Ladies and gentlemen, good day, and welcome to Bajaj Finance Limited Q2 FY 25 earnings conference call, hosted by JM Financial Institutional Securities Limited. As a reminder, all participant lines will be in 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 touchtone 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, Neeraj. Good evening, everyone, and welcome to the 2Q FY25 earnings conference call of Bajaj Finance. First of all, I would like to thank the management of Bajaj Finance for giving us the opportunity to host the call. From Bajaj Finance management team, we have Mr. Rajeev Jain, Managing Director, Mr. Anup Saha, Deputy Managing Director, Mr. Sandeep Jain, COO and CFO, as well as the entire senior management team of Bajaj Finance and its subsidiaries. As always, we will have opening comments from the management team, post which we will open the floor for Q&A. With that, I would now like to hand over to Mr. Rajeev Jain for his opening comments. Over to you. Thank you.
Thank you, JM. Thank you, Sameer. I also have with me Atul Jain, Managing Director, BHFL, with me on the call. Very good evening to all of you, or good morning, depending on the geography. I'll just take you through the presentation that we have put on the investor section of the website. I'll jump straight in, on panel number four. On a consolidated basis, I would say mixed quarter, for us as a firm. Good quarter in terms of volumes, asset management and operating efficiencies. Loan losses remain elevated in Q2 as well, as they were in Q1. As a result, profit growth and return on assets were muted for the quarter. We overall delivered AUM growth of 19,732 crores in the quarter.
Booked 9.7 million loans and added just a tad below 4 million new customers to the franchise in Q2. Bajaj Finance app now has 61.7 million net users. In terms of AUM, the overall consolidated AUM came in at three lakh seventy-four thousand, just a tad below that. OPEX to net and NII continued to improve, came in at, so expenses remain controlled, came in at 36.2%. PBT grew to 5,401, PBT growth of 14%. That as a result of last year's deferred tax, fourteen thirteen is not? PAT came in at 13%. Oh, this is as a result of the the minority interest in BHFL. Okay, understood. Sorry.
PAT grew by 13% to 4,014 crores. ROE came in at 19.1% and net NPA came in at 46 basis points. I'll quickly take you through some of the highlights on panel number 5. As I said, AUM grew 29%. New lines of businesses that we've launched in the last five, six quarters have now started to contribute 2% to 3% of AUM growth. Overall AUM composition, which is appended in the latest section of the presentation, on a year-on-year basis, remains largely stable. Now, AUM growth, I've talked about. New loans booked were up 14% to 9.7 million, as against last year we did 8.53 million. In terms of customer franchise, we added 4 million customers.
We now estimate that our overall new customer addition to be 15 to 16 million in FY 2025, which will be in line with what we originated last year, marginally higher. Last year, we did 14 million customers. This year, we foresee between 15 to 16 million new customer addition. Customer franchise, as a result of the first half of the year, having added 8 million new customers, stood at 92.1 million customers, and we are optimistic of crossing a milestone of 100 million customers, customer franchise, in FY 2025 as we finish the year. Cross-sell franchise, which is a key measure of good to not so good, was at just a tad below 58 million customers. In terms of liquidity, liquidity buffers stood at INR 20,200 crores.
Cost of funds came in at 7.97%, an increase of three basis points on a sequential basis. In general, our assessment is that the cost of funds for the company has actually peaked now. Deposits growth grew by 21% and stood at 66,131 crores. Deposit book growth is obviously softer, given that there's significant amount of price war that's happening from across the system. Given the fact that the company has found other alternative sources which are more attractive in terms of coupon, the deposit book growth is slower than expected. On the next slide, in terms of operating efficiency, the net interest income grew by 23% to 8,838 crores.
Overall, NIM in our assessment is now stabilized. Between Q1 and Q2, there's hardly any drop. We think the NIM is now stabilized at these levels from here on. Net total income grew by 24%, so NII grew by 23%, NTI grew by 24%. Opex to net total income improved to 33.2% versus 34% last year same time. We continue to optimize operating expenses, I would say. As I've said in the past calls, that it's one of the levers that we have to continue to pull through, both by optimization on one hand, and continue to invest in technology, which is mainly GenAI, to improve productivity.
Employee headcounts stood at 59,400 people on a consolidated basis. We added 4,700 staff in Q2. Annualized attrition was marginally higher than last year, at 16.4%. Opex, which is the dampener for the quarter, I would say, because when I look at the PPOP number, came in at 24%. [crosstalk] Twenty-five. 25%. PPOP number was good, so we managed to do well on AUM, managed to do well on NII, and managed to do well on managing expenses, but credit cost was a dampener for the quarter. It was so in the last quarter as well. I'll give you some update on that over the next four or five points. Gross loan loss and provision came in at 1,934 crores. They remained elevated in Q2 as well.
If you break up the loan losses in terms of Stage One and Stage Two, in Q2, Stage Two assets have actually reduced by 357 crores, and because of elevated Stage Two in Q1, the Stage Three increased by 900 crores, and as a result, the net increase in Stage Two and Stage Three assets on a consolidated basis was 542 crores. It is lower at one level than the previous quarter. It was across all, as I'll take you through the panel later, across all retail and SME lines of businesses, so it's not restricted to any one segment or any one geography or any one. There's marginal inching up across all retail and SME lines of business. We as a prudent company continue to take risk action by either cutting segments or proving exposures.
The gross loss came in at 2.16%. In Q1, that number was 2.12%, so there's a sequentially a four basis points movement. It was 2.16%? [crosstalk] Four one six. Oh, same number. Sorry. Gross loss to average assets was 2.16, as it was in Q1 as well. We are cautiously optimistic, looking at the portfolio movement or gross flow rate methodology, that loan loss to average AUF has hopefully peaked, and we estimate loan loss to average AUF to go down to 2% or so by Q4. That's really what our estimates at this point in time is. We'll of course continue to watch the environment and continue to invest in debt management and risk management to sharpen the pencil. Net loan losses, as a result of 2.16%, came in at 1,910 crores.
We utilized a management overlay of INR 25 crores, and as a result, net loan loss to average AUF came in at 2.16%. If you recall, we had estimated that our net loan loss to average AUF should be in the corridor of 1.75% to 1.85% for FY 2025, with improvement projected in H2. At this juncture, from a guidance standpoint, I would say that we estimate the FY 2025 net loan loss to average assets to be between 2% and 2.05%. Now, it's more likely to be 2.05% than to be 2%. As a result of this, the GNPA and NPA stood at 1.06% and 0.46%, as against 91 basis points and 31 basis points. They still remain among the lowest in the industry, but we've seen on a year-on-year basis, slight inching up.
When we look at the portfolio movement across secured, unsecured portfolios, one thing I think jumps out in general is that those clients who have more than three or more live unsecured loans are showing higher propensity to default, and in general, have lower downstream, lower collection efficiencies. So as you look at this data, we are continuing to tighten our underwriting norms for such cohorts of customers across all our products in an intelligent manner. I think that's really the update on credit costs. In terms of profitability, consolidated pre-provision profitability grew by 25%. Consolidated profit before tax grew 14% to INR 5,401 crores, and PAT grew by 13%. The ROA came in at 4% just a tad below 4.5%, and ROE came in at 19.1%, and capital adequacy remain, continue to remain reasonably strong. Tier 1 capital was just a tad below 21%.
I just want to provide two important updates for as an additional updates standpoint. As you would recall that, we as Bajaj Finance started doing non-Bajaj Auto two-wheeler financing business in June 2022. In September 2022, Bajaj Auto also decided to set up its own captive financing unit, namely Bajaj Auto Credit. BACL started its operations in Q4 of FY twenty-four, which was six, seven months ago. In FY twenty-four, Bajaj Finance financed eight hundred and sixty-four thousand two-wheelers for Bajaj Auto and hundred and ninety-nine thousand three-wheelers for Bajaj Auto. In H1 so far, BFL has financed two hundred and seventeen thousand two-wheelers and fifty-five thousand three-wheelers of Bajaj Auto, principally meaning that the rest of the business has been booked in by Bajaj Auto in Bajaj Auto Credit Limited.
And, as a result, the company's financing to bank customers has reduced considerably post start of business operations by BFL. I thought it's important that we provide this update. As you're also aware, we started our non-Bajaj Auto two-wheeler financing business in 2022, and it's already grown to around 35,000 accounts per month. That means we have rounded at this point in time of 480,000 accounts on a non-Bajaj Auto two-wheelers. We expect to disburse just a tad with 500,000 accounts in the current year and scale to 720,000-odd accounts in FY 2026. And so as the, as BA, as Bajaj Auto products AUM goes away, this AUM will replace it fully by FY 2027, by end FY 2026 through to FY 2027. On the three-wheeler business, we're still evaluating what our strategy should be, so that's something that's still open.
But the two-wheeler business volumes, we hope to fully mitigate, make up for by March 2026 or so. That's just an additional update. As it has financial implications, I thought we just provide an update. Just the last point on that, we have so far investment grade rating for our international borrowings from S&P. We were rated investment grade for by S&P. We are happy to inform you that Moody's has also assigned a Baa3 long-term rating, which is the sovereign rating, to Bajaj Finance as well. So these are the two additional updates that I have. I'll just quickly run through some of the panels for BHFL.
You would have listened into the call yesterday that the management did, so I'm just skipping that. I'm on panel number. In terms of rest of the panels are reasonably routine. If there are any specific questions, we'll be happy to answer. I thought it's important I open the call for Q&A. All our panels are completely routine in nature.
Thank you very much. We'll now begin with the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the queue, you may press star and two. Participants are requested to use handsets while asking your question. Ladies and gentlemen, we will wait for a moment while the questions are assembled. Participants, you may press star and one to ask the question. First question is from the line of Chintan Joshi from Autonomous. Please go ahead.
Hi, can you hear me?
Yes, we can hear you.
Yeah. Hi, thank you. So two questions, one on asset quality and one on NII. On asset quality, could you give us some more color on what gives you the confidence that slippages and credit costs may have peaked out here? Would be interesting to get some idea, you know, across different products and different trends that you are seeing both in your data and perhaps industry data that you observe. And then on net interest income, if you could please help us think about where NIMs might go over the next year with the rate cut likely, you know, what would the timing benefit be in terms of NIMs peaking would be helpful. Thank you.
So, you know, let me use this to principally just take you through the portfolio quality. The main interesting thing that we are seeing in the cycle is actually that the bounce rates are still lower. The portfolio quality, when you see on the panel, is still holding, the flow rates are higher. You know, I think so people are still defaulting lesser. I keep telling people prior to COVID, people think it's too far away. The default rates are still lower, the flow rates are higher. So one of the things that we've done is looked at the capacity planning and the debt management infrastructure. Out of four thousand seven people that you principally saw, that we've added in Q2, close to two thousand people have been added in deeper geographies as a result of our sharpened capacity planning. So that gives us one level of confidence.
Two, the underwriting actions that we've taken in the last four, five months also gives us the confidence that as we move through the leverage point that I made should start to result in benefit from Q4. But as I use the word, we are cautiously optimistic. We hope that the environment continues to remain stable. I would not call it. I would say the current, if the current state was to remain, given these two actions, one on underwriting and two on further investments in debt management, we are cautiously optimistic that we should. If I give you a texture that at a point in time, in terms of clients who came on board, non B2B, non B2B loans are shorter than our loans, so this point is not relevant.
If you had 13% of the clients who came in with three-plus personal loans when we gave them, now it's only 8-9%. So, that's the impact on volumes we've taken. Doesn't mean they're bad, but as we've cut exposures on them, as we keep doing more and more such actions, we should see the books start to, you know, come back to a hundred and eighty-five to hundred and ninety-five basis points of credit cost. That's on the one part. Second part is on NIMs. Look, I mean at yeah.
I think, NIM very clearly, as the cost of funds starts to go down, I think with a lag of, one or two quarters, we should start to see the benefit very clearly emerge to us as well. We forecast that on a twelve-month changing basis, a twenty-five basis point drop in, let's say, repo rate, should clearly will lead to a ten to twelve basis point improvement in the NIM. However, we would like to use, the NIM, improvement, to our advantage to grow some of the secured and new lines of businesses that we added in the last couple of years. Idea would be to, not take it through the P&L.
Idea would be to use this opportunity for improving the quotient of secured balance in the overall portfolio, and continue to create a resilient balance sheet, focusing on the newer lines of business that we have launched in the last two years.
Won't that lead to a rate pressure, you know, once the cycle peaks?
At this point in time, I mean, as Sandeep said, we'll use the reduction. As I said, okay, if you go back to my earlier comments, so the NIM is stabilized, that is one part. We think cost of funds is peak. As the cost of funds, so it's about management of portfolio. At a portfolio management level, our intent would be to use the reduction to grow our low-margin secured businesses, and we otherwise keep the composition very, very steady.
And I think,
Thank you.
It's important, Chintan, that I make this point as we get into FY twenty-six. Rajeev did make a point on operating efficiencies getting created by rationalization of operating expenses. At the same time, GenAI leading to a lot of areas where we could significantly increase deployment and reduce operating expenses for us. Some of these will become very, very important risks for us to play over the next couple of years. So operating efficiency will be a dimension that we would like to explore in FY twenty-six. And beyond that, I think Rajeev did make a point saying that pre-provision operating profit still remains strong at 25%.
So even if the environment were not to improve, we have a good tailwind coming from pre-provisioning operating profits that should ensure that any NIM improvement, even if it goes towards fueling the secured by the balance sheet new lines of businesses, should still be able to assist us in terms of delivering the rightful ROEs for the shareholders.
That's fair. Just a clarification, Rajeev, you said 185 to 195 previously. I presume you meant 175 to 185?
No, no, no.
Okay.
As we said earlier, that principally the 170-172 basis points that we used to be pre-COVID, based on the regulatory changes and our write-off policy changes, adds up being between 185-195 basis points. That's really what our-
Thank you.
Go forward, forecast is at least for the next, I would say, next fiscal, and then we'll take it forward from there.
Excellent. Thank you.
Thank you. Next question is from Dhaval Gada from DSP. Please go ahead.
Yeah, thanks for the opportunity. Three questions. First is on the Rural B2C business and also the business and professional loan. Both of them are color-coded yellow. Just if you could give some perspective on when do we see normalization in both these segments? That's the first question. The second one relates to cost to income and just to the point that Rajeev highlighted earlier on further operating efficiency. If you, I mean, somewhere in COVID, I think our aspiration was 30% to 31% kind of OpEx to NII. Is that what one should expect in the medium term based on the business mix that you're targeting?
So some perspective around how much more benefit can one see in the medium term. So that's the second one. And the final one is on RBI commentary that we are hearing around various, you know, segments relating to growth and asset quality pressure, plus the regulatory perspective around NBFC. I mean, if you could just highlight how the company is looking at navigating these, you know, on the current environment. Yeah, those are three questions. Thanks.
Yeah. So look, Rural B2C, as you can see, after a long time, after virtually seven, eight quarters, it showed a double-digit growth. Clearly, we are, that portfolio has not grown for the last, has grown in single digits for the last six quarters. As we get through the worst of it, we've started to slowly grow that. We foresee that that portfolio, it'll remain yellow, and this is time. There comes a time in any credit business where you cut all the bad cholesterol, and you have to build, you know, the good business. We are 18 months into it. We are moving to a phase where we are starting to build the good business. I think that's point number one on Rural B2C that I would like to make.
We foresee that business still, however, may grow only by 12-14% on a full year basis. That's on Rural B2C at this point in time. Business and professional loan, mind you, that the hurdle rate is, bar is very, very low. As you can see, we color code based on, you know, it used to be 99% in pre-COVID. That's our, quote, unquote, "threshold number." So that's one part. It's now at 98.63. That's one part. Two, if you go to SME, we've seen some level of elevated flow rate. Just go to, if you go to panel number, I'm referring to panel number 52, you will see SME lending. You see elevated numbers that on, No, not this comparison. Not this. Just give me one second.
Okay.
Yeah, here. You see the GNPA come in at 134 basis points, sorry, 164 basis points. It was a year ago, 134 basis points. And that's how we have. And I repeat, Dhaval, what I was saying earlier, while 98.63% looks like it is fine, but as I said, across portfolios, whether it's SME or retail, the default rates are lower and flow rates are highest. So that's a little unique situation that we are actually seeing. It's unique, is what I would just say. So given 164 basis point GNPA, we've stamped it as yellow. Having said that, in that the professional loans part is fine. The SME, MSME businesses are that way only. The risk goes up, we pull back business, risk goes down, we accelerate. I think that's the nature of the MSME business. So that's the second point.
Operating efficiencies, look, we are amongst the most efficient. You would know that as you benchmark us across various peers. As we build on this year's long-range plan or long-range strategy, which is published in January, the intent would be to dramatically transform our operating focus on operating efficiencies using GenAI across call centers to service what I would call a phase three of digital transformation that we are ready to embark on for us as a firm. Where that takes a number two is an outcome. I think you will see expressions of that in when we, when we share in January the long-range strategy. Would do we see operating costs as a lever? Answer is yes. Will we continue to make progress? Answer is yes.
I can't say whether a number will get to 31 ever, because at our base, 31-33 is a significant drop, but you will continue, you should continue to see the number trend down. On regulatory matters, I would not like to comment, Dhaval. You know, do we continue to make deep investments in compliance, operational risk? Answer is yes. We have now, from two and a half years ago, from very little to now, two hundred and fifty people in first, second, and third line of defense we have. Answer is yes. Are we on a proactive basis, on an ongoing manner, looking at areas that we can improve on? The answer is yes. Is all I would like to say.
We are investing in all three lines of defense: business and operations compliance, central compliance, internal audit. And we also, when the embargo happened, we embarked on a proactive integrated compliance framework and did a periodic review and created a self-corrective regulatory compliance framework for us. So we're doing all that we can to be from a compliance readiness standpoint as a firm.
Yeah. Just to add maybe a couple of points on OpEx to NIR, because that's a point that he made. I think it's also important to note that over the last 18 months, we've launched lots of businesses. We have made, investment in all those business launches and so on and so forth. As we go along, over the next two-year period, I think, one, the investments will be very marginal in terms of only propelling the presence of these businesses and growth. That's one thing. So this should give us some operating leverage, in the subsequent years. Second, of course, the investments that Rajeev talked about on GenAI capabilities and so on and so forth. But the important point is, we would like to, pace it out, have 20, 30, 40 basis points in a year.
Idea is to continue to improve, but at the same time, continue to remain invested in the growth of business. That's a point that I thought I should make. As regard growth, I think Rajeev did call out at the beginning of the call that while the balance sheet grew by 28-29% in the current quarter, 2% growth came from new lines of businesses. As we forecast full year, we see the growth at 27-28%, with new businesses and mostly being secure in nature, contributing about 2-3% of the AUM growth for the current year. Which means that the non-new business, which is old existing businesses that we have in the company, will see a growth of anywhere between 24%-25% for the current year. We remain guided by our medium-term guardrails, which is 25%-27% AUM growth and leading to a 23%-25% profit compounding, and that's what we remain guided by.
I think the point that Sandeep made on investments have peaked out in launch of new businesses
Yeah.
And geographies, is an important point. And they should swing from loss to start to breakeven to generating profit, as we get into the next fiscal.
Yeah, thanks. Just one small follow-up on that, Rural B2C. Do you think by the end of the year, we can see the you know, business turn into green, which means, for next year, the growth will normalize? Or you think it is still few more quarters away?
That we are cautiously optimistic about it. I would say so.
Got it.
Yes.
Got it.
As Sandeep is saying, quarter at a time. We can forecast the current year, but if we just to reinforce the point, it's possible that as if we exited a 12-14% growth on a year-on-year basis, then next year could start to grow between 23% and 25%.
Got it. Thanks, and all the best.
Thank you.
Thank you. Next question is from the line of Piran Engineer from CLSA. Please go ahead.
Yeah, hi, team. Congrats on the good set of numbers. Just a few questions. Firstly, on the overall asset quality environment, what really, So I know you've mentioned that, we've made underwriting, you know, tweaking and improving our collection infrastructure. But what would make the cycle prolong, as in this elevated credit cost cycle? Like, for example, you know, you mentioned 8% to 9% of your clients have three plus loans versus 13% earlier, but, you could have other irresponsible lenders lend to these people, right? So just trying to get a sense of, what's changing right now versus, say, three months back.
I think, one, the fact is that various actions by the bank has started to slow down the unsecured market. I think if you take the first half, if I'm not mistaken, based on the bureau data, the personal loan year-on-year growth is degrowth, if I'm not mistaken. I think it's minus 3% to 4%. So I think, in terms of disbursements, we're not seeing. So clearly, the supply side has slowed down. So in fact, that was probably mostly needed, too. Availability had become very easy. So I think that's one, at a macro level, point I would like to make. Two, as we further prune segments, as we reduce exposure, we're doing both, pruning segments and reducing exposure. I think mix of both these factors.
You know, when excesses happen at times, there is a phase of excesses. Post that, you know, good also don't last too long, and bad also doesn't last too long. Don't believe it. It'll last too long either way, right? So, as the portfolios get washed, you should see improvement. But as I said, we remain cautiously optimistic of the same.
Got it. Got it. And just secondly, on our fee income now, you know, I noticed that it's a little bit weak, considering the fact that the ban on those digital lending products was lifted, and that itself was some 60 crores of quarter. So if I kind of adjust for that, it does not look like we've seen any fee income growth. In fact, we've seen degrowth QOQ. So anything here to read into it?
Yeah. Usually.
Yeah, major degrowth here because of, you know, I mean, summer season versus non-summer season. But last time we didn't have the, those digital lending products, right? Which were banned.
Yes, yes, yeah.
And now we would have had it, so I would have expected to be at least flat. So is this because of the RBL thing, where collections we are not doing for them, and therefore fee and OpEx both are proportionally more?
Yeah. So, Piran, point number one, I think if you're referring to last year, whether we had the fee income, or the digital lending fee income not being there, I think last year the action by RBL was in November of the quarter. Quarter to last year, we did have that income from a viable comparable point of view. However, to the other point that you're making on the co-branded credit card, where the collection activities was earlier managed by us, incrementally starting quarter two, that activity has moved to RBL, rightfully so. And there, that has an impact in terms of overall fee income for the quarter, from a comparable point, comparative point of view.
Got it. Got it.
He was making a point on sequential basis, if I'm not mistaken.
Yeah, I was making a point on sequential.
Sequential.
No, I was QOQ.
Good.
Yeah. Because last quarter, two months, you all didn't do that product, right?
Yeah. The answer is then, very clearly the transfer of the collections activity to RBL Bank, which otherwise would have come to us as payment towards the collections activity, would have sat in the fee income.
Ah, okay. Fair enough. And just on the NIM outlook, did I hear it correctly that NIM will be stable, assuming no rate cuts further? Or is it that cost of funds will be stable, but yield could still decline because of portfolio mix?
Both are peaking and AUM composition should stabilize. Both.
Got it. Got it. Okay, that's it from my end. Thank you, and wish you all the best.
Thank you.
Thank you. Next question is from the line of Kunal Shah from Citigroup. Please go ahead.
Yeah. So, firstly, maybe in terms of the overall growth, given the environment wherein we are, we have kept on increasing the credit cost guidance as well. But still we sound a bit on the growth despite Bajaj Auto business. I think that's coming off. Plus, you said like you are tightening few of the standards, but I think that compression on the growth still seems to be like 27% to 28%. No doubt there is something which is contributing from the new business, but existing is also continuing. So wouldn't it maybe in terms of the approach, maybe in terms of the growth versus credit cost, is there any change in the approach that we are looking, or there is no need to change at this point in time?
No, no, there's no need to. There's no, as I mentioned earlier, Kunal, that between two to three years maybe, in fact, as we exit the year, close to 4% of the growth may probably be coming from new lines of business possibly, between new two-wheeler to tractor to Car financing. To new car financing, to CV, which just went live in July, to gold loan, while it's an old business but growing healthily. These are five, six lines of businesses that are yet to, if I may say so, break out in any given manner. Some of them will start to break out by the fourth quarter, so if you knock this off, the organic so-called, even this is organic, the organic number would have looked like 24% to 25%, you know.
It's just we use the good times over the last 24 months to launch or complete our product suite as a firm, which is helping us continue to generate AUM momentum without having to compromise in any given manner, the credit quality.
Sure. And secondly, in terms of urban B2C, so if you look at stage two, that still continues to be quite elevated, almost similar to where it was in last quarter as well. And that, and then we had seen this kind of increase out there as well of say, almost like thirty-eight odd basis points in the GNPA. And maybe as you indicated for SME lending, maybe moving from one point four to one point six made it like get into the amber. Do you see the risk of urban B2C also getting into amber, given the collection efficiency and this kind of trend in stage two?
No, we remain watchful, Kunal, is what I would say, and as I said earlier in the call, that we saw inching up on panel 51 across. So, you know, technically, so clearly there is pressure across. And now, mind you, you can see the numbers and absolute numbers in urban sales finance and rural sales finance are smaller, but one has seen movement across lines on a year-on-year basis. So we remain watchful. You know, and only point I would like to make is that between managing risk and managing growth, we'll choose credit. We'll choose credit. So is the only point I would make, so.
Right. And Kunal, I think there's a, there's a technical thing also, because of number of days logic for DPD classification, and given that most of our customers get banked on second, there is that one month plus and minus that happens between quarter one and quarter two. So that's one thing that I think, is an important point. But, leaving that aside, I think, it's also important to the point that Rajeev mentioned at the beginning of the call, as part of the portfolio quality, that in the current quarter, the stage two and stage three has actually gone up by INR 542 crores. And he did make a point saying that this number was, much lower than the last quarter.
Just to give you context, last quarter, the Stage Two and Stage Three, on account of various disruptions that we had referred to in Q1, and I'm repeating it, has seen actually 1,100 crores of movement. So- Had seen. Yes. So Q1 had seen 1,100 crores of addition to Stage Two and Stage Three. Versus that, in the current quarter, the movement- Nine hundred In Stage Two and Stage Three is 542 crores. So there is that level of improvement that is clearly visible.
Got it, and last question, was there the option to create the management overlay buffer against this one-time gain? And would you have done that? Or maybe that was not there from the auditors, and that's the reason we inch up the guidance and still maybe not have created any buffer out there against this one-off.
Yeah. Kunal, just to clarify, when you mean option, I think we don't have options. We look at the data points, and based on that, decide what is the right thing to do. The one-time gain does not necessarily give you an opportunity or option to create provision. We looked at the information, and based on that, we did not felt a need at this point in time to create an overlay. However, to the other point that you made, even from accounting perspective, the gain sits in other non-financials on a consolidated basis goes and sits in the reserve. So if that was a question that you were... Another point that you highlighted, yes, it's in the consolidated numbers, it go and sits in the reserve.
Okay.
Kunal, I'd like to raise the point that I made that, as I, which I said earlier, that if the PPOP is 25%, then we have sufficient margin in the PNL for us to sustain any kind of... I won't even, you know, just on this point, I would just make a point that, let's say, if our long-term or medium-term guidance stroke experience stroke guidance is 185 to 190 basis points, and if you're looking at full year, 205 basis points, doesn't create pressure. It's a 10% increase or an 8% increase in credit costs, doesn't create that kind of year-on-year comparables are looking bad because we were at 156 basis points at that point in time, and we were consuming overlays.
If you do apples to apples, what our run rate is, which is 185-195, let's say, for a moment, given our diversity of businesses, and the number on a full year basis comes in at 205, even let's say worst case, 210 basis point, that's a 10% or 7% to 10% increase in credit costs on a year-on-year basis, or from our medium-term experience or guidance. So I wouldn't lose too much sleep over it.
Sure. Yes, sure. Thanks and all the best. Yeah.
Thank you.
Thank you. Next question is from Viral Shah , from IIFL Securities. Please go ahead.
Yeah, hi. Thank you for the opportunity. Rajeev, I wanted to ask you. You were talking about the new businesses and then contributing to growth, but if I look at the distribution slide for Tractor, I see that nearly on a sequential basis, the distribution has halved, so is there anything to read into it, or what has happened over there?
So, what we disclose out there for the first two quarter is exact number of dealers that we have signed up. But depending on the activation rate, that we see as to how many dealers have started booking cases, on a two-quarter basis, we do the adjustment. So if you see that drop, that drop is on account of having seen probably less or no business from those counters. So it's very early stage of business. Don't read anything into it. This is now onboarding between 65 to 70 crores of volumes per month since January. We started the business in January. We are cautiously growing this. It's a business to be grown cautiously only, even though it has a different repayment behavior and pattern. Nothing to read in that line, but we are now disbursing between 65 to 70 crores of volumes a month in.
Got it. And,
Sorry.
Sorry, you were saying something.
No, no. Go ahead. Go ahead.
And, secondly, if I look at the two-wheeler and the three-wheeler business, right? You mentioned about the Bajaj Auto Credit and that business. Wanted to understand, like, is there any, say, the ROA or the profitability differential between, say, doing the non-captive business versus the captive business? Just trying to understand if at all there can be any profitability pressures.
It's a fair question. So principally, look, we, the group two-wheeler, this company was formed to do, Bajaj Auto products. So it's a little bit of mixed feeling that as-
Yeah.
As that business goes out. It's a profitable business, but it also used to be, as you may have observed over years, it's also a volatile business. All captive businesses are more volatile than non-captive. It's a global truth in terms of credit performance. I mean, during COVID, we really struggled. It was 5% of the balance sheet and 20% of the GNPA. But over cycles, it was a profitable business. We foresee that the group two-wheeler financing AUM will mostly wind down fully over the next two years. In fact, that will. Since you raised the point, I must make a point. It will actually lead to, as this winds down, it will lead to lowering of our loan loss to average AUM.
you know, it's an important point I must make. If you look at it today, as of September, it's 4.3% of the balance sheet, and it is 18% of consolidated GNPA. Right. You know, this is a factual number as of Q2. So eventually, as this book winds down, we will see the benefit come through in the overall loan loss to average AUM. Correspondingly, the non-Bajaj book for us, because it's an open architecture business, comes in at half the risk cost. You know, that's been our experience over the last two years. So in the short term, it'll have some impact on profitability. Over long term, it will be beneficial in building a lower risk business in aggregate for us as a firm. So I think that's really how this migration or transition will principally play out. So it's a mixed feeling, but.
No, I understand, and thank you for that detailed listing Rajeev's perspective. And, because you mentioned also the asset quality piece over there, if I look at your panels that you gave in terms of the portfolio quality, so, in that, we have seen that in this quarter, sequentially, it has moved up, right? The Stage Two and Stage One has come down. And even versus, say if I compare it, I understand, even from a YOY basis, it's come down. Whereas over this period, I would expect that the non-captive business would have built up, just in terms of the size and the contribution of it.
It'll take us two years. As I said earlier, it'll take. We are at 35,000. We used to do 65,000. We're doing very little three-wheeler. We used to do twenty thousand three, and every three-wheeler is virtually equivalent to two and a half, three, two-wheelers. So it'll take us, as I said earlier, two years to fully make up for the, AUM, you know. So, that's why, as I said, there'll be short-term, impact on profitability because AR will go down. It's by March 2026, we'll start to, make up as much, AR addition as Bajaj Auto used to do with us in terms of, quarterly addition. But we are very clear it's, it's half the risk cost. That is super clear to us.
Got it. But, my question was actually more on the, asset quality front. Like, what was the sequential-
High credit phase. Last year was abnormally low credit phase. I must make a point to you. Its long-term average loan loss to average assets has been in the region of 4%. Last year, if you see, this number was looking like 1.5%, and recoveries were very high. You know, this business went through an ultra-low credit cost phase last year, rather last two years. It went through 2021, 2022, very high credit cost phase. Then it went through an extremely low, lowest that we have seen in the last, I would say, 17, 18 years phase. It is normalizing but inching up more higher than its longer-term trend line. I must make that point as well. That's really how volatile we have seen it to be actually.
Peaking, bottoming, and right now, rising, but rising above the long-term threshold.
Got it. And, Rajeev, if I may, one more question. If I look at the Rural B2C panel, right? Over there, if I look at sequentially, there seems to be some bit of improvement. And, of course, you mentioned and you discussed that at length. My question was that, given the way the cash flows are in the rural India, and especially the asset quality pain that the MFI players are witnessing, like, I was actually a bit surprised to look at this. If you can just throw some more light on this?
Yeah. We would get only 5% of the clients in this entire portfolio who would get. Not even that much actually. 2% to 3% of the clients would probably qualify for a MFI, Anup Saha.
Yeah, the only other point I think, Anup, when we classify this as rural and what MFI classify, those are the villages of India. So I would, MFI would be even one tier lower. And so that's. [crosstalk] Two tier lower. Two tier lower, because those are the six and a half lakh villages we largely talk about. Our rural is still the, you know, smaller towns and cities. That's one. [crosstalk] 550-plus cities. Yeah. And the second point is, the MFI equivalent segment will be very small. That would be 3-4%. So, who can be like household income below three lakhs or so on and so forth. So, there will be not much of overlap there.
Got it. No, makes sense. And thank you so much. All the best.
Separately on this rural stress, I mean, you know, we also, as I've mentioned always in, for the last 5-6 quarters because of the Rural B2C, that we don't see such the so-called rural distress pressure in the B2B business, where we deal with millions of customers. So it's a little bit of, you know, it's anecdotal, but the rural B2B performance is not anecdotal. Even when you're looking at the season's growth at this point in time, we are 15-17 days into the season, we are seeing the momentum to be reasonably strong in rural. So it's a, we are driven more by our experience rather than by our, you know, by anecdotes. So rural B2B continues to be strong, both in terms of momentum and in terms of credit performance. B2C, of course, we've seen pressure and we've acted on it.
Got it. No, makes a lot of sense.
I think it's important that I call it out. Rural B2C also includes MFI JLG business. That is run independently.
So true.
There's about 600 crores of balance sheet that we have, therefore, sitting there. The portfolio continues to remain reasonably healthy.
It's very young.
Yeah.
Yeah, understood that. Agree.
Thank you.
We'll break that some other time, but it's too small.
It become relevant.
Yeah, it's not relevant. That's right.
Next question is from the line of Roshan, from ICICI Prudential. Please go ahead.
Yeah, thanks for taking my question. Firstly, you mentioned this 13% number to be the live unsecured loans overlap that three plus live unsecured loans overlap number. That was the case a few years ago. What was it? It was not clear. 13% dipping to 9%.
8%. Let me tell you, give you full numbers, since you're asking. It was 8%, it went to the peak of 13%, is now down to 9% to 10%. That. So it's not like this is a new thing, but the supply of those clients' propensity to take has increased, you know, and because the supply increases or availability increase, their borrowing pattern increase. So it's not like it was pre-COVID it was zero, it is 8% in our. [crosstalk] Customer banking. Customer banking. It went up all the way to thirteen. It's down to nine, ten.
Right. And when I look at this amber color panel and your GNPA moment, if I. The GNPA has increased across the board, like you said, but you chose to call out SME lending and Rural B2C alone as amber. Anything more to what you are seeing, which is not here in data?
It's a management assessment, Roshan, nothing else. You know, where we are tightening in a transparent manner, we are assessing. You, as you rightly, as I rightly, as I pointed out, as you are reinforcing, you're seeing movement even in gold loan, right? On a year-on-year basis, like, 35 basis points, GNPA has gone to 53. I'm giving an example to make a point, right? Or a 60 basis points, then urban sales finance has gone to 81. But, wherever we tighten, and we act on, is really what we or things go, lower than pre-COVID, or higher than pre-COVID, in terms of delinquencies. That's how we would, we, in general, provide management assurance to you. So it's a, there is-
Understood.
I hope that makes it clear.
Yeah, yeah. The other question I have here is, last quarter you said bounce rates are stable, but whatever has bounced is turning out to be very chronic.
Same, yes, that is. As I said, the flow rates, I use the word flow rates.
Yeah.
It's the same point. The defaults remain lower, but flow rates are higher. That has not changed, Roshan, as yet.
Right. And, just one last question. This, there was this suicide case, that had happened, right? So any comments on that?
We're very saddened by the incident, and our prayers are with the family. We've referred the incident that happened. It's very, very unfortunate and sad incident that happened. We've referred it to our internal disciplinary action committee for investigation and recommendation. We'll go by, and we've shared our actionabilities or learnings that we've taken away with the board as well. This is all I have to say.
Sure. Thanks. That's all from my side, and all the very best.
Thank you.
Thank you. Next question is from the line of Umang Shah from Kotak Mutual Fund. Please go ahead.
Yeah, hi. Good evening. Thanks for taking my question. I have two questions. One is, Rajeev, if you could, I mean, you, at the beginning of the call, you already mentioned that, probably, by the end of twenty five, you'll share, a long-range vision. But if there's some color as to how should we look at the standalone Bajaj Finance entity, maybe broadly in terms of growth and profitability and ROE, given that Atul has already spelled it out, about Bajaj Housing Finance, on the Bajaj Housing earnings call. I mean, that will give us some clarity on how should we look at the standalone entity, maybe from a two to three-year perspective.
Just because we happen to have listed the firm and offloaded 11%, we continue to be 90%, just short of 90% owner of Bajaj Housing Finance. That's why we still look at it as sum of parts. While they have an independent journey and independent, you know, but they are 31% of the balance sheet today on a consolidated basis. I don't foresee the composition, their contribution to profitability, et cetera, so on and so forth, to change in any given manner. We still look at it as sum of parts of BHFL, BFSL, and BFL. We continue to be excited about both the subsidiaries and, of course, the core operating business of Bajaj Finance. So we, at least in my head, until I run it, I continue to look at it on a consolidated basis, is what I would say.
Understood. Fair point. And just the second question is on clearly we are getting a little mixed sort of views or commentaries when it comes to consumption trends.
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Give us some time.
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Am I audible?
Yeah, a little better now. Better, better now.
Yeah. So, I just wanted to thank you for you. So, if you could just comment on this.
We are still not able to hear you.
Okay.
Yeah, it is better.
I assume he's asking a question on season.
Yeah, that's correct. On the festive demand. Yeah.
Yeah. So look, in the discretionary consumption businesses that we are in, what we are principally seeing is that if you look at the first quarter growth for us was 8% in terms of units sold. Second quarter was actually 9%. When I say discretionary consumption, I am talking our point-of-sale businesses, which is CD, Digital, rural, CD, Lifestyle, e-com, you know. So far, if I look at the first, the season, festival season started on third of October. We are virtually 18-19 days into it. So far, at this point in time, looks like the count growth is, like, between 20% and 21%. Between 20% to 22%, depending on a day. Every day during these 30 days is important.
The season will end on third of November. So far, 20 days into or 19 days into the season, numbers looking like 21% in terms of count. In terms of value, in terms of discretionary, it's clearly prices have cooled a little across phones and televisions and so on and so forth, given reduction in raw material prices. We're seeing a 19% to 20% growth between. So I would call that, on our base, a good number. I mean, it's a, it's a, so if I take our. Mind you, we're talking 2 million, 2 million kind of number being delivered. So it's a very large representative sample of what we are seeing, at least in our categories, so far in the first 19 days of the season.
Perfect. Perfect. This is quite helpful. Thank you so much, and wish you good luck. Thanks.
Thank you.
Thank you very much. Ladies and gentlemen, we'll take that as the last question. I'll now hand the conference over to Mr. Sameer Bhise for closing comments.
Thank you for joining this call today evening, and thank you to the team from Bajaj Finance for giving us the opportunity to host the call. Thank you, Rajeev, Sandeep, Anup, and Atul. Thank you.
Thank you, all. Thank you, all. Thank you.
Thank you.
Thank you. Bye-bye.
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.