Utkarsh Small Finance Bank Limited (UTKARSHBNK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Utkarsh SIB Limited Q1 FY '27 Earnings Conference Call hosted by ICICI Securities Limit. [Operator Instructions]. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Renish Bhuva from ICICI Securities Limited. Thank you, and over to you, sir.

Yes. Thank you, Manav. Hi. Good evening, everyone, and welcome to Utkarsh Small Finance Bank Q1 FY '27 earnings call. On behalf of ICICI Securities, I would like to thank Utkarsh SFB management team for giving us the opportunity to [indiscernible] call. Today, we have with us the entire top management team of Utkarsh SFB as represented by Mr. Govind Singh, Managing Director, CEO; Mr. [indiscernible]; Mr. Virender Sharma, [indiscernible]; Mr. [indiscernible], Head of Banking; and Mr. [indiscernible]. I will now hand over the call to Govind for his opening remarks and the we'll open the floor for Q&A. Over to you, sir.

Yes. Thank you. Thank you, Renish. Thanks a lot. Good evening, everyone, and thank you for joining us for our quarter 1 FY '21 earnings call. The first quarter of FY '27 marks an important point in our journey. Over the last several quarters, our bank has navigated one of the most challenging operating environment faced by the microfinance industry in recent years. Throughout this period, our focus remained firmly on protecting franchise quality preserving balance sheet strength, improving corrections and ensuring that every strategic decision was aligned with the long-term interest of our customers, shareholders and other stakeholders. We are encouraged by the progress achieved across multiple dimensions of our business during the quarter. The actions undertaken over recent quarters are beginning to translate into measurable improvements in business momentum asset quality indicators, portfolio composition, funding costs and operating performance. While profitability has not yet fully normalized with significant reduction in losses and the strengthening of underlying business drivers they enforce our confidence that the bank is moving in the right direction. Over the last year, our objective has been clear to build a stronger and more balance incision by improving the quality of new businesses. strengthening risk management practices, diversify revenue streams, expanding secured lending enhancing collection infrastructure, deepening customer engagement and improving the credit and quality of our liability franchise. These efforts are now providing the foundation for a more sustainable growth cycle. One of the most encouraging development during the quarter has been strengthening our business across both our JLG and non-GLP segments. Disbursement trends have been -- have improved significantly, reflecting both increased customer demand and our confidence in the calibrated growth. During quarter 1 FY '27, total disbursement grew by 49% year-on-year, supported by GLG disbursement, which grew by 5% year-on-year and non-GLT dispersant, which registered a robust growth of 9% year-on-year. Important, this growth has been built on strength, strengthened underwriting framework and improved portfolio monitoring mechanisms. Our objective remains to grow access of the right quality and risk profile rather than forcing roar its own segments. Equally encouraging are the trends visible in portfolio performance. The improvement in business momentum has been accompanied by continued strengthening in asset quality. During the quarter, ex bucket collection efficiency in the JLG segment remained strong at 99.7%, up from 98.6% in quarter 1 of pools within the Micro Bank segment contracted to 1.2% from 1.3% in March '26 and 5.1% in June 25, reflecting strong field execution enhanced collection processes. Along this, the total stress NPS leases, net of recoveries and upgradation reduced mainly crores compared with INR 17 crores in the previous quarter and INR 400 crore in the corresponding quarter of the previous year. As a result, the GNPA ratio as a percentage of gross loan portfolio stood at 5.9% as of June '26, representing an improvement of 50 basis points year-on-year and 160 basis points quarter-on-quarter. These trends demonstrate the measures implemented over the recent quarters are producing tangible outcomes. As we assess the future shape of the bank, diversification continues to remain a central strategic priority. Over the years, we have consciously work towards reducing concentration risk and building multiple growth avenues. Our GSE portfolio now represents 26% of the gross loan book and 26%, including BC CSD exposure compared to 88% in March and 90%, including BCG exposure. Simultaneously secured lending has increased to 51% of the gross loan book from 45% a year ago. The structural and transformation is changing the nature of our balance sheet, reducing margins, volatility and supporting a more resilient risk profile. Within micro banking, the growth of our micro banking business loan product continues to validate our customer life scale strategy. MBPL serves customers who have demonstrated repayment discipline and are ready to graduate beyond traditional group lending structure. Further, we have expanded the product to new -- to cater to new to bank customers as well. MBBS portfolio grew by 147% year-on-year and 11% sequentially during the quarter and now constitutes more than 30% of the micro banking portfolio with penetration still below 20% of our customer base, these -- there remains substantial room for further expansion. We believe this segment represents an attractive opportunity to deepen customer relationships while supporting business growth among our borrowers. Beyond microbanking, grow the momentum across secured and diversified asset classes remain healthy. Our MSME portfolio expanded by 12% year-on-year to INR 4,482 crores supported -- also supported by the [ Microlife ] segment, which is delivering dispersed around 18%. Housing loan grew by 8% year-on-year to INR 1,005 crores while our BBG the Business Banking portfolio recorded strong growth of 40% year-on-year. In Commercial Vehicles and Construction Equipment segment, we have continued to find refining portfolio conversion with greater focus on asset rems, demonstrating stronger risk profile. The share of used vehicle in disbursement is around 30%, reflecting our emphasis on balancing growth with prudent risk management. [indiscernible] is also expanding through our digital LOS aimed at improving turnaround time, controls and operational efficiency. Collectively, these trends highlight the emergence of a broader and more diversified lending franchise capable are contributing to long-term profitability and stability. Over the last several quarters, we have remained focused on strengthening our liability franchise increasing regulatory, enhancing customers' engagement and reducing dependence on barrel deposits. Total deposits grew by 3% year-on-year, supported by CASA deposits, which grew by 15% year-on-year. while retail term deposits also increased by 15% year-on-year. Consequently, CASA plus retail term deposit ratio improved to 83% compared to 74% a year ago. and the CASA ratio is then to 22% as of June 2026. The benefits of the improving deposit mix are also reflecting in funding costs following RBI reported cuts. We have phased reduction in the interest rates on savings and some deposits to remain competitive while optimizing cost of funds. As a result, cost of funds declined by around 40 basis points year-on-year and around 50 basis points quarter-on-quarter to 7.7% in quarter 1 FY '21. We expect the full impact of repricing actions to the unfold progressively over the coming quarters, providing further support to margin [indiscernible]. From an earnings perspective quarter on FY '27, it reflects a business that is steadily approaching normalization. We reported a net loss of INR 34 crores. This represents a reduction in more than 80%, both on a year-on-year basis as well as sequential basis. as it earlier also to further derisk incremental flows, we reinsert credit guarantee scheme for eligible JLG and MBB disbursement with effect from January 17, 2025, 60% of our microfinance book in disbursement up to quarter 4 of FY '26 is already covered under increasing to around 80% upon including quarter 1 FY '27 disbursement. This coverage materially reduces the risk associated with new disbursement and support for further stability as we continue to scale higher quality, secured lending products. During the quarter, the CD SMU scheme provided mitigation of around INR 75 crores in terms of P&L impact contributing to a reduction in the credit cost to 2.3% compared with 5.3% in quarter 4 FY '26 and in quarter 1 FY '26. Importantly, the key drivers of future profitability, asset quality, credit costs, business growth, cost of funds and product and portfolio mix have all moved in a favorable direction. While pursuing growth opportunities, we have remained committed to maintaining a strong liquidity and capital position. As of June 2026, the bank maintained surplus equity of around INR 3,200 crores and NCR of 2.27%. The CD ratio stood at 83.8%, and our capital adequacy remained at 17.4% well above the regulated threshold, providing sufficient capacity to support growth plans and absorb potential uncertainties in the operating environment. The bank is planning to raise around INR 500 crore [indiscernible] NCD in the current year to accelerate growth initiatives and reinforce its capital adequacy. Also, we have taken a strategic decision aimed at accelerating balance sheet clean up through the ARC sale of [indiscernible] Wheels portfolio and ensuring that we remain focused on future growth opportunities rather than registries. We believe subsections, improve transparency, [indiscernible] franchise and create a leader and platform for long-term value creation. On the proposed [indiscernible] of amalgamation of holding company, UCL with an incubank, the NCS hearing on July 23, 2026 [indiscernible] the sponsor received from the relevant authorities. And wherever the replies were pending granted another 10 days to file the same enhance fix the matter of next hearing on August 6, 2026. The [indiscernible] are there expected to complete in the next few months, subject to ancillary proceedings. Operating excellence continues to remain a core area of focus. We have strengthened our collections infrastructure operated a specialized call center for overdue accounts, enhance monitoring processes and training program for new frontline staff emphasized core processes such as center meetings and customer onboarding ensuring consistent execution across the field. Our collection workforce supporting JLG and BPL businesses exceeds 1,200 personnel. We have also improved brand level oversight and strengthened customer engagement mechanisms. These operational enhancements have contributed meaningfully to the improvement seen across collections, SMA trends, recoveries and overall portfolio quality. Technology continues to play an increasingly important critical role in our transport journey [indiscernible] 2.0 technology transportation project, we are embedding greater automation, data-driven decision-making, monitoring capabilities and process efficiency across the organization. Enhanced digital underwriting tools are helping us identify and award overleveraged borrowers while 360-degree controlled parameter mapping strengthening monitoring frameworks and improving visibility across the trade cycle. The bank is also about to launch new CBS. These investments are expected to improve customer experience, tenant risk controls and support killing of the business over the coming years. We have also taken steps to improve the quality of new account sourcing and to cross-sell set the products through our liability focused general banking branches, thereby increasing product penetration per customer and improving wallet share. These actions taken together are designed to reduce the probability of future stress and to create a more diversified resident earnings base. The best strategy is centered on improving productivity and operating efficiency rather than brand expansion. Employee head count has been rationalized by around 1,700 while growth is being driven through enhanced product of the existing branch network, digital and technology investments. The bank is also untrading various products and process implication simplification initiatives, including workflow automation, digitize customer journeys, reduction of manual interventions and streamlining of operating processes put turndown time, service quality and cost efficiency. As we look ahead, our priority remains clear. We intend to build on the positive momentum achieved during the past few quarters. sustaining collection performance, further improving asset quality, expanding secured lending, accelerating growth in diversified asset classes and deepening our liability franchise. At the same time, we'll maintain disciplined underwriting standards and a prudent approach to risk management. We are aiming for a loan book growth of around 25% to 30% with the secured lending comprising 65% of the portfolio maintained NIM of around 8% and delivering an ROE of 15% by FY '28, while sectoral headwinds and regulatory transitions may continue to influence near-term performance, we remain confident that the strategic direction we have started will deliver a stronger, more sustainable franchise over the medium term. In our view, a clear is a year of rebuilding earnings strength and translating operational improvements into sustainable financial outcomes. The progress achieved during quarter 1 is encouraging because it demonstrates that the recovery process is formally underway. We are seeing stronger disbursement, improving portfolio quality, lower as stress formation, better recoveries, a healthier funding mix, declining cost of funds and increasing transaction costs across diversified businesses. Together, these indicators gather the indicators point towards a franchise that is emerging stronger, more balanced and better position for the future. With this, let me hand over the call for the question-and-answer session. Thank you very much.

[Operator Instructions]. We have a first question from the line [indiscernible].

Could you just give some color on to what would be the portfolio rundown of your portfolio like going ahead in the year, like what percent of your portfolio did be and the overall MFI portfolio also? And how much do you plan to run down the gross?

So just to mention, we have been talking past also. I mean we have a strong belief that the JLG and overall micro banking has good potential for growth also. So our idea is to remain almost in the same range, around 25% or so. Overall, if you look at the JLG part over a period of next 2 to 3 months also -- sorry, not 2 to 3 years also. So around 25% is what we expect our JLG portfolio will be.

Okay. So if you are not planning to run down much of the JLG portfolio from here on, so what would be the total overall portfolio growth for this year and the next year?

So as you mentioned, in case of JLG, and I also had -- we have microbanking business loans also. Our range is around 15% to 20% growth as far as the JLG and the micro banking is concerned. And we have mentioned that overall, we expect that 25% to 30% growth will be there. But GLP growth will be below 20% overall.

Okay. And sir, regard -- yes.

Sorry, just to add, I guess, maybe if you are referring to the stress that has been seen in the past in the JLG and the fact that how are we looking at that in this book. Two things. One, that environment, as we speak, all the divestments are happening under the new guard rail, which is to say that the behavior of the new guard rail is keeps are normalized. So to that extent, the past guard rail legacy [indiscernible] can be called as part. And second, in any case, you have covered this portfolio under the CGM guarantee scheme for any abnormity that can in future come. So one way is we have already -- as far as mix is concerned, and this was the plan trajectory, our a couple of quarters, 8 quarters, it will move from unsecured to secured, and we will bring the JLG or microbanking to 1/3 of the portfolio. We have already almost on track on that trajectory. And while we grow the portfolio on a total portfolio basis, I think we will continue to keep the cap around 25%, as Govind mentioned, but still grow this book and not thinking about running down the book as you started the question.

That was helpful. And if you could just guide about what what's your like guidance for the NPA and the credit cost for the rest of the year? And how much provision do you expect to build up because of that? And ultimately, apart from the NCD foundries that you are doing any additional fundraises that are planned in the medium term?

On the credit cost, I know you would be around on the upper side being conservative, not more than 3% or 3% to 3.5%, 3.5% as we go along. And on your second question, we are raising INR 500 crores, but we are also retaining at 1 of the trends that we have of INR 200 crores, which is at 12.5% coupon. We are prematurity that about a year earlier that should happen in mid of August. We have already put this form an announcement across. That should the bank around INR 20 crores as we go along. The primary the idea was not to carry INR 200 crore plus INR 500 crores, INR 700 crores which we are repaying or prematurely or making an alert redemption at near you had no delta on the CR benefit. What we are going to do now, we've raised NCD under Tie2 classification that helps us to boost our CRR. And on the back of the envelope, this INR 500 crores should inch up the CRR by around 250 basis points.

Right. So that was helpful. And any indications on the early signs of a of portfolio for your new lending book that you're giving or so the new lending book, any part numbers that you would like to share?

Yes. Amit, this is right. So if you see the -- so we do track the pre-guardrail and post guardrail portfolio, which we have built up in the micro banking and MG space. So if you'll see post guarding that is first April 2025. If you'll see our total gross NP majority of our outstanding book now belongs to that particular period in GLG in particular. And our gross NPA is below 2%. So we provide it was around 1.85% to 1.9% on. And just to add, this book now starting January -- mid of January '25, J&J or our MBBL portfolio is covered in the [indiscernible] whatever NPA is coming post April '25 is also covered under CGMS.

And probably just a point to add that as we speak, as of March, my CGM coverage on the portfolio 160% and if I take June, it is 80% of the portfolio is covered. And this part is GBP including the CGG. So 80% of the portfolio as it stands as of June is comes you get in the scheme.

We have our next question from the line of Sagar Shah from Spark.

My first question, sir, was actually related to your ABL portfolio. we are seeing a sharp jump, especially in the [indiscernible] disbursement side actually more than 100% growth. So is this portfolio completely to the existing customers who have demonstrated good behavior in the JLG portfolio? Or is it something like are we sourcing some new to banking customers also for these kind of loans?

So currently, I think it's [indiscernible] our existing customers only. We have just piloted you can say the open market or the new to bank customers. I mean, the number may not be even 100, 200. So it's primary -- almost 100% of our existing customers with the [indiscernible] with us and to see what we say cycle have been exhausted in these cases. So they're existing customers only.

Okay. So basically, on the underwriting front, how is the difference from the normal JLG front, how -- what sort of underwriting different underwriting measures have we taken for this portfolio?

So there is -- so this portfolio is -- this is Virender. So primarily, this portfolio is built up on the bids only to the people who are having an established business activity and the credit is done by the cap underwriting team which does the complete underwrite thing as is the nominator on other unsecured loan business. So we have built up this business over a period of last 4 years. The incremental business has jumped in the last 1 year. after learning experience of the last 3 years, which is helping us grow in this side. And our focus after the study of last 4 years, 3 years on the portfolio. Additional to that, we also cover portfolio under the CGF scheme. So with a very stable collection team and as well as deliquency is being closely monitored in that.

Just to add, Virender, I guess, when we are doing MBL, we are having a dedicated collection team for BI business as well. So if the head count that we have spoken only for JLG stays with JLG and every grow, we do at the necessity in terms of the support for the collection, and we have given correction head count to teams to ensure that NPLs net-net, the contribution and the pipe to the business remains and the NPA remains checked.

Just to add, again, first April 2025, we will see the outstanding out of this portfolio, which is close to INR 2 crores is post April '25. And out of that particular tool, we have only [indiscernible]. So we do track whatever interventions in terms of process, underwriting standards we have done, what kind of outcome we are getting in terms of asset quality.

Okay. So now my next question was related to the asset quality. We have seen that your recovery gradations are getting slower actually. We expected this quarter to be strong in terms of recoveries, but it hasn't happened. So means the NPAs that have been shown in the past actually, why is the recovery being so slow or it's nonrecoverables that like that way?

I guess the in particular, you would see that -- and I can say that as far as [indiscernible] things are sorted. But when it comes to retail book, we have certain accumulated recoveries from surf and which is a matter of pushing that to come back. So as we go along when you see this legal litigation bucket where some amount is line yet to be recovered. You will see that unfolding in coming quarters. So that is one of the reasons where it's taking time, at least on the retail side to the secured book side to get this encashed.

So on the secured book, if it is getting time for what about the unsecured because every Small Finance Bank, almost 8 or 10 Small Finance Banks are getting stronger on recoveries at least what the last 2 years that the every bank have based on the micro finance side. So on the microfinance side, out of the INR 69 crores that you reported in this quarter, how much was it on the unsecured microfinance book?

So close to INR 42 crores was for the NPL write-off pool in the unsecured [indiscernible].

Out of INR 69, INR 49 was [indiscernible].

INR 42.

INR 42? Okay. Okay. Okay. Got it. So at least you expect the recoveries to pick up in the coming quarters.

Quarter 1 was normally slow in that recovery if you see quarter 4 was good. So we expect to see the pickup back in the quarter 2 and quarter 3.

So that I just want to add one more thing and [indiscernible] you can hope, I guess, you buy this is one that we had in up our head count about 1.5 years back, obviously, to improve our collection efficiency, which last 5, 6 months has been about 99.5%. And the head count as we added up stands at about, say, 1,100 head count only on collection and I'm talking of JLG. I just mentioned MBit on source of collection, it comes that we have allocated to them. But [indiscernible] the head count that is lying in JLG. And as we see normalization is happening in the credit cost, we would obviously shift some of the head count for recovery of the write-off. So you would see some traction there in the coming quarters because at the normalized rate of credit cost in GLG probably 1,100 is a bigger ask in terms of head count being there. but we will continue to hold them and deploy them for recoveries of the past NPAs and write-offs. And I guess you could see some traction there in coming quarters.

Okay. Okay. So now just one suggestion from my side. As you highlighted on the asset quality, the recoveries were taking time. So the asset quality, if you can -- on the investor presentation, on every segment-wise asset quality, if you can mention from next quarter onwards, what was the C&P for every segment. So because I wanted to know what was the GNPA for MSM for Arzon this quarter?

We will do that.

Point taken.

So what is the GNPA as on 30th June for MSME?

It was around INR 169 crores.

INR 169 crores out of your INR 4,4482.

Yes. percentage-wise, you will see it 3.8% when [indiscernible] said, I just wanted to add a set taking time means there are certain cases which are legacy cases which has come into NDA in the last quarter itself. So now if you have to go for [indiscernible] auction the properties and take into position, normally, it's a process of 6 to 7 months, and that is we are [indiscernible]. Normally in secured, we have seen when we initiate the initial notice regarding this specific majority of the cases and the customer comes and pace the overdue amount. So that is where -- because these cases have come into NP in the last quarter itself, so probably in the next 2 months, the majority of them should get resolved or without going for actual options. So just wanted to add that point on.

Okay. Fine. And just last one from my side. In case 528, you're saying 25% to 30% portfolio growth that you just higher on the guidance. So 25 to 30 percentage growth from FY '26, right?

A year-on-year growth of around 25% to 30%. So from...

[indiscernible] for FY '27 also, you are running 30% growth.