Ladies and gentlemen, good day and welcome to Fedbank Financial Q3 FY 2025 investor conference call hosted by Equirus Securities. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone telephone. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinion and expectations of the company as on date of this call. These statements are not the guarantee of future performance and involve risk and uncertainty that are difficult to predict. I now hand the conference over to Mr. Shreepal Doshi from Equirus Securities. Thank you, and over to you, sir.
Thank you, Nivedita. Good evening, everyone. Welcome to the earnings conference call of Fedbank Financial to discuss the Q3 performance of the company and the business updates. We have with us the senior management of the company, represented by Mr. Parvez Mulla, MD and CEO, Mrs. C.V. Ganesh, CFO, Mr. Jagadeesh Rao, CBO for gold business, and Mr. Amit Singh, investor relations head. I would now like to hand over the call to Mr. Parvez for his opening comments. Post which we can open the forum for question and answer. Over to you, sir.
Good evening, everyone. I would like to extend a warm welcome to all of you for joining the Q3 FY 2025 post-results earning call. My name is Parvez Mulla, and I have recently assumed the role of MD and CEO of Fedbank Financial Services. I have been in the BFSI industry for over 30 years, with my longest tenure being ICICI Bank. It is a privilege to talk to you today and share the update for the company.
I joined Fedbank Financial Services in mid-November this year, and during the last few weeks I have actively engaged with the key stakeholders. These interactions included discussions with employees across various levels, board members, investors, analysts and the regulator. Additionally, I had the opportunity to visit branches, meet customers, allowing me to understand our operations and on-ground realities. These experiences have provided me first-impression insight into the strengths and areas to work on.
FedFina, Fedbank Financial Services, is an organization with a strong foundation, built and majorly owned by Federal Bank, backed by a strong and committed board, a diversified investor base, and a robust business model. FedFina has a compelling mix of secured play with a wide geographical presence and a diversified product portfolio. I believe this organization has a lot of untapped potential, which represents an exciting opportunity. FedFina is predominantly focused on mortgages and gold loans with a small portion of unsecured business loans. Our gold loans, which constitute 38% of our AUM business, continues to perform well both on growth and profitability, aided by increase in tonnage and rising gold prices. Our productivity ranks as one of the highest in the industry.
In our medium-ticket LAP business, which constitutes about 24% of our AUM, we have built a stable business catering to customers with prime and near-prime profiles who require a loan against property. It is a scalable and profitable business and runs with a strong focus on execution, and through direct assignment, allows us income with low capital allocation. On the small mortgages business side, however, there are a few short-term challenges that the company has faced and these have required our immediate attention. Our small mortgages business is experiencing a moderate level of delinquency elevated. We have seen a delay and drop in realization for deeper bucket NPA pool. However, we have identified the areas to focus on and are taking proactive steps to address them. First, we have appointed a seasoned leader, Mr. Shardul Kadam, as the new Chief Business Officer.
Shardul has been handling various function in our organization since 2011, including setting up and growing this business in its initial stages. Second, we have reviewed and refined our policies, tightened lending norms, and migrated to a robust new business rule engine supported by Salesforce as our loan origination system, providing objectivity in decision-making at scale. Third, in certain locations, our collection infrastructure has not kept pace with business growth, and we are strengthening our team from grounds up. Fourth, we are implementing product-specific collection structures and have onboarded a dedicated senior collection head for this business. Fifth, towards enhancing resilience of our balance sheet as a one-time exercise. A, we have shored up our provisions on NPA loans in the mortgage portfolio. B, undertaken a management overlay to factor for the increased delinquencies to take care of the delayed resolutions.
We have also done our annual ECL refresh exercise in Q3 and taken additional provisions on that account. These conservative measures, we believe, will strengthen our balance sheet. Our unsecured business, around 12% of our loans, has been sourced on an originate-to-sell construct. We have consciously slowed disbursal in this product and from a strategic perspective and at an entity level, we would be pivoting to a more secured construct, more than 90%-95%, and reduce emphasis on this product. We have taken additional overlays on unsecured book as a conservative measure. These measures are crucial to addressing current challenges while fortifying our operational and risk management frameworks. I am confident that these decisive initiatives will not only resolve immediate issues but also position us for long-term growth, sustainability, and value creation for all our stakeholders.
With a clear focus, empowered team, a drive for excellence and tough decisions, we are confident in our ability to navigate this phase of rebuild and revise successfully and bring in a period of predictable and consistent outcomes across the metrics of quality, ROA, and fostering sustainable growth. Some of the business numbers are as follows. Our AUM touched INR 14,922 crores, seeing an accretion of INR 704 crores in Q3, translating to a growth of 5% quarter-over-quarter, 39% year-over-year.
Mortgage AUM reached INR 7,581 crores and AUM growth of 5.6% quarter-over-quarter, 38.6% year-over-year. Gold reached INR 5,203 crores, an AUM growth of 5.4% quarter-over-quarter, 52.9% year-over-year. Disbursements have clocked to INR 4,395 crores in Q3 FY 2025, up 31.4% year-over-year. On the profitability side, our operating profit has grown 30.9% year-over-year to INR 144.6 crores. However, our net profit stands at INR 18.8 crores in Q3 FY 2025, down 71.3% year-over-year.
This profitability impact is on account of a one-time elevated provision of INR 75.5 crores. Mortgage gross stage three stands at 3.3% versus 3.2% quarter-on-quarter, and gross stage three is largely stable at 1.9% at an entity level. The net NPA stands at 1%. I will now hand over to Mr. C.V. Ganesh to take you through the business numbers and the provisioning details.
Thank you, Parvez. Thanks, everyone, for your participation on the call. While Q3 was a challenging quarter for us, sharing a few highlights. We commissioned 28 new branches in the quarter, including 22 in gold loans and six for small mortgages. This takes our branch strength to 793 branches. Overall, AUM was INR 14,922 crores as on December 31. This is up from INR 12,200 crores as of April 1. In the nine months ending December 31, our AUM has grown 22% in the first nine months of this fiscal. Of this, gold loans and medium-ticket LAP have grown 53% and 45% year-on-year respectively, while small mortgages grew 32% year-on-year. The unsecured business loans AUM has grown 15% year-on-year. Currently, in terms of split, 51% of our AUM is in mortgages, of which INR 3,980 crores is medium-ticket LAP and about INR 3,600 crores is small mortgage.
Another 35% of the AUM is gold loans, which crossed INR 5,000 crores in the quarter and ended December 31 at INR 5,200 crores. Our gold loan AUM per branch increased from INR 10.7 crores per branch to INR 10.8 crores per branch in spite of the addition of new branches. Overall, tonnage at an entity level was 10.7 tons. Now to new loan origination. Our medium-ticket LAP continued to clock high growth, with disbursements of INR 561 crores in the quarter, up 55% year-on-year. However, there was a minor degrowth sequentially, partly due to a slowdown in Bengaluru due to the government mandating e-Khata for property records and some challenges with respect to the same. We have been tightening the policy and process around our small mortgage products, and this has resulted in a slowdown in new origination.
New origination for the quarter came in at INR 172 crores, a degrowth of 26% quarter-on-quarter. Quarter three is historically a weak quarter for gold. In spite of the above, our gold loan AUM grew by INR 269 crores, which is 5.45% sequentially quarter-on-quarter and 53% year-on-year. As Parvez mentioned, strategically, as we pivot to a more secured construct, we have gone slow on the unsecured business loans and have decelerated originations by 39% quarter-on-quarter to INR 219 crores. On the P&L, our yields have increased by 20 basis points, and we have been able to hold and even improve cost of borrowings in the quarter. As a result, our spreads have correspondingly grown 20 basis points sequentially quarter-on-quarter. Our net interest income is up at INR 284 crores, which is a 7% sequential quarter-on-quarter growth and a 30% year-on-year growth.
Our gross total income is up 6% sequentially and 27% year-on-year. We were able to hold OpEx flat quarter-on-quarter at INR 178 crores. We had a steady operating performance. Our pre-provisioning operating profit came off better at INR 145 crores, which is up 14.5% quarter-on-quarter and up 31% year-on-year. For the 9 months of this fiscal, our pre-provisioning operating profit crossed INR 400 crores, which is 40% up over the corresponding period of last year. On credit cost, our credit cost for the quarter stood at INR 119.6 crores, which is about 4.2% of our average AUM. With this, the credit cost for the first nine months of this fiscal stands at 2.4% of the average AUM. Let me deconstruct this for you. We had elevated delinquencies in Q1, which persisted in Q2.
We have seen a continuation of this trend in some parts of the small mortgage book in Q3 also. Also, on the NPA pool, where we had seen a dry up of cash realization, we saw further duress in Q3, which has necessitated a reevaluation of provisioning on the pool. Out of this INR 119.7 crores, our core credit cost is only INR 25 crores, which is 88 basis points annualized. As we guided last quarter, we have our annual ECL refresh in Q3 of every year. So when we did this exercise, we got a P&L charge of INR 19 crores, which is incremental provisioning on the entire stock of the loan book. This, which happens annually, accounts for another 67 basis points.
We did a thorough evaluation of the NPA book and with a view to strengthening the balance sheet, have decided to do a one-time additional provisioning of INR 75.5 crores, which is another 270 basis points. It is primarily made up of two parts. There is a one time additional provision on the NPA pool of INR 57 crores. This is across our mortgage book and the residual book on construction finance. With this, we believe our NPA book is adequately provided for. We have also taken additional management overlays of INR 18 crores, primarily on stage one and stage two loans in the small mortgage book. On the GNPA, we have been able to hold our GNPA flat at 1.9%. As a result of the additional provisioning on the NPA bucket, our net NPA stands at 1%, down from 1.5% in the last quarter.
Consequently, our PCR on stage three has moved up from 21.85% - 44.75% as of December 31. The provisioning on stage two has also gone up from 11.5% - 12.84%. On the treasury side, I will break it up into two parts. One is on total borrowings and the second is on incremental borrowings. On a quarter-on-quarter basis, our weighted average interest cost has gone down by 4 basis points from 8.74%- 8.70%. This is the third quarter of consistent decline in weighted average cost of borrowings, and has been facilitated by resets on our external benchmarking borrowing book. About 88% of our total borrowings are floating rate in nature. Of these, 41% of our borrowings are externally benchmarked, and another 47% are linked to MCLR. We added one new PSB lender to the relationship, and our total partners now stand at 41.
On the incremental borrowings, our incremental cost of borrowing for the quarter was 8.75%. 79% of the incremental borrowings raised during the current fiscal are on floating rate benchmark, which should help us as rates start going down. On the balance, which are fixed rate in nature also, another 17% are of short-term in nature, and hence resettable on maturity. Consequently, our debt-equity ratio has also improved to 3.98 from 4.09 on September 30. During the quarter, the company continued to move forward in its policy of deleveraging through co-lending and direct assignment of installment loans. We added one new bank partner for gold loan CLN during the quarter. Our AUM grew by INR 704 crores. On the securitization side, we did INR 302 crores of co-lending and securitized another INR 486 crore across the mortgage book and the unsecured CLN.
Through this, we have been able to improve capital adequacy and improve our leverage position. Currently, our off-balance sheet book stands at INR 3,471 crores, up 86% from INR 1,864 crore in the previous year. Of this, gold loans held in partner books account for INR 875 crores, unsecured business loans securitized stand at INR 554 crores, and mortgage loans securitized account for INR 2,042 crores. Our CRAR stands at 21.6%, up from 21.4% in September. Lastly, our shareholders' equity as of December 31, was INR 2,464 crores.
Our book value per share stands at INR 66.1. With that, I hand it over to the operator for any questions.
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 the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handset while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Renish from ICICI Securities. Please go ahead.
Yeah. Hi, sir. And congrats on a good set of numbers during this challenging time. My first question is on the strategy side. You did highlight about relooking at some of the processing, the way business is structured currently. Just wanted to know what is your sort of initial assessment, in what areas we have to sort of restructure the process, et cetera, and does that require additional investment? If yes, where do you see cost ratios settling down in near term?
Yeah. Hi, Renish. Thank you so much. As far as my strategic thoughts are concerned, one is we want to look at capital allocation to high ROA, ROE businesses, and clinically look at it. If business loans is not giving us the ROE that we want, and if the appetite for sell-down is not there for business loans, we want to take a tough decision on it, and so be it. Then we want to pivot on secured business construct. If the environment is not helping us make money on it doesn't make strategic sense for us to continue. That's why we're slowing down that business. Second is, if you look even in the secured business construct, we want to double down on our LAP and gold business. LAP includes our medium-ticket LAP business and our small-ticket LAP business.
We would like to be known as a company which is doing LAP first. There are many players who are doing home loans and also doing LAP. We want to be known as a company which is doing LAP first. Our gold business is doing well, and it is a twin engine strategy, which we have communicated earlier also. It helps us to hedge constructively. Even in the secured business side, we want to look at a mix of high yield and low yield. That is why we feel a medium-ticket LAP and a small-ticket LAP both go hand in hand, where one is a high yield, one is a moderate yield business, one is a moderate risk and the other is a low-risk business. So that gives us an adequate diversified hedge.
We also want to be deep and invested in collections, and that is where we were lacking. I personally believe we should have invested into collections. We want to be spending more money in terms of hiring people at the right strategic level as well as at the ground level. Collections in a lower bucket is very different from collection in a deeper bucket, especially when you're doing the affordable segment. We want to be deep invested, and there are models which have done well there. At our OpEx side, we want to solve it with the aid of tech. Obviously, you might not see it in the immediate now, but directionally, we want to go there. We want to look at a frugal OpEx structure, and which will encourage collaboration.
You will see by the next quarter, we telling you about our synergies between our gold branches and our MSME small ticket LAP branches. Today, our small ticket LAP branches do business separately and our gold branches do separately. By next quarter or FY 2026, you will see us not putting so much investment on the ST LAP branches, but trying to do business through the gold branches. We will pilot some successful models to the gold branches. So more core business, less DA. Overall, trying to focus on the quality of business followed by profitability and growth, and trying to take these provisions so that we can make credit costs more predictable, putting processes which will allow us to scale, making processes as lean as possible. So the standard stuff, but focusing more on execution and getting the collaboration right.
Got it. Just to follow up on that is that once we go through this path, there will be lot of AUM mix sort of will change wherein small ticket LAP, medium ticket LAP, or incrementally will grow at a faster pace. Unsecured business will grow at a slower pace. High ticket LAP might also grow at a lower pace. Of course, as you rightly mentioned, there will be investment towards collection infrastructure, et cetera. So, where do you see you want to achieve a steady state ROA after sort of restructuring everything? Is there any thought behind that?
No, definitely there is a thought. See, if you look at our three businesses that I spoke about, our medium ticket LAP business, our small ticket LAP business, or our gold business. Our gold business is a good, profitable business, very execution-focused. We have invested well in it. It is operationally run very efficiently. We have a definite ROA glide path to that, and we are very happy with the kind of glide path that we are getting on our gold business. That mix of gold business will always remain between 30%-40%. So we will be between 30% and 35%, and sometimes it might go to 40% when we are trying to slow down on our BL business. Our BL business in the next one year, you will see us reducing our contribution from 12% - 5%, and then slowly it might slow down.
That is where the piece will be. Our small ticket business, which is the small ticket LAP business, you will see us pivoting more, allocating our resources and some of our best people that side. You will see us focusing more on this business, putting in processes, tech on this business so that we can scale this business. This business will grow at a much, much faster pace than all other businesses.
Got it.
But it will be grown with quality, and that is why you have a seasoned leader who has handled risk as well as growth. Mr. Shardul Kadam, who is coming in there, comes with a risk mindset as well as a growth mindset. The idea is to scale it. Today, initially, you will see higher growth in that business, which we are trying to build, but it will pivot to a decent growth rate once we put the processes in place, once we put the tech in place. That is my only injured business. One of the advantages of being in a diversified setup is you have three, four businesses. When one business gets injured, you have the other businesses taking care. But once this business picks up, this will be our pivot business.
I personally think you can look at a 40, 30, 20, 10 kind of a ratio. Or maybe if our business loans flows down, it might go down to five. But in that ratio, you will see us putting our portfolio forward. Basically, looking at quality then profitable, sustainable growth.
Got it. Just last question to Mr. C.V. Ganesh. Where do you want to keep the PCR? In this quarter, with accelerated provision, we have been able to improve our PCR to 40%. Now of course, this is a one-time exercise, but going ahead on incremental flows, you guys want to keep PCR at 40%? Let us say, typically LGDs in mortgage business is lower, maybe around 25%-30% gold, literally zero or maybe 5%-10%. How does one see the PCR going ahead?
Thanks for that question, Renish. Our current PCR rise is incidental to the provisions we have taken.
Our ECL model has shown us the impact of the ECL refresh exercise is INR 19 crores. On top of that, we have taken a management overlay of another INR 19 crores. That is based on the current empirical data which we see with respect to our delinquencies. If the delinquencies improve based on the investments we are putting on the ground, then there is a case for reevaluation of these provisions. On the PCR, it is not that we will stay here, but what I can tell you is it will not be as low as it was in the past, but it will also not be as high it is as we are reporting for December 31.
Got it. Would you like to guide us for a credit cost for next year?
What I can do is I can guide you for a credit cost for this year. For FY 2025, our credit cost, we might end-
On the credit cost, Renish, I can assure you that in the Q4, we will keep it sub 1%. This provision that we are taking is a one-time provision for this particular time. Q4, we should normalize. The idea of taking this one time is to get a predictability to the credit cost. You have to also understand that I am slowing down BL.
Correct.
That credit cost, BL is a part of my credit cost. If I have to give you some number, about 20%-30% of my credit cost comes from BL. That is the piece. Once it will go slow down, you will see a far more predictable credit cost.
Got it. Okay. No, that's it. Good enough, sir. Thank you and best of luck.
Thank you, Renish.
Thank you, Renish.
Thank you. The next question is from the line of Vivek from DSP Mutual Fund. Please go ahead.
Good evening. Mr. Ganesh, thank you very much for giving the split between the various provision numbers. It was very useful. I wanted to ask about the economic situation, especially in the small mortgage business. You said there is elevated delinquencies in select pockets and delayed realization in deeper bucket NPAs. My questions are, is there an income shock or where is the specific geographies or specific clients who are facing this problem? How is the situation on the soft bucket collection efficiencies in the same areas?
See, Vivek, typically, I do not want to attribute it to the environment. We are in a secured environment. The environment for unsecured is very different, and secured is different. There could be inflationary pressures there, but our issue is our own operational issue. The provision that we are taking is because we were under-invested in collections.
We personally believe the segment that we are operating in requires a constant touch with the customer, consistent engagement, and proactive follow-ups. It is a collection-intensive business, our small-ticket mortgage business. I do not want to attribute it too much to the environment. There could be some factors of the environment, definitely. Shardul, you want to add about the environment?
Yeah. Hi. The way we have seen it is that this particular stress build has been in certain select pockets of a few states. The customer segment which we deal with is typically an assessed income program, and these are relatively under-banked customers. It is very important that we need to have the last mile collection reach in place, which as Parvez mentioned. In some pockets, we are falling short of that because of which we have seen some flows and typically after this kind of a customer has some two or three EMI pendings, then obviously the resolution, the rollback becomes that much difficult. In anticipation of that basis, our ground team feedback is where we prudently believe that we should shore up the provisions. Having said that, 96% of our borrowers are having, I mean, the properties which are mortgaged with us are self-occupied residential properties.
More often than not, these are the primary assets of these families. The way we look at it is while there has been a shore up in the provisions, we will see a resolution subsequently coming in here, but it may possibly get delayed as compared to what we have seen in the past, hence this particular shore up.
Thank you very much. Now I can see the confidence that you all say about keeping the credit cost lower and going forward because it is your own effort. The second is a more trickier question, and this for Ganesh. With the bank-owned NBFC guidelines out there, are there any thoughts from the management of either yourself or your parent that you want to convey to us? That is the last question. Thank you, and wish you the best.
Thank you for that question, Vivek. We have been in correspondence with RBI, as have many of the other impacted parties as well. Broadly, the way we see it, the October 4 guidelines had four stipulations. One is that the upper layer restrictions will apply. The second is that you have to be listed. The third is that there will be no regulatory arbitrage in the NBFC. And the fourth is that you will follow rules and regulations applicable to loans and advances as applicable to banks. We tick most of those boxes. Again, I think the RBI letter is confidential. I can't speak much. But I think at the end, we already seem to be at much of the end stage there.
Which is why if the destination is where we are, then we have possibly reasons that maybe there is an opportunity to relook in terms of the differential niche, the priority sector segment we lend to. And we are confident RBI will apply mind. As of now, we are interacting in a constructive manner, so we will keep our fingers crossed.
Yeah, Vivek, just to add there. This is a space where the regulator will take the final call. And we are cognizant of that. And as a regulated entity, we have represented our side of the story, and we are hopeful that the regulator will look at it because we are a listed entity, and there are certain challenges of a listed entity going through those things. So it is a representation both from our parent as well as from us, and we are seeking the regulator's exception for this. And we believe that we have a case for representation. We strongly believe we have a case for representation.
Thank you very much, and again, transparent answer and wish you all the best.
Thank you.
Thank you.
Thank you. The next question is from the line of Shubhranshu from Philip Capital. Please go ahead.
Hi. Thanks for the opportunity. I just have two questions. The first one is around this change in the mix that we spoke of just a bit earlier. That was not very clear to me. Second is that, is there a regulatory pressure to change gold loans from a bullet repayment product to an EMI product which could be yield mitigating? Thanks.
Hi, Shubhran. The mix that we have today is in our mortgages business. Mortgage occupies about 50% of our AUM, so 25% is medium-ticket LAP, small-ticket LAP is about 25%. And about 35%-38% is gold, and about 12%-15% is our business loans piece. The only piece which we are changing there is business loans, we are slowing down. So you will see the percentage contribution of business loans going down from 15% - 10%, then slowly to 5%. And that additional increase will, for the short-term, might go towards gold, but eventually it will go towards our small-ticket LAP business.
You will slowly see small-ticket LAP business occupying more percentages and business loans occupying lesser percentage. That's the mix change. As far as gold is concerned-
Not regulatory. Is there a regulatory, was the question.
Yeah.
Is there a regulatory pressure to move to a non-bullet, was the question.
No, there is no regulatory pressure to do that. Although the regulator has issued guidelines in terms of how gold loan companies, as well as NBFCs doing gold, have to follow those regulations. We also have had a gold loan audit, and we have successfully complied with most of them. Wherever we had certain concerns, we engaged with the regulator and the regulator clarified to us, and we complied with it. We are on complete sync with what the regulator wants, and we have complied with most of the pieces on the gold loan side, including the LTVs piece, which the industry was interpreting it differently. As of January 1, we have complied with the way the regulator has said that we should maintain it completely. At a sourcing level, we have reduced our LTV.
Gold loan won't become an EMI product in the future. Is that a fair understanding?
No. Basically, we do a mix, Shubhranshu. It's not that we don't have the EMI product. I think the limited answer was that there is no regulatory pressure. In fact, we had an annual RBI inspection for the last two years, which happened for us about two months ago, and we have had a very satisfactory outcome. I think RBI pretty much is giving us the freedom to choose. We are very clear of what RBI wants us to do, and we will adhere, but there's no product construct-level stipulation being guided by the regulator.
Sure. Thanks.
Thank you.
Thank you. Participants are requested to press star and one on their touch-tone telephone to ask questions. The next question is from the line of Chirag from First Water. Please go ahead.
Hello. Yeah. I just wanted to ask regarding, let's say the next two years, where do you see cost to income ROA and ROE? Just wanted to know your guidance on that.
Chirag, I would like to jump on that question, but if you could give me Q4 to give you those numbers, because I am right now guiding on the credit cost for Q4. Directionally, I can tell you that FY 2026, you will see us driving cost to income. There is a definite number in our head where we want to chase an ROA/ROE for FY 2026, but it will be too early for me to give you that number right now.
Okay.
Chirag, I will just chip in here. I think the point being made here is that we will be agile and nimble and calibrate our strategy according to the environment. I think that is what we are saying. We have very clear large numbers in our mind, but we will go one quarter to another in terms of that number.
Got it. That is it from my end. Thank you.
Thank you. The next question is from the line of Pranav from Aionios Alpha Investment Manager. Please go ahead.
Yeah. Hi and good evening. Just a couple of questions. One clarification for Ganesh, sir. You mentioned the breakup of credit costs, where about INR 75 crores is one time and INR 19 crores is for the management overlay. But the math is sort of not adding up. Maybe you can clarify or maybe I misunderstood it. That is the first bit.
Yeah, Pranav. Our total credit cost was INR 119.6 crores.
Right.
Of that, the core credit cost was INR 25 crores, which was the normalized credit cost for the quarter. The annual refresh exercise we did, the ECL refresh exercise, which we do once a year.
Okay.
Now, in light of the elevated delinquencies we had, and that we do on the entire stock. That led to an additional charge of INR 19 crores.
Right.
Now that leaves INR 75 crores. Now that INR 75 crores, both of these are normal. I wouldn't call the ECL refresh also as a one-time, because that anyway we are supposed to do annually.
Correct.
Now, apart from this, what we did that INR 75 crores is the one-time element. Out of the INR 75 crores, the INR 57 crores was towards the NPA pool where we have shored up our provisioning there. Another INR 18 crores has been on account of management overlays across the small mortgage and the unsecured business loan book.
Understood. Now that's clear. Thank you for that. The second question is on the OpEx. While obviously, the guidance that you would want to give is probably next quarter, just qualitatively, Parvez Mulla, you mentioned that you want to get more synergies out of the gold branches wherein more LAP business can happen through those. Could you just give us a qualitative sense of a few of the things that you think are low-hanging fruits where we can reap benefits on the cost side, probably through 2026? Not asking for any numbers, but just qualitative guidance.
See, qualitative-wise, you can look first is the BL construct. There will be an OpEx which will change there. Second, as I told you, we will look at gold branches and not putting the MSME branches or very few MSME branches, is the second construct which we'll look. Third is we will look at manpower wherever we can use certain There is an industry which is using the apprentice model, and we want to explore that model in certain functions, and that is where we personally believe there could be a cost saving. Technology, already there is an investment of technology which we've done on the MSME side, and there is a digital flow which is happening and which will give us certain process efficiencies once we start scaling our MSME LAP business as well as on the LAP business. Next quarter, we should implement Salesforce on the LAP business.
We will also reevaluate certain branches which are not giving us the revenue but the cost to income is not correct in certain branches. So we will look at that. We want to look at approval construct when we are constructing the ST LAP business. When I told you that Shardul is coming in, Shardul is also looking at the kind of construct that is there in the ST LAP business and the kind of cost to income that we are incurring on the ST LAP business. He's looking at everything there, including incentives, including the tenure yields where we can get the better cost to income. So you will also see one is obviously the back-office lift, but a productivity lift on the individuals businesses also will give us certain pieces there.
We will also explore some synergies which we can get with certain partners which should give us another upside. These are broad level thoughts, but I will be able to articulate it to you in a more constructive manner. There are opportunities for us to take it directionally with a number that we have in mind.
Fair enough. That's pretty useful. The last question, sir, on credit costs. Obviously again, you mentioned that maybe guidance is something that you will look at in the fourth quarter for FY 2026. Again, looking at all of the changes in terms of tightening of underwriting standards and imposing collection infrastructure in the small-ticket LAP business. On a more longer-term basis, where do you want this business to settle? Because if you look at what was guided to us earlier, we were looking at about 75 - 80 basis points. But with this improved construct, is it fair to assume that the steady-state credit costs for this business once the dust settles could be a lower number than that?
Yeah. As I told you, even with my business loan construct, I'm telling you that my Q4 we will try and do a sub 1%. And then in that sub 1%, I'm telling you that my BL is there and my BL as a construct will slow down and that is almost 20%, 30% of my credit cost today. It will come to the number that you have in mind.
Sure. Thank you. Thank you for the opportunity.
Thank you. The next question is from the line of Aditya from Bandhan Mutual Fund. Please go ahead.
Hello. Yeah. Am I audible?
Yes, Aditya.
Yes, sir. I had a question. In last quarter, we had mentioned that there is some stress in our small ticket LAP book. This quarter, we have built a contingent provision to manage that stress. I just wanted to understand what are the possible reasons for this stress and are these the same as the reasons for the microfinance players and what time could it take for this to normalize? Because this is a secured product and the level of stress that I am expecting should not be as high as other unsecured products. What is your outlook on this loan book right now?
Yeah. Hi, Aditya. I am Shardul. I want to take this call. First of all, the customer segment which we deal into does not have so much of an overlap with the microfinance segment because my average ticket size is ranging at about, say, INR 13 lakhs-INR 14 lakhs. So we are talking about a collateral which is mortgaged, is roughly in the range of about INR 25 lakhs to INR 30 lakhs of a property.
And we have done our checks also through the bureau scrubs. So we are really not seeing too much of an overlap with the MFI segment. We do have our borrowers who have taken unsecured loans elsewhere, but then again, a large portion of them continue to remain current with us or less than 30 DPD, though there may be deeper buckets with unsecured loans. And we remain watchful on those accounts from a potential stress build. But because, as I said earlier, that 96% of our collaterals offered are self-occupied residential properties, to that extent, we believe that while we may see delays in our EMIs, but ultimately we should be able to get our monies back. Now to address as to what has been the reasons for the stress.
Clearly this is a relatively underbanked customer segment, so it is important that your last mile collection reach also needs to be in place, because we price our mortgages roughly in the range of about 17%-17.5% kind of yields. That is where in some pockets, we found that we were not adequately capacitized on collections, which resulted into certain flows and we are taking corrective actions in terms of strengthening our collection infrastructure grounds up.
If there is no issue with the borrower capacity, this should normalize within next how many quarters?
The way we are looking at it is, there has not been any systemic risk as such, which you are seeing. I mean, there have been delays on the borrower side, yes. The sense what we get from the ground is, wherever we felt that there was a reason to shore up our provisions, I think we have done that. The way we are looking at it is, with the collection infrastructure falling in place, we already got a dedicated collection head on boarded, and we are putting a structure under him. By Q1 is where we should start seeing a good pullback.
Understood, sir. Thank you.
Thank you. That was the last question. I will now hand the conference over to Mr. Shreepal Doshi.
Thank you. Thank you everyone for attending the call, and thanks to Fedbank Financial Services management for giving me the opportunity to host the call. Thank you everyone, and have a good weekend. Thank you.
Thank you.
Thank you.
Thank you. On behalf of Equirus Securities that contributed this conference, thank you for joining us and you may now disconnect your lines. Thank you.