Ladies and gentlemen, good day and welcome to the Can Fin Homes Limited Q4 FY 2025 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance in the conference call, please signal an operator by pressing star and then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nidhesh Jain from Investec Capital. Thank you, and over to you.
Thank you, Mike. Good afternoon, everyone. We have welcomed to the Q4 FY 2025 Earnings Conference Call of Can Fin Homes Limited. To discuss the financial performance of Can Fin Homes and to address your queries, we have with us Mr. Suresh Iyer, MD and CEO, Mr. Vikram Saha, Deputy MD, Mr. Prakash, General Manager, and Mr. Prashanth Joishy, DGM and CFO of Can Fin Homes Limited. I would now like to hand over the call to Mr. Suresh Iyer for his opening comments. Over to you, sir.
Thank you, Nidhesh, and I welcome all of you to the earnings call of Q4 for Can Fin Homes. Just to give a brief of the performance for the quarter end for the year ended March 31, the few points is that the small issue of e-Khata that we had experienced mainly in Q3 of this year, we have seen some improvement in the disbursement position and some e-Khata releases also happening, as a result of which our Karnataka disbursements in the Q4 have increased by almost approximately INR 200 crore compared to Q3 of the year. Basically, in the month of January and February, we could do about INR 200 crore each, and in the month of March, we have touched INR 300 crore. That is one positive point.
As a result, with other zones also continuing to do well, our growth in Q4 has been 31% compared to Q3.
Just to give a brief, our North Zone, West Zone, and Tamil Nadu zones have grown at 30%+ , 16%, and 25% +, respectively, for the entire year. In terms of the guidance for the current year, that is FY 2026, we are very positive that we should be able to achieve a 20% growth in disbursement because the three of the zones, major zones, are already performing well, with Karnataka also looking to come back to the old numbers. What we had seen in H1, even Karnataka should be doing around 20%+ growth. Telangana, which was an issue for us, has also kind of reached a level from where now we expect that we have bottomed out.
Already in Q4, we have started seeing a small turnaround from the bottom of INR 70 + that we had done in one of the months back to about INR 100 + . We are confident that even Telangana should start would be in positive in this year. In terms of the growth, we are confident about 20% growth in FY 2026. As for performance of the recovery, during Q3, we had the increase in the SMA-0 because of a change in the regulatory guidelines, which we had indicated that we would be working in explaining to the customers, educating them, and more aggressive follow-ups for SMA-0 . That has been done, and we are happy to show that the number of INR 770 crore which had gone up was on account of the less than INR 1,000 overdue.
We have been able to collect a majority of it, and as of the end of Q4, this number of SMA-0 has come down by an almost equivalent INR 700 crore-INR 750 crore. Even our NPA numbers have reduced in absolute number as well as in percentage, and it is at 0.87%. We would, as indicated in the previous quarter also, say that 0.90% is the kind of number that we are saying we can kind of look forward to. It should not be any increase beyond that. In terms of the reduction in SMA-0 and the reduction in NPA, we have had an actual write-back in our ECL provisions in Q4 to the extent of about INR 10 crore. However, as a prudent measure, the management has taken a call to have a management overlay of an additional INR 25 crore.
There was a INR 34.28 crore management overlay being carried. Added to that, another INR 25 crore has been done in this quarter, as a result of which our management overlay now is at around 59% or approximately 15-17 basis points of the overall book size. Net net, if you exclude the management overlay, the ECL provisioning or the credit cost would be around INR 50 crore approximately, which is about 13 basis points, which is lower than the 15 basis points that we have been guiding for throughout the year.
In terms of the other areas, as in terms of the strategy that we have been talking about in terms of a shift to a little more towards the SENP category and a little more towards the North and Western regions, the situation is that from beginning two years back of about 89% of portfolio being housing, including CRE, it has come down to 85%. There has been a gradual reduction, and we would like to, in the next three years, take it down to around 80%. That is including the CRE for housing. Even the SENP, which we had indicated was around 72% was housing, sorry, salaried, and 28% was SENP. On the books, now it stands at 70% salaried and 30%.
There also, the journey has been going on, and in the next three years, we would like to take it down to 65 salaried and 35 SENP. That journey is also on course. In terms of the branch expansion, there was a plan to open 15 branches during the year, which has also been opened. The current position stands at 234 branches, and the new branches have also been able to contribute throughout the year, and they have been on course for a normal reaching the profitability in 18-24 months' time, which is a normal thing. In terms of the current year, we plan another 15 branches in FY 2026, again predominantly in the North and the West and a little few in Tamil Nadu as well. We are looking at ending FY 2026 with around 249 branches.
In terms of the profitability and in terms of the ratios, our guidance of 2.5% spread, 3.5% NIM has throughout been maintained in the last year, and we would continue to maintain that kind of guidance for the current year also of a spread of 2.5% + and 3.5% + NIM, which would therefore allow us to maintain an ROE of 17% approximately and ROA of 2.1%-2.2%. The positive part is that for the first time in the company's listing, we have cost in terms of the PBT, we have reached the four-digit mark, which is for the first time in the history. That is one positive in terms of the profitability. In terms of the guidance for the current year also, we would like to have a spread and NIM of 2.5%, 3.5%+ , ROA of about 2.1%-2.2%.
That is what it is we are looking at. I once again welcome all of you to this, and I'll wait open for any questions, if any. Thank you.
Thank you. We will now begin the question-answer session. Anyone who wishes to ask a question may press star and one on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use the handset while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. We have the first question on the line of Rajiv Mehta from YES Securities. Please go ahead.
Hi, Rajiv, you're not able to hear anything. You're there?
Can you hear me now?
Yes, yes, yes, Rajiv. Please go ahead.
Yeah, yeah. Sir, how are we going to ensure that SMA-1 and SMA-2 accounts do not go forward, and what mechanisms are put in place for that?
Sure. See, actually, in SMA-0 , basically, it was more of a small change in regulation where the advance, whatever was there, had to be adjusted to principal, and nothing was being carried. Basically, we moved about with educating the customer and being more aggressive in terms of our follow-up with the customer for the charges. Also, sending and retaining the text of the pre-NACH intimation and all those kinds of things, which we will continue throughout. This is the new norm. Now we'll be more explicit in our communication to the customers. That's basically what we will continue to do. Focus on SMA, or we also have a probable SMA, like for example, from the 15th onwards, we start following up with customers whose current month EMI has not yet come because our NACH cycles are 5th, 10th, and 15th.
Those where there has been a bounce, obviously, it starts from the very next day the cheque bounce happens. Even otherwise, for the rest also, we have this probable SMA-0 , which we start following up from the 15th onwards throughout.
Sir, sorry, my question was with regards to SMA-1 and SMA-2 . Yeah.
Yeah, so basically, the SMA numbers also, we will be the same. We have to be following up with this only. We are increasing the number of staff also in some of the branches where the numbers are a little high. Plus, we also have increased the call center listing because as the base increases, also we need to have that pressure. We have also increased so that the repeat calls can be made also to our existing customers. We are also initiating and following up for skip tracing wherever the numbers are not going through for three or four calls and stuff like that. These are some of the steps we have also increased or added to our current processes so that we can work on the SMA-1 , SMA-2 .
Okay. Sir, my question is on management overlay. What do we see as the benefit of topping up management overlay or even holding management overlay? Because we did not utilize management overlay in early FY 2024 when we had that Ambala fraud provision. We made a fresh provision without utilizing the existing management overlay then. How and when can this management overlay be utilized for us? This question also assumes significance because you also have INR 49 crore worth of restructured provisions, which will get rolled down or released over the coming years as these accounts are closed or transferred. You already have some kind of a buffer of provision coming in the future, and plus you are topping management overlay, whose utilization of how and when is not very clear. Can you just throw some light here?
See, basically, this restructured portfolio provision that we have been carrying is more of a regulatory requirement, and it will be coming down as and when the portfolio gets released. That is, getting gets closed. If you see, we started off with opening a restructured book of about INR 720 crore. The principal at that time was around INR 680 or something. We started off with a 68 point something crore of COVID restructuring provisioning, which now as and when the portfolio has come down to around INR 480 odd crore, this provision has also been reduced because as and when the portfolio gets cleared or closed, the account gets closed, this will come down. Over a period of the next few years, as and when the portfolio goes down, this portfolio, this provision will completely become zero. It will be withdrawn.
You would have seen in the last year or one and a half years, two years also, we have been exercising that and reducing that provision. In terms of the management overlay, it is purely just a prudent kind of thing. There is no major concern or anything that has resulted in this management overlay. It is purely because from the old PCR concept where we are, at least some of us are used to a net, nil, NPA also, in the initial provision calculation, in fact, our Stage 3 provisioning comes to somewhere around 45%-48% in that range only. Therefore, it is a very low number. From that point of view only, we have at least thought that somewhere in the range of about 15 basis points extra if that can be carried.
That was the logic just to have some kind of 10-15 basis points extra. That is the only logic. Otherwise, there is no reason to say that there is a major concern or anything, except that during the quarters, there are some fluctuations. This gives a little more comfort that if at all some fluctuation, though there is like it happened in this regulatory change which happened in Q3, if that is all. That otherwise is not a major reason. You are right in a sense. There is no sense in as such carrying the provision because so far, at least in the last two years, we have not actually utilized it. Even when it did go up, we made it from the current year profits we provided for the additional provisioning. From that point of view, it is purely a buffer.
It is purely a comfort and strengthening of the balance sheet and nothing more.
Okay. Sir, that's it. Thank you, and wishing you all the best.
Thank you.
Thank you. We have the next question on the line of Shreepal Doshi from Equirus. Please go ahead.
Hi, sir. Thank you for giving me the opportunity. My first question was on the cost of fund movement. Given the consecutive rate cuts, how do you see the cost of fund trending in FY 2026? How will we pass on the cost? How will we pass on the rate benefit to the end customers and its implication on the margin for FY 2026?
Sure. Thanks, Shreepal . We had a 25 basis points reduction in the month of February and further another 25 basis points in the month of April. We have an entire bank borrowing portfolio that we have about 55% or something. That entire portfolio is either linked to the repo rate, 80% of it, and the remaining 20% linked to the T-bill. Those 80% of the bank borrowing that we are having, the benefit of the first repo rate cut was passed on to us in the last week of March when we made the interest payments because the reset happens on a quarterly basis linked to the interest payment frequency. That 55%, whatever impact is going to come to us, is roughly going to be around 5-7 basis points, which is going to be effective from 1st of April for us.
The second benefit of the rate cut is that the Q4, we have been able to raise the commercial CP, which is about 7% of our book at approximately 7.3%-7.4%, whereas now the CP rates have come to below 7%. That way, in fact, today, in fact, earlier when we were looking at something, it was almost in the range of 6.6%. Anywhere between 6.6%-6.7% is what you can consider. There has been a good amount of reduction in the rates at which we are going to replace the CPs also.
Next, I would assume that the combined effect of both 50-60 basis points on the 7% CP that we carry, plus the 5-7 basis points that is coming on the entire book because of the 50%-55% bank borrowing, would translate to somewhere around 10 basis points by the end of this month for us. We will look at the next ALCO meeting. We will definitely be considering whether we can pass on to the customers the 10% that we are experiencing. It will not have an impact on our spread or NIM because we will be passing on to the customers only after we experience on the liability side. We do not expect to have it impacted on our listing.
As for the.
Yeah, sorry?
Yeah, sorry, sir. Please go ahead.
Anyway, I was saying, in terms of the lending, normally when there is a lag in passing on to the customers, there could have been some impact in terms of the BT out. However, so far, we have not seen the incremental lending rates being changed by any of the HFCs or some of the private sector banks also. It is only on the existing customers. The banks have, and that also PSU banks mainly, reduced their rates for the existing customers. For the new customers, not much, except for a few PSU banks, it has not changed. In fact, the slight delay in transmission to the customers also may not have so much of an impact, at least as of now, at least till now on the BT out also. Yeah, you were asking something.
Sorry, also, yeah, with that, this 10 basis point benefit on the cost of fund is assuming only a 25 basis point rate cut. If you also, since there was cumulatively a 50 basis point rate cut, is it fair to assume that the benefit would be 15-16 basis points?
Yeah, it would be a little higher, up to 2025 also. The point is that this April rate cut benefit will probably pass on to us by the end of the quarter only. Whereas it is the 50 basis point, as I said, and the CP is already reflected or it's already factored in. In terms of the bank borrowing rates, only the first one has been factored in because we have had only one interest repayment cycle in March. For the April one, the interest repayment cycle will come in June. Only post that, we will experience the second rate cut benefit for us on the bank portfolio.
Got it. Got it, sir. Just the low impact on margin is what you are highlighting for this whole year.
Correct, correct.
Got it. Second question was on the provisioning rate. We are carrying almost 15-16 basis points of this management overlay. Is it fair to sort of assume that next year we might do provisioning which will be lower in terms of the run rate or from the guidance point of view, as we can also absorb some bids from here?
As for the provisioning, yes, it will definitely be below 15 basis points because whatever impact of the restructuring, whatever impact of the stickiness, whatever other things have been, have all been factored in. The present, what I would say, the present NPA of 0.87% is there, is the figure which is not going to increase or is not going to see any major change. Having said that, I believe next year, in fact, the provisioning may not be as much, and therefore we may not be required to make, so the guidance of 15 is there, 15 basis points for the credit cost, but I guess it should be lower than that.
Got it. One last question was on the tax rate front. This quarter, the tax rate was 16%. For the full year, it is closer to 20%. What is the, I mean, could you just explain the difference here?
Sure. See, basically, if you go back in time in 2023, that is in FY, in October 2023, post-September results, we had a review of our tax rates and the 36(1)(viii) benefit, which was not getting captured into our tax calculation, was done. Therefore, our tax calculation at that point in time, which was 25% without considering the 36(1)(viii) benefit, was reduced to 21%. That was what was in line with the industry and everything because subsequently, the 36(1)(viii) would come later post the assessment. When we changed that calculation methodology in 2023 October, at that time, there was for the first two quarters of 2023, that is June quarter, June 2023 and September 2023 quarter, there was already a INR 19 crore excess provision for tax, which was already provided for. That time, since post-assessment, the assessment order has just been done this year in Q4.
Therefore, that return, that INR 19 crore has been reversed. That is why we have actually reduced the, in fact, the provision for taxation in the current quarter. That is why it is looking at a lower rate. Otherwise, technically for the quarter, the actual provision for taxation is around INR 242 crore. Because of this INR 19 crore reversal, because of the assessment order getting passed, it is net INR 222 crore or something. Okay? In fact, this INR 19 crore, which was also a write-back because of a previous year calculation, is also what prompted us to take this management overlay because it was not, otherwise, it would have been unnecessary looking at a current year profit, which was actually pertaining to previous year. That was also one of the reasons which prompted us to also use that previous year income to strengthen our balance sheet.
Got it. From next year, going ahead, there will not be any reversal from the tax point of view, right?
No. In fact, the full year of FY 2025, we have gone with the revised calculation only, which also has now been as part of the assessment getting closed, has also been accepted and cleared. Basically, now the rate will be 21% approximately, which is what we had in the, which is the real rate tax code.
Got it. Got it, sir. Thank you so much, sir. That was helpful. Good luck for the next quarter.
Thank you.
Thank you. We have the next question from the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.
Yeah. Thank you and good afternoon, sir. Just to think on this time on the OpEx side, if I look at your other OpEx, slightly elevated versus what we are used to seeing. Any one-offs there on the expenses side?
No, nothing. In fact, only because of this provision management overlay that we have taken, it is slightly coming in this. We have shown it as the otherwise, there is no other specific reason for this. No other expenses or one-offs have come in other than this. There is no other reason. It is all been in line with the normal first three quarters.
Management overlay that we have created during the quarter would have got routed through the provisioning line item, right, if I'm not wrong?
It will come under the requirement, which will form part of the cost when we design the cost-to-income ratio. It will come.
Not part of OpEx, right?
Yeah, it will pass part of the OpEx. This quarter also, if you see the SEBI format, it comes above the line before the PBTs come.
Got it. Okay. Fair enough. The other thing that I was trying to understand is while in your opening remarks, you did speak about things getting better in Karnataka, more e- Khata is coming in. If you could, for the benefit of all of us, help us understand how should we look at things evolving in the coming months, right? What is it that you are hearing from your regional managers on this problem? What is the status today? By when are things expected to get fully normalized?
See, in the case of Karnataka, at least in the municipal corporation limit of Bangalore, in fact, they have already sorted out this e-Khata issue. There has been a good trickle of e-Khatas coming out on a regular basis. Whereas in case of the BDA, that is the Urban Development Authority, and the Panchayat area, it is still not being done, although the government has been working towards resolving that issue also. Having said that, even this small impact of this municipal corporation limits getting resolved, what has happened is our disbursement in Q3 had dropped to approximately INR 150 crore per month. We were doing about INR 275 crore per month disbursement in Karnataka, which dropped to around INR 150 crore per month for Q3. In Q4, things slightly started improving from January.
January, we were able to just push, and of course, there was also a slight shift in strategy where we started pushing for a little more of LAP because for LAP cases, we do not need a refresh registration because the customer is already having the property document. For LAP also, we slightly pushed. Having said that, this change of this municipal corporation limit, e-Khata also helped. January and February, we were able to touch INR 200 crore. In March, of course, there was a little push also, plus a little more improvement in the e-Khata. We were able to touch about INR 300 crore. Compared to around INR 450-475 crore or something that we have done in Karnataka in the third quarter, we have done almost INR 200 crore more in Karnataka alone in Q4 compared to Q3.
With this Panchayat and development of the Urban Development Authority areas also getting resolved, which we hope will happen in Q1, I think definitely we should be back to INR 75 crore disbursement per month numbers for Karnataka very soon.
Got it, sir. This is useful. Sir, just to understand this, meaning it a little better, while you have guided for 2.5% shares and margins of 3.5% +, is it fair to understand that till now, we have not passed on any interest rate cuts to customers, and maybe we will do that in the upcoming ALCO meeting.
That is correct. We have not done because, as I said, we experienced it only in the last week of March when we made the repayment. Now the actual impact is going to come now. We will now examine the exact benefit rate that we are getting and take a call in the next ALCO.
Got it. As of now, the initial expectation is maybe at the entire liability book level, we'll see a 10 basis points kind of a decline, which we hope could get passed on to customers.
That is correct. That is correct.
Got it. To that end, sir, I mean, you also suggested earlier in the call that you are not seeing any additional aggression from HFCs or private banks, even after there have been two rate cuts already, right?
That is correct. We have not seen major rate cuts in the incremental lending rates from the HFCs and some of the private banks.
Got it. Sir, lastly, thank you so much for being so patient. Lastly, I mean, this guidance that you gave earlier during the call of a 20% growth in disbursements in FY 2026, I mean, are there any additional things that you would be doing this year beyond expanding, putting more branches, focus on self-employed, focus on LAP that you spoke about earlier in your call, right? Because what I am trying to understand is somewhere during this year, we are also going to see that tech transformation that we have started, right? Just trying to understand, I mean, how confident are we about this 20% disbursement growth this year?
Sure. See, I'll just share some numbers. Like our North Zone, last year, consistently throughout the year, quarter on quarter, we were able to have a good healthy growth of 25%+ and ended with more than 30% growth by the end of the year. Same with Tamil Nadu also was consistently able to show a growth throughout the year and ended up with around 25% of growth. West Zone also has had a consistent growth and throughout the year was in positive and ended with around 16% growth. Karnataka was around 20% growth in H1, but because of this e-Khata issue, it dropped, and we could end the year with around 3% growth. Technically, FY 2024, we were doing about INR 220 crore per month, which was the average because we did about INR 2,650 odd crore in FY 2024 in Karnataka. That was working out to INR 220 crore.
H1, we were doing with run rate about INR 275 crore, which was clearly a 20% growth. Now, because of this e-Khata issue, we have come back to just a 3%. We could end with only a 3% growth. Back to we are back to INR 225 crore average for the entire year, and Karnataka has entered somewhere in that range of about INR 2,700 crore for the entire year. At INR 275 crore also, if we are able to do, Karnataka should also be able to do 20% growth. Telangana also, as I mentioned in my opening remarks, we have reached a kind of a base itself has gone down to a level of just about INR 100 crore per month, which is way below what we have earlier assumed. Even from here, with the turnaround already started, we have already started witnessing the turnaround.
We can expect at 15%-20% growth. This would be the normal thing. Now, the second thing is, last year, you would recall we had started this marketing or sales department with a small team of 30-35 odd people. In Q3, the team was able to contribute in the entire quarter somewhere in the range of about INR 60 crore. In Q4, that number has increased to about INR 100 crore. That is in three months put together. Having said that, it gives confidence that this team, with a little more addition of staff and all, should be able to start contributing a little more. Same also for the case of the branches, which we opened in FY 2024. They have started a decent disbursement of about INR 7.5 million per month per staff plus in the year.
This current year, they would be doing a little more. Plus, the branches which we opened this year will also add a little bit. Basically, these are the things which will definitely contribute. As for the tech transformation, yes, it is expected in Q3. We will definitely try to, we are already working towards minimizing the impact, or I would not say there will be zero impact. Definitely, we are trying to work towards minimizing the impact of that transition so that it does not affect our Q3 numbers also much.
Got it. This is very, very useful. Thank you, and wish you and your team the very best.
Thank you, Abhijit.
Thank you. We have the next question from the line of Shweta from Elara. Please go ahead.
Thank you, sir, for the opportunity. I have a couple of questions. The first one being that you guided for restriction of NPAs till 0.9% odd level. And for the whole of FY 2025, we have seen provision for NPAs around INR 150 million odd or INR 150 million odd broader range. Do we expect that quantum also to slide in the forthcoming year? Second is, I joined back a bit late.
You're welcome. I just get you. 150 what?
Provision for NPAs, the provision which is held for NPAs for throughout the year, each quarter has been somewhere in the range of INR 150 million-INR 160 million. Do we expect that also to come down given that we are guiding for something that's below credit cost and also GNPA? We are aspiring to restrict to 0.9% odd level. That's the first question. Second is, on the disbursal front, I joined back late, so I'm not sure whether you covered this. Given the fact that now you are saying we close March with INR 3 billion odd per month disbursement, which means at the quarterly run rate level, can we easily put up closer to INR 30 billion odd disbursements going forward? Q1 per se will start looking better than what we posted in Q4, around INR 24 billion odd.
Lastly, you mentioned that the long-term goal or a couple of years down the line, we will be seeing 65, 25 mix, right? The DSA sourcing continues to move higher, and it is around 82%. Even for incremental disbursements, it is 80%. How do you see this sourcing mix changing with that AUM mix shift? Thank you.
Sure. I'll take one by one. Thanks, Shweta. First, the provisioning side, yes, our guidance would be for about 15 basis points, but I am fairly confident it should actually end up below. In fact, this year, also excluding the management overlay, our credit costs have been to the tune of about 13 basis points or something only because we had a first three quarters, we had a cumulative provisioning of about INR 600 million. In Q4, we've had a write-back of INR 100 million. Net, about INR 500 million is what is the provisioning, which works into around 13 basis points or something. Next year, also with the majority of the impact of all this restructuring and everything already built in, I don't expect the NPAs to go up much except for the percentage to be almost in the range bound only.
Yes, it could be lower than 15 basis points, but as general practice, we have been prudent in our guidance, and we would say about 15 basis points would be the guidance for provisioning, though it could be definitely and would be lower. The second thing is disbursement. As you mentioned, INR 300 crore we touched for Karnataka as a state in the month of March. Now, obviously, March is one month where it is always, I mean, it's for reasons unknown, it's always magic in March. But having said that, normally, Q1 and Q2 are a little more subdued.
When 2,400 that we have done, I would rather say we would target somewhere around 20% over Q1 of last year rather than saying that we would because the momentum of March normally does not sustain in April and May, considering there are too many holidays, too many vacations, and all those things. Plus, also post-March, there is always a Q1, Q2 is a little lower. It is 45%, 55% H1, H2 kind of a breakup. I would say 20% in Q1 over Q1 of last year is what I would say would be a more realistic number for disbursement. Okay. Third is, as regards third question was regarding DSA sourcing. Yes, we have been guiding for bringing it down to 60, 40. This quarter, I mean, this year, we have just been able to bring it down from 82 to 80.
It has been a little slow in terms of the progress compared to what we would want. It has been a very stable set of DSAs, so there is no reason to kind of discontinue them or to pull them out or stop doing business from them. Basically, they have been solidly supporting us. Yes, our direct sourcing or sales team will also keep pushing, and we will see some improvement coming from there. Yes, gradually this number will come down, and the sales team business will keep going up. It will be, so far, it has been a slower progress, but we would like to see it come down slightly.
Sure. Thank you, sir.
Thank you.
Thank you. We have the next question from the line of Umang Shah from Kotak Mutual Fund. Please go ahead.
Yeah. Hi. Good afternoon. Thanks for taking my question. Suresh, I have a couple of them, both on asset quality. One is, is there any particular segment of the loan book which you are in particular worried about, be it the non-housing portfolio, the restructured loans, the SMA piece? Is there any part of the loan book that worries you today?
No. In fact, we have looked at it. Restructuring book was one where we also started, that's where we started actually doing this management overlay. Now, in fact, we have seen issue that maximum guidance we had given was that 18% of the restructured book would be in NPA. As we end the year, actually, two things have happened. One is the outstanding portfolio of the restructured pool has also come down from around INR 720 crore at its peak to around INR 480 crore or something now. Plus, the ratio also from 18% has come down to around 17%. During one of the quarters, we had said it might peak to around 18%, which it did. Now, as at the end of the year, in fact, it has actually come down. In the restructured pool also, we do not see much of an issue.
During the year, we have experienced both, we have been monitoring both the salaried segment as well as the self-employed segment, as well as a little bit of a geography-specific NPA also. There, only Telangana slightly showed some increase and more increase compared to the others. There also, in Q4, we have not seen any major change. In fact, in Q4, that also slightly changed. I would believe that that also is now under control and probably we've peaked out in terms of Telangana delinquencies also.
Okay. Okay. Suresh, that brings me to my next question. What I am just trying to understand is the management philosophy on provisions, right? I mean, if I look at your last decade, there have been only three instances where your credit cost has crossed even just 25 basis points. One such event was the Ambala incident. The other two years were actually COVID years, right? Barring that, your credit cost has been fairly below 20 basis points. If I look at all the other metrics, be it Stage 3 provision cover, be it overall ECL on the book with or without management overlay or with or without the provision on restructured loans, it feels that we are adequately covered, right? I mean, what is it that the management or the board is kind of targeting when we are talking about conservatism?
Because it appears that, I mean, we are fairly provided for. I mean, and all through the call, your commentary has been fairly upbeat about credit cost and asset quality. Just trying to understand then what's the rationale of holding the management overlay. A related question is that, assuming we are just holding these provisions on the balance sheet, under what circumstances will these be utilized, right, if we don't really have intention of utilizing it, let's say, in the normal course of business?
Yeah. Thanks. Just if I could explain, Umang, basically, you are right. I mean, we do not see a major kind of a reason to hold the overlay except for the fact that post our in the ECL scenario, our Stage 3 PCR has always been below 50%, which always we have been used to maintaining at a higher level. That was slightly one issue where that is we thought we can have something like a 15-20 basis points extra buffer over and above our normal ECL provisions that would help. That was the basic one point.
As I had mentioned earlier, this year we also had an approximately INR 19 crore tax refund, which was pertaining to FY 2024, wherein we had in the first two quarters of FY 2024 provided for an extra provision for taxation, which post the closure of the assessment, we have got a refund or we have got an adjustment in our tax. Basically, that was one aspect also which triggered us to kind of take this view that the same INR 19 crore would also help in kind of build a stronger book. Otherwise, there is no reason to look at it. As for when we would want to take it back, I guess there is, as you rightly pointed out, the last 10 years also in gross NPA, we have never crossed 1% in terms of our credit cost.
We have not had a major setback or a major spike in any of the years, barring the Ambala incident mainly. I guess it would be a kind of a buffer. Maybe we will have to see when we can kind of take a reversal. As of now, it is purely just a kind of a comfort that we have about 15 basis points extra, which is there as a management overlay.
Sure. This last one is that on Stage 3, again, I mean, we run a 100% secured book. In fact, our Stage 3 PCR would be comparable, if not better than some of our peers. Do we have any particular Stage 3 provision cover target number in mind, or are we comfortable at about 45%-50%?
No. See, actually, ECL provision, when we look at this thing, this probability of default definitely works based on the performance of the account for the last five years, which is a purely actual data-based analysis. But the LGD, which comes out, is also a factor of the assumptions that we have been taking. We have been very stable in the assumption that we have been taking right from day one as to in what period the account once moves into NPA will come out of NPA and things like that. I think these assumptions will remain. Therefore, this 45-49% kind of coverage on Stage 3 will probably continue. There is no other reason. It's purely a matter of the assumptions that we have considered for the purpose of arriving at our LGD from the PD.
Understood. Suresh, just one last question is, I mean, you kind of answered it in fair amount of detail about your conviction for a 20% disbursement growth in FY 2026. Assuming if at all there is any disruption in the third quarter because of this whole tech transition, and assuming you have to work with just about 11 months in FY 2026 when it comes to loan origination, would you still be confident of achieving a 20% sort of a growth rate for the full year?
I'll do it like this.
Or is everything else remains constant? Yeah.
Yeah. Everything else remaining constant, yes, we are confident. It should be a 20% growth in disbursement. We are targeting that would be around INR 10,000-INR 10,500 crore is what it would come out to. Yes, we are confident that unless there is a major disruption, which we are trying to minimize, there should not be a major change, and that should not impact our growth target of 20%.
All right. Perfect. Thank you so much for taking my questions. Wish you all the best.
Thank you, Umang. Thank you.
Thank you. Participants, the request is to kindly limit your questions to one per participant. We have the next question Aniket from Morgan Stanley. Please go ahead.
Sure. Thanks for taking my question. My question is largely on the margins and the lending rates. We spoke about passing on the cost of fund benefit as and when we experience it to the customers. Just hypothetically, I wanted to understand if this practice works in the sense will customers continue to remain happy with 10 basis points kind of pass on in terms of the rates going forward as and when we see the benefit in our borrowing cost, and that should be sufficient to keep the balance transfers in check? If we see any aggressive rate cuts coming in the market from banks, will we also have to follow suit, or in fact, is sufficient on a regular basis?
Sure. See, traditionally, HFCs have been following this practice of passing on only after they experience it on the liability side. This practice, I think, is a generally accepted practice in the market. The second thing is that in the current scenario, as I had mentioned, the current HFCs, the players have not reduced the rate because none of them have experienced the benefit on their liability side. Two, even some of the private banks have not increased or reduced the rate for the incremental lending for their customers. Even if my customer wants to shift, they will not be able to get the reduced rate because that is only for the customers who were in the books of a bank as on a particular date of the repo rate cut. Whereas for the incremental rates, it continues to be the same. Okay.
In fact, the pressure is still there on the banks for borrowing because the deposit rates have not come down. In fact, what we have experienced is that banks have still been reluctant to pass on the repo rate cut on incremental loans. For example, a bank which was lending to us prior to the rate cut cycle was lending to us at repo rate + 150 basis points, roughly around 8%. That is now saying that even after the reduction, they would be comfortable giving it at repo rate + 170 basis points. Basically because they are also having a pressure on the spread on the margins. Going forward also, I do not expect that incremental lending rates to come down that fast, although it may have some impact to the customers.
I guess a 10 basis points will be sufficient provided others are also in the same line. The second point is whether there will be a BT pressure. Yes, normally in such scenarios, because of the lag effect, there will be some impact on BT out. At least March, we have not experienced this. As long as the incremental lending rates do not come down, other players also will not be very aggressive to cut their rates.
Understood. That was quite a detailed answer. That answers my question. Thank you.
Thank you. Thank you, Prashanth.
Thank you. We have the next question from a line of RDP from CD Equisearch. Please go ahead.
Good afternoon, sir. My first question is, why have the dividend payout ratios increased substantially this time?
Sorry, dividend payout ratio?
Has increased substantially this time.
Okay. Basically, I mean, the general feeling was that for the retail, which is about 20%-22% of our shareholders, there is at least a dividend payout ratio used to be in the range of about 8%-10%. At least we thought a 20%, close to 20% dividend payout ratio would be healthy. That is the main reason why we have been doing it. I guess now that we are almost at 18.9% or something as the dividend payout ratio, I think now going forward, probably we will kind of limit it to this 18%-20% range of dividend payout ratio.
Basically, it just started with the thing that we should at least be having a 20% kind of dividend payout ratio, which for us was very, very low about three years back or something, as low as about 7%-8% or something. That was the only justification. Going forward, as I said, we might probably retain it at around 18-20% kind of a range in which we will want to have the dividend payout ratio.
Okay. Sir, what are the challenges the company is facing in increasing loan book?
Sorry?
Loan book increasing challenges.
Sorry, can you repeat the question?
What are the challenges we are facing in increasing the loan book?
Obviously, the challenge is that we need to have a higher growth in terms of our disbursements. We are having a 16% rundown in our book on an average for the entire year. Obviously, if we have to do a 20%, we will have to do 35%-36% of our loan book, which is what we will have to disburse in the current year to have a 15% AUM growth. Basically, it is clearly a function of our disbursement that will drive the AUM growth.
Okay. How will that happen? Are there any macroeconomic challenges that you are facing?
Yes. We have been discussing that. Since the last year, in fact, we had a challenge on two fronts, two of our major markets, basically. That is Karnataka and Telangana. Karnataka was more of a temporary issue whereby the registration process was changed in the state. As a result of which, we have had some delays in the registration of documents, sale transactions. That affected our business. The state where we were experiencing about 20% growth had to slow down, and we ended up with around just a flatish or a 3% growth in Karnataka. It is a major market for us because that contributes about 30%-35% of the incremental disbursements for us. The second market where we were affected was in Telangana, where more of a sentiment issue.
I would say more of a long-term thing where there would be a change in the entire growth for the state itself. Having said that, there also, we have kind of bottomed out. I believe from here onwards, on that lower base, we will definitely have a growth from there also. These are the two major reasons why we've had an impact on our growth in disbursements, which has affected our AUM growth.
Okay. Sir, are you planning any change in funding to reduce the cost of borrowing?
Madam, we have about 55% borrowing from our bank. The only change I would see is one is that NCDs will have to raise a little more because we have a requirement of 25% of incremental borrowing has to come from market, which will be NCDs basically. That now, which is around 19%, is slowly inching up to 25% in the next two years and would probably remain at that. The second change which should happen is that the National Housing Bank has come out with a mortgage-backed securities fund-raise program where they will be raising bonds or NCDs basically against the receivables of the portfolio held by lending institutions. That is HFCs to start with. The pilot project is being currently under process. They would be doing it.
Once that process is done, I think the NHB is planning to now, going forward, raise more funds from the market and then give it instead of a refinance where there are limitations in terms of how much they can lend. That would be another source which would open up for us in the current financial year. We are also looking at participating. The program is such that the NHB will raise and also be one of the participants to that. That will be giving us something like an enhancement for us for the institutions because they are the ones who are also doing this inspection and monitoring of the HFCs. They will be also coming in as one of the backups for this. There will be an MRR of about 10%, which the institution will have to have.
As the pilot is being worked out, once that is successful, more and more HFCs will be getting involved and participating in that mortgage-backed security transaction issuance, which should also increase our borrowing avenue.
Okay. Thank you.
Thank you.
We have the next question from a line of Pawan Kumar from RatnaTraya Capital. Please go ahead.
I wanted to understand about what would be the cost to incomes next year because the thing is FY 2025, there has been a decrease in terms of the OpEx. What I see, given your IT investments, etc., what do you think will be the cost to income going forward, maybe for the short to medium term? Also, one particular thing I noticed on your balance sheet was the amount of investment has gone up, and so has the debt. What is the reason behind that? Can you just throw some light?
Sure. Sure. First is the cost of income. The cost of income, in fact, for FY 2026, we do not see much of a change. It will be almost in the 17-17, give and take a few basis points. I think that would be the cost of income ratio for the current year because IT transformation costs that are going to come in will actually kick in from FY 2027, April only, because FY 2027 only, that is April 2026 only. The reason being that the project was given in the month of January. There is a 12-month implementation period followed by a 3-month handholding. Basically, till March 2026, whatever expenses are there will all be capitalized as the project implementation phase.
Therefore, the actual cost, which will be the depreciation as well as the annual maintenance contracts and all those things, will start coming in from FY 2027 only. FY 2026, we expect the thing to be around 17%. FY 2027 onwards, I think it would go up by about 1 percentage point somewhere in the range of 18% it should be because the total cost would be around INR 550 million, including the CapEx and OpEx. The current INR 150 million that we are spending currently per year for our IT expenses, that will stop post our moving to the new CBS. Effectively, the net impact will be about INR 400 million for the year, which would be around 1% of the overall thing. FY 2027, we can expect the cost to income ratio to increase to around 18%.
For the current year, we think it will be around 17% only. The second investment. The second is the investment in IT.
Market investment.
You're talking about market investment, right?
Right. Right. I was asking about the increase in debt and also the other side increase in investment.
Yeah. The investment basically is about INR 400 crore of additional investment for our LCR purpose. Because as our book is increasing, we need to also increase our LCR, plus the regulatory LCR requirement to move up from 60% to 70%. This year, it has already moved up to 80%. From 70% to 80%. Basically, for our LCR purpose, we have had an investment during the year of about INR 400 crore in terms of our LCR. That was the one for the investment purpose. I think you asked something about your increase in expense also, right? Or IT expenses?
On the debt side, I can see your debt, which is like there is deposits plus your borrowing, has gone up from around INR 33,800 crore to around INR 38,000 crore. I was just like, what has changed in this particular quarter for that to have?
I was just typing that if you are going by the presentation, first of all, my apologies. There is one small presentation page where I think the total borrowing is showing as INR 38,000 crore, right? I think that is what you're referring to. Yeah. Actually, there is a mistake. It is INR 35,000 crore. I'll just give you the 35. I think my just a second.
All right. All right.
That's INR 35,289 crore, actually. The increase in borrowing has been to the extent of about INR 3,400 crore, which is similar to the kind of increase in our AUM also.
Okay. Got it. Thank you.
Yeah. My apologies.
Yes.
Thank you. We have the next question from a line of Viraj Mittal from 3P Investment Managers. Please go ahead.
Hi. Good evening, team. Just one clarification. Our disbursements in fourth quarter, excluding Karnataka and Telangana, is around INR 1,450 crore. Is that number right?
No. I think we have, as I said, 200, 200, 700 crore. So about INR 1,600-1,700 crore is the disbursement other than Karnataka for us in Q4. We have done a INR 2,455 crore disbursement of which about INR 700 crore is from Karnataka. So INR 1,700 crore approximately is somewhere that number is where we have done from other than Karnataka.
Okay. This number for 3Q would be?
For 3Q, in Q3, we had about INR 1,879 crore total disbursement of which about close to INR 475 crore or something was from Karnataka. Roughly about INR 1,400 crore or a little less, INR 1,400 odd, was from the rest of the state. INR 1,400 odd something has gone up to INR 1,700 crore in Q4.
Got it, sir. Perfect, sir. Thanks and all the best.
Thank you.
Thank you. We have the next question from a line of Gaurav Jani from Prabhudas Lilladher. Please go ahead.
Yeah. Thank you, sir. For sure, sir, just wanted your assessment of given the deposit rates such, how do we plan to sort of control the repayment rate in FY 2026, right? Because banks have already started reducing deposit rates, being bulk or card. I am sure there will be an increase in competition in the housing space. How do you plan to tackle that?
Actually, yes, we were discussing that we will be passing on some benefit of the borrowing cost benefit that we get to our customers. About 10 basis points right now and probably another 50-odd basis points in Q2 is what we might be able to pass on, which obviously will be lower than what banks are doing.
Particularly in our INR 5 million + segment where the competition is definitely there directly with the PSU banks and the large private sector banks, there definitely there could be some pressure. We will have to look at some retention or something for the customers and maybe so that we will be, depending on the strength of the case, the score, credit score, the interest, we will be looking at something on a case-to-case basis for those customers. For the below INR 5 million, probably it will not be as much because there the main competition is mainly from the, at least up to the INR 3.5 million, mainly from the other HFCs and smaller banks. It is beyond that, which is a small percentage for us. We will definitely have to look at some retention policy. We will over and above what it is there.
Depending on the CIBIL score, depending on the repayment track, we will have to look at, we will be reviewing our policy.
Sir, I'm sorry. Just want to recognize the numbers and just wanted your comments on growth, right? Assuming a 20% disbursement growth and a 15% repayment rate, that translates to about a 12% AUM growth. How do you plan to actually increase that number going ahead?
See, current year, yes, we are looking at a 20% growth. Our rundown generally is around INR 1,300 and something crore per quarter. Approximately INR 5,600 crore is the rundown that we are looking at for the next financial year. To have a 15% growth, we should be somewhere in the range of about INR 10,500 odd something crore is the disbursement we should have to be able to arrive at a healthy growth. Obviously, we will be trying for that. That is what we have said, that 20% disbursement growth resulting in a 13%-15% AUM growth is what we will be looking at.
Sir, lastly, if you could just quantify the investment income for the full year, last year it was about INR 125.8 crore or INR 126 crore. Yeah. Investment income?
Just a second. We'll come back on that. I don't have the exact figure.
Yeah. Can you tell me investment income? Can you specifically come?
Yes. INR 126 crore was last year, full year, 2024. Can you quantify it to FY 2025?
I think we'll just come back to you on that.
That's fine. That's fine. That's fine. That is just a mind. Thank you.
Thank you. Ladies and gentlemen, that was the last question. I would now like to hand the conference over to Mr. Suresh Iyer for closing comments.
Yeah. Thank you very much. I once again thank all of you for taking your time out. I hope all the queries have been answered. We look forward to if there are any more queries, you are feel free to always get in touch. I guess we have answered. I'll just come back on the investment income. Probably I'll revert back to Mr. Gaurav. Thank you once again to all of you for joining in the earnings call for Can Fin Homes Limited.
Thank you. On behalf of Can Fin Homes Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.