Ladies and gentlemen, good day and welcome to the Q2 FY 2026 earnings conference call hosted by HDB Financial Services. 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 and then zero on your touchstone phone. Please note that this conference is being recorded. Ladies and gentlemen, also note this conference call is only for analysts and not for media. I now hand the conference over to Mr. Vishal Patel from HDB Financial Services. Thank you, and over to you, Mr. Vishal.
Thank you, Sagar. I welcome you all to the Q2 earnings call of HDB Financial Services Limited. We have with us Mr. G. Ramesh, MD and CEO, along with Mr. Jaykumar Shah, CFO and the senior management team of the company. I believe all of you would have had a chance to peruse our financial results, investor presentation, and press release, which has been filed with the stock exchanges earlier today. We will start with the management remarks and then open up the call for Q&A. Audio recording of this call will be available on our website shortly after the call ends. I will now request Mr. G. Ramesh for his opening remark, followed by Mr. Jaykumar Shah, who will provide a brief on the financial results. We will open up thereafter for Q&A.
Thank you, Vishal, and a very good evening to all of you who have joined us today. Greetings of the season. Briefly on the macros, India seems to be in a very unique situation in terms of domestic economic activity, which is showing resilience in spite of geopolitical uncertainties, as indicated by GDP estimates and high-frequency indicators. The latest monetary policy review commentary on growth and inflation estimates bodes well for the economy. The robust monsoon season is expected to perk up rural consumption, easing inflation, and the impetus provided by GST rationalization bodes well for the broader economy and financiers as we step into the festive season. The regulators' comments as a part of the latest monetary policy commentary on the draft circular for forms of business is meaningful and augurs well for us while we wait for the final guidelines.
Coming to the quarterly business updates, as you all recollect, we have our businesses which are bucketed into three distinct business lines. The first business is what we call enterprise lending. This business has both secured and unsecured loans. The secured lending products, which is primarily consisting of loan against property and enterprise business loans, grew moderately in Q2. On gold loans, recent changes in regulations in the gold loans business have helped us gain good traction in Q2, along with the increase in price of the metal, and augurs well for this segment going forward. We have held a conservative position on unsecured business loans. As asset quality pressures ease, we expect to return to a growth trajectory in the coming quarters. The second business that we have is what we call asset financing.
In asset financing, we have faced challenges in this commercial vehicle financing segment on asset quality in Q1, and this continued through Q2 as well. Monsoon accentuated matters as high precipitation in specific geographies of the country, that is, North and East , impeded vehicle deployment with consequent impact on customer cash flows. Based on our business insights, we believe that vehicle idling, which is a phenomenon that we normally notice in Q2 because of monsoon, this year was much higher than the prior years. The second factor was that there was a deferment of demand for vehicles because of the announcement of GST rate rationalizations.
However, with the extended monsoon season and a seasonally slow quarter behind us, we anticipate a positive momentum in book growth with the onset of the festive season and supported by key policy changes made by the government through GST rate cuts, which have essentially reduced the cost of ownership of commercial vehicles. On consumer finance, which is the third business line that we talk about, in this segment, again, growth was moderate in Q2 due to demand deferment on expected GST reductions, which have actually now come through specifically in some product categories like two-wheelers and consumer durables and auto.
This should help us pick up; there should be a pickup in demand in auto, two-wheelers, and consumer durables on the back of one festive season, two, easing inflation, three, better crop, kharif crop sowing, and so growing farm incomes, and that should be positive for this segment going forward. We have already started seeing good movement in retail off-take in the first few days of October, which should reflect in the months ahead. Thank you all for joining in and wishing everyone a very happy Diwali and a wonderful festive season. I'll now hand over to our CFO, Mr. Jaykumar Shah, for an update on the financials.
Thank you, Ramesh. A very warm welcome to all. Moving on to the financial performance for the quarter, customer franchise grew to 21 million with an increase of 4.2% sequentially and 19.6% year-on-year. The gross loan book as of September 30, 2025, stood at INR 111,409 crore, growing 1.9% sequentially and 13% Y on Y. Secured loans comprised 73% of the total loan book. Disbursements for the quarter ended September 30, 2025, was INR 15,599 crore, up by 2.8% sequentially. Branch count stood at 1,749, spread across 1,157 cities and towns. Net interest income for the quarter was INR 2,192 crore, an increase of 4.8% quarter-on-quarter and 19.6% year-on-year. Net interest margin for Q2 FY 2026 improved to 7.9% versus 7.7% in Q1 FY 2026 and 7.5% in Q2 FY 20 25.
Cost-to-income ratio for a lending business declined to 40.7% in Q2 FY 2026 as compared to 42.7% in Q1 FY 2026 and 42.7% in Q2 FY 2025. The ratio for the half year was 41.6% as compared to 43% compared to last year, i.e., H1 FY 2025. Cost-to-assets reduced from 3.8% to 3.7% Qo Q. Pre-provisioning operating profit for the quarter was INR 1,502 crore as against INR 1,388 crore for the prior quarter. Credit cost for the quarter was INR 748 crore as against INR 670 crore for the prior quarter. Profit after tax for the quarter ended September 30, 2025, was INR 581 crore as against INR 568 crore for the prior quarter. Gross stage three as of September 30, 2025, stood at 2.81% as against 2.56% as of June 30, 2025. Provision coverage ratio on stage three stood at 54.73% as of September 30, 2025.
ROA annualized for the quarter ended September 30, 2025, stood at 1.93%, which includes opening assets of approximately INR 9,000 crore of OFS money as of September 30, 2025. Adjusted for this, the ROA would be 2.02%. ROA annualized for the quarter—sorry, ROA annualized for H1 FY 2026 stood at 2.1%. ROE annualized for quarter ended September 30, 2025, stood at 12.23%. Earnings per share for the quarter was INR 7, and book value per share stood at INR 233.10. Our borrowing mix remains well-diversified with a positive cumulative mismatch across all buckets up to five years. We remain well-capitalized with total CRAR, i.e., capital adequacy, of 21.82% as of September 30, 2025. This was a summary from our end. Sagar, we can now open the floor for Q&A.
Thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask a question may press star and then one on the touch-tone phone. If you wish to remove yourself from the question queue, you may press star and then two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, also in order to ensure that the management is able to address questions from all the participants in the conference, please limit your questions to two each per participant, and you may rejoin the queue for follow-up questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Again, to register for a question, please press star and one. Our first question comes from the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.
Yeah, good evening, sir. Thank you for taking my question. Just a couple of things. In your opening commentary, you spoke about some shares that you saw in CV in monthly and that continued in Q2 as well. You also spoke about some vehicle idling, which in Q2 was much higher than prior years. Likewise, in the last quarter, you had shared something around MSME or WSC. If you could just touch upon that. In addition to that, are there any other more retail space segments which have emerged during the quarter? That is my first question. The second question was, now that you have practically seen through almost the specificities and maybe another five days to go, what is the view that you are emerging?
I remember kind of ended your opening remarks by saying that in the first few days of October, we are seeing a good retail offtake. If you could just, for the benefit of all of us, kind of dwell on that, how has the festive season been with my property and investor value material? Lastly, sir, given that you are among the first NBFCs to report on early season, if you could just kind of speak about some of the trends that you would have seen in the last quarter, that would help us. Thank you, sir.
Thank you, Abhijit, for your questions. I'll try and answer them, Jaykumar here. In terms of the stress segments, Abhijit, I'll just cover it as a whole, I think, so that it helps holistically. As you're aware, enterprise lending is approximately 38% of our book, asset finance approximately 39%, and the remaining is consumer finance. We spoke about and you specifically referred to MSME. We had quoted last time stating that we had seen stabilization in our MSME book, and that's continued into Q2 as well. We haven't seen any significant stress increase in the MSME space within the enterprise lending segment that we had called out earlier. That's one. Second, on the CV space in specific, we had stated at the end of Q1 that there were certain challenges.
As Ramesh alluded to, on account of some of the monsoon challenges, i.e., flash floods that you've seen in the north and east of the country, there have been certain areas which have actually been closed for more than a week, 10 days, or even 15 days, which has resulted in vehicles not really plying the roads, which has impacted our customer base. That's been as a result of which there has been stress which has come through. As we've moved towards the latter part of September, we believe that was an event that happened in August or July and August, and we should be moving forward from here on.
In terms of the festive season view, we are, as all of us have read in the newspapers and as all of us are looking around in the market, there is a lot of positivity that we see all around us in the retail segment. We are very hopeful that with that positivity, we should be able to ride the market and do well over the coming quarters.
Just to follow up there, sir, Jaykumar sir, you spoke about this positivity in the festive season. You've seen that across both auto as well as consumer durables?
In the consumer segment, we're surely seeing it. In the other segments, there is some amount of positivity, but I think we have to give it time. It's the first week, 10 days of October. As we go through the month of October and beyond, we'll have to see that.
Got it. Other than CV and MSME, there's no other?
Can I request you to come back in so that others also get a chance, and then I am sure I can answer more? Thank you so much.
Thank you. Our next question comes from the line of Viral Shah from IIFL Capital. Please go ahead.
Yeah, hi. Thanks for the opportunity. If you can just say double-click on the asset quality piece. You mentioned that MSME has not seen any deterioration on a sequential basis. Even in asset finance, it is only commercial vehicle. This entire stress of, I would say, what we are seeing in that slippage is attributable only to the commercial vehicle segment on a sequential basis. Secondly, Jay, if you can also talk about the provisioning. If I see and look at the stage one and two numbers also, I understand stage three, there could be some write-off impact. Why has the PCR come down for the stage one and two? That would be two questions from my end. Thank you.
Okay. I'll cover the first one first, which is on terms of slippages, et cetera, it is materially coming from the CV segment. There has been a little bit of construction equipment that gets affected naturally. It's in a similar domain, but that's rather small. Largely, it's come through the CV segment. When you look at 2.56%-2.8%, that's what contributes to it in terms of slippages. As far as the provisioning is concerned, you would think about it. Last time also we have spoken, ours is largely a formula-based piece. We have a very diverse portfolio ranging from lab through to consumers. The book mix in terms of what sits in what book drives it a lot more. Plus, the PD, LGD of each book is very different.
If you look at our stage three provisions, again, as the secured book has gone into it, there is a slight bit of difference, but that is more because each product has a different PD, LGD. On stage two, our provisions are largely similar. On stage one, as some of the book mix has moved, there is a slight bit of reduction. On an overall basis, fundamentally, there is no change in approach that we have towards provisioning.
Got it. Just on your piece and commentary with regard to the CV segment, you mentioned that that is the major contributor. Within that, is it, say, the new or the used piece? Has it anything to do with, say, the correction in the CV prices, especially on the used piece?
What happens in Q2, it's a seasonal thing. It happens both in construction equipment and in commercial vehicles that there's some amount of idling that happens. For example, let's say construction equipment is being used in a mine, right? And the mine gets flooded because of rains. There will be idling of the machine. Similarly, if there's very heavy rains and if a vehicle typically covers, let's say, 100 km or 150 km a day, that might come down by about 20%-30%. Historically, if you look at Q2 as a season for commercial vehicles, there's about 20% idling that you can look at in this period as compared to Q3 or Q4. Some of our insights suggest that this time in certain markets that went as high as 30%-35%.
It is not really vehicle type, but really where the vehicle was and how the vehicle got impacted by unseasonal rains or inability to commute because of weather conditions.
Yeah. Got it. Thank you so much, Ramesh. All the very best.
Thank you.
Thank you. Our next question comes from Subhranshu Mishra from Phillip Capital. Please go ahead.
Hi. Thanks for the opportunity. Quickly on the climatic change impacting our book, climatic change today is a reality. Are we providing additionally for this? Even the climate change can be predicted to a certain extent, and this would be a seasonal thing. Anything more to read into the asset quality and what should be a sustainable credit cost that we should punch into our models? Also, if you can spell out the PD, LGD assumptions for the CV piece. Thanks.
Thank you. Subhranshu, I'll cover the second part first. In terms of PD, LGDs, how we look at it, we have, depending on the individual product, between a five- to eight-year bucket in terms of the data that is available. We go through the cycle in terms of what is the probability of default and the loss given default for each asset type. That is what we factor in. In terms of specifically on seasonality, you're right, it does affect in certain times. India is a country where seasonality, of course, is there. That largely gets factored into PD, LGD and also in the asset movement. Today, if you look at it where some of the book has moved to stage three from stage two between June and September, you're actually seeing provisions increase.
It naturally factors it in in terms of the risk parameter for us to look at it more closely and then work on corrections and recoveries.
What is the blended PD, LGD, if you simply call that out for the CV book?
We do not put it out because I think it is a complex model. What I would suggest is you speak to our IR team. You speak to Vishal after the call, and we will see how to best factor that in.
Can I just squeeze in one last question?
Sorry to interrupt. Subhranshu sir, may we request to return to the queue for any follow-up questions, please? Thank you. Our next question comes from the line of Shweta from Ilara. Please go ahead.
Thank you, sir, for the opportunity. I have two questions. The first on credit cost. Barring the pandemic periods, today, the credit costs have actually reached historical highs. At 2.7%, knocking off the seasonal challenges pertaining to the first half of the year, what is the normalized credit cost going forward, say, for the next two years? That is the first question. Second, again, sorry to harp on asset financing on the CV side. While you mentioned about certain distinct challenges of vehicle idling, also certain markets or regional challenges, will these challenges be able to, will these challenges negate the positives coming from GST rate rationalization? Therefore, do we expect CV vehicle financing growth to remain subdued even for the remainder part of the year? Yeah, those are my two questions.
Okay. In terms of credit cost, let me take on that one. Shweta, what we look at is, I would not say we do not provide an immediate-term forecast. In the three- to five-year period, we look to operate within a ±2.2% in terms of overall credit cost. That is where we believe the ideal range for our book is. Today, we are at 2.7%, which is on the elevated side. We expect that to start coming down from the coming quarters. That is the first one. In terms of GST rate rationalization, I think we have got to watch that space closely. It is a very recent phenomenon where things have just about panned out in the last two weeks, if I can put it that way.
People are still getting to terms in terms of how should some of the used segment play and some of the new segment play. We believe with the country growing, there is enough opportunity. As we go through this coming quarter, I think it'll be worth watching that space and then commenting on it.
One more point, Shweta, that you asked about the credit cost. If you look at pre-pandemic, our product mix was very, very different compared to what it is today. For example, our consumer book was just about 10% six or seven years ago. You really can't compare credit costs, let's say, five years ago with the credit cost today because our product mix has changed substantially. Many of the products that were very small in our book five years ago are pretty large contributors to our balance sheet. When we look at really cost, it is sort of a blended cost based on the product mix. I said, "Jay, we've sort of given you a credit cost that we are comfortable with given our current product mix.
Right. Just a follow-up question there on commercial vehicles. What is our?
Shweta, may we request to return to the queue for any follow-up questions, please? Thank you so much, ma'am. Our next question comes from the line of Avinash Singh from Emkay Global Financial Services Limited. Please go ahead.
Yeah, hi. Good evening. Two questions. The first one is that can you please help your mix of new and old in your CV? The second question is, with all this kind of the summit of challenges that were there and some bit of a demand revival across businesses as a conjunction, this 13% kind of growth, of course, I would think lower than normal. What kind of growth do you expect, I mean, to pan out in H2 and probably in FY 2027? Thanks.
Thanks, Avinash. Avinash, let me answer both your questions. The first one was new and used. If you look at our slides, this was something which a lot of you had asked for. If you look at our slides on slide 18, we have actually put it out. CV new is 16%, and CV used is 9% of our book today. Yeah? In terms of your other question was?
On growth outlook because of the 13%.
From a growth outlook point of view, the way I think one of your colleagues asked the question earlier, the way we would look at it is Q3, again, as I mentioned, we see a lot of upbeat in terms of the entire expectation from the market, expectation from the customer, and expectation on the Street. Now, that needs to translate. The first week, 10 days, as Ramesh mentioned, have been positive on the consumer side. We are very hopeful that that translates into a much better growth momentum for the entire retail industry. That should augur well for our growth for the quarter and beyond.
In terms of the medium term, if I were to look at a three- to five-year trajectory in terms of how we build our projections and we build our growth forecast, we look at a 18%-20% CAGR book growth over a period of time. Of course, as GDP moves forward and grows well, we would adjust, and we have the absolute engine and the capability to do a lot more. GDP numbers came in positive over Q1. Assuming that continues over Q3 and Q4, you should see good momentum pickup for us as well.
Okay, thank you.
Thank you. Our next question comes from the line of Shreya Shivani from Nomura. Please go ahead.
Yeah, hi. Thanks for the opportunity. I have a question on the LAP book. I can see your ticket sizes are on the higher side in this book. However, if you can help us understand, do we have under 10 lakh ticket size over here? What is the stress trend in this portion, if any? Now, second question is on the business loan and the gold loan. Broadly similar kind of a ticket size, and assuming that the same kind of customer would come to you for either of the loans, can you help me understand, was the trend very divergent? Did you go slow on business loan and gold loans? We have an idea must have grown at a much faster pace. Those are my two questions. Thank you.
Thank you so much. Shreya, in terms of LAP book, we might have a few loans here and there in terms of less than 10 lakhs but most of them are in the average book that's been mentioned. It is INR 2.5 million plus, right? That is one. In terms of business loans, as Ramesh mentioned, we have been slightly conservative in that space. It is an area we have specifically called out over the last, I would say, almost three quarters where we have had stress, and we watched that space closely. As we have now achieved some level of days where we believe credit cost is moderated and expected to come down, we would hope and work on growth in that business in the coming quarters.
Last one being on the gold side, that is an area, as was specifically mentioned at the beginning, we see it as a good opportunity with all the rules harmonizing. Our book has almost grown by 10% Q on Q and 40% year- on- year in the gold space.
Just on the LAP portion, any stress trends for your portfolio? I understand you do not have under 10 lakh, but anything that you would like to highlight over there?
Nothing.
Just as a, at a level, the way a LAP is underwritten is that this is a customer who's got a property that he or she owns. And that's a collateral for a business loan that the customer takes, which means that the business has to have sound financials to generate enough cash for a monthly EMI. Now, if you're looking at a loan of, let's say, INR 5 million, you're looking at an EMI of upwards of INR 50,000 a month. And what do you expect the customer to generate adequate cash flows to be able to service that kind of EMI? I think the advantage of a collateral is that the company is able to give a slightly longer-term loan, which reduces the monthly outflow, right?
Also, because you are writing a longer tenure, you have to make sure that the business that the customer has is of a quality that can sustain for the next few years while the loan is being serviced. Unsecured business loan, by contrast, is for smaller amounts. If you can see, our average ticket size is about INR 300,000. They also return for shorter tenures, which means that the EMI is in the region of INR 10,000-INR 15,000. You are evaluating the customer for ability to service a smaller amount for a shorter tenure. Gold loans, by contrast, are typically shorter tenure contracts because this is a product where customers would like to prepay as soon as possible, right? It is really a temporary business requirement that they are looking at to fulfill.
Yeah, I think your question is probably around micro LAP as a segment. We typically do not have exposure to that segment, right? We are underwriting customers with larger value properties and larger ticket sizes.
No, no. Completely understood. This is very clear. Thank you so much.
Thank you.
Thank you. A reminder to all the participants, if you wish to register for a question, you may press star and one now. Our next question comes from the line of Rajiv Mehta from Yes Securities. Please go ahead.
Yeah, hi. Good evening. My first question is on asset quality. When I look at your loan stages and the movement through the quarter, stage three increasing is pretty much in line with the seasonal pattern when we look at the overall stage three, including the write-up amount. When we look at stage two, stage two is stable. Broadly calculating back, calculating the flows coming from stage one, the flow rate seems to be improving. I mean, Q on Q, it improves, but even while the flow rate seems to be stable. Are there any early indications that from stage one, the collection efficiency is now getting better, or the flow rate from stage one going into stage two, is it getting better in the more recent months?
Okay. Rajiv, let me answer a little, give you a little longer answer and try and address your question. If you look at stage three, right, as we called out earlier, there have been certain flood-like situations. Assam was closed for five days for certain reasons. The northern belt had certain challenges. Some of the expectations that we had in terms of bringing the book back in towards the second half of September actually faced challenges. We are working on obviously improving that and getting the book back in. In terms of a number of actions that we had taken through July and August, that did help us in curbing some of the flow forwards from August to September. Recoveries is something which we have to improve coming into October, November. That should really help us bring the stage three back in.
These were very specific things on the ground which happened due to which circumstances did not help in reaching out to customers for a reason or the other. Obviously, there are reasons. We are very hopeful that we could bring that back in in the coming months.
Your observation around stage two assets being stable or improving is correct. There is obviously a higher focus on collection efficiencies, which we have started seeing across most products. We expect commercial vehicles to also improve as the economy and next few months that we are looking at.
Okay, okay. Sorry, internally, what will make us push growth? I mean, I know macro, GSP, some demand will improve. Internally, what are the indicators and what thresholds will make us push growth on the ground? A related question is on competition. Do you see the competitive space getting slightly more cleared now? Some irrationality in competition going out in certain products?
From a growth point of view, Rajiv, I think that's something we're equally focused on. Let's see how the Diwali festive moves forward across all segments of ours, be it business loans, be it the LAP side, as Ramesh mentioned, it's businesses that we're funding. As confidence starts to come back, we should see a better offtake there, right? Similarly, on the CV side, as you've seen, we're doing more of used.
As prices also move around, that is still a portfolio which we believe there should be good growth coming in. Similarly, on the consumer side, as we mentioned, the first 10 days have seen some good traction on the field. We are very hopeful as we move from now through to 23rd, 24th of October and to the end of the month, that traction actually pushes us into a zone where not just October, but the entire quarter looks a lot more positive. We are very well geared up within the company and within the team to push for a reasonable amount of growth.
Got it. Best of luck.
Thank you.
Thank you. Our next question comes from the line of Renish from ICICI Securities. Please go ahead.
Yeah, hi. Just two questions. Sorry, circling back to the growth outlook. Given we have a very large bucket of products, incrementally, which product do you feel should drive the growth and which are the products where you will still go a little cautious in the end term?
The way I would look at it, Renish, is growth across all, if I can put it that way, genuinely, right? Segment that we have been slightly cautious of and which is just about stabilizing is the business loan segment that we have. We believe in the coming quarter that should also start to see growth. Some of the consumer side, clearly, if you look at auto loans, right, it has ticked up in terms of really well over the last two to three weeks. Two-wheelers have also started picking up, and so have consumer durables. Over the course of Q3 and Q4, we believe there should be, given the economy as well as the customer sentiment, there shoulRenishd be enough amount of power behind each one of these products for us to grow.
It is obviously going to depend on the overall economy and the geopolitics that plays out. If everything stays equal, we should be able to move ahead on most fronts.
Okay. Should we assume CV might take a couple of more quarters before we start pushing growth, or do you see that product segment as well contributing to growth incrementally?
CV is a reasonable size book for us. There are some segments within that that we will push more on in terms of where we see long-term focus. There are certain segments like HCV, for example, where we may not push very hard in the short term.
Got it, got it. Just a last question on the asset quality.
Sorry to interrupt. Renish, may we request you return to the queue for any follow-up questions, please?
Okay, okay.
Thank you, sir. Our next question comes from the line of Shreepal Doshi from Equirius. Please go ahead.
Hi, sir. Thank you for giving me the opportunity. My question was particularly on the enterprise lending and within that, especially on LAP business loan and enterprise loans. How have we seen the bounce rates, let's say, for September versus what it was during February, March period? Have we seen signs of improvement there, or is it still at the same, or has it gone down? Just some color on that, on that front.
Shreepal, the way I would like you to look at it is our lab book has been fairly stable, right? Something which has very low on credit cost. And it has operated in a similar zone over the last six to nine months or maybe almost a year. That is how I would want you to look at it rather than an increasing, decreasing trend. It's a stable portfolio, something we're very focused on, something we wish to grow, and has reasonably good asset quality.
That is for LAP, for business loans and enterprise loans?
For business loans, as I covered it earlier, there has been a stabilization in Q1. There has been a further slight amount of improvement in Q2. That is something we're very hopeful of as the book matures. We will see a good amount of improvement in the coming months, and we should see growth also coming back.
Got it, got it. The second question was pertaining to rejection rates. I understand that all lenders had tightened their underwriting norms probably around 1 Q period. Are we continuing with the similar strategy, or have we moderated it given that some of the segments are showing signs of stabilization on bounce rate as well as improvement? Are we moderating our underwriting norms, and are we seeing rejection rates coming off? Some color on that front, if you could give. This is particularly for enterprise lending.
Yeah. When you look at approval rates, it's really a function of product, the asset risk. In the case of a mortgage, you look at assets, you would have a measure of asset risk. There's an element of customer risk in terms of the customer's own income and cash flows and previous financial behavior.
You are looking at a forecast for that business. When you really do an underwriting, you are looking at asset risk, you are looking at customer risk, you are looking at geography risk, you are looking at business risk. For example, which industry is the customer in? There would be a flavor of that in terms of the underwriting. There could be businesses that naturally lend themselves to better cash flows in certain markets, right? I mean, if you look at India, there are pockets, for example. There would be a textile hub, there would be a manufacturing hub, there could be a retail hub. What you are really trying to do is to marry these into your credit policy and underwrite the customer. In enterprise lending, you really do bespoke underwriting. It is not really a scorecard.
A scorecard might be an initial filter, but you end up doing a bespoke underwriting because the ticket sizes are large, which means that a credit officer does a detailed evaluation. You would fine-tune these credit policies really to a micro-market or to a customer segment or to a particular category of customers based on our own internal experience of how things are progressing, how things are moving. For example, what could be the impact of tariffs on certain industries? You might decide to tighten the regulations, tighten the policy, or moderate the policy. Broadly, I think our approval rates have not been very different in enterprise lending over the last one year.
About a year ago, we did make some changes to our underwriting policy on unsecured lending because we found that we had certain sets of customers who had higher propensity to borrow from others because there is just a bunch of lenders who lined up and were essentially doing credit score-based underwriting. That was something that we were not comfortable with. For us, leverage is important. Total exposure of the customer is important. That is the way we really look at underwriting. Yeah?
Got it. Thanks for the detailed answers. Just before I conclude, have we seen 70%-80% of our underwriting for, let's say, geography, customer profile-centric? Have we seen some moderation or are we looking at moderating it in terms of the underwriting norms, or are we sort of still broadly keeping it intact?
Shreepal, the way we look at it is the Chief Credit Officer today, along with the data that he has, he will look at each segment, each geography in a very detailed manner and will go through that and take decisions. It's not a one-size-cut formula that you'd go in and say, "Let's slice it or dice it in a simple piece of paper.
Got it. Got it. Thank you. Thank you for the answer.
Thank you. Our next follow-up question comes from Abhijit Tibrewal from Motilal Oswal. Please go ahead.
Thank you for allowing me to follow up. There are just two follow-up questions that I have. First thing, how should we think about margins now? Just as the last call was shared that 95% of our bank borrowing is [EDLI] linked, with obviously repricing lines which can allow market benchmarks. Assuming they have already repriced, right, how should we look at the cost of borrowing credit and the margin credit? Obviously, assuming status quo, while there is room for a few more rate cuts in the December and February policy, but assuming status quo, how should the cost of borrowings and margins trend? Lastly, on the CV side, we discussed a lot in this call already, but I just wanted to pick your brains on one thing. When I look at CVs, there are predominantly two things which are highly seriously there, right?
Your consumption and the other thing is your construction and infrastructure activities. While consumption might pick up given all the actions that the government has taken, what is the threat you're seeing on the construction and the infrastructure activities? That's my follow-up.
Thank you. I will take both your questions. On the margins and cost of borrowing, the way we would like everybody to look at, Abhijit, is today, I think we have taken a lot of actions over the last few months, and that is exactly what we spoke about with the confidence in the Q1 call. That has allowed us to bring margins up and reduce our cost of capital. We are NIM standard 7.9. For somebody like us, the way we look at it, the sweet spot is between a 7.9-8. While pressures may come on every side, we will work towards trying to maintain in that region. That is how I would want to look at it. That is on the margins. Obviously, cost of borrowing, yields, both factor in that, right? On the CV side in specific, as you rightly said, the consumption side is improving.
On the construction and infra side, we're very hopeful that the initiatives that the government is taking help bring some of those activities back in, as we saw in previous years. As that comes through, we should be able to see that segment also growing from here on.
That's very useful. Thank you for taking my questions, and I wish you good work.
Thank you.
Thank you. Our next follow-up question comes from the line of Subhranshu Mishra from Phillip Capital. Please go ahead.
Hi, thanks for allowing me to follow up. Given the fact that our asset mix has changed considerably over the last three years, how do we look at the asset mix in the next three to five years? That's the first. Second one is, how do we also forecast the credit cost of each specific asset class when it's growing? Thanks.
Okay. On the asset mix, Subhranshu, the way we look at it is the consumer business should grow faster, while the other two verticals will also continue to grow. What you see as 23% today should inch up a few percent over the next couple of years, right? The reason I say a couple of percent is because the other businesses obviously would grow fast as well. Pace would differ in each one of them. There is no set target that we have today. The most important focus for us as a company is to grow our entire diversified portfolio that we have, keep focused on every product that we believe is a long-term focus for us, and continue to grow in each of our products and each of our markets. That is a very important one that we should do, and we will do.
Second piece around credit cost, at this point in time, the way we look at it is because it's a very diversified portfolio. We spoke about some of the products where, for example, LAP comes at a very minimal credit cost. There are other products which come at a slightly higher credit cost, like consumer durables, etc. The way we look at it is we need to balance it out as a portfolio, as a whole, for the company, and really focus on how are we going to manage a balanced return that we wish to give and work from there. That has been our key focus, and that is how we would even want the investor community to look at us, that the diversified portfolio helps us grow in a balanced fashion across cycles and also balance out the credit cost.
While it's been a little high in the last quarter or two, we're very hopeful of bringing it to a moderate level in the coming quarters.
Thanks. Any new products you are planning to launch in the next three to four quarters to make our book more developed, right?
Subhranshu, I've been told as a listed company, as soon as I think of something and we get it approved, I have to publish it on the exchange. You'll see it as soon as we are doing something.
Thank you.
Thank you. Our next question comes from the line of Prithviraj Patil from Investec. Please go ahead.
Yeah, thanks for the opportunity. Just one clarification that I wanted. In the product mix, we've mentioned something on the line of relationship PL. I just wanted clarification on what product that is. The second is on adoption of technology. If you look at some of the other peers in the sector that have adopted technology for underwriting or for sourcing, I just wanted to know what HDB is doing on that front.
Sure. Relationship PL for us is an absolute product that we've made only for our customers. It is what most people would call as cross-sell. This is a product that is available exclusively to HDB customers. It comes as a cross-sell to the product base that we would have in the consumer book as well as some of the other books that we have.
That customer, if performing over the first 6, 9, 12 months, depending on the customer profile, depending on the product they've come to us first with, we give them an opportunity to take the second loan and we work from there. It's a book we've been able to grow over the last four to five years really well with our customer base. We're very happy with how we're functioning there and will continue to grow well in that space. That's one. On the technology front, there's a slide that we've put up on HDB on the Grow, HDB on the Go. Prithviraj, I'm sure all of us today live in the financial services world, which is almost a technology company more than anything else.
Technology is so akin to our blood system that if we do not have good technology, I do not think we would be able to progress very well. In terms of slide number, I think it is 38 and 39, we talk about it. You can have a look and I think you can give our IR team a call and we can take you through in detail. Fundamentally, I think we have made sure whether it is a loan within two minutes, whether it is making sure a customer is able to finish their journey online. We are trying to make sure that every single one of those basics that a customer expects from a company like us, we have that in our works and we are able to execute it for the customer.
The most important thing is that we're the right choice for our customer and we're able to progress from here in a manner that the customer chooses us because of the technology and the service and the right fit for him or herself.
Sure. Yeah. Thank you. Thank you.
Thank you. Our next question comes from the line of Gautam Jain from GCJF Financial. Please go ahead.
Good evening, sir. First, in last quarter, you said your NIM will expand and get perfectly expanded in Q2. Now, can we say that the higher credit cost, which started from Q3 of last year, has peaked and we will come back to the normal credit cost itself from Q3? Number one. Second, on the growth side, again, I mean, growth will pick up from Q3. Can we assume that number one? Second is your cost-to-income ratio has come to 40%. Historically, we had even lower than that. What is our ideal cost-to-income ratio we want to achieve? The third question would be, would you blame higher competition in the market? Because of that, the credit growth has been lower than some of the peers? Thank you.
Thanks a lot, Gautam. In terms of growth, as I covered it earlier, very hopeful that we are able to grow well in the coming quarters. There is a lot of underlying market, how do I say, sentiment which does show that Q3 should be a lot better than Q2 and Q1. If you look at the commentary also that has come from other banks or financiers, all of us are very positive on how we see Q3 going forward. Q3 and Q4 should augur to a good amount of growth. That is the way we look at it. In terms of cost-income ratio, if you look at on an H1 basis, we are 41.6% and we were 42.7% earlier.
As we grow and as we push on a number of initiatives, we believe between a 41.5%-42%, that's something fairly ideal for us as we continue on our growth journey. The more important metric there is in terms of cost-to-asset. It's in one of our slides. I can give you the slide number in a minute. I'll give you a slide number in a second. That's something we're very focused on. It's 3.7 today. It was 3.8 earlier. Our whole focus is on slide number 26, where we clearly reflected 3.7. That's something if we are able to manage between a 3.6-3.7 as we continue to invest and grow, I think it should augur well in terms of us reaching our ROA targets.
On credit cost?
On credit cost, as I mentioned, the medium to long term, we should be able to operate within a 2.2%.
It will start reflecting from Q3 onwards, right?
Gautam, I'm sure it will start to improve. If it starts reflecting from Q3 onwards, I'm sure I'll be as happy as you are.
I have one more question. Can I ask?
Sure. Go ahead.
This time, your BPO profit also went up sharply, Q1, Q2, and YoY . Can you comment on that [business?]
We had earlier mentioned the way to look at BPO, and sometimes there is obviously billing, which will be plus minus a month, or accruals which get deferred. If you look at a PAT of INR 15 crore per quarter, it more or less flatlines towards that. A PAT of INR 60 crore per annum is where it largely moves around plus minus a few. There has been a little bit of billing which would have moved from one quarter to another, but nothing more than that.
Okay. Thank you so much.
Margins are fairly stable there. There is nothing which changes fundamentally.
Okay. Thank you.
Thank you. Our next question comes from the line of Rajiv Mehta from Yes Securities. Please go ahead.
Hi. Thank you. Thank you for taking my follow-up. This relationship PL, which is 8% of your portfolio, and you said that it is offered to existing customers. What is the existing product overlap? Can you name the product with which it overlaps with? What has this portfolio growth been on Q1, Q2, and YoY basis, this relationship PL?
Relationship PL is a product that is offered to only existing customers of the company. It is a business where we offer loans to our existing individual borrowers. The customer could have originated to us through any of the other businesses, including consumer. If you look at our company, we have today 21 million customers, but a large proportion of them would be through our consumer finance business, right? As the customer matures with us and the loan tenure is towards closure, we look at multiple ways of engaging with the customer, either through follow-up products or the advantage of relationship PL is because it is an unsecured loan, it can be used for multiple use cases by the customer, right? The customer will have a pre-approved limit either for purchasing a consumer durable.
If you take a consumer finance case, he could have a pre-approved limit for buying a consumer durable. He could have a pre-approved limit for buying a two-wheeler, or he could have a pre-approved limit for an unsecured personal loan, right? These would be different limits based on what product the customer is looking to buy because the tenures are different, the transaction sizes are different. We engage with the customers on a continuous basis, either through our in-app notifications or through our outreach programs to the customers. That is how we engage and build this book in any color in terms of growth that you want to give.
It is a focused business for us, Rajiv, and something we will continue to grow over a period of time.
If you look at the same product four years ago, I think we would have almost grown a CAGR of 40% plus over a period of time. We are very focused on the consumer segment as a whole, as I mentioned, and that's something which we will continue to grow.
Would it also have CV customers as well here in the customer base of this RPL product?
Yes, there would be customers.
There would be, but if you'd like to think about it in terms of the customer base, right, it would obviously be a slightly smaller customer base. If you have a million customers in consumer durables, you might have 10,000-20,000 customers in CVC. The number of people to whom you could cross-sell obviously would be there as a percentage of that customer base, but the absolute number of people would be lesser.
Okay. Okay. Now, second thing is on the cost levers and cost dynamics. Now that we are in a very moderate growth environment and we are also constantly checking on growth, right, what are the cost levers or dynamics available to us to manage the peak provision operating profitability? Are there anything more that we can do on the cost efficiency side or productivity side which will help us control the people?
At this point in time, Rajiv, the way I would look at it is on the cost front, we believe we're fine. I think this quarter, as there was slightly lower growth, we've made sure we managed to moderate some of the cost as well. We would continue to do that. I do not see that as the biggest worry. Our key focus is to our business is let's invest.
Let's focus on the long term in terms of how we build on this as a growth area, right? The most important focus, if you think about from a long-term point of view, is how well do you invest so that you achieve your medium-term growth targets and also achieve your ROAs as a whole. That's how we look at it.
Sure. Sure. Thank you.
Thank you so much.
Thank you. Ladies and gentlemen, we are at the end of the time. I now hand the conference over to Mr. Jaykumar Shah for closing comments.
Thank you very much, Sagar. From everyone here at HDB, wishing you all a very, very happy Diwali, a prosperous New Year, and a year full of good health and happiness. All the very best, and may your families do well as well. Thank you so much.
Thank you. On behalf of HDB Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.