll have to see what is the additional requirement in -- on quarter-on-quarter basis based on the recovery and the further slippages. So very difficult to anticipate today. But yes, there will be some additional provisions for sure in next quarters also.

Because for the NPAs that are accrued in the MFI portfolio, if we have done provisioning for 62%, then my -- actually what my point was that you will need to do at least 100% of the at least -- you may need to provide 100% for the NPAs that are already there in the microfinance is concerted. So that is what my point was that you will need to do further provisioning in the next quarters because all banks and NBFCs have done in the last 3 quarters 100% provisioning for the NPAs that are accrued actually because of this over-leveraging crisis. My second question was related to our diversification. The diversification -- yes, for the diversification, my point was the -- say, in the MFI portfolio, we -- our majority of the advances are coming from Bihar and UP, almost 84% of the loans are sourced from there. So what are the plans to diversify at least in the JLG portfolio?

Okay. So broadly speaking, I mean, it's not 84%. I'll give the exact number -- details. In some state level, it is not 84%. It is 69% actually, not 84%. But having said so, when we're talking diversification, we are looking it from 2 angles, one from the geography and second from the product angle. So you also mentioned that our JLG portfolio, which has come down to almost 45% of our book right now, which you are aware that almost we started at 90 -- almost 100% in 2017. So there is a long way we have come to that level, and now, it is only 45%. That is one part. As far as JLG's business is concerned, we are working in 11 states, which is northern and central belt. And we have seen some diversification. We have gone to places like Odisha and Rajasthan during last 2, 3 years, and there is some diversification, but more diversification will happen through the -- because we are not going to grow our JLG book to that extent. The major growth will come from the non-JLG and which is pan-India. It is not limited or linked to any of the states. In fact, where -- there we are a pan-India player, be it MSME, be it housing, be it CE and CV businesses. So overall diversification of the geography as well as product is happening on a regular basis. And you'll see that next 2 to 3 years' time there'll be a significant -- I mean, from here also, there will be significant diversification of portfolio and geography. And that's a continuous process, sir, in our case.

Okay. So can you quote that what is the share of secured to unsecured that you're eyeing in the next 2, 3 years, sir?

So currently, around 45% is secured. And I think this -- maybe if you look at medium-term plan, I think because JLG portfolio is coming down and others are very limited, unsecured, so at least we can expect in medium term, this mix will go to around 50-50 if you look at 2 to 3 years horizon. Our secured will be more than 50% going forward also.

Okay. My third question was related to the leveraging of the existing branches. In the last 3 years, we have significantly expanded our network in terms of branches, so -- but still the utilization of the branches -- utilization of the employees is still very low compared to the industry. So what are our plans to scale up? Because that will lead to operating leverage that will only scale our ROE. So what are the plans to actually leverage our existing branches so that at least...

So very important point, sir. I think our entire focus is right now, as you mentioned about diversification, that is one part. And secondly, on the operational efficiency. So this year other than barring a very few branches, which are basically split branches for JLG, we are not opening branches. Our idea is that we have enough number of branches right now, and you mentioned that during last 2, 3 years, we have opened many branches. So we have a large, you can say, manpower base, and we have a large network base right now, and we have a good client base also. And that is what we have started, in fact. We have a big focus on the cross-sell right now. I also spoke when I gave the opening remarks with a big focus on the cross-sell part so that our customers are able to get more accounts or more products from us. So there's a big focus on that, and you'll see a big change because of that. Without expanding the network, I think we'll be able to give more -- we will be able to expand our balance sheet, and that is what will be visible, sir. In fact, when we have to expand our other products, like, say, MSME or housing, in fact, we keep expanding to newer locations without opening a branch. So that is also keeps happening on a regular basis. So we'll see that this -- the operational efficiency part will play a big role as far as medium term next 2 to 3 years trajectory, next 2 to 3 years balance sheet, next 2 to 3 years performance of the bank is concerned, sir. That is a focus area for us right now.

Okay. Fine, sir. Got your point. My last question was that what was -- what is the PCR that we are eying for the MFI portfolio by the end of FY '26?

I guess, you may consider about 10 percentage more. Of course, as we said, there is normalization happens, and we have the collection efficiency for the interventions, we have done, it should be plus 10% from where we are.

[Operator Instructions] The next question is from the line of Anand Dama from Emkay Global.

In your presentation, it shows that your collection efficiency, excluding the prepayments, has dropped to 82%. Which states are basically contributing this? Is it the Uttar Pradesh, Bihar or there are other states like Karnataka where you have some presence and where you are seeing the drop in collection efficiency?

So in our case, there are some pockets where we might have challenges. And just to talk of Karnataka, actually, we are not there in South at all. I mean, we are not in Karnataka, we are not in Tamil Nadu. And all these were impact of guardrails only and -- I mean, the resultant reasons coming out of guardrails. So there's no specific state per se. There might have been some pockets where we might have challenges. So for example, some portion in the Bhagalpur in Bihar or some portion near Gorakhpur in UP. So there might have been some elevated, we can say, collection issues in some of the pockets. But there is no geography specific, there is no state specific in our field. Unlike in some players, it might happen because of some of the states where there have been specific challenges. In our case, largely, it is because of the impact of Guardrail 2.0.

In these pockets also, is it more of economic distress, which you are seeing at the borrower level plus the MFIN Guardrail or there is something more to it? Because I think we are also getting closer to the elections. So what basically explains the pocket wide stress that you're seeing?

So sometimes it may be specific to some entity also. Suppose I have some issues in terms of local level issues or sometimes we might have some staff issues or the distance from the branches issue. So those might elevate these things. And in some pockets, last year, we had seen there used to be a [Foreign Language], what we say. We had some impact in some pockets of Bihar and the Gorakhpur in that belt of UP. So these are very small, isolated things. But sometimes they have an impact for a longer period. Sometimes some pockets, again, there may be some specific issue because of the -- some natural calamities or those types of things. Again, those are the isolated things. So those might have the reason. Sometimes maybe this operational issue with the entity also. As far as elections are concerned, as I mentioned in the past also, and I think elections have never impacted the JLG part and especially in the places like UP and Bihar. And we don't foresee any challenge or anything on account of this. What generally happens because of elections, some -- there may be some restriction on the local operational part, movement of cash and those type of things get a little impacted during that period. But otherwise, as long as your operations or any impact on the collections part is concerned, disbursal part is concerned, we don't anticipate. And in past also, we have never seen that.

Right. Sir, secondly, my question was that is it possible to get your 3-plus lender portfolio in terms of borrowers and also the overall outstanding loans?

Number of lenders?

3-plus lender portfolio.

Yes, 24% to 25% of our customers have more than 3 lenders, so ours plus 3 lenders.

In terms of portfolio, how much is the outstanding loans?

In terms of portfolio also, it will be in the similar range, not much difference.

And of this 3-plus lenders portfolio, is it possible to tell us like what is into SME and how much is into NPAs?

No, at this point of time, it will be difficult to say. But it's certainly more than -- whenever the number of lenders are lesser.

Sorry, I didn't get you, sir. Sorry.

So Anand, I can share the details with you maybe. I don't have exact full details right now. But I agree that we have the experience where number of lenders, there is a direct correlation between these 2 things. We have seen it many times. And past also, during last -- almost now it is 1 year, in fact, past August, the guardrails were put in place. And wherever there are more number of lenders, it has impacted badly. But I don't have the exact data right now with me. I'll certainly share with you offline after this.

And sir, third is, do you see any stress in the CVC segment? Obviously, your portfolio is pretty small, but still in that segment, are you seeing some similar stress?

So for last -- around the year, we saw some -- I mean, not the way we have seen in some of the things like JLG, but yes, it was a little higher than usual, you can say, we had seen, and we had taken corrective actions also. We put a little higher -- 2 things we have done, one, we have reduced our -- rather 3 things we have done, we have reduced our overall disbursement. In fact, we used to disburse almost INR 30 crores to INR 60 crores, now it is in the range of INR 20 crores to INR 25 crores per month. So we have reduced that part. Some of the pockets where we thought that this may be vulnerable, we had stopped disbursement in those places all together. And we have -- in fact, some of our sales team people were also moved to that so that before it goes out of hand, we should be able to control that. And another thing that we have done, we have focused more on the secondhand vehicles or used vehicles, which I have spoken in my opening remarks also. It used to be almost 5% or so until 1 year back. Now, it's almost 30%, where the losses -- because LTV is lower in that case, the losses -- the propensity of losses is much lower. So I think these are some of the things we have done so that it doesn't go out of hand as far as the wheels business is concerned.

[Operator Instructions] The next question is from the line of Anant Mundra from Mytemple Capital.

Sir, so we've seen some other lenders give a commentary that there is some stress appearing in the MSME segment? And for us, I think that's the second largest portfolio. So just wanted to check what has our experience been in this vertical?

So our experience is there is not much so far. And largely because in case of our MSME, it is largely secured portfolio. These are all against hard collateral. Again, I don't have exact number, but almost 95% of portfolio is a secured portfolio as far as MSME is concerned. A very limited portfolio is unsecured there. And we have not seen much change. I mean, there are maybe some fractional change, but any significant increase in delinquencies or overdues that we have not seen so far in MSME. I think we just mentioned to a previous caller, Anand, that besides JLG, where we had seen a little higher uptick was the wheels. In all other businesses, I think things are looking under control. Maybe a few basis points here and there, that's the only difference.

Got it. Got it, sir. And sir, sorry, if I might have missed this out, but did you call out what was the expected collection efficiency in July for our JLG portfolio?

No, I think we have not mentioned that, but it was at the same level of June, 98.6% was our X-bucket collection efficiency for July also.

The next question is from the line of [ Henil Shah ], who is an individual investor.

Sir, so how do we see FY '27, if you can guide us a little bit since FY '26 is more clearer in profitability or due to the JLG issue?

So sir, broadly speaking, as I mentioned, we are not giving guidance only because JLG uncertainty has not gone away completely. But if you look at the medium-term horizon, certainly, the way we have done our liability franchise, in fact, currently, we're restricting our liabilities just to not to take too many liabilities because our asset growth has been a little lower. So that franchise is working very well. Our asset franchise other than JLG, everything is working very well. Even within JLG, MBBL franchise is working well, and we have got some other high-yielding products like Micro LAP and those type of things also. Even when we talk about used vehicles in wheels business, that is also giving better yield. So I think -- and we have seen good improvement in the yield overall in MSME -- be it MSME, be it housing also. So our -- in medium term, we expect that we should be able to give a 15%-plus type of ROE. If you look at next 3 years horizon also, we are confident of giving that type of ROE on an overall basis. And a good growth of around 25%, 30%, what we expect if you look at the medium-term horizon. This year, I think, is a little difficult because of JLG issues.

Okay, sir. Can I ask one more question?

Please, sir. All yours. Thank you.

Okay. Sir, since we have registered with CGFMU, are we required to make provision in future if situation arise? Or how -- means, can you throw some light on that?

So I think the way process operates, maybe CFO can say if I'm not correct. The provision is required to be made upfront, in fact, in case of all guarantee schemes. As and when the guarantee claim become mature, you get claim money and then you have to net off from the provisions you have made. So first time you have to make the provisions. That is my understanding. Sarju?

That's correct.

Yes.

[Operator Instructions] The next question is from the line of [ Harsh Satya ], who is an individual investor.

I wanted to understand. So as your secured loan book shrinks, what is the realistic margin number that one can expect at a normalized level? Because if -- it's already shrunk quite substantially. But currently, of course, there are interest reversals, which are happening. At a normalized level, what would your margin number be?

So one is that I think our unsecured will certainly come down, secured will go up. But within secured also, there are some little better yielding our high-yielding products. And also, in terms of cost of funds, it's coming down. Operational efficiency is also improving. So again, I mean, what we can estimate on a medium-term basis, our margins will improve from here and which has really come down. In the past, we were in the 9% -- plus. But I think 8.5%-plus margins should not be a problem. I'm talking NIM should not be a problem in medium term. Again, I'm talking of medium term. It's not for this year. I want to make it very clear. This is for the medium. When you look at 2 to 3 years horizon from here, close to 8.5% NIM should be possible with the change of mix. That's important, change of mix. But because we'll get the operational efficiency, we'll get cost of fund decline and overall benefits of scale. So I think that is what we expect.

Okay. Yes. Very clear. Sir, with regard to your recovery, you've said that Q2 onwards, you will start to see recovery because you blamed MFIN for Q1 FY '26. Q2 should start to see recovery, but you're also saying credit costs will remain elevated. Can you give us some perspective on what's happening? Are recoveries expected in Q2 or Q3 onwards? What should one see?

Sir, as we mentioned, whatever NPA we have seen in the past, in the last year Q3, Q4 and again in Q1, so incremental provisioning would be required to be done. So even when the incremental slippages is on the lower side, we'll have to provide for NPA, which is not being collected. So that's why there will be some lag in terms of NPA gross slippages and in actual credit cost in the quarter.

So despite the recovery, you will still see a larger credit cost overall, and therefore, your credit cost will largely remain flat in Q2. Is that the right understanding and the right way to look at it?

Yes. Yes, sir. Yes. That's right.

As there are no further questions from the participants, I now hand the conference over to the management for closing comments.

Yes. Thank you, everyone. Thanks a lot for joining our investors call. And we have clearly mentioned currently, yes, there is a stress in JLG portfolio, which we are working on, and we are confident that it's a matter of few months from where things should become certainly much better from where we are today. And our -- all other verticals, including the non-JLG part and the liability part working really well. We are seeing a good traction in terms of operational efficiency part is concerned. Cost of funds are coming down. So I think overall, in -- while currently, it might be a stress scenario, but if you look at the medium-term horizon, I think we should be able to do much better on all accounts. In terms of all the KPIs, all the parameters, we expect to do much better. So again -- once again, thank you very much for joining the call, and Renish and team, thank you very much for hosting us. Thanks a lot.

On behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.