Ladies and gentlemen, good day and welcome to the Fusion Finance Limited Q2 and H1 FY 2027 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Hanishi Shah from Adfactors PR Investor Relations. Thank you, and over to you.
Thank you, Rituja. Good evening, everyone, and thank you for joining us on the Q2 and H1 FY 2027 Earnings Conference Call of Fusion Finance Limited. We have the company's senior management team with us on this call. Before we begin, I would like to remind you that certain statements made in today's discussion may be forward-looking in nature and may involve certain risks and uncertainties. A detailed statement in this regard is available in the Q2 FY 2027 investor presentation, which has been uploaded on the stock exchanges and the company website. I now hand over the call to Mr. Sanjay Garyali, MD and CEO of Fusion Finance Limited, to begin with the proceedings. Thank you, and over to you, sir.
Yeah, thank you, Hanishi. Good evening, everyone. On behalf of the entire Fusion team, I would like to extend our festive greetings to you and your families. If there is one thing the last few quarters have reinforced for us, it is that in a constantly evolving environment, it is more important to navigate by the compass than by the clock. There are several moving parts around us: industry dynamics, customer behavior, credit conditions, and emerging growth opportunities. When we laid out our priorities, we were clear about four things: restoring growth, strengthening credit discipline, delivering sustainable profitability, and building a more diversified institution. Those priorities remain our compass. We also articulated three financial milestones: an AUM ambition of INR 10,000 crore, credit costs of 2%-2.5%, and an exit quarter ROA of 4%.
I am pleased that we have made meaningful progress on two of these ahead of our original timelines. Credit costs are sub-2%, and we have already achieved an annualized ROA of approximately 4% this quarter. The progress gives us confidence in the direction of our business, even as we remained measured about the pace of growth. Q2 performance: Our disbursements stood at INR 1,726 crore, representing a 33% year-on-year growth while remaining broadly flat sequentially. The AUM subsequently increased to INR 8,007 crore, 14% year-on-year growth. During the quarter, five of our markets experienced heavy rainfall and floods, resulting in temporary disruptions to customer accessibility during July and August. However, recovery through September was encouraging, and collection efficiency returned to 99.75%, with net flow rates falling below 0.10%. This is a testimony to our well-disciplined approach towards customer acquisition.
Portfolio quality continued to improve, with GNPA declining to 1.6% from 2.5% in the previous quarter. Importantly, even if we consider the 54 crore ARC transaction as a part of the loan book, the GNPA would still be 2.28%, reflecting an improvement over the previous quarter, 2.5%. Credit quality and customer leverage: We believe sustainable credit performance begins at origination. One of the most important changes we have made is how we assess customer leverage and repayment capacity. 83% of our onboarded customers in MFI have no more than two lending relationships, including Fusion. This is a deliberate choice. We continue to monitor lender count, indebtedness, repayment capacity, supported by differentiated credit templates. Our on-ground credit assessment program has now expanded from approximately 200 branches to 950 branches now, giving us greater control over customer selection. These initiatives are designed to strengthen the quality of our new origination.
Early bucket collection performance has remained resilient. Same-day X bucket collection stood at 97.9%, with monthly gross and net collection efficiencies at 99.7% and 99.84%, respectively, on the quarter basis. Our objective is not simply to maintain strong collection performance today, but to build a portfolio that delivers more predictable credit outcomes over time. Recoveries and legacy portfolio: Alongside strengthening new originations, we continue to address the legacy stress portfolio. You are aware that we brought recovery activities for the 90 DPD portfolio in-house, supported by dedicated teams, analytics, and specialized recovery capabilities. We are also deploying structured interventions, including Lok Adalats, legal officers, and legal notices wherever appropriate. During the quarter, recoveries from the 90 DPD portfolio exceeded INR 30 crores, including INR 21 crores from return of accounts. While the new book will determine our future earning quality, recoveries from the legacy portfolio can progressively unlock additional value.
Growth and diversification: Turning to growth, we see three complementary opportunities. First, core microfinance will deepen our presence where portfolio behavior supports growth, while continue to maintain focus on disciplined expansion. Second, premium JLG, which is income levels greater than INR 3 lakhs, and individual lending. These products and segments allow us to deepen relationships with eligible customers and serve differentiated credit needs. Our Vishwas product that we had shared with you, which we launched in the last quarter, has made an encouraging start, accounting for 20% of MFI disbursements during September and now in October. Third, secured MSME. We are expanding our reach by leveraging our existing microfinance infrastructure. Approximately 10% of MSME disbursements are now originating through the MFI branch network, and we have expanded from 50 to 100 MFI branches acting as MSME spokes. Our focus remains on cash flow-based underwriting and secured lending to suitable customers.
The strategic advantage of these three businesses that we just spoke about is to allow us to serve a broader range of customer needs through infrastructure and customer relationships we already have established. Operating leverage and technology. We are pursuing four interconnected operating initiatives. The first is improving branch productivity and operating leverage. The average MFI AUM per branch has improved to INR 5.4 crores from INR 5.1 crores. We are rationalizing approximately 102 branches while planning to open another 50 branches in markets which offer strong opportunities. The second is generating growth through our existing distribution infrastructure. By expanding the premium JLG individual lending and MSME sourcing through our network, we aim to increase the earning capacity of our branches without a proportionate increase in infrastructure or operating expenses. The third is strengthening credit underwriting through differentiated credit templates and more rigorous customer assessment.
This should allow us to pursue growth opportunities while maintaining discipline around customer leverage and repayment capacity. The fourth is building stronger in-house recovery capabilities, particularly for the harder delinquency buckets. Together, these initiatives should support greater productivity, more consistent credit performance, and better operating leverage over the medium term. Technology will be an important enabler of this transformation. Our new LOS and LMS systems have been implemented now while I talk across 15% of the branches, with broader transition targeted for completion before the financial year end. We are also developing AI capabilities across collections, customer service, and credit assessments. Our objective is to create a more scalable operating platform with greater underwriting consistency, stronger controls, and improved productivity. Our way ahead, outlook, and priorities. Our medium-term ambition remains AUM growth of 20%-25%, ROA of 4%+, and credit costs in the range of 2%-2.5%.
We are entering the next phase of growth with a focus on building a more diversified, productive, and resilient franchise. This will be supported by disciplined underwriting, very strong credit costs, continued investment in technology, and strong commitment to sustainable and profitable growth. Our INR 10,000 crore AUM ambition remains firmly on track as a medium-term objective. The disruptions during the first half have led to a slight calibration of the timeline. We are moving to integrated branch-led model, which will cater to our core lending products, which are as follows. First, our JLG products, which is going to be the major portion of our business. We will continue to evolve underwriting standards based on incremental data and experience. Second is premium JLG borrowers, income greater than INR 3 lakhs.
Borrowers which have graduated and whose income has increased from the INR 3 lakh limit will be offered the loan based on repayment history and track record. Third is the individual loan product for small businesses under the MSME secured product umbrella. This allows us to diversify our lending portfolio by benefiting from capital-efficient expansion and operating leverage. Hence, our branch infrastructure will enable growth and diversification vision of the company, enhancing operational efficiencies without any increase in OpEx. The early improvement in Q3 disbursal growth momentum with 10%-12% growth over the previous quarter average is encouraging and reflects the gradual improvement in our operating environment. While this provides a starting point, we remain disciplined in translating this momentum into sustainable portfolio growth in line with our medium-term ambitions and underwriting standards. With that, I will hand over to Krishan to take you through the financial performance in greater details.
Thank you.
Thank you, Sanjay, and good evening, everyone. I am pleased to present our quarter two financial performance. Our quarter two performance demonstrates clear improvement across key businesses and financial metrics, including growth, margins, operating efficiency, asset quality, cost of borrowings, and profitability, reflecting disciplined execution and a focus on well-capitalized growth. Asset quality continues to improve during the quarter. Our gross NPA stood at 1.6% as of September 30th, 2026, compared to 2.51% in the previous quarter, while the net NPAs stood at 0.11%. If we would not have done the legacy transaction, our gross NPAs stood at 2.28%. This improvement was driven by strong collection efficiency, healthy recoveries, and seasoning of a higher-quality portfolio. Credit costs remained constant on a sequential basis despite floods in the five states. During the quarter, company strategically decided to sell secured loans of INR 54 crore, including INR 3.5 crore of return of loans to an Asset Reconstruction Company.
This will enable the company to invoke SARFAESI and get the recoveries quicker. Our focus has been on reducing the cost of funds and maintaining a stronger liquidity buffer. These initiatives are now clearly visible into our funding metrics, ALM position, and margin profile. One of the most significant achievement during the quarter was the continued reduction in the marginal cost of borrowing. The marginal cost of borrowing declined to 9.35% in quarter two of FY 2027 from 12.16% in quarter two of FY 2026, representing a year-on-year improvement of 281 basis points and 74 basis points improvement on quarter-on-quarter basis from 10.1% in quarter one of FY 2027, which was last quarter. The marginal cost of borrowing stands at 9.39% for the quarter, even when we exclude the borrowing through CGS scheme for MFIs. This makes the fifth consecutive quarter of decline in marginal cost of borrowing.
In this quarter, we have raised INR 320 crore through PTCs, which enhance its share in overall borrowings book to double digit, which is 10%. The company secured PTC funding at an all-in cost of around 8.5% during the quarter. We have further scope to increase the PTC transactions in coming quarters, and that will help company to keep the marginal cost of borrowing in control in an increasing interest rate scenario. In addition, we are working to reduce reliance on direct assignment transactions quarter-on-quarter. The DA outstanding as a percentage of AUM has come down from 13.75% to 12.65% last quarter. We maintained strong negotiating leverage and adopted a disciplined cost-focused approach to funding decisions. In last quarter, one of the key priorities was to strategically utilize the CGSMFI 2.0 scheme, ensuring that its benefit were maximized through prudent allocation and a lower all-in cost of borrowing.
As a result, the company accepted selected sanctions aggregating to about INR 468 crore at an average all-in cost of 9.23% out of the available sanctions of about INR 1,100 crore under CGS scheme. We maintained a firm stance of not taking sanctions that did not align with company's economic value and carried unfavorable commercial terms. Our disciplined treasury approach and proactive liability management resulted to reducing the marginal cost of borrowing at 9.35% for the quarter. On the liquidity front, we have maintained INR 1,661 crore of liquidity. In addition to this, we have INR 2,800 crore of undrawn sanctioned facility available for utilization at any point of time. Further, we have a strong funding pipeline of INR 4,500 crore. Together, these provide us with significant liquidity cushion, hence our funding flexibility and position us well to meet our obligations. Our capital adequacy ratio stood at 36.75%, comfortably above the regulatory requirement.
Our external credit rating remains strong with A- stable from Crisil, A stable from CARE, and A- stable from ICRA, while our PTC program carries ratings of up to AA+ SO. Coming to our margins, our NII for quarter two FY 2027 is at INR 265 crore, that is 12.52% compared with 10.85% in quarter two of FY 2026, representing an improvement of 167 basis points year-on-year. On a sequential basis, it improved by 59 basis points from quarter two FY 2027, contributed by improving yields and reduced cost of borrowing. The reduction in the cost of borrowing has come after the lenders have derived confidence after extensive discussions and due diligence. We are confident to sustain these margin levels and further improve upon these. Our pre-provisioning operating profits stood at INR 125 crore in quarter two of FY 2027 compared with INR 89 crore in quarter two of FY 2026, an increase of 40%.
Quarter-on-quarter PPOP increased by 22%, demonstrating the underlying earning strength of the franchise, reflecting the tangible benefits of the operating efficiencies we have systematically built over the last few quarters. Our credit cost is INR 39 crore as compared to INR 39 crore during the quarter, broadly remaining flat even in a tough quarter. Our total provisions stand at INR 209 crore, which includes INR 19.5 crore of management overlay. This translates into provision coverage ratio of 93.4% on stage three assets and 67.3% on stage two assets. As a result of improving asset quality and better operating efficiencies, present quarter makes a clear turnaround story with profit for the quarter standing at INR 86 crore compared to loss of INR 22 crore. On a sequential basis, our profit is up by 40% from INR 62 crore last quarter.
ROA improved to 4% annualized, while ROE stands at 13% annualized, reflecting normalization of business performance and improving earning quality. Overall, with a strengthened leadership team, robust capital backing, and new portfolio underwritten through stringent guardrails, we begin festive season with a lot of confidence in achieving new scale in the coming quarters. We will continue to pursue growth in a disciplined manner, ensuring that our provisioning and capital buffers remain aligned with the evolving risk environment. With improving asset quality, robust capital adequacy, strong liquidity, and diversified borrowing profile, we are confident of delivering a sustainable and responsible value creation over the long term. Thank you. With that, I would like to open the floor for a Q&A session.
Thank you very much. Ladies and gentlemen, we will now begin 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 question queue, you may press star and two. Participants are requested to use handsets while asking a question. Participants may note to please limit their questions to two per participant and can ask both questions at the same time. Ladies and gentlemen, we will wait for a moment while the question queue assembles. First question is from the line of Meet Sangoi from PL Capital. Please go ahead.
Hi, am I audible?
Yes, Meet. Hi.
Hi. Hi, sir. Congratulations on a strong quarter, sir.
Thank you.
Sir, just wanted to understand two things. One, if you can quantify, since October is done, if you can quantify the collection efficiency number for the month of October, and also the disbursal number for the entire book, and also specifically for Maharashtra and Karnataka.
Right. Meet, the collection efficiency for September was 99.77% gross, and October is 99.78%. So October actually at a gross level is little better than September. In terms of disbursals, we were averaging about INR 568 crore per INR 570 crore per month for the previous quarter. There is a growth in October of about 10%. So October has grown by 10% across both MFI and MSME separately. On Maharashtra, we have about a INR 117 crore book from Maharashtra, where the collection efficiency in October is at about 98.84%, which is essentially, which used to be 99.4%. If you look at a net level, it is about 0.57% net flow, which means at a portfolio level of about INR 117 crore, about INR 57 lakh is moved into net flow forward.
Got it. And Karnataka?
Karnataka is a pristine portfolio. Karnataka, we do not see. Karnataka is 99.95% in October. And Karnataka, the net flow rate is negative.
Got it. That's good to hear, sir. The second question then is, in terms of second half, given that it will be seasonally strong, do we press the growth button now, or do we wait for another month to see how things are panning out in some of these drought and flood-affected areas, and then maybe look to hit the growth button?
No, sir, absolutely. I think what we have already done is, certain bordering branches of Karnataka and Maharashtra, and almost entire of Maharashtra, we have moved to stricter guardrails. We are not doing new customers. There are a lot of precautions that we have taken. But as you know that Maharashtra is about 2% of our portfolio. Karnataka is another about 1.25%. Other than that, we are pressing the growth accelerator, and I think the confidence U.P., Bihar, M.P. , Odisha, and partially Assam also, they were all They went through two months of floods, excessive rainfall. Other than one month of flow forward, we have been able to come back to actually better collection efficiencies, both in September and October. You see the 99.78% October, it includes Maharashtra going down from 99.4% to 98.84%.
Without Maharashtra, actually we would have been 99.83% or 99.84%. I think you're absolutely right that we have already pressed the growth, and we see good demand coming. I think because of floods, the demand had got postponed, and we see demand coming back.
Great, sir. Thanks. Thanks for answering the questions.
Thank you. Next question is from the line of Renish from ICICI Securities. Please go ahead.
Yeah. Hi, sir. Before I put my question, I would like to congrats your team, sir, for excellent asset quality outcome despite so many headwinds in last three to six months. This also reflects the operation level changes we have done since Sanjay has joined and started using positive note. Sir, just two things. One, on the asset quality front, right? We can see that, the net flow levels, we are some of the best at just 7 basis points. Now, there is some noise around this drought, rainfall deficit, et cetera. Thanks for sharing October collection numbers as well. When you look at ground or from your branch visits, et cetera, are you seeing any stress building up in any of the districts, state, et cetera? Is there any sign of things worsening because of rainfall deficit or droughts?
Okay. Yeah. Thanks, Renish. Renish, I'll separate Maharashtra because Maharashtra you've already said, and that's like a We have already in the previous question explained that there was a drop-
Correct
of collection efficiency in Maharashtra. I have also explained that what is the cause. Assuming a 50 basis points deterioration, that's approximately about INR 50 lakhs which has gone into the first bucket, and this I'm saying in October. If you look at the rest of the markets, I think one thing that we have learned over last six to seven months, and this is not just pertaining to drought or El Niño expectation, I think while there are new segments, new products we have launched, we have continued to be putting guardrails which are little stricter than what the laid out otherwise guardrails are. I think the positive thing that we see right now is that there is no baggage that we are carrying in any of the markets.
There is no baggage of October performance, September performance, September spilling onto October spilling onto the next month. I think with that, and the second thing, we have been able to launch two products which take us into premium JLG. We continue to do JLG at 3 lakhs and above ticket size up to 6 lakhs. So 3 lakh to 6 lakh income. The ticket size we have not increased too much, so the ticket size continues to be till 1 lakh. We are seeing good progress in that. So 20% of our MFI disbursal, while it will be non-qualified, however, it is the same ROA accretive, the credit cost is little better.
Just to give you a number, in that segment, through the cycle, in the last one and a half years, the PAR was 0.19% in third cycle and above, which is essentially majority of what we are catering to. I think we see good positive momentum right now, and we feel that the early calls that we had taken when the West Asia crisis happened, I think this is the time to take advantage of all those checks or balances that we had internally created.
I am sorry to interrupt you, Renish. We are unable to hear you, sir. Your voice is breaking.
Is it better now?
Yes, Renish, we can hear you now.
Hello?
Renish, you are dropping in between, but yes, we can hear you.
Okay. Just to follow up on that, sir. When we are calling out this high-ticket MFI loan as a JLG, I think this is individual loan, what industry calls out. Is that right?
The RBI has clearly informed the bureaus that if you do a JLG, as long as you do a JLG, you report it under MFI JLG. While it will be a non-qualified, you are absolutely right, but we are following all the guardrails. When the bureau also, when let us say the other lender also looks at bureau for this customer, they will adhere to the guardrails. This product is with all MFI guardrails, but income greater than 3 lakhs.
Got it. You said it is 20% of disbursal in Q2.
Absolutely. The ticket size is INR 1 lakh. It is not like, it is not a complete swing. It is not like 1.52 ticket size. The ticket size continues to be up to INR 1 lakh.
Got it. That is why our more than INR 1 lakh average ticket size customer went up to 3% in this quarter. Is that right?
Correct. Greater than 90, greater than equal to INR 1 lakh has gone to [inaudible].
Correct. Got it. This is very helpful, sir. Thank you and best of luck.
Yeah. Thanks, Renish.
Thank you. Next question is from the line of Viral Shah from IIFL Capital. Please go ahead.
Yeah. Hi. Good evening, and thank you for the opportunity. I had two questions. One is basically on the growth front. I think over the last two quarters, of course, initially we were uncertain about Sanjay, the West Asia kind of war, and then basically I think this quarter got impacted because of the flood. Now, in the current context, there are some potential headwinds. Of course, we are not looking at anything immediately currently apart from couple of geographies and pockets of that. How confident are you basically to scale up the disbursal growth? Because in the last two quarters, we have been kind of stagnant. Idea and expectation was that we will be scaling it up quite fast. Now, in this potentially adverse macro condition, what is the level at which you intend to go to in terms of, say, the disbursal growth?
The second point is for Krishan. Basically, last quarter we had the excess liquidity, which kind of pulled down our margins and spreads. Now, in this quarter, it seems to have kind of normalized. Plus, there is some benefit of the rate hike, 55 basis points rate hike that we had taken, right? How should we think about, say, the margins incrementally, and do we intend to take any rate hikes?
Okay. I think first, Krishan, we will take the question on margins and spread, and I think you are referring to the cost of borrowing also.
Yeah. Well, during this quarter, there was an uptick of about 24 basis points in the yield. That was due to the rate hike we exercised at the beginning of the year. It was a mix of one was rate hike and another was the reduced delinquency, so there was no reduction in the interest due to NPAs, et cetera. That was one piece. Second is, there is a reduction of about 35 basis points on the cost of borrowing. Now, at a steady state going forward, this NIM of 12.52%, we have a scope of another 15-20 basis points from the yield, which will come out of the rate increase we did at the beginning of the year, and 15-20 basis points similar on the cost of borrowing in terms of the spread.
Now, mixing this with the external environment of increasing interest rate scenario, et cetera, I think we definitely see in the next quarter an increase in the margin for about at least 15-20 basis points. Then after that, I think we would endeavor to sustain at these levels because on the cost of borrowing, even there is an external environment of increasing interest scenario. As I mentioned in my discussion, we are going to increase gradually our PTC share, which is the least cost borrowing for us at about 8.5%. That will sustain our marginal cost of borrowings and the average cost of borrowing on the books. So, we are pretty confident for about the next two quarters on maintaining these margins, plus even increasing this. That is one piece.
Post that, we will review the situation, and if required, I mean, we may think of increasing passing on the increase rates, but that is a little away, six to nine months away. We don't see that happening as of now. That's the situation on the margin. We are pretty confident on sustaining these and even increasing it by a few bits.
Yeah. And Viral, on the growth. I think it is important to quantify that it is not that overall in the country there are macro headwinds. I agree with you that there are macro headwinds pertaining to a particular event. But if you see, and I'm not saying that our book in that market is very small, while it is 2%, even then the impact on our collection efficiency is about 98.85%, and at a net flow level, we have explained even in October, which is two and a half months of drought, it is 0.57%. So, the net collection efficiency is 99.43%. That aside, we don't see headwinds in the rest of the country. And I think three things we have done very patiently.
I think we have identified clear customer segments where we want growth to come from, and I think very silently, we have built a strong credit muscle in the MFI thing. Like I said, 950 branches now have the ability to actually gauge what's happening on the ground in that particular lady's household or the center meeting. I think that gives us the confidence that we are not looking at just the BRE or the bureau or the past performance of that customer when we are giving a fresh loan. We are also evaluating how her household and the center is doing on the ground. I think we are fairly confident, and you already see, October, we had, what, five days of holidays because of Dussehra and Puja and multiple things. Despite that, there is a 10% growth in each of MSME and MFI.
I think this is the point where demand starts to go up over the rest of the half year. We are confident of the demand, and we are confident that there will be significant growth from here on.
Sanjay, just if I may, typically, of course, the second half remains more heavy in terms of both growth as well as also the asset quality. You expect that trend to now sustain in this year, despite all of this?
Absolutely. Like I said, I do not see we have ring-fenced. There are challenges in certain markets, and those markets we have ring-fenced. So, in those markets, we have either stopped disbursements or we are going extremely cautious. In fact, in certain markets, we have assumed that the income levels have dropped by 20%-30%, and we have reduced FOIR drastically. So, the ticket sizes, everything we have crashed in the ring-fenced market. But rest of the markets, look at it this way, we have our ground force credit now, which is evaluating every customer. So, we are not just going by the past performance of the customer with us. We are also looking at how her household and how she is doing on the ground. So, that gives us ample confidence that there is no reason why the growth will not come in the next four to five remaining months.
We are already seeing that growth in October. I have given you October figures.
Right.
October is already 10% growth over September.
Right. Just one last question.
Sorry to interrupt you, Mr. Viral Shah. May we request you to please rejoin the queue? Thank you. Next question is from the line of Ashlesh Sonje from Kotak Securities. Please go ahead.
Good evening. Sir, just one question from my side on this Maharashtra situation. When you are speaking to these delinquent borrowers, what is the typical reason for the non-repayment from their side? I understand there is a drought, but is there an impact on their income, or are they holding more cash, or has their access to credit been affected? How would you characterize it?
Okay, great. I think majority of our customers, Ashlesh, the cash flows are not impacted yet, but they are saving for, let's say, in case there will be income impacts going forward. Most of our customers, rarely it has come across that the customer has no money or because of the drought there is some problem that has happened, because of which she is not in a position to pay. That will be, let's say, less than 0.5%. Let's say the 1.2% or 1.3% customers which are not paid. Majority of those customers are which are, let's say, a little uncertain about the future, and it is not that their cash flows have dried up or they have got directly impacted because of the drought.
I think plus there is a lot of uncertainty when there is a drought, and the customer would be, let's say, saving a little extra or seeing how it goes. But in most of the cases, we do not see an impact on the cash flows because the dependence on direct agri is very little.
Understood, sir. You mentioned that you have taken a few actions there, including cutting your FOIR, et cetera. When do you think you will have the comfort again to loosen these filters again?
I think, see, drought is a situation which will not This is not something that will immediately go away like floods. If you look at, right now, internally, we have thought that we will do this at least for one quarter, and we will see how things are on the ground. We have our branches and teams very close to the ground. But at least for one quarter, we would want to keep it at this level.
Understood, sir. Perfect, sir. Those were all the questions I had. Thank you.
Thank you. Next question is from the line of [inaudible] from C.R. Kothari Stock Broking. Please go ahead.
Thank you for the opportunity, sir. I just joined the call a little late. I just wanted to check, our credit costs fell from INR 39 crore and stage three coverage rose 93.4% while we were about INR 70 crore, I think. What is the FY 2027 credit cost guidance that are we guiding for something at this point in time? What portion of H1 profit is recurring? I mean, is bad debt recovery inside our other operating income?
Okay, I will. Krishan, you want to explain the change in that provisioning?
Yeah.
Then I will explain the guidance on credit cost.
The credit cost, annualized credit cost remains flat, sort of flat. It is just a reduction of change of about INR 1 crore. Net of the recovery, it is 0.3% for the quarter and 1.2% annualized, net of the recoveries. These recoveries are sort of normalized, and we expect these recoveries to continue. That takes us to the next question also. This INR 86.47 crore is as a recurring one. In this, there is no extraordinary or exceptional item in this.
I think his-
Yes
His other question is this 81.5% to 93.4%.
On the stage three, the PCR has increased from 81% to 93%. That is because we have sold a secured portfolio to an ARC of about INR 54 crore. After that is out, this PCR has increased from 81% to 93% in the stage three.
Okay. On the guidance, [inaudible], on the guidance on credit cost for the rest of the year, we are clearly saying that our flows are roughly what? Around sub 20 basis points. So let's say about 15 - 16 basis points. Assuming this at an annualized level is about 1.8% of credit cost. What we have also given guidance is that every time there is a shock, let's assume a 30 basis points per quarter impact. So, you add 60 basis points to that, so about 2.5% credit cost. So, the range is between 2%-2.5% guidance on the credit cost for the year. But like you already see, despite the shock, we are at sub 2%. But from a guidance perspective, the range is 2%-2.5%.
Thank you very much. All the best.
Yeah, thanks.
Thank you. Next question is from the line of Rajiv Mehta from YES SECURITIES . Please go ahead.
Yeah. Hi, good evening. Congratulations on pretty strong numbers. I just, sir, want to check, firstly, on Maharashtra collection efficiency impact, the drop we have seen. Any idea that how much it would have dropped for the competition? Are we better off in terms of seeing a little drop versus competition since we have been very cautious in the last six months in terms of customer identification, the whole underwriting, you spoke about? Is our drop relatively less than competition in Maharashtra's impacted districts? Secondly, in terms of Karnataka, do you expect any impact to come in November with some lag? Or you believe that if any impact had to come, it should have come in October?
Absolutely. I think I will take the easy one, which is Karnataka. There are certain markets in Karnataka or branches which are prone to drought. Those we have been cautious. Like I said, Karnataka collection efficiency is actually improved in October. We are close to 99.95%. It has been like that for the last now two quarters, two to three quarters. Karnataka, we do not see any concern, but we have still put other potential drought impact on a different guardrail. On your first question, which is Maharashtra, obviously, that is a very tough question. I cannot say for competition.
But I think if you look at what we have been talking about guardrails or what we have been, and this is right from the last week of February when the West Asia crisis happened, obviously, we did not know that there would be these kind of situations. But we have been saying that it is not that there is no demand or there is no growth, but from a guardrail perspective, we will always keep an industry minus one. Our guardrails will always be a little plus one over the industry. I think we obviously feel that we are very confident that we will be able to. I am not comparing against competition.
We are very confident that there will not be too much of impact because of this, but obviously, we will have to wait and watch because we have done far stronger customer selection than what we were doing, let us say, much before, about one or two years back. I think I would stick to that rather than comparing directly with competition.
And sir, just one thing on growth and disbursal scale up. See, this premium JLG, I do not know when did you launch, but I think you are saying that it is already 20% of disbursal. Then individual loan product is also being launched. I think it is already launched, so that will also add to some disbursal volume. As I see that you also raised ticket size in MSME to up to 50 lakhs from earlier 25 lakhs. So I think all this incrementally have to contribute to much larger disbursal run rate going forward. Hence, what will be the exit AUM number which we can kind of reach by the end of March? Then the related question is on the exit ROA. I mean, you have already done 4% in this quarter, and our CFO said that there is nothing one-off in this.
Can the exit ROA be slightly even better? Would you want to raise that guidance for the exit ROA?
Okay. I think on the number, I do not want to give another number because we have already given a number, and we have also shared that because of the floods or excess rainfall that happened in Q2, there was an impact on those numbers. But I think if I put I am just putting three things in perspective. One, we are not carrying any baggage from September or quarter two and including October. So we are getting into November absolutely fresh with a super and a very good collection efficiency, no baggage on collections, no prior incidents or concerns. So I think that makes us very, very confident. The second thing is that the two new products we have launched.
The individual loan, you will see now scale up happening, but the JLG MFI, which is a non-qualified loan up to 1 lakh, that we will continue to grow, and we see very good demand in the market, especially our customers and competition customers or customers out in the market who have a previous track record. The third is the MSME growth, which will come from the increased ticket size. So MSME has already grown about 20% between quarter two to quarter one and grown by about 10% this quarter over the previous quarter. So, I think with this, you will see a very strong growth obviously coming in MSME, and they will start having substantial contribution to the numbers now. But I am refraining from giving a year-end number, but I can tell you that we are in a strong position for growth.
Best of luck.
Thank you. Next question is from the line of Sarvesh Gupta from Maximal Capital. Please go ahead.
Good evening, sir, and congratulations. Sir, on Maharashtra, you said INR 117 crore book, but it's 2%.
I am sorry to interrupt you, Mr. Gupta, but your voice is sounding very muffled. Can you please check? In case if you are connected on any Bluetooth, can you please come on your handset?
Yeah, yeah. On Maharashtra, you said INR 117 crore [inaudible]
I am sorry to interrupt, Mr. Gupta, again.
Sarvesh, INR 117 crore. Yeah. Okay.
That is [inaudible] growth, right?
Correct. That is at a 98.84% collection efficiency in October and net flow rate of 0.57% in the current bucket.
And this is the entire Maharashtra book, right?
Yeah, this is the entire Maharashtra book. This is the entire Maharashtra book.
Okay. Okay.
The drought-affected Maharashtra is smaller. That POS is also close to about INR 26 crore to INR 27 crore.
Okay. All this reduction in the net flow of 0.5% is coming because of INR 26 crore book rather than the INR 117 crore book?
Yeah, most of this is coming from. Like I said, it is not that all of drought is. In fact, 60% of drought has not started giving impact yet. We see it. Wherever the drought impact is also there on the collection efficiency, like I explained in the previous question, it is not because the customer's cash flow is impacted. It is because the customer, she is not sure about her future earnings, and she is just playing a little safe.
Okay.
The 0.57% or 0.55%, the net flow forward is on the overall Maharashtra book.
Okay. But since you are saying that INR 26 crore is the main affected one, in that sort of a geography, maybe you are coming down to 96% or thereabout, and remaining might be-
Yeah, obviously. There we are at about 97.25%. That's about INR 26 crore of POS.
Okay. The remaining book, which is 90-odd crore, is that at 99.8%, just like the overall company?
I have not done that math separately, but yeah, I have given you the two books. You can do the math. I have given you. You can put weightages, I have not done that separately.
Okay. Secondly, sir, on the DTA side, how much DTA are we carrying now, which can be consumed in future?
As on September 30th, we are carrying INR 271 crore of DTA, which is unrecognized.
INR 271, okay. On the Karnataka side, normally, we have seen some commentaries by companies about drought, et cetera. But in your case, you are saying that it has actually gone up in terms of X bucket. I mean, any particular reason why our book might be behaving a little bit better than the commentaries otherwise?
I think Karnataka, as a rule, we had put, we will do only two lenders. When the Karnataka crisis had happened, post that, we had not opened Fusion+2 across all the branches. There were multiple riders that we had put, and even where we did Fusion+2, there we put with multiple other caveats. We've been overall, since the Karnataka episode, we've been very cautious on Karnataka. We did this homework, I think, about seven, eight months back, that which are the markets which are rain-fed, and which markets could get impacted. We had identified part of, after this issue happened, the rain-fed part of Karnataka, we had identified with separate guardrails. I think maybe that's why the collection efficiency continues to be strong. October also, like I said, I've shared with you the October numbers also.
October also, Karnataka continues to be very strong.
Mr. Gupta, sorry to interrupt. We are unable to hear you, sir. Can you come in a good reception area?
Yeah, I was asking that two states, they don't have anything in any other geography.
No, we don't see. We have been watching. We saw reservoir levels dropping in Andhra and Telangana, but we don't see any impact on collection efficiencies there or any disturbance or any impact on the ground.
Okay. Secondly, sir, on the NIM side, there are larger players which have spoken about reducing the yields, and then also sort of yields. On the competitive side, how is that going to play out? Because the difference between the various players is also getting higher now. How do you see that situation panning out? Because some of the bigger guys also have very good sort of source of funding, et cetera, and now they are earning excess sort of. How do you see?
We have lost you, Sarvesh, but I am assuming your question is that, do we see any stress on the cost of borrowing going up because you are seeing everybody else's cost of borrowing going up, and people are talking about that, even the large players? I think clearly, you have to appreciate that we are personally coming out of a high interest rate cycle. You look at the incremental cost of borrowing, and you look at the trajectory. Now, the market, the external rates have not changed so much. I think it was because of our past performance where our cost of borrowing was high and not to do with the market. The increment that you see is because our performance continues to improve from a profitability perspective.
And like Krishan already explained, we think there is an opportunity to further reduce the incremental cost of borrowing from the levels right now. And assuming that, let us say, there is a 50-75 basis points increase in the next two quarters, impact of that will be very muted for us. Plus, the other thing that Krishan already spoke about is that the rate that the pricing because of the PTC coming in. You see PTC as a percentage has significantly gone up to close to about 9%. And Krishan already explained that this will further go up. So, we have plenty of leverages available to reduce the cost of funds. The second thing is that there is another, the yield increase that we did, only 25-30 b asis points of that effect is coming in the portfolio.
In the next two quarters, you will see another 12-15 b asis points coming per quarter. So, we see NIMs to be continuously increasing from here on. And I think next quarter, we will give you a more clearer idea on the future NIMs, how they will be. But at least right now, we see that increasing.
Okay, sir. Thank you and all the best.
Thank you. Next question is from the line of Varun Gajaria from Boring Asset Management. Please go ahead.
Hi, sir. Congratulations on a good set. Sir, just wanted to understand, in case I missed it, we are on track for our yearly guidance? Do these macros worry you at this point, or are we good to go?
Sorry, did you say which guidance, Varun? Is it AUM guidance?
Yeah, for the growth guidance and our credit cost guidance for the NIM.
Absolutely. I think there are three clear guidances that we had given for this year-end. I will just reiterate. We had said that INR 10,000 crore of AUM. Two, we had said that the credit cost will be in the range of about 2%-2.5%. And third, we had said that we were at 3%, 3.1% in quarter one. We had said we will be at 4% by the last quarter. Now, we are very confident. You already seen 4% ROA hitting right now, so we see continuous growth happening in ROA. You see good performance on credit cost. We will continue to hold that. I have shared with you the October numbers already.
I think on AUM growth, because of Q2, because of the five states that we spoke about, the demand has got a little delayed, and hence, the INR 10,000 crore, we may have to moderate a little, and that AUM could come a little later. But like I said in the previous question, I do not want to give another number because there are too many moving parts right now. However, I have shared with you the October numbers. We are already seeing a 10% growth, and we are confident that the growth will continue. However, your specific question of INR 10,000 crore of AUM, I am not giving another number, and I think we will wait and watch. But obviously, some of that will get moderated because of what happened in Q2.
I think the good thing is that there is no moderation in the credit cost reduction or the ROA targets that we had taken.
Right. Overall, our borrowers seem like down by 25%, while we have our outstanding per borrower is probably up by 52% at 37.7. When do you think the borrower count stops? Is it conscious credit management policy to onboard safer borrowers? How does it work?
I think so. If you look at in our book, there are approximately, and most of it is old book, there are about 4% customers who are more than three lenders. We cannot fund to these customers. They will have to right and move out. Similarly, there are also customers who are moving out because they are over-leveraged because of other reasons, let's say, not just the lenders. I will just give you a sense of how we are measuring this. Of the customers which are eligible for a second loan between the 24 - 27 month, that is when 50%, 60% of customers come for a retention or a repeat loan, we were retaining about 30% of the customers. Actually, exact number was 29%.
There are some changes that we have done, and there is additional focus that we have put from August onwards on how we are tracking, what offering we are giving to those customers, even our KPIs internally at a branch level. This retention has now moved from 28% to 38%, actually close to between 38% - 39%. I think our focus is that customers who are eligible, who are ready for a repeat loan, a significant percentage of that we should be able to retain with us. The immediate target for the next few quarters is we want to be at about 50% of the customers we want to retain.
Okay. Thank you so much and all the best.
Thanks.
Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Sanjay Garyali for closing comments.
Yeah, thank you everybody for being with us and wishing you and your families a festive season ahead. Thank you so much.
Thank you very much. Ladies and gentlemen, on behalf of Fusion Finance Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.