Ladies and gentlemen, good day and welcome to Bajaj Housing Finance Limited Q3 FY25 earnings conference call hosted by JM Financial Institutional Securities Limited. 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 during this conference call, please signal an operator by pressing star, then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sameer Bhise from JM Financial. Thank you, and over to you, sir.
Thank you, Nirav. Good evening, everyone, and welcome to the 3Q FY25 earnings conference call of Bajaj Housing Finance. First of all, I would like to thank the management of Bajaj Housing Finance for giving us the opportunity to host the call. From the management team, today we have Mr. Atul Jain, Managing Director, Mr. Gaurav Kalani, Chief Financial Officer, Mr. Jasminder Chahal, President, Home Loans, Mr. Vipin Arora, Executive Vice President, CRE and Loan Against Property, and Mr. Neeraj Adiani, Executive Vice President from Risk. As always, we will have opening comments from the management team, post which we will open the floor for Q&A. With that, now I would like to transfer the call to Mr. Atul Jain, Managing Director, for his opening remarks. Over to you.
Thank you, Sameer. A very good evening to all of you, and good morning to those who are attending from Western Hemisphere. First, I'll take you through the presentation that we have uploaded on the investor section of our website and also on the stock exchanges. Coming to panel number three, it was overall a good quarter for us in terms of AUM growth and profitability.
During the quarter, AUM was up by 26%, and overall AUM has now stood at INR 108,314 crore, while PBT and PAT both also grew by 25% on YOY basis and were INR 713 crore and INR 548 crore, respectively. Asset quality continued to hold well during the quarter, with GNPA remaining stable at 0.29% and NNPA at 0.13%, provisioning coverage of 55%. Operating efficiencies improved further during the quarter, and OPEX to NIM came at 19.8% in the quarter gone by, against a 23.2% in quarter three FY24.
Operating expenses remained in control at 7% growth on YOY, against a NIM growth of 25%. Capital adequacy of the company remained strong, with CAR tad below 28% due to the capital raise which we recently did. PBC ratio also remained above. PBC is a principal business criteria ratio, which is applicable to housing finance companies, and which is at 60%. The ratio was at 62.15% for BHFL. I'll move to panel number four. The addition of AUM during the quarter was INR 5,745 crore. Total AUM growth was 26%. Within 26%, under various segments, home loans grew by 23%, loan against property by 19%, lease rental discounting by 26%, and developer finance by 59%.
Broadly, overall portfolio mix remained stable, with slight movement between the product HL at 57%, LAP at 10, LRD at 19, and DF at 12%. During the quarter, we also saw disbursement growth at 17% compared to the same quarter last year. As an update, we had set up a near-prime and affordable vertical to meet the mortgage need because we had predominantly been a prime company earlier. This SBU has started picking up, which is in line with our expectations, and as we go forward, we expect this vertical to become very significant in our overall scheme of things. Moving to panel number five, cost of funds was stable at 7.9% from the last quarter, indicating that the cost of funds have peaked out. The past two quarters overall cost of funds have been there in the balance sheet.
Borrowing mix, again, remained by and large stable at 43% to the banks, 46% money market, and NHB at 11%. Interest income, net interest income grew by 25%. Net total income also grew by 25%. Gross spread remained constant at 1.9%. NIM dropped slightly to 4% against a 4.1% on a sequential basis and also on a YOY basis. Moving to panel number six, GNPA stood at 29 bps against 25 bps on Q3 FY24 and 29 bps of preceding quarter. NNPA at 13 bps against 10 bps of Q3 FY24. In terms of credit cost, loan loss to average loan assets stood at 0.15% in Q3. However, net of overlay release, it was 0.20%. It's the same number net of overlay release during the last year. Same quarter was 0.15%.
Now, past it, there is no other management overlay which is there remaining in the balance sheet of the company. In terms of profitability, as already called out, PAT grew by 25% in Q3, and ROA remained at 2.4% in line with Q3 FY24 and ROE at 11.5%. ROE is down given the full impact of capital raise, what we had done in September. In Q2 FY25, the ROE had a partial impact because the capital raise being done in September. These ROE figures, of course, are annualized figures. I'll move to panel number 15 now. This is the first time we are putting up a medium-term guidance on key financial indicators. In last quarter, when we did our first call, we were still in the silent period, could not have guided for medium-term guidance on the financial numbers.
We estimate in the medium term 24%-26% AUM growth. OPEX to net total income to go down to 14%-15%. From the current quarter, it came to 19.8%. GNPA at 40-60 bps . Credit cost remaining sideways between 20-25 bps . Provisioning coverage at 40%-50%. ROA of 2%-2.2% with leverage of 7-8 times. Thus, ROE of 13%-15% in the medium-term horizon. Moving to panel number 17, I've already talked about the quarterly numbers. On the nine-month number, the PAT has grown by 17% because of a one-time tax provisioning release during last year, what we had. Nullifying that in PBT, the growth had been 23% as far as nine-month figures are concerned on YOY basis.
Moving to panel number 19, on a key portfolio trend, marginal downward in the portfolio yield from 9.9% to 9.8% and spread remaining same at 1.9%. In fact, it was 1.94% last quarter to 1.89%. That's why you are even with a 10% portfolio deep, looking at 1.9%. So it's a second decimal change what has happened there. Operating efficiencies have talked about 19.8% in terms of OPEX to net total income and remains at 4%. Asset quality, again, stable at 0.29% with NNPA at 0.13%. Return ratios, again, talked about from 13% now to 11.5% with full impact of a capital raise coming in. Moving to panel number 20, the borrowing mix remains quite diversified. Banks' borrowings are backed by 20 banks, 43%. Bank borrowings have reduced by 1.2% sequentially.
The portion which has been offset by money market borrowing, which has gone up by the same amount because it was led by larger bond issuance during Q2. Moving to panel number 23, portfolio mix remains stable over a period of time with a minor movement in terms of the composition of the products. Moving to panel number 28, we have talked about GNPA and NPA. Stage 1 assets have stood at 99.34, again in line with the long-term average of what we have seen over the last few quarters. Stage 3, we have already talked about 0.29.
Stage 2 at 0.37, again more or less in line with the last seven, eight quarters. Moving to panel number 30, in terms of provisioning coverage, the provisioning coverage, we continue to remain conservative on the provisioning coverage across products. In terms of product-wise, GNPA in home loans are slightly up by two bps to 33 basis points. LAP has improved by three bps to 76 basis points. LRD continues to have a Nil GNPA, while DF has improved by one beep to nine basis points, and overall, NNPA up by one beep sequentially. That is all from my side on the highlights of the quarter. Open to take any questions from the forum. Thank you.
Thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two.
Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants, you may press star and one to ask a question. The first question is from the line of Raghav Garg from Ambit Capital. Please go ahead.
Sir, hi. Good evening and congrats on the results. I have three questions. So one is on the retail segment disbursements. Can you give us the absolute number of retail disbursements that were there? And then what was the growth on YOY basis and Q1, Q2 basis in retail disbursements? And then another part of that question is that within retail, what was the growth in the home loan disbursements?
Gaurav, would you have a segmental disbursement number? So Raghav, first, thank you for your compliment, but we won't be able to share segmental disbursement numbers. We have given the segmental AUM growth number and overall AUM growth as a product level. But segmental disbursement numbers, we generally do not publish.
Sure. But last quarter, you had indicated about 7% retail disbursements growth. Can you give a comparable number to that for this quarter, which is?
This quarter was a total disbursement. There was no retail disbursement.
Okay. I thought you had indicated retail disbursement growth of 7% in the last quarter.
To the best of my memory, Raghav, no. To the best of my memory.
The other question is, can you talk about your strategy in affordable home loans around ticket size, sourcing model? Are you going to be targeting the existing players in the market, maybe from a BT perspective or pushing their loans? Which all geographies will you be focusing on? Just some color on that and the affordability.
For affordable strategy, we'll remain anchored on purchase transactions, not on taking over the BT because BT, in any case, as a part of our digital channel, what we get leads through the digital channel from Bajaj Finance. I think we have built a presence there. The vertical what we have set up, which is a special SBU, what we have set up to cater to non-prime and affordable, is largely organic. Of course, a part of a BT, which is in the terms of an industry, 15%, 16% of the disbursals remains BT.
This vertical also may have 10%, 15% of the total disbursals as a BT. States, what we'll be focusing is largely southern states and the western. Initial period, Andhra, Telangana, Maharashtra, and Gujarat would be, and Rajasthan would be the states where we are focusing, where we have started. Because this has two parts.
This SBU has two parts. One is a near prime and second is affordable. Near prime would come through the top 26 markets more, which is outskirts of the top 26 markets. And affordable will come through a bit of a deeper presence in these markets. Ticket sizes in affordable will be between average ticket size would be 16, 17 odd lakh, 16, 17 odd lakh, and in the near prime, close to 35 to 40 odd lakh. That would be the ticket size focused on purchase transaction.
Understood, and sir, one more question. Very broadly, at a maybe industry level, or maybe you would have also heard some kind of softness in sales for developers, the numbers which we listed real estate developers have reported, so what is your assessment? Can you give us some idea in terms of what the developer uptake is or can potentially be, given your view on the real estate industry, the absorption of the existing inventory and all that, just in that backdrop?
Yes, Raghav. I think all of us have read through the reports or which have come by various agencies tracking real estate sales and launches that the first nine months of FY25, residential real estate has witnessed slowness in growth versus last year. So I'll say slowness in growth versus last year, and there is an overall sales drop also as what has been reported by a few agencies. But in terms of market sizing and in terms of there, the launches have been lower.
So the sales are lower because of the number of launches or the amount of launches are lower in our assessment because what we see in the market, the launches across various markets are lower. But where the launches are there, we have not seen an issue in the sales. The sales at the counters where there is a new launch, there is no, so there's no inventory built up. There's no inventory overhang getting built out. The decline in sales is largely led by, I'll say, decline in launches, what we are estimating. Of course, we'll have to wait for the formal official numbers. These are all feedback from the ground kind of numbers, what I'm talking about.
Sure. No, that's fine. But I was asking more from a perspective where your developer loan book growth could also come down. Right now, it's growing at a supernormal rate of more than 50%, right? Do you see any risk to that if, say, for example, the launches are not as much as other demand on a higher base comes down from here on?
Raghav, our book, which has grown at a faster pace, but at an absolute level, we are still less than INR 13,000 crore kind of a book, which is across 738 active projects. So I'll say, even if the launches are slow, which launches have been slow in the first nine months, but we have continued to grow at a good absolute pace because the percentages in our case are not that relevant because of a base being lower compared to the industry overall size. So in the short term to medium term, I don't see a problem in terms of a continued to grow construction finance because that is an essential ingredient for us to grow our retail home loan base.
Understood, sir. Thanks a lot for answering the question.
Thanks, Raghav. Thanks, sir.
Thank you. Next question is from the line of Piran Engineer from CLSA India. Please go ahead.
Yeah. Hi, team. Congrats on the quarter. Before I get to my question, if I can just.
Sorry, we lost your voice.
Piran, can you hear us?
Am I audible now? I can hear you all. Can you hear me?
Yeah. Your voice is breaking a little bit.
One second. Is this better?
Yes, a little better.
Okay. Thanks. So before I get to my question, I just want to ask the previous participant's question a different way. In the 17% disbursement growth, would the retail growth be higher or lower than the overall average?
I'll have to check because we track not because last time I had answered specifically saying that we track AUM growth, but I'll check, and by the time we finish the call, we would have checked. It should more or less, to the best of my understanding, in the similar range or a bit above retail, a bit above, but I'll check. I'll check and I'll confirm to the number.
Okay. Okay. That gives us good color. So my first main question really is on builder loans. This is a product where you're growing quite fast. If you can just give us some sense of what percentage of the loan book is under moratorium right now or where the DCCO has not yet come because I see your Stage 2 is NIL and Stage 3 is just a few crores. So want to get a sense of whether the entire pool right now is even eligible for repayments or most of it is under moratorium.
So Piran, the way we do our builder finance business is that we take the sweeps from the day one largely, barring one or two projects where the agreement can be that the sweep is not from day one because moratorium is not the rightful metric to look at it. So technically, the moratorium, the project moratorium is in line with the RERA extension date, RERA completion date, which is the date at which the DCCO is supposed to happen. And after that, the repayment starts from the contracted term. However, along in the contracted term, what we always contract for is a sweep from the day one in the realization. So practically, there will not be any project where there is a launch has happened and the repayments are not coming in.
But the contracted repayment rate, where that irrespective of the sales they have to pay down, comes when the RERA expiry date comes, which is the DCCO date of the project. Because any project finance is constructed, the moratorium is till the DCCO date, which is the date of RERA expiry. And after that, the customer is supposed to pay in equivalent monthly principal installments for the balance period. However, as per our construct, we start taking sweep from the day one from the sales proceeds as agreed with the developer partner. And most of the cases, you don't hit the DCCO date because the sales have been so strong in the last three years that you don't even hit the date for the full repayment of a loan before you hit the DCCO date.
If you're referring to the DCCO extension, in our history to date, we have given two DCCO extensions in our history. Not even now, and no DCCO extension has been given in the last one year. There were two DCCO extensions which have been given over a period of time, one during the COVID period and one a bit later on that. Out of that two loans which DCCO was given, one loan is already successfully closed and one loan is NPA, which is part of your Stage 3 asset as of today. Apart from those two loans, there is no other loan where we have ever given DCCO extension.
Okay. So if I understand this right, if you give a builder loan today on 27 January 2025 and the RERA completion date is, let's say, September 2026, which is in line with your DCCO date, between January 2025 and September 2026, he is not obliged to make payments, but obviously, if he has some pre-launch sales are good, he will make payments. But he's not obliged to do it. Correct?
He's obliged to pay the interest servicing every month. Interest servicing is every month. Principal servicing is from the sweeps where the collection has happened. There is no moratorium on interest servicing from day one in any of the loans. Interest needs to be serviced by developer on each loan from day one through the ECS mandate. The principal repayment, there is no obligation till the DCCO date, but the sweeps come in.
Understood. Okay, this is pretty clear, and just my second question in terms of you've given your medium-term OpEx to NIM target of 15% to 19-20%. What exactly would be the driver of that?
We intend to keep on seeing. If you look at even the past, also every year, generally, we improve this ratio by 1.5%-2% because the kind of investments what are required or the income growth would always outpace the OpEx growth given the nature of the business, and as the balance sheet keeps on becoming bigger. T here will be one natural jaw which will keep on coming in because in our case, in mortgages, expenses are on acquisition while the income is on AUM, so as AUM becomes bigger.
Y our jaw in any case keeps on expanding, giving you more operating efficiency, so that's what we estimated to play at, so 14%-15% is a number in the medium term, which we are very confident. In a longer term, in fact, we want it to go down to between 9% to 10%, but that's the longer term. That's what we are not guiding for. But we're pretty confident that this is the operating efficiency path which we'll be able to achieve.
Okay. Okay. That's it from my end. Thank you. And that answers all my questions. Thank you, and wish you all the best.
Thanks, Piran. Thanks.
Thank you very much. Next question is from the line of Subhranshu Mishra from PhillipCapital. Please go ahead.
Hi, Atul. I'd also quickly on housing home loans. Essentially, we have to grow the home loan and lap part much higher, at least to meet our medium-term growth rates because they are growing at around anywhere between 20%-23% with home loans being a larger part because this is roughly around 70% of the book, so what is causing this slowdown in lap book and home loan book?
The second question is around the home loan book. We actually used to give a split between pure home loans and what is the top-up, so today, we have got roughly around 56%, which we quantify as home loans. But I believe there is a substantial part which is also top-up, and by RBI's prescription, we need at least 50%, which should be pure home loans, right? 60%, which should be related to home loans, and 70% of the assets should be related to pure home loans. So wanted that part. Of the bank borrowings, what is on external benchmark? These are my couple of questions. Thanks.
Thanks, Subhranshu Mishra. I'll try to answer your questions one by one if I've noticed them right. Home loan and lap growth, you are saying we need to grow much faster, yes, because if we are guiding for 24%-26%, probably we are growing close to that range today, maybe 21%-22% in terms of a home loan plus lap book together. Lap, actually, we don't consider as a standalone because lap for us is a, as you have rightly called out, there's a regulatory requirement for individual home loan. There is a regulatory requirement for residential assets, which is 60% of total assets. There's no 70% requirement. I'm not sure what is 70% requirement, what you are referring to.
There's a 50% individual home loan requirement, which is pure home loan, excluding any top-up or excluding any VAT product sold, which is booked as a home loan. And there's a 60% requirement for a total residential assets on the total assets. Now, for the remaining assets, remaining part of the book, which can be non-home loan, we take a call basis at any point of a time, return risk metrics on between loan against property and lease rental discounting. Our recent assessment of last three years had been that the lease rental discounting adjusted for risk is better return generator in the last two, three years given the intensity of competitive activity in loan against property market and the kind of what we say risk adjusted returns which are coming in. So LAP and LRD, we are agnostic.
We have grown LRD much faster in previous two years as return risk metrics were in favor of LRD. For home loans, it remains the piece where we have to continue to grow in line with where we have to grow the company book. If you are guiding for 24%-26% kind of a company book growth, that is where that minimum or higher than that is where we have to grow home loans. Now, this 23% growth has been coming in where our economies of scale or economies from our new near-prime and affordable vertical has not kicked in. We expect this vertical to start generating meaningful contribution to the growth from next year because this year we just started in May and June. So right now, the numbers are for us a good indicator of the beginning, but not that relevant from the AUM growth perspective.
But coming year, 25, 26, and followed by 26, 27, I think from an AUM growth perspective from a home loan, this vertical will generate significant contribution to give us overall growth. In terms of the question you asked on the numbers in terms of IHL, 50%, that number is 51%, 50.9% out of 57%, 50.9% is the number for individual home loan, which is minus any top-up or minus any VAT loan or p ercentage of total assets. As a percentage of total assets, this is what you see. 57% is a breakup of AUM, but 50.9% regulatory requirement is total assets, which includes the cash balances that you carry.
So there's a bit of a different metric, but 50.9% is, you can say, the conservative metric when you are looking at that metric. 60%, I called out with the residential assets, which we are 62%, 61.9%. 62.1. 62.1% on the total assets, again, which is called out as per the presentation as of 31st December 2024. Bank borrowings, you had asked a question on how much is linked to out of 43% total mix, 30% of our total liability is linked to external benchmark and 13% to MCLR. 43% bank borrowing out of total borrowing. Out of that 43%, 30% is EBLR, 13% is MCLR. I hope I've answered your question, Subhranshu.
Just one counter question here, Atul. You're talking about economies of scale taking in next year from a very low ticket item. Our average ticket size is around INR 45 lakhs-INR 50 lakhs. We're talking about a INR 15-INR 20 lakh ticket size given economies of scale just a year from now. The math seems staggering.
So what I'm talking about, Subhranshu, is that there is a normal organic growth on the normal business, what will keep on coming in, which is what we are delivering a growth today of 22-23%, let us say, in the home loan segment. The incremental growth, because we have to deliver above 24%-26% or at least 24%-26% if you want to deliver the growth there, that is a growth which will come in from the new vertical, if not from expansion in the market share in the current vertical. Because when you look at the growth number, if you're talking about, let us say, 2% or 3% of an incremental growth number to come, then we are talking about, Subhranshu Mishra, only INR 3,000 crore kind of a number in terms of 25-26, so it's not staggering.
Right. Thanks. That clears my thought.
Thank you. Next question is from the line of Viral Shah from IIFL Securities. Please go ahead.
Yeah, hi. Thank you for the opportunity. Atul, a few questions. One is I'm looking at your stage two. Over there, across both home loans and LAP, we are seeing that the stage two has kind of increased. So sequentially, is this the part of the normal seasoning? What are you seeing? Any color, incremental color would be helpful.
Yeah. Thanks, Viral, but if you look at a, of course, you're looking at a Q2 to Q3, but when you look at over the year, which, because we have put up in the investor deck for the last seven, eight months, seven, eight quarters, this is broadly in line with it. Because what happens is there are stage two assets. They consist of two parts, which is 31 to 90 DPD accounts. And also in our case, we classify certain accounts below 30 DPD also as a part of a stage two. This is our internal classification where risk team assesses that there is a significant increase in the credit risk. There are two parts to it, so 31 to 90 DPD, which is the regulatory definition of a stage two.
But incrementally, we also follow a definition where internal risk team categorizes certain assets as stage two, which are actually in stage one from a definition point of view. Now, there was reduction in stage two last quarter, primarily on account of a movement of less than 30 DPD, which were risk classified accounts. When you look at a 31-90 DPD account, the movement, there is no movement. So there was a less than 30 DPD, which were risk categorized accounts.
There was a movement downward last quarter, which got broadly normalized in this quarter. 31-90 DPD have remained largely range bound to 0.08% at a company level from 0.07% in Q2. So we don't see anything. So 0.07 was a 31-90 DPD regulatory definition with stage two accounts in quarter two, which is 0.08. Rest of the stage two assets are a reflection of what we internally classify as an increased risk, and that's why we classify them as stage two. Have I answered you, Viral?
I think you are mentioning at an overall level. I think broadly that will hold true even for home loans and LAP segment.
0.07-0.08, it will hold true. And lease rental discounting does not have any stage two accounts. So it is home loan and lap. And DF also does not have. So it will apply on home loan and lap only.
Correct. Got it. And Atul basically wanted to get a sense if you can quantify if at all there has been any impact from the property registration disruptions in a few states, Karnataka, Telangana, what has, say, how much it has been impacted. And secondly, has it impacted your, say, incremental disbursements? Again, not the existing projects, but the new projects, even on the construction finance or LRD side, if you can just give some color over there, both on retail as well as wholesale.
Viral, there has been some delays in execution of registrations due to a change in Karnataka. If you're calling out a state of Karnataka because of an e-Khata introduction, which is for long-term goods for the industry and long-term goods for the customers. The situation is getting normalized as we speak because there are delays. It is not canceling or impacting the volume in the long term, and we don't see any long-term or a persistent impact of e-Khata as far as Karnataka is concerned.
Telangana, I am not aware of any disruptions in registrations or anywhere. Telangana, you called out Karnataka and Telangana. Karnataka, yes, has introduced e-Khata, which has resulted in some delays or some deferments in terms of a time taken, but not in Telangana. To the best of, I'm not aware of any impact in the Telangana.
Got it, Atul. And lastly, just again, I think this point has been broadly touched upon. But see, if the real estate cycle turns, right? And again, I think we are probably in third, fourth year of the cycle. And whatever, people have different opinions for how long the cycle lasts. My question is that, say, if the cycle turns hypothetically, whenever that is, do you see the exposures that you have taken?
Have you done stress testing? How will your exposures fare in that cycle? And what can be the, say, potential, say, portfolio at risk, say, either on stage two, stage three levels if that kind of thing pans out?
So, Viral, in terms of the way we lend our construction finance construct, which is given again also as a part of our IP, we try to do so that we are able to stand the time. And in terms of a cycle, if there is a cycle movement or a slowness it says, because you have rightly called out, there is a cycle which will be there, and there can be a cycle when there is an enhancement in terms of what you call inventory overhang. But if I have to say on a macro level, the kind of inventory overhang today is there, even if there is a slowness in sales versus the launches, I think we are very far from even the pre-COVID days of a kind of inventory overhang, which is there.
So there is a good three, four years away in my assessment, even the inventory overhang what we had during the pre-COVID days. At that time, also industry was working. Second, the way we underwrite, if you look at this INR 13,000 crore kind of a balance sheet, what is outstanding in developer finance, it is representative of 738 projects. Average disbursal or average outstanding per project is what we construct ourselves for granular book. And that is what we, I was mentioning in the earlier question when it was there on the terms of a sweep. While the repayment starts on the DCCO date, but the sweep starts from day one.
Our disbursals are constructed in such a manner that we give a generally tranche-based disbursal that every stage, there are each disbursal amount what is booked for a construction finance is given in terms of a breakup of various tranches, which are linked to three milestones. One is a construction milestone, second is a sales milestone, and third is a collection milestone in the project. We believe the construct what we follow, even in terms of a downturn in industry, we should be able to hold ourselves well.
Got it, Atul. Really helpful. Thank you and all the best.
Thanks, Viral. Thanks.
Thank you. Next question is from the line of Ganesh from Bharat Bet Research. Please go ahead.
Yeah. So my question was basically a follow-up of the same. So given that we are kind of growing our developer finance book at a relatively high pace, broadly, as we go into the, if we go into a kind of negative cycle in that sector, how will that fare? And broadly, the way I wanted to think about it is if you could give us some guidance with respect to, say, past negative cycles in the real estate space, how has, say, the median player done? How has, say, the top decile player done in terms of, say, GNPAs on the developer finance book? That would be kind of helpful to kind of quantify this research.
Ramesh, if I carry the same point forward what I was mentioning to Viral. Now, in terms of you asked for a benchmark for better players versus a, you can say, not so good players in terms of a low cycle. I think if you look at a pre-COVID or the last cycle, probably I would not have access to the numbers. You will have access to the numbers. You should probably refer to HDFC Limited and ICICI Bank numbers on GNPAs and NPAs on the construction finance because they had one of the largest books there. To the best of my understanding, they never have these issues of what we are calling out even in the low cycle because it depends upon how do you run the business. How do you run the business and what is your construct in terms of running the business?
Are you able to identify the emerging risk or emerging stress much earlier and manage the risk accordingly? Because there is an execution risk which is embedded in the construction finance, which you need to manage. So my assessment and my knowledge is that the better players had always handled the risk very well and have not got impacted by the cycles over the period of time, the longer-term players. We also have been in the industry now for seven years. Now, since inception, we have funded close to more than 1,300 odd projects. 1,300 odd projects. We have so far seen only four cases which have slipped into an NPA. Out of them, two we managed to recover later on and close. And the two which are still in NPAs, which is visible from the balance sheet.
And, which I called out earlier also, to date, we have only given DCCO extension also to two accounts. And the industry had not been that good apart from what it had been for the last two, two and a half years. So I'll only maintain that if you handle the risk well, you play granular, and you are on top of the risk, you have an ability to manage this risk. We believe we have an ability to manage this risk better than maybe some other players.
Understood. Got it, sir. That's it from my side.
Thank you.
Thank you. A reminder to all the participants, you may press star and one to ask a question. Next question is from the line of Siraj Khan, individual investor. Please go ahead.
Hello. Am I audible?
Yes, Siraj. Siraj, go ahead.
So my first question is actually a first. I would want to have a clarification with respect to the LRD vertical. So there we see that there is no NPA, GNPA, but the average ticket size that I can see is approximately INR 98 crores. Although I would not want this situation to happen, but in which scenario will there be an NPA in this case? And what will be the procedure for collecting such a large amount in the NPA?
So, Siraj, as the name calls out, lease rental discounting is given against two securities. If I have to say two securities, one, the customers here in broadly 50% of the portfolio would be to very large rated funds or rated companies which have a very large portfolio. So you can say the inherent risk stability of the portfolio is much higher than any other mortgage portfolio. That's why you see GNPA and NPAs as nil. And if you look at overall industry, also for the last 20-25 years, this is not the LRD has never gone through a cycle. Because of the inherent double security structures which get built in, first is that you have the cash flows escrowed to you because there is no execution risk of the project.
You have, because this is already built and leased out, you have the cash flows escrowed to you, which is more than your current EMI coverage, and as there are rental escalations and as the tenor moves, your security in terms of a cash flow keeps on getting better. Added to it, in any case, the property is mortgaged to you, which is at a lower LTVs. So that's why you want this portfolio to us, I think this is one of the safest asset classes in mortgages. That is an industry experience in India, and that has been our experience as well, which is reflective of a nil NPA.
Understood. Okay. And now, to the the main question for the affordable housing. So we have seen many players coming into the affordable vertical. There are already some players there in the affordable vertical. So my question is, in the medium term, the slide that you have given that you want 20%-25% growth, so the book size for this affordable vertical, what do you see in the medium term for this vertical over the medium term?
So, Siraj, the medium term growth. So our dominant portion of the book is likely to remain in the medium term of a prime only because it's affordable. As if I have to put it over a five-year period, this will be between non-prime, near prime, and affordable. 80% of the book is still going to remain prime. So because there is an affordable. It is a various definition of various people. We generally call it non-prime, near prime, and affordable. Affordable is not going to be very, very large as an overall portfolio composition even in the medium term.
So would that still go somewhere in the region of, say, 5% of overall portfolio or something like that in the medium term? Because why I want to understand is, if that grows very fast, will it have an extra impact on the yield or the ROA, etc.? Like for example, because ROA is on the lower side, affordable will have a better yield. So will the yield increase faster, higher, and the ROA as a consequence?
No, probably even 5% of the overall book also would not be affordable. 5%-7% of the home loan book can be affordable. 5%-10% of the affordable home loan book can be affordable, but not 5% of overall book. That is the first part because I think it will because prime has a much more head start. We are already at 108,000 crore kind of a balance sheet for us to build a 10% on an overall, 5%-10% on an overall book that fast. Second part, on the terms of yields, yes, affordable is a different nuanced business, while the yields are better, but there is also a much higher cost to originate, which is what you see in most of the affordable companies' results.
Given the mix what we are projecting for a medium term, I don't think it will have a very significant impact in enhancing the overall ROA, but we need to move to affordable to cover our full product suite because we are a mortgage company. Also given the emphasis of the government and the regulators on the housing for all, we need to be part of contributing to that vision as well as offering a full suite of the mortgage product for all customers so that we are present in all markets. As we learn the trick of the game because it has a different skill set, like we called out, we had been largely present in the prime segment. It has a different skill set.
As we learn the skills, basis the metrics what we see, and if we are able to do it at a lower cost and it generates a much higher return, net return, net of cost, we can take a call to accelerate this more, but as of today, I'll say that it will have some impact on the overall yield profile, but not much impact on the overall ROA profile. That's why the medium-term guidance also for ROA, what we are seeing is not very different from what we have today.
Understood. And you actually touched one follow-up question was on the distribution and the cost side only. So it was with respect to how are we going to source this business? Because these affordable companies, they have very high cost because they have to set up a lot of branches and etc. So cost is high. So how are we going to do that?
We will figure out our ways in terms of we have started in a particular way. We will learn, Siraj, over the period, whether that results into an efficient origination, what we are trying. Because we are very small, I would not want to comment upon our sourcing model today. But we are trying to be slightly different from the industry to have a benefit of a lower cost as well as a bit of a higher yield. But time will tell whether we succeed or not.
Sure. Thank you. Thank you very much.
Thank you. Next question is from the line of Jigar Jani from B&K Securities. Please go ahead.
Hi. Thanks for taking my question and congratulations for the set of numbers. Just one question. Can you share what yields are you giving loans as of now on the near prime and affordable segment?
Hi, Jigar. See, near prime and affordable actually is a very wide segment. The yields vary from a, let us say, if a home loan, we have talked about home loan from a 9%-16% in the market because it is a scale of a profile, assessed income, not assessed income, verified income, not verified income, type of collateral, and very, very various combinations. We largely operate in this segment between 9%-13%.
We are not in a much higher segment because there is a 13%-17% or 18% segment as well in the market. But for the near future, in the foreseeable future, we'll operate in the 9%-13% kind of a market, not 13%-17%, 18%, because we have to learn that skill set also to further source.
Yes. And just to follow up to this, will we have separate branches or this product will be sold through the same branches?
The geographies where we are commonly present with the other segments, it will be the same branches, but where geographies, there will be geographies which we are going to cover through this segment where we are not existingly operating. We'll set up the branches in those markets for this vertical. But there are no dedicated branches in that sense. In that market, if we start on affordable and later on the prime vertical or the other verticals want to go, that's a BHFL branch. There is no affordable branch. It's a BHFL branch which all businesses of the company can operate from.
Yeah, so no dedicated branches, per se, which will be all products across those branches.
Yes. Yes.
Thank you so much for answering.
Thanks, Jigar. Thanks, Jigar.
Thank you. Next question is from the line of Rahul Jain from Goldman Sachs. Please go ahead.
Yeah. Good evening, Atul and Gaurav. Just two or three questions. So I actually joined the call much later, so pardon me if it is repetitive. But did you answer any question related to the credit cost? It was about 15 basis points in this quarter annualized. So what explains this? Is this just the rise in stage two and stage three in this quarter that you had to make provisions for, or some contingent provisions also started building into the books?
So, Rahul, just to answer you on the credit cost, because you did not ask, so over credit cost, gross of overlay release in this quarter was 0.20%, which was 0.20%, which is because there's an INR 10 crore overlay release because 0.15% is net of overlay release. But if we nullify that, then it is 0.20%, which was in last quarter 0.15%. A quarter prior was 0.17%. So it's more or less in range.
The stage two also remains more or less in range, which I answered in a previous question, saying that if you take a 31 to 90 DPD kind of account, that remains in range bound between 0.08%. While you see the stage two accounts at a 32 to 37 beeps kind of a movement. But out of that, the 31 to 90 DPD, which is a regulatory stage two accounts, are only 0.08%.
So, there is no uptick in the credit cost, if that is a question, what you are saying, 15-20 beeps range movement. In the last year, same quarter, the credit cost was 0.15, again, net of overlay release, which is 0.20. Now, the difference of 0.15 and 0.20 is also largely on account of a stage one provisioning movement because the credit costs move in line with because there is a stage one movement and of various asset classes mix.
So if there is a particular because every asset class has a different stage one provisioning, which is a general provisioning, what you call it. So there is a particular mix shift it happens or an assignment out versus in a one quarter to another quarter. So largely stage one movement, which is a harmless movement, Rahul, if I have to just answer you.
No, very helpful. Thank you so much, Atul. The other question is, can you or have you disclosed what proportion of the developer financing book would be to the under-construction projects? And would you be able to explain what stages of development these projects would be, etc., etc.?
The entire book would be largely to under-construction projects because construction finance is given for that purpose to build so that entire almost entire book barring very some portion, which may be to in the completed project phase. There's a rundown of what is happening. That is entirely for the under-construction projects, Rahul. The various stages of under-construction because there are 738 projects. There are projects which are in various stages because it's an ongoing business. We keep on lending more, and there are projects which keep on getting completed or the loans getting run off.
Got it. Got it. Very helpful. Just one last question. In retail disbursal, has there been any significant movement with regards to balance transfer out in this quarter versus the previous quarters?
No. It is by and large stable. In a home loan, we generally have, if you see on an annualized basis, close to 12% kind of a balance transfer out, which is more or less in line with what we had seen in previous quarters.
Got it. Very helpful. Thank you so much, Atul.
Thanks, sir. Thanks, sir.
Thank you. Next question is from the line of Bharath from Nomura. Please go ahead.
Thank you, sir. And thank you for taking my question. So yeah, most of my questions are answered, but just I wanted to catch up on one point.
We are losing your audio in between.
Yeah. We are not able to hear you.
Yeah. Am I audible now?
Yes. Yes.
Yeah. So yeah, thank you for taking my question. Most of my questions are answered. But just one doubt. You have previously mentioned that one of the reasons for growing the developer finance book is to act as a distribution channel. But now, considering the developer finance growth in this quarter, are you saying the developer finance book is a potential growth driver in the coming quarters or in the near term?
I think in between, I was again losing your voice, but I'll try to answer what I've understood from your question. I think you are asking, do we had earlier pointed out that construction finance is a tool for us to grow our home loan business as a distribution point. But do we now see that can it be a growth engine in itself? Have I understood your question?
Yes.
Developer finance remains critical for us in two parts. First, of course, as a funnel for home loan and a point of availability at an expansion of a distribution counter, but in itself, also from a mortgage company point of view, it is a return enhancer, but given there is an inherent risk in construction finance, which is higher than the normal home loan business, we would like to not exceed around in the short term close to 12%-15%. We are already at 12% kind of a mix, 12%-15% mix in terms of our portfolio of construction finance to balance the risk. So it is not going to be a standalone growth driver from the balance sheet. From the current perspective, yes, 12% contribution to AUM can go up to 15% in the incoming time.
But it is not going to be a dominant portion of the book because then the risk profile of the balance sheet changes. Because irrespective of the method, the way we would want to underwrite and the way we monitor the projects, inherently, there is an execution risk of the projects or a macro risk which sets in versus a retail granular transaction. So that's where it on a standalone basis, it won't be a balance sheet builder for us.
Okay. Thank you. That was very helpful. That was all on my end. Thank you.
Thanks. Thanks.
Thank you. Next question is from the line of Abhishek from HSBC. Please go ahead.
Yeah. Hi. Good evening, Atul and Gaurav. My question is on this medium-term guidance. Just wanted to understand some of the assumptions behind it. Is it like a two, three-year aspiration? And have you factored in any repo cut impact, etc., or this is just BAU without all those external events?
Abhishek, this is a three-year kind of a medium term, and we call it a three-year kind of a visibility. Of course, it is assuming what you can see or what you can forecast, whether it's a repo cut, because we are largely a variable balance sheet on the assets as well variable. Like I had called out earlier as well, that changes in the rate, there can be at a point of a time, sometimes lag impact, where if the rates are going up, we can see temporarily for a timing margins going up, which happened in FY23. That is where, or if there are rate cut is there and the competitive intensity is higher, there can be a bit of a lag of six-to-nine months in terms of there.
Of course, this medium-term guidance assumes the cycle to the best of what we are able to predict. It is not created in standalone where the impact of a repo cut is not there. For next year, we have our own predictions of repo cut, which are baked in in the forecast or the assumptions, medium-term guidance, what we are giving.
But essentially, you're saying that over three years, it will get neutralized. So whether repo cut or not repo cut, you could still look at it as a through-the-cycle kind of aspiration.
Through the cycle, average returns. But if you look at today, we are having an ROE of 2.4%. If you're guiding for 2%-2.2%, there is a bit of a lag impact also, which impacts the margin for some point of a time, that in any case, factors it out, the 2%-2.2% kind of an ROE range. Factors that ROE does not move beyond that. Also, we had at the highest level, Gaurav, we had seen the ROE to go to 2.5, 2.6. So if we had seen on an upward cycle movement of 20 beeps, if you take the same movement from 2.4%, 2.1, 2.2%, that's where Abhishek it is factored in.
Understood. Because when I work back, it sort of implies a 25 basis points NIM compression from here. So I was just wondering whether this is a function of you assuming repo cut, etc., or whether this is a function of the loan mix changing, yields coming off in the industry. So this 25 basis points is.
Yields coming off would be because yields coming off is one of the factors, and as you grow bigger, and we have to assume the competitive intensity, which is already very high, will continue to be at like that, so there are various factors which are baked in, whether it's a yield compression, and with yield compression and the cost through the cycles at a point in time, which can compress, so I'll say we have done a bit of a financial understanding of the P&L, what we understand, and based on that, we have forecasted that.
No, fair enough. Fair. Just trying to understand because obviously, with scale, the mix will change, the yields will change. So I can understand that. Okay. Thank you. Thank you for that. Yeah. Just wanted to get a sense of what is going on.
Yields in our business, Abhishek, are also guided by competitive intensity because that's where that's an external factor. We generally assume a bit of an extra competitive intensity to be there in the market.
Right. And Atul, the second question is we are doing all this developer financing right now, obviously, with a view that this will help us in increasing our retail home loan sales later on. So at what point do we see that inflection, right, that this starts contributing to more retail origination and disbursements?
So Abhishek, even today, also, they contribute a very significant part of our retail home loan. So it is at while we see the penetration, what we have in our projects may be still lower than what we want. Our penetration in our projects in terms of would be close to 16%-18% as of today. We would prefer to be having a higher. But it is even today, also, a significant portion of our home loan originations in a month. It contributes a very significant amount. As it goes forward, it will contribute more as well as we become more efficient, as we are able to penetrate more at the counters where we have extended the construction finance.
Then, irrespective of whether you scale up near prime or not, ideally, the growth in prime should sort of accelerate because right now, the jaws between growth in developer finance and let's say, even if you take it by number, number of developers you're financing versus how many of those projects are contributing, there's a jaw there, right?
Yes. We have work to do to improve our efficiency in capturing the market where we are funding the projects. You are rightfully calling out, Abhishek. There is a gap there, and we capture that what we intend to do, or the prime growth can be much, much higher than what is there. But pluses and minuses, there are always pluses and minuses. That's why the projections for near-term or medium-term or the medium-term projections are in line with what is there. There will be some pluses, there can be some minuses. That is it.
Understood. Got it. Got it. Thank you so much and all the best.
Thank you.
Thank you. Next question is from the line of Prakhar from JP Morgan. Please go ahead.
Hello. Yeah. This is Prakhar from JP Morgan. Thanks for taking my question. So if I just follow up on the previous question another way, for this 14%-15% OPEX to NII and 2%-2.2% ROE, is there a particular set of spreads that you would want to target on a steady state?
Spread? Gaurav, will you be?
Spread would remain in that corridor of 2%-2.2%.
NIM today? Gross spread, yes. Gross spread would be lower than 1.8%. Broadly, yes. So over a medium term, yes, it would be so between 1.8%-2.2% in that corridor, spreads would move. That's. Depending on the rate cycle and depending on the competitive intensity, 1.7%-1.8% to 2.2% through the cycle, the spreads will remain at the book level.
Understood. That and seven to eight times leverage, as you stated in your presentation.
That is from ROE at 7%-22%, 7-8x leverage. The levers are 13%-15% ROE. We had previously been raising capital when we had been closer to 7, but as we have now grown in scale and reached a stage. Our earlier threshold used to be 6-7 times leverage as a private company. Now we have moved the threshold to 7-8x of a leverage as we have grown bigger. Not as a private to public, but as we have grown bigger, we believe that we have an ability to sweat the capital more now.
Understood. Thank you. That's helpful. That's it from my end.
Thanks.
Thank you, Prakhar. Ladies and gentlemen, we'll consider that as the last question. I'll now hand the conference to Mr. Mayank Mistry for closing comments.
Thank you all for joining the call today. Thank you to the management team of Bajaj Housing Finance for giving us this opportunity to host the call. Thank you all.
Thank you very much. On behalf of JM Financial Institutional Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.
Thank you, Sameer. Thank you, JM.
Thank you.