Ladies and gentlemen, good evening and welcome to Bajaj Finance Limited Q2 FY 2026 earnings conference call, co-hosted by JP Morgan. This event is not for members of the press. If you are a member of the press, please disconnect and reach out separately. Please note that this call and your questions will be recorded, and the recording will be made publicly available. By participating in this event, you consent to such recording, distribution, and publication. All participant lines are 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 touch-tone phone. I'll now hand the conference over to Mr. Anuj Singla from JP Morgan. Thank you, and over to you, sir.
Thank you, Neerup. Good evening, everyone. This is Anuj Singla from JP Morgan. Thank you very much for joining us for the Bajaj Finance Q2 FY 2026 earnings call. To discuss the earnings, I'm pleased to welcome Mr. Rajeev Jain, Vice Chairman and Managing Director, Mr. Sandeep Jain, COO and CFO, and other senior members of the management team. On behalf of JP Morgan, I would like to thank Bajaj Finance management for giving us the opportunity to host them. I now invite Mr. Rajeev Jain for his opening remarks, post which we will open the floor for Q&A. With that, over to you, Rajeev, sir.
All of you. The investor deck for Q2 FY 2026 has already been uploaded on our website. I hope you had a chance to go through the same. I'll quickly focus on key updates for the quarter before we move to Q&A. Overall, good quarter across key metrics of AUM growth, OpEx to NTI, and profitability. ROE and ROE remained steady. Q2 credit cost was elevated. We expect full-year credit cost to be at the upper end of guided range of 1.85%-1.95% now. In terms of growth drivers, if I move to panel number 47, actually, so I'll keep moving panels, so be with me. Assets under management grew 24% to INR 4,62,261 crores, led by secular growth across businesses. New lines of businesses, namely gold loans, new car loans, CV, tractor, are growing in a healthy manner and contributed to 3% of overall AUM growth in Q2.
MSME growth, which we have flagged in last quarter, moderated to 18% as part of our risk-first approach to ensure portfolio resilience and long-term sustainability. The captive two-wheeler and three-wheeler finance business is getting phased out as per the plan, strengthening overall asset quality trends from FY 2027 onwards perspective. It now only contributes to 1.5% of overall AUM. Customer franchise, a key driver of growth momentum for future years, expanded to 110 million to enter 110.64 million. We added 4.13 million new customers in Q2 alone. We now expect to add 16 million-17 million new customers in FY 2026. In general, from a growth standpoint, if I look at the outlook, the company has decided to take a prudent and balanced stance on AUM growth for FY 2026.
We now think the growth will be in the region of 22%-23% as compared to our earlier assessment of 24%-25% due to a set of risk actions that we have taken in MSME business and the revised assessment provided by BHFL on its AUM growth for FY 2026. We now would circle up our guidance to 22%-23% growth for full year versus 24%-25% that we had penciled in January 2026 when we had January 2025 when you talked about. In terms of cost of funds and liquidity, cost of funds continued to improve, improved by 27 basis points in Q2 and came in at 7.52%. For FY 2026, we expect cost of funds to be in the region of overall full year to be between 7.5%-7.55%. IAM came in flat in line with Q1.
Deposit book, which contributed to 18% of the overall consolidated borrowing, grew by 5% year- on- year. For FY 2026, in general, as we saw in the trends in Q1 as well, the company has adopted a measured stance on its deposit program with higher focus on delivering cost of funds efficiencies to the businesses. We will share greater detail on deposits business as part of LRS that we will publish for FY 2026. In terms of operating efficiencies, company continued to deliver efficiencies. OpEx to NTI improved to 32.6% as against 33.2% in Q2 last year. AI implementation across each line of business continues to move forward and should start to reflect in costs and productivity benefits over the next 12-18 months. In general, we remain very, very excited about the FinAI transformation.
On risk and credit quality, loan loss to average U.S. came in at 2.05% compared to 2.02% in Q1 from a sequential standpoint. Credit cost principally remained elevated in Q2. However, the good news is that the vintage metrics, when we look at the portfolio across 3MOV, 6MOV, 9MOV, are showing significant improvement. As a result, we expect full-year credit cost to come within 1.85%-1.95% for FY 2026, and we expect significant improvements in credit cost for FY 2027. On credit cost, let me just give you a double click on it to give you some texture. MSME business remains under watch, and company has taken significant risk actions. We have virtually cut MSME business by 25% in our unsecured MSME volumes. We now expect MSME business to grow in the current full fiscal by 10%-12% only.
The captive two and three-wheeler business continues to, which contributes to 1.5% of AUM, but accounts for 9% of the overall loan loss, also continues to run down. That should also lead to significant improvement in loan loss to average AUM metric in second half of the year and also in FY 2027. GNPA and NNPA came in at 124 basis points and 60 basis points. In general, let me just flag that on a first quarter to second quarter, the number goes up or moves up sequentially because of a high number of days between Q1 and Q2. You will see that even in last year as well. The number moves anywhere between 15-18 basis points. 18-20 basis points, as Sandeep is correcting me, which is really how it is for the last two to three years if you look at the trends.
On portfolio credit quality, the management assessment for rural B2C and MFI has been improved from yellow to green, as you can see it in the numbers itself in the portfolio quality panel. Lastly, but most importantly, I would like to just re-emphasize the point you're aware of it as long-term investors that we principally remain a risk-first company. Let me now switch over to FinAI transformation. Soon we'll start to publish metrics as well. We are eighth, ninth month into implementation of FinAI transformation for us as a firm. It remains central to our long-term vision, and we are on track to become a future-ready AI financial services company over the next, I would say, 15 -1 8 months.
It's underway across each line of our business and should start to reflect in cost and productivity benefits and for consumers as they experience Bajaj Finance over the next 12-18 months. We as senior management are now spending virtually over the last eight to nine months 12%-15% of our time on FinAI transformation. We have identified as a firm, as part of our BPR process, 123 high impact areas across business and functions, with 80 of them, which we will plan to go live by end of FY 2026. Lots of action happening on FinAI. Some of the capabilities are already live, like B2B businesses. I'll give you some texture. 442 AI voice bots are now live. They contributed INR 2,000 crore of origination in Q2 alone. It's five AI conversational bots.
Text bots are live for EMI Card, Extended Warranty, Personal Loans, Health Insurance, and Life Insurance. The conversion rates in general are quite encouraging. We foresee that all our communication by March 2026 would have a bot in it, depending on the affinity product that we principally see. So far, five have gone live. The pace will now increase very rapidly as we get into the second half of the year. 85% of customer service resolutions in Q2 was resolved via AI-powered service bots. In B2B, where we moved a lot of volume in these 40 days, 42% of loan applications in terms of quality checks was performed by AI. We booked in the process 650,000 loan applications in a single day with zero compromise on operational and compliance. We have continued to perfect, perfect, perfect. This number is at 42. Eventually, it has to go to 85%-90%.
Good work done, but there's lots of work to be done as we move forward. In terms of content generation, 42% of our digital banners, if you go to our asset, and 100% of videos we experience are now principally AI-generated. We're also using AI for significant enhancement or enrichment of data variables in terms of using audio recordings to extract meaningful variables. We are quite excited about the kind of data breadth and depth that it would really improve as we deploy this capability across our voice ecosystem. One of the areas that we are very excited about on FinAI is deploying face recognition technology, where we're going to test with 300 points of sale, service, and gold loan branches to identify existing customers and create a wow experience when they walk into these branches or points of sale.
That's something that will go live between now and December and should help significantly transform the experience. That's really on FinAI. I've so far covered consolidated financials and company. I've talked about FinAI. Let me now jump over to subsidiaries. BHFL has already published its results. They had a stable quarter with AUM growth of 24% despite heightened competitive intensity, I would say, and significantly higher than expected portfolio attrition. They still delivered a PAT growth of 18% and ROE of 2.3%. Asset quality for BHFL remained very healthy at 26 basis points GNPA and NNPA of 12 basis points. BFSL, which is the other subsidiary, albeit smaller, saw 40% growth in AUM, and profits were up by 27%. It added 94,000 customers in Q2. Very quickly, just before I open up the floor for Q&A, I thought I'll just provide two more updates.
One update is on management. As if we made a set of announcements in Q4 FY 2025 regarding the management structure. The Board of Directors at its meeting held today has approved the elevation of Mr. Manish Jain as the fourth Deputy CEO of the company. Manish, in addition to his current role as Managing Director of BFSL, will also now be responsible for the company's loans against security business, commercial lending business, and the deposit business. The company would now have four Deputy CEOs and three Chief Operating Officers as what we call executive management group running the firm. Just before I finish, I thought I'd just give you a quick update on the festive performance. Clearly, the structural reforms in income tax and GST by the government have lifted customer sentiment and spurred consumption, led to a very strong season.
We've already done a press release where the company delivered a record 6.3 million loans, up 27% in volume and 29% in value over last year. This is a 37-day, right, Manish? 30?
35.
35 days. 35-day period. It's Navratri to Bhai Dooj, or 35-day kickoff of the festival and end of the festival season. Overall, festive period disbursements were 7.4 million loans we did, and a 26% increase year- on- year. And added 2.3 million new customers during this period, with 52% new to credit at par with previous years. That's really the end of my opening remarks. We are pretty confident of delivering sustainable growth, managing risk proactively, and leveraging technology and AI to create long-term shareholder and stakeholder value for everybody. Happy to take questions now. Anuj, over to you, guys.
Thank you very much. We will now begin the question and answer session.
Anyone who wishes to ask a question may press star and one on their touchstone 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. First question is from the line of Kunal Shah from Citigroup. Please go ahead.
Yeah. Hi, Rajeev. So firstly, with respect to growth, you indicated mortgages and SME growing slightly slower. But again, at the same point in time, festive appears to be quite strong, and everyone seems to be quite constructive on the growth.
Are there any other segments which you would be worried about in terms of pulling back on the growth side because new businesses are also scaling up well, or is it only on account of these two product segments that we are revising the guidance lower?
Both these contribute to 31% and 14%, 45% of the balance sheet, right?
Yeah.
They contribute to 45% of the balance sheet. In a way, your point is absolutely right that the other businesses are picking up the slack. The guidance reduction to contribution of these businesses and their slower growth is meaningfully being made up by other lines of businesses, Kunal, as you can reflect on. We remain quite excited. It is other businesses, whether it is gold loans, car loans, rest of the lab business is growing quite healthily.
Okay. In fact, now rural B2C would also start, given that now it is turning into green, so that will also contribute to the overall growth.
That is correct.
Okay. Secondly, with respect to asset quality, stage three is moving up. Would it be fair to assume that a larger part of this flow is from stage two? Maybe net number is quite small, but including that, otherwise, when we look at it, maybe the GS3 increases all across the segments. When you look at it, all the product segments have seen a significant increase. That is largely only the flow through which is there?
Yeah. Kunal, your assessment is absolutely right. Look at them together. I will hand it over . Yeah. I think if you look at even last year, quarter two, you would see that the GNPA sequentially goes up.
There's a peculiar situation that you have 231 days month in quarter two. And since we have recognition of stage three and GNPA on number of days, the customers who are at the edge, which is 88, 89 days overdue, goes and crosses 90 days position on in the September quarter. As a result, versus a normal quarter where we see three months of GNPA flowing in, etc., you see in quarter two, one additional month of GNPA. That creates like 18-20 basis point of additional GNPA formation in the quarter. Now, having said so, on a Viva basis, also the number is higher.
And correspondingly, just to correspondingly, there's a benefit that appears because of fewer number days in fourth quarter. In fourth quarter. Correct. Just to level the point.
Correct. Having said so, the number has gone up between, say, last year same time to now. Last year same time was 1.06% of GNPA. Currently, it's at 1.24%. Out of this 18 basis point, the captive two-wheeler, three-wheeler financing business, which is on rundown mode, contributes to about 12 basis point of additional GNPA formation. And the MSME, which is what we called out in Q1 as well, has contribution of another six basis point. These are the two businesses to call out. Other than that, all other businesses have held their performance on a YoY basis and sequential quarter basis as well.
Sequential is purely number of days, Kunal. Yeah. Year on year is principally on account of two-wheeler and MSME. The last point on that is to the point that I'm making on stage two to stage three.
The overall formation of stage two and stage three put together was just about INR 162 crores for the quarter, one of the lowest that we have seen in a very, very long time.
Got it. Got it. Okay. Yeah. Thanks. Thanks and all the best too.
Thank you. Next question is from the line of Jay from Nomura Bank. Please go ahead.
Hello sir. Thank you for the opportunity. Sir, my first question would.
Jay, sorry to interrupt you. Can you please speak through the handset?
Yeah, sure. Am I audible, sir, now?
Better. Much better. Yeah. Thanks.
Yeah. Yeah. Thank you for the opportunity, sir. So my first question would be on the MFI lending. So we see there is a 217% growth year- on- year on that book. Do we expect that the pain in the industry has peaked out or it is flattering?
Some comments on that. My second question is on capital financing. Can you give the split between used and new for the same?
We are too small in MFI. Balance sheet is only INR 70- INR 150 crores. The right people to comment on whether the worst is over for MFI or not. I think that's the first point. We are focused on our portfolio. As you can see at this juncture, the portfolio based on the disclosure we provided is at 99.22% current. We continue to tread carefully, knowing fully well as to what's happening in the industry. Tractor, again, the book is very, very small. That's point one. Total book is INR 1,000 crores, so not material. On a more important basis, as we started the business, we were very clear as to what the mix is to be.
The mix is to be 75 new and 25 used. That is the mix. And that is the mix with which we are building out the business. Our portfolio modeling says that for us to deliver minimum hurdle rate of return on equity in the tractor finance business, we will need a 75-25 mix. That is really what we are going with.
Okay. Understood. Sir, do we have a partnership with the OEMs, or how does the partnership with the OEM work here?
Like in a typical B2B business, this is a B2B business. We work closely. They are mostly very regionally dominated players. We work with all of them. I mean, we are not pan-India as yet. We are in how many?
400 towns.
We are in 400 towns in India at this point in time. Predominantly north and west. North and west, sorry, dominated.
We're just building it out. It's too small as yet, but promising.
Okay. Sir, last question on MSME lending. Sir, we see GNPA growing up significantly. Is it because of the regional issue, regional rainfall issues, which were highlighted by the peers?
As we had outlined, we are seeing in last first quarter, we talked about it, that we are seeing incipient stress. It's across the board. It's not regional in nature. As I've said in my opening remarks, we've cut business by 25% and hoping that the worst is behind us by between March and June, and it can be in a growth mode from there on.
Okay, sir. Thank you. Thanks a lot. That's it from my side. Best of luck.
Thank you very much. A request to all the participants
Please restrict to one question per participant, and we join the queue for a follow-up question. Next question is from the line of Sucrit Patil from Eyesight Fintrade . Please go ahead.
Good afternoon, Rajeev. I have two questions, but first is it's a forward-looking question. As more fintechs and NBFCs scale up across India, what is Bajaj Finance doing to build a strong edge, not just through AUM or app downloads, but something more deeper, like a way of working or thinking that grows over the time and makes your competitors hard to copy your model? Thank you.
I mean, we could spend one hour on this question, quite honestly. But on a more serious note, for the last three years, we've published a long-range document. Long-range planning document demonstrates how we're thinking about the company, the business, the diversity of its businesses, the way we see franchise growing, size growing, our ambition. I would request you to look at that document, which provides reasonable coverage. If you see it rather than on a one-year basis, if you see the pattern over three years since we started to publish long-range plan, you will connect the dots much better. We are anyway headed into our fourth release of long-range plan, which will be published on 5th of December this year because we have an Investor Day. We would welcome you to come and join us for the BFS Investor Day, where I'll be sharing what a long-range plan is. We remain quite excited, is what I would say. We are building business.
Last point I would make, we are building businesses with a 10-15 year view. We are very clear we will deliver the short-term, medium-term, and the long-term, all three at the same point in time. I think that's the principal differentiation, if you ask me, sustainably for the past, present, and I would hope for the future as well.
Thank you. My final question, again, a forward-looking one, is about margins and cost planning. As growth picks up and costs go up, whether it is tech compliance or collections or any other things, how do you manage to keep the profits in line without cutting any corners? Are there any smart ways you have built into your systems or you will be implementing that will help you stay efficient even when things are getting costlier?
No. At a fundamental level, process automation, technology leadership at an underlying level, followed by process automation, followed by now FinAI, will allow us to continue to generate velocity on one hand, benefit from scale on the other, and ensure costs keep going down. All three will happen. That is why we are a big believer in technology, its early adoption on one hand, and do it as a what we are quite excited about it. We have remained excited about we started to use cloud way back in 2007. We used data very extensively between 2014 and 2020. We built a 75 million app franchise. We do think it is now very close to being Amazon of financial services in India in terms of experience. We think we want to pioneer AI and financial services in this part of the world. All that for what?
For scale, velocity, controllership, and eventually lower OpEx to name. We see technology is playing a multifaceted role across the value chain.
Thank you for the guidance, and I wish the entire team best of luck for Q3.
Thank you.
Thank you very much. A request to all the participants, kindly restrict to one question per participant, and rejoin the queue so the management can address all the questions from all the participants. Next question is from the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.
Yeah. Thank you for taking my question. Just two questions that I had. Firstly, in addition to what you've already shared on the MSME segment, if you can give some more color.
What I'm trying to understand is I remember in the first quarter of the means score we had shared that we spoke about another INR 150 crores of loan restructuring in the second quarter. I think this quarter we have done about INR 288 crores. I mean, was the asset quality experience in MSME much more pronounced than what we were earlier expecting? I also heard Rajeev Sir earlier today on the call that maybe by March and June next year is where we are expecting this incipient stress to settle down and be back in what MSME does. How much restructuring are we expecting in the MSME business in the coming quarters? Like I asked, if you can give some more color.
We are mostly done with restructuring, Abhijit. We are mostly done with restructuring. It is used as a tool to enable good customers to assist them.
In terms of restructuring that you will see over the next few quarters, our number will be very variable. That is just one point I want to make. Sandeep wants to add.
Yeah. The other point that I want to make, I think it is in the interest of all the participants on the call. I think we do not want the discussion to get hijacked by MSME discussion the way it happened last quarter. Just to reiterate the point, we are on top of it. We have taken corrective actions. We believe that the problem is manageable. We have also provided guidance in terms of growth, credit costs, and so on and so forth. Nothing is alarming as such. I would request that we focus on other areas, important areas, than just focusing on MSME as a segment.
Actions have been outlined to all the investors.
As Sandeep said, it is not changing the overall credit cost guidance in any given manner. That is the power of a diversified business, that there are pluses and there are minuses. Net-net, as building a sustainable business for long term, it helps us, and it helps investors in the process.
Got it. The only other question I had was, I mean, maybe 15 days that the festive season has gone over in India, while we have already given out a festive season update. If you could give some color on whether this momentum is sustaining or the impact we are now kind of.
Yeah. Momentum, Abhijit, is yes, yes.
I think we're surprised by the given that the festive season was strong, but I would say, in general, the consumption patterns look quite promising, is what I would say, based on our understanding of the products that we finance.
Got it. Sir, would you also agree that, I mean, this momentum has sustained across most of the product segments that we are presenting, including consumer durable, auto finance.
Yes. Answer is yes.
Product segments.
Answer is yes.
This is useful. Thank you so much.
I would just add.
I wish you and your team the very best.
Abhijit, just to be fair, I would just add we are very dominant in electronics, so what we say is happening to the market. We can say that confidently. I'm not so sure I can say that for Auto. Auto being new cars and so on and so forth.
We are growing on a small base, so I can say it's strong for us, but our base is smaller. I just want to flag that point. In electronics or any of the consumption loans, we are pretty dominant. We can say that what's happening with us or what we are driving does lead to denominator expansion.
Got it. This is useful. Thank you so much.
Thank you.
Thank you. A request to all the participants, kindly restrict to one question per participant. Next question is from the line of Piran Engineer from CLSA. Please go ahead.
Yeah. Hi, team. Congrats on the quarter. Just a sneak peek on. Let me see. We are.
Piran, sorry to interrupt you, but we are dropping the audio.
You dropped.
Okay. Is this better now?
Better now. Better now. Yes.
Yeah. Yeah. No.
Just wanted to get some sense on how things stand in rural unsecured, rural B2C in terms of you used to give this data on how many customers are 3PL and above and how that has been higher than history. Is the fundamentals also improving just in terms of over-level?
The answer is, and principally, that was Piran, is a fair question. Across businesses that we are in, we have cut 3PL to prior to 2019-2020. It has meant, I would say, a reasonable growth dilution, but it is one single univariate variable that's helping improve portfolio performance, I would say. Let's say if you take rural B2C, numbers below 1%, less than 1%, is what somebody with 2PL would be. In urban, it would be 4%, 3%, 4.8%. We have cut business. This number used to be 13% a year ago, 13% and 3%.
I can go business by business, but as we concluded that it's an important demonstrable variable metric of prudence, we've gone hammer and tongs after it. It's showing benefits.
Okay. This is on incremental or it's on your book?
Since February. Since February, whatever you are originating is on these numbers. It's incremental, but the book churns. You know that, right? Our behavioralized maturity, the book is 20-23 months. To that extent, the book churns pretty rapidly. What we track is not just, we track vintage performance. What we are heartened by is the three months on books, six months on books, and nine months on books. If you take February onwards, as I said, we started to take very drastic actions across portfolios. We were taking one earlier, but it was much more drastic from February.
We're seeing 3MOV, 6MOV, 9MOV now. Virtually 9MOV is coming. Improved significantly. It is just a matter of time that the whole portfolio churns.
Talking about rural B2C, after a long time, we have now revised the management assessment from yellow that it was tagged for close to about two years to green. We are reasonably confident with the kind of change management that we have done in the business, the granularity with which we are building the rural B2C business, and the significant improvement that we have seen in the vintage performance in the last couple of quarters. We are quite excited to rebuild the business and grow it faster.
Got it. Got it. Just secondly, you had mentioned captive two-wheelers, which is 1.5% of the book, is 9% of loan losses. It is 9% of this INR 2,200 crore credit cost number.
Answer is yes.
Correct.
The non-captive would be how much? Just want to get a sense of what is the difference in that.
Not size. Not size now. Equal size, virtually. As you can see on panel 47.
Definitely no. I mean, in credit costs.
If you see the number, if you go to, we have separated it in the portfolio quality. That book, of course, is growing a lot more faster. Just go to portfolio quality. I think 98% current. Is it 97%? Just give me one sec. That is 97.8% current. We are very clear it has to be at, it has to be at lower than, it has to be at one-third of the loss of our captive as well. We are very clear. That is the choice we made.
Okay. Okay. Okay. That puts some context. Fair enough. Yeah.
For the question that you're asking on open market two-wheeler financing, the vintage will have to still play out based on the number available so far, 1.5%-2% balance sheet contribution, and same is the contribution for loan losses. Eventually, it will probably be, let's say, 1.5 x of the portfolio contribution because the business generally operates at higher credit cost compared to what we deliver at the organizational level, but will be significantly better compared to what we are observing at this point, I mean, captive two-wheeler financing deal.
Understood. Understood. Okay. This answers my question. I'll get back in the queue and wish you all the best.
Thank you, Piran.
Thank you. Next question is from the line of Ashish Sharma from Oaksec Capital Management . Please go ahead.
Yeah. I hope I'm audible, sir.
Yes, you are. Yeah.
Just one question on credit cost.
Have we given the guidance for FY 2027? Given that now we will be closer to the upper end of the guidance at 1.95%, but you seem to be confident about the credit cost outlook for FY 2027. Have you given a number for that? What would be the normalized credit cost?
We are not giving absolute guidance at this point in time, Ashish, but very clearly, direction of the travel suggests that we should see a much lower credit cost in FY 2027. If the trajectory that we are seeing today should continue for the next year, we should definitely see a significant improvement in the credit cost ratio. The second piece, which is also important to highlight, is the point that we discussed that 8% of the loan losses were contributed by just about 1.5% contribution of the captive two-wheeler financing business.
That will also become very, very insignificant as we get into next year. That, again, will provide, I would say, tailwind to the overall credit cost number for the next year. Third piece is we have taken significant provisionings in the MSME business in the current year on account of the issue that we are observing. Hopefully, as we get into next year, God willing, we should definitely see improvement out there as well. That, again, should provide tailwind to the overall credit cost performance. My hunch would be that the gold loan business, the new car financing business are much lower risk business. And their contribution in the overall balance sheet is growing. That should also be the another element of tailwind to the business. Yeah.
My hunch would be that while the range currently is 1.85%-1.95% for the current year and we are inching towards probably the upper end of the range for the current year, the number should be much lower as we get into fiscal year 2027. Of course, if the first half was 2.02% and 2.05% for Q1 and Q2, for even 1.95%, the numbers have to show significant improvement in Q3 and Q4. We believe that itself will provide a massive tailwind to fiscal year 2027 guidance. We will give that guidance sometime in quarter four or quarter one of next year.
Yeah. Just reconfirming one thing in terms of the MSME guidance of 10%-12%, do you think given the current scenario, the number 10%-12% is a very conservative guidance or is a realistic number?
For the current year, right?
Yeah. Yeah.
It is realistic.
Sure. Sure. Perfect. That's helpful. Thank you, sir. And all the best for the next quarter. Thank you.
The last point, probably, Ashish, on that. As an organization, we have never shied away from cutting business. Wherever we find an issue with risk, we are more than happy to take cuts. That's the power of diversified business model, that we cut a part of the business where we don't find the credit to be acceptable, but at the same time, work with other businesses where the credit performance continues to remain very solid and use those businesses to build the balance sheet. Right.
That's helpful, Sandeep. Thank you. Thank you.
Thank you. Next question is from the line of Priyan Shahujah from ISL Capital. Please go ahead.
Yeah. Hi. This is Viral here from ISL Capital. Thanks for the opportunity. Just two questions from my end.
Sandeep, first one for you. On the cost of fund guidance, I see that we have lowered our cost of fund guidance for the full year by around five basis points. Does this set up the stage for, say, from here on, five to 10 basis points kind of a margin expansion?
I would love to add that. I would love to add that, Viral. I think the best assumption that we have at this point in time suggests that we will rather hold the NIM at the current level. The idea is to pass on the incremental benefit to customers. We have seen already 27 basis point improvement, and we have passed on the entire benefit to the customers here in the current quarter. As a result, NIM came in flat versus Q1.
The idea would be that work with improving the overall cost of our environment as far as Bajaj Finance is concerned and use that opportunity to pass on the benefit to the customers and maintain the NIM at current level.
Just as a clarification, Sandeep, in this guidance on cost of fund, you have taken only 100 basis points of rate cut, right? Not, say, any additional incremental that will come in?
Yeah. We are not privy to any further rate cut that is being discussed or has been announced formally or informally. We have taken only 100 basis points. Having said so, even if there is a rate cut either in December or February, given that it will be too close to the year-end, it will not have any material impact on the cost of funds for us as an organization.
You can assume that even with that, the 755-760 guardrail probably will remain same only. Benefit will flow in next year, not in the current year.
Got it. There will be a benefit then, right? Once there is a cost of fund.
Yeah. There will be. Of course. Of course. Of course.
Okay.
Of course.
Second question, Rajeev, for you. On the gold loan piece, more so from, say, a medium-term perspective, I think we have executed there fantastically as to how we have kind of scaled up the book. I think incrementally, a lot of players are possibly looking at how we have been able to achieve this in a market that had long been just, say, a duopoly or maybe three players at max.
Now, fundamentally, how do you see this, say, over a two to three-year horizon with the entry or the plans that so many other so-called large NBFCs have to get into this segment, assuming, say, two scenarios. Again, gold loan prices, say, continue going up. Or secondly, if they do not go up, then how do you see this basically market evolving as such?
Three scenarios, right? It goes up further, good. Remains flat, good. Goes down. We have seen in COVID, it went up to INR 55,000 per 10 grams and went down to INR 45,000. You land up doing fire sale. That is the nature of the business. So adjusted for that scenario, which, let us say, if I was for a moment leave aside, I would say I would bet that this portfolio could be between we will end this year with around we are INR 12,000 crores.
We'll end at around 16 or INR 1,000 crore ± . We have significantly, we've just signed up a significant expansion in the business. It should be between INR 27,000-INR 30,000 crore business by March 2027. We are raring to, principally Siddhant is supportive. Yeah. Yeah. We've signed up. We think we have reasonably, and when I say reasonably, perfected the model. Perfecting the model is not just about aggregating assets. We track leading competitors in this business and the ROEs they generate. We are generating very similar ROEs as they are generating in the business. To us, the metric is not just scale. Metric is the level of profitability because that was the purpose of building this business. We are satisfied with the fact that the business is generating ROEs in line with leading competitors. Thus, we can expand.
You will see structural expansion. You will see from now till March 2027, virtually 900 more branches coming through. You would see a set of 500 of our existing branches get converted into gold loan branches. There is a second-order point. As FinAI gets deployed, branches will be rendered surplus, quite honestly. The staffing will become free to do other things rather than doing some of the work that they are doing today. It is a fact. It will happen in the next 15-18 months, which is connected to the point on FinAI that I was making to you. Two things are coming together. A cost center will become a profit center. Look at it another way. A category which is pretty durable, low risk, adjusted for the third scenario. Adjusted for always the third scenario. It is a commodity business to that extent.
We are quite excited about it.
Just on that, even in the second.
To come back for a follow-up question, please.
Sure. It's okay.
Sorry. Go ahead. Go ahead. Go ahead. After this, you stop, Viral. Go ahead. Go ahead. Go ahead.
Sure. Just on the second scenario, you mentioned that, say, assuming the gold prices do not go up or even go down, then in that scenario, how do you think that the market will grow, right? Because, I'll tell you, no, it's a good point. Volume growth is hardly low.
I should have covered that at a fundamental level. See, one of the key modes that we have developed is, apart from generating efficiencies per branch, which technically one has benchmarked and learned, 40%-45% of the business is coming from existing customers.
Actually coming digitally, 40%-45% of the monthly disbursements that we do now, we do INR 1,700-INR 1,800 crore of disbursements a month, are coming from the app. That's really where they're coming from. It is a moat that we have created, which gives us a high degree of confidence in being able to continue to sustain momentum. Mind you, 75 million customers are sitting on the app, 45-odd million are MAU. I do not have branch coverage. As I multiply the branch coverage, the number will, in general, automatically multiply. It is a coverage issue rather than a franchise momentum issue or the digital infrastructure issue. We are, at this juncture, very comfortable.
Got it. Thank you so much, Rajeev.
Thank you.
Thank you very much. Ladies and gentlemen, we will take last two questions. Next question is from the line of Avinash Singh from Emkay Global.
Please go ahead. Hi. Quickly, if you can help, I mean, the softness in other operating income, is it, I mean, lower recoveries from return of account, or is it on the lower marketing fees and all? That's one. And in FY 2027, credit guidance, I understand that, I mean, of course, the captive two-wheeler going out and gold and new vehicle increasing. Is there some risk? I mean, now your customer franchise is close to 12 crore. You go further, deeper, then each of the business lines where you are, probably you are going to a bit of a slightly at the margin riskier customer. I mean, is that understanding wrong? Or will you see some impact from that part because you are going perhaps deeper in each of the product segment? Thanks.
I'll take the first question. The other operating,
yeah. I didn't hear properly.
The other operating income, as you rightly called out, is on account of flattening of the baddest recovery number. As we have seen the COVID period write-offs getting cleaned up through recovery process over the last three years, the overall baddest recovery number has started to plateau out. That is why the other operating income has not seen the kind of growth that we have seen in the past. That has submitted some.
No, we are also guided that in the current year. That is overall fee and other income put together. That is fee and other income. We have guided into a better year.
We're guided for the full year that between the NIM, NTI, the entire fee revenue pool that we generate, combination of the fees and charges plus sale on assignments and so on and so forth, all put together, we will see 13%-15% growth in the current year. I think so far we are holding up to the guidance, and that's how the numbers are speaking about itself. As regard the other operating income, it's mainly on account of flattening of the baddest recovery number.
The second question was going down the curve. We keep reiterating that it's risk first. That's one part. The second important part is continue to manage risk at a nuance. As our scale grows, as our complexity grows, so does our understanding improve. We do not believe that increasing risk. The franchise is very, very large.
We are 13% of number of loans in India on a monthly basis, but we are only 4% of the balances. We can just continue to pick and choose what we feel comfortable with from a risk standpoint and from a margin standpoint and continue to grow for a foreseeable period. The gap is actually, it is 4% and 13%. It is a 9% gap. That is the share of wallet of the customer that is available that we would like to target over the medium term. It links to the earlier point the gentleman was asking. I think that was Abhijit. Abhijit or that, where is the differentiation? Differentiation is in continued mining. The differentiation is between 4% and 13%. 4% of balance is 4% market share, 4.5% market share retail, and 13% of customer wallet.
I mean, so number of loans to AUM. That is the difference. And that is what we will deliver.
Okay. Thanks. Thanks.
Thank you. Participants, we will read the last question from the line of Mahrukh Adajania from Nuvama Wealth. Please go ahead.
Yeah. Hi. Good evening. Good evening. You transparently laid out all the SME-related issues. I guess you were the first to flag it off even in the first quarter. Most other lenders do not seem to be flagging any issues. Would you say it is a ticket-sized issue, or is it something that the sector will eventually have to catch up with?
I have no view on the sector. I am a bigger believer in micro than macro.
I had made the point even earlier that while macro has a role to play given our size and scale and breadth, but risk is a choice that you make, what you want to do and what you do not want to do. I have no view on others. I have view only on our book. Only thing I can re-emphasize is that we are not seeing it to be a regional issue. We are seeing it as an across-the-board issue. We do MSME lending in 2,000 cities and towns in India and spans across north to south and east to west. We are working hard to mitigate that is really what I would say.
Okay. Got it. Thanks a lot. Thank you very much.
I would just counsel just the last point that you guys should ask tech bureaus help in giving you deeper and better understanding of the data that may be of greater help. We are seeing pressures on our base, definitely.
Sure. Perfect. Thank you.
Thank you very much. I'll end the conference. To the management for closing comments.
Nope. Nothing. Thank you. Good night.
I thought you were referring to Anuj. Thank you so much. Thank you, JP Morgan. Thank you, Anuj.
Yeah. Thank you, Rajeev. Thank you, Bajaj Finance, for the opportunity.
Thank you.
Thank you. Thank you. Thank you so much.
Thank you very much. On behalf of Bajaj Finance Limited and JP Morgan, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.