Ladies and gentlemen, good day, and welcome to the L&T Finance Limited Q2 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 call, please signal the operator by pressing star and then zero on your touch-tone phone. Please note that this conference is being recorded. We have with us today Mr. Sudipta Roy, Managing Director and CEO, Mr. Sachinn Joshi, Whole-time Director and CFO, and Mr. Raju Dodti, Whole-time Director and COO, and other members of the senior management team. Before we proceed, as a standard disclaimer, no unpublished price-sensitive information will be shared during the call. Only publicly available documents will be referred to for discussions during interaction in the call.
While all efforts would be made to ensure that no unpublished or price-sensitive information will be shared, in case of any inadvertent disclosure, the same would, in any case, form part of the recording of the call. Further, some of the statements made on today's call may be forward-looking in nature. A note to this effect is provided in the Q2 results presentation uploaded. I would now like to invite Mr. Sudipta Roy to share his thoughts on the company's performance and the strategy of the company going forward. Thank you, and over to you, sir.
Thank you. A very good morning, everyone, and thank you for joining us today for the Q2 FY 2027 investor call. Joining me on the call today are our Whole-time Director and Chief Financial Officer, Mr. Sachinn Joshi, and our Whole-time Director and Chief Operating Officer, Mr. Raju Dodti, along with the members of the senior management team of L&T Finance. On behalf of the entire L&T Finance team, I would like to extend our festive wishes to you and your families and the broader investor community. Similar to our previous earnings call, today's discussion will be divided into two sections. I will begin by sharing my thoughts on the macroeconomic environment, our business performance during the quarter, and the strategic priorities under Lakshya 2031. Subsequently, our Chief Operating Officer, Mr. Raju Dodti, will update you on the distribution initiatives and the build-out of the gold loan business.
Finally, this will be followed by our CFO, Mr. Sachinn Joshi, who will take you through the detailed financial performance for the quarter. Post our commentary, we will be happy to take questions on the call. Before we delve into the highlights of the quarter, I would like to share our perspective on the macroeconomic environment, particularly the volatility in the geopolitical arena and the impact of the monsoon and the El Niño on the rural economy, which remains an important consideration for the financial services industry in the current operating environment. The global economy continues to be in a state of flux, with re-escalation of the conflict in West Asia and a sharp volatility in the crude oil prices. At the same time, strong economic growth data combined with inflation pressures have reinforced expectations for higher-for-longer policy rates.
While this uncertainty warrants close monitoring, India's domestic demand fundamentals and the underlying drivers of consumption continue to remain resilient. Input cost pressures have accentuated, but the pass-through has remained limited so far. Real GDP growth recorded a growth of 7.8% in Q1 FY 2027, reflecting strong demand conditions on back of robust private consumption, investments, and exports demand. Upgrades in India's GDP growth expectations for the full year FY 2027 by RBI, World Bank, OECD, et cetera, underscore the strength of economic activity despite significant headwinds. Despite intermittent volatility in the domestic financial markets, credit demand also continues to grow at a robust pace. On the rural front, the progress of the southwest monsoon has remained an area of close attention for the financial services industry.
As you would be aware, the 2026 southwest monsoon concluded with a cumulative rainfall at approximately 87% of long period average, with considerable regional variations. While rainfall improved during July, the deficit in the early part of the season and the below-normal rainfall in several regions have implications for agricultural output, water availability, and rural cash flows. However, rainfall spells during the month of August have substantially improved the expectation of a near-normal kharif outcome. In spite of the below-average monsoon, kharif crop sowing is at par with previous years, reporting a marginal 1% year-on-year contraction with a total coverage of 101% of the normal acreage. In most regions, irrigation buffer and stable reservoirs have helped mitigate rainfall shortfalls.
While localized drop in crop yields and moderation in rural sentiments remain a latent risk, rural consumptions continue to be strong currently, driven by resilient non-farm activities, robust government DBT transfers, and favorable terms of trade for agricultural prices. We are therefore maintaining a close watch on the operating environment across our rural markets, with particular attention to geographies where rainfall deficits and water availability could exert greater pressure on borrower cash flows. Sustained momentum in services and broadly stable employment conditions are supporting urban demand as well. Despite cost pressures, manufacturing activities are holding well, as indicated by IIP and PMI figures, and services sector activity remains steady and broad-based owing to buoyant domestic and external demand. Economic momentum thus remains broad-based and is expected to sustain strong demand through the current fiscal year.
Coming to this quarter's highlights, I am pleased to share that L&T Finance has delivered another consistently strong quarter of profitable and quality-led growth. During Q2 FY 2027, we recorded our highest-ever consolidated profit after tax of INR 975 crores, representing a growth of 33% year-on-year against INR 902 crores in quarter one FY 2027. Our consolidated book now stands at INR 1,36,635 crores, reflecting a year-on-year growth of 28% against INR 1,29,634 crores in quarter one FY 2027, with an RoA of 2.6% against 2.48% in the previous quarter. This has been achieved on the back of quarterly retail disbursements of INR 24,027 crores, up 27% year-on-year with contributions from all our lines of business.
The disbursement momentum has been a result of our strong customer acquisition funnel, with a 3 crore customer database and our continued focus on granular distribution channels, branch footprint, digital acquisition capabilities, and our AI-powered credit administration framework. Project Cyclops, backed by strengthened risk guardrails, continue to function well. However, we consciously chose to attenuate our rural disbursement momentum and raised risk guardrails in view of uncertain progressions of the monsoon. Now that we have reasonable clarity on the monsoon outcome, we will carefully increase our risk-calibrated rural disbursement momentum. You will remember that over the course of the last few calls, I have been emphasizing on our trajectory of paring down credit cost on account of implementation of structural credit policy measures in our businesses and implementation of Project Cyclops in various businesses.
I am pleased to inform that consequently, credit cost has moderated to 2.46% this quarter, reflecting a further sequential improvement of 8 basis points from 2.54% in quarter one FY 2027, supported by collections excellence and AI-led portfolio management. We would like to reiterate that we are confident of achieving our guided credit cost corridor of 2%-2.2% by quarter four FY 2027. Our NIMs plus fees, which is another focus area for us, stood stable at 10.48% against 10.47% in Q1 FY 2027, well within our guided corridor of 10%-10.5%. This was possible due to reduction in weighted average cost of borrowing achieved successfully through implementation of astute liability management. OpEx remained range-bound at 4.08% during the quarter, despite continued investments in branch rollouts as well as technology investments. All of this has resulted in an improvement of our RoA to 2.6%, with RoE consequentially increasing to 13.56%.
We remain hopeful that our RoA trajectory will achieve our guided objective of 2.8%-3% corridor exit quarter four FY 2027. Before I move on to our progress on Lakshya 2031, I would like to take a few minutes to address a topic that many of you have been tracking, and that is the consultation paper issued by IRDAI on insurance distribution and commission structures. As the framework is still a draft consultation paper, it would be premature to quantify the final impact. The paper proposes to rationalize the commission payouts across the board, with significant cuts in credit linked insurance and motor insurance. There is also significant attenuation in the thresholds of commission payouts on standalone insurance products as well, however, to a lesser extent.
We understand that the regulator's suggestion on the consultation paper are from a viewpoint of making insurance more affordable for the common man in line with the Government of India's Insurance for All as part of Viksit Bharat 2047 plan. We believe that there is a significant scope for consultation with the regulator on creating an economic rationale for BFSI entities to continue supporting the insurance industry through their distribution channels. It is to be noted that our all credit life insurance policies sold in the country are approximately 90%-95% are sold by banks and NBFC distribution channels, and this touches 65 million-85 million lives in the country annually and accounts for about 35% of all insurance policies issued in India.
As an industry, our SRO FIDC is working with all member NBFCs to kickstart an engagement with the regulator, possibly in collaboration with other financial industry SROs. The salient points of discussion would be a realistic assessment of the distribution cost incurred by the BFSI industry to support distribution of insurance products on behalf of the insurance manufacturers. We would also request the regulator for a glide path for commission optimization to distributors in line with the glide path proposed by the manufacturers in the treatment of Expenses of Management. As an industry, we would pursue all possible channels of dialogue to ensure that the final outcome is balanced and positive for all stakeholders, consumers, distributors, and manufacturers of insurance. As an organization, we look at all possible means of revenue optimization, including new initiatives like the cross-sell deepening as well as the payments business focusing on value-added agentic commerce.
In summary, we expect L&T Finance to navigate the IRDAI consultation paper related impact with minimal disruption to our Lakshya 2031 goals. We'd also like to apprise you about two very important initiatives that we started in Q2 FY 2027, which we expect to gather pace over the next couple of quarters. The first is Project Achilles, our increased focus on reducing cost of customer acquisition through focused cross-sell initiatives to our existing customer base, leveraging our extensive agentic AI expertise. You may be aware that L&T Finance has one of the largest customer bases in NBFC industry at 3 crore customers and an equally large number of prospects who have applied for products from our company at some point in time and were found to be not eligible at that instance.
In fact, our microfinance customers, tractor customers, and two-wheeler customers have borrowed more than INR 50,000 crores worth of gold loans, prompted our entry into the gold loan business. To effectively tap into the demand of this large base of customers, an integrated agentic AI-based cross-sell engine called Hercules is being built and implemented in phases. Quarter two FY 2027 saw the implementation of phase I of Hercules cross-sell engine across a few important lines of business with promising initial results. For example, for the conversion of gold loans cross-sell leads generated by other businesses is currently running at 14% + as of the first week of October 2026. The full complement of Hercules with agentic AI workflows will be implemented by early December 2026 and will be showcased to the investors during the L&T Finance Investor Digital Day on the 15th of December 2026.
We expect the momentum of cross-sell volume buildup to further improve in quarter four FY 2027 and add to our low acquisition cost disbursement buildup in FY 2028. The second major initiative is our payments platform, which is being rapidly built to provide an agentic commerce experience to our customers and also be a driver for increased new customer acquisition velocity. Our UPI stack is live and currently undergoing closed user group testing. We're implementing the agentic commerce payment stack in partnership with Pine Labs and will unveil this effort in RAISE 2026. We have also applied for a prepaid issuer license, and we expect to bring a host of AI-enabled prepaid payment products in FY 2028, subject to the receipt of the PPI license from RBI. I would now like to share an update on our Lakshya 2031 goals, which marks our leap from transformation to delivery.
I'm pleased to state that we have began this journey on a strong footing, where our profitability metrics continue to improve quarter after quarter. Our immediate focus remains on maintaining consistency in execution. We recognize that Lakshya 2031 is a five-year journey and therefore our endeavor remains focused on delivering sustainable growth while steadily improving credit costs, profitability, and returns over the course of the strategic plan. Book growth. We had set ourselves a book growth CAGR of 20% + over the Lakshya period, against which we have achieved a robust 28% growth in quarter two FY 2027, supported by disbursement momentum across secured and unsecured products, 72% year-on-year in personal loans, 24% year-on-year in two-wheeler finance, 22% year-on-year in rural business finance, 20% year-on-year in mortgage loans, 27% year-on-year in SME finance, and 9% year-on-year in farmer finance.
Second, on the credit cost front, we continue to drive credit costs down to a level of 2% or less over the Lakshya period. In quarter two FY 2027, our credit cost stood at 2.46%. Our participation in the central government credit guarantee schemes, CGFMU and CGTMSE, continues to create an incremental safety net for select cohorts of our rural business finance and SME portfolios as outlined in slide number 36 of our investor presentation. The continued moderation of credit cost and improving asset quality during the quarter provide us confidence that the structural interventions are delivering the intended outcomes. Our return on assets target remains in the range of 3%-3.2% for FY 2031. Against that, we recorded an RoA of 2.6% in quarter two FY 2027 versus 2.41% after utilization of macroprudential provisions in the corresponding quarter in FY 2026, up 19 basis points year-on-year.
We remain committed to work on achieving the 2.8%-3% RoA corridor threshold in quarter four FY 2027, as communicated earlier. On return on equity front, against the Lakshya 2031 target in the range of 16%-18% by FY 2031, RoE increased to 13.56% in quarter two FY 2027 from 11.31%, which was RoE after macroprudential provisions in quarter two FY 2026, up by 223 basis points on a year-on-year basis. In my last call, I had outlined three strategic objectives for FY 2027: driving cross-sell and upsell, enhancing productivity, and embedding a strong tech DNA across the organization. We continue to drive the key outcomes defined by these pillars as they remain critical to achieving our short-term and long-term business targets while building sustainable capabilities for future growth.
While I've already spoken in detail about our cross-sell engine, Project Hercules, I wanted to highlight the momentum we are seeing in the other initiatives. On the second objective, driving organizational productivity, it has gathered speed. We're actively enhancing productivity across all our business lines with a primary focus on empowering our frontline employees through customized performance dashboards. Thirdly, in line with our strategic objectives of embedding AI-powered tools across the organization, we have made significant efforts to inculcate a tech DNA upgrade throughout our workforce. As part of our initiative to upgrade the tech DNA, LTF launched the AI Citizen program, equipping 1,200 + employees with the Google Enterprise Agent Platform and a continuous learning ecosystem with dedicated training sessions by industry experts. The goal here is to build custom agents that exponentially boost operational productivity.
Following this exclusive training, this initiative is rapidly expanding enterprise-wide to build a robust network of AI champions, ensuring that AI is not just central technology function, but a democratized tool actively utilized by our employees. It is worth mentioning that in the short span of this project going live, 5,730 agents working on our regular business tasks have already been created by our employees. The strategic objectives are central to a structural evolution into a risk-first, tech-first, AI-native, multi-product retail financier of choice. I will now request Mr. Raju Dodti, our Whole Time Director and Chief Operating Officer, to take you through an update on the expansion of our gold loans business and the branch infrastructure rollout execution.
Thank you, Sudipta, and a very good morning, everyone. I will walk you through the gold loan business performance and our branch expansion strategy of the company for the quarter. Central to our distribution strategy is the transformation of our legacy physical network to a multi-product sales and service-ready network. This approach moves our focus from transactional lending to a holistic relationship management, enhancing customer lifetime value by positioning every branch as a gateway to our full suite of financial solutions. Specifically, as we have shared in previous quarters, we have commenced with the integration of our gold finance branches into the multi-product Sampoorna branch format. Since inaugurating our first Sampoorna branch in Ujjain, we have accelerated our model shift from single-product touchpoints to integrated service hubs.
This also ties in with our overarching cross-sell goal, wherein Hercules supports both the Sampoorna initiative as well as the digital fulfillment of cross-sell funnel, as Sudipta just mentioned. I am pleased to share our current progress on this front. We have successfully scaled our network to a total of 150 Sampoorna branches across the country in a short timeline of 18 months since this concept was launched in FY 2025. This comprehensive ecosystem currently includes 33 Sampoorna branches integrated with gold loan business as well. This rapid rollout keeps us firmly on track with our broader expansion goals and our ongoing commitment to scaling our integrated physical presence. I am happy to share our good progress in building the gold loan business. We registered a robust quarterly disbursement of INR 3,237 crore, representing a 229% YoY growth, with our closing book reaching INR 5,043 crore, up 242% YoY.
This performance is driven by our rapid branch expansion, having launched 172 new branches in half year of FY 2027 to reach 502 active branches, with 110 branches already crossing INR 15 crore in PoS as of September 30, 2026. To create granular awareness and to support the growth in our business volumes, we launched an integrated gold loan campaign featuring our brand ambassador, Jasprit Bumrah. Additionally, our organic brand integration with TVF's Family Kirana Store Season 2 was a success, crossing over 15 million views. Furthermore, as the co-presenting sponsor for India versus Sri Lanka Test Series on Sony Ten, we secured a 34 million reach. We believe that these outreach programs, while creating brand equity, will also help us boost business volumes and propel the growth of this business line.
I will now request Mr. Sachinn Joshi, our Whole-t ime Director and CFO, to take you through the financial updates.
Thank you, Raju. As always, I will be walking you all through the financial performance of the company for the quarter. First, talking about the quarterly performance. Consolidated NIMs plus fees for the quarter stood at 10.48% versus 10.22% for Q2 FY 2026. Consolidated PAT for the quarter was at INR 975 crores, up 33% year-on-year. Quarterly retail disbursements stood at INR 24,027 crores, up by 27% year-on-year. Retail book stands at INR 134,600, up 29% year-on-year. Our consolidated book stands at INR 136,635 crores, up 28% year-on-year. Our consolidated RoA stands at 2.60%, up 19 basis points year-on-year, and our consolidated RoE stands at 13.56%, up 223 basis points year-on-year. Talking about the businesses. Rural business finance registered quarterly disbursements of INR 6,356 crores, up 1% year-on-year, mainly on account of improved collection efficiency and sectoral trends.
The book size reached INR 33,465 crores, which was up 22% year-on-year in Q2 FY 2027. In the farm finance vertical, the quarterly disbursement stood at INR 1,643 crores, down 1% year-on-year. The book size reached INR 17,397 crores, reflecting a growth rate of 9% year-on-year. As Sudipta mentioned earlier, we consciously maintained a calibrated disbursement momentum in our rural businesses during the quarter and raised the risk guardrails, keeping impact of the macroeconomic factors in mind. The coverage of select customer cohorts with CGFMU insurance cover and parametric insurance will enable us in de-risking the rural portfolio. We will continue to closely monitor the developments in this space and are carefully increasing our risk-calibrated rural disbursement momentum in the third quarter.
On urban finance, the segment which comprises of two-wheeler, personal loans, and mortgage loans, it saw a 27% year-on-year jump in overall quarterly disbursements to INR 10,328 crores. As a result, the overall urban finance book size increased to INR 67,668 crores in Q2 FY 2027, translating into a 32% YoY growth. The two-wheeler business registered quarterly disbursements of INR 3,170 crores in the quarter, up 26% year-on-year. The book size increased to INR 16,158 crores, up 24% YoY. With 92% of two-wheeler disbursements in the prime segment in Q2 FY 2027, we continue to prioritize high quality growth and optimized risk-adjusted returns. In the personal loans business, we achieved our highest-ever quarterly disbursement of INR 4,233 crores, translating into a stellar growth of 45% year-on-year, with the book size at INR 18,664 crores, an increase of 72% YoY.
During the quarter, we operationalized our personal loan originations with Airtel, and overall large partnerships constitute 40% of our personal loans origination. In the housing or mortgage loans business, we achieved a quarterly disbursement of INR 2,926 crores, up 8% year-on-year. The book size reached INR 32,846 crores, an increase of 20% year-on-year. During this quarter, we launched RM Loans, L&T Finance's offering for the economical housing segment in non-metro and peripheral urban geographies, with ticket sizes ranging between INR 20 lakhs to INR 50 lakhs. In the SME business, quarterly disbursements stood at INR 1,820 crores, up 24% YoY. The book stood at INR 9,495 crores, up 27% YoY. The growth in business volumes was aided through an increase in direct sourcing and an existing strong network of distribution channels.
As Sudipta mentioned earlier, we have covered around 80% of the portfolio through an insurance cover with CGTMSE, which puts us in a good position to focus on risk-calibrated growth going forward. As Raju mentioned earlier, in case of gold loan business, the quarterly disbursement stood at INR 3,237 crores, up 229% year-on-year. The closing book reached INR 5,043 crores at the end of the quarter, representing a significant growth of 242% year-on-year. Let me now hand over the call back to Sudipta to make his closing statements.
Thank you, Sachinn. In summary, this has been a great quarter for L&T Finance, with superior performance across key performance parameters marked by record disbursements, superior portfolio quality, and highest-ever profit after tax. These outcomes reflect the strength of our business franchise, the resilience of our operating model, and our continuous focus on delivering sustainable risk-calibrated growth. A key enabler of this journey is our continued investment in technology and artificial intelligence. We believe that the investments we are making today will not only strengthen our credit and risk management capabilities, but also create a more agile and future-ready organizations. I am particularly proud of how our teams have delivered during the quarter, despite the uncertainties in the macroeconomic environment. We recognize that the operating environment may not be without challenges, and there may be air pockets within the way, but particularly across certain customer segments and geographies.
However, our confidence stems from the strength of our franchise, the discipline of our underwriting approach, and our granular distribution model, and the investments we are making in technology and people. We remain vigilant, respondent to emerging risks with agility, and continue to pursue opportunities for responsible growth. I am confident that these capabilities will help us navigate near-term uncertainties while keeping us firmly on course towards our long-term strategic ambitions, as detailed in our Lakshya 2031 goals. I thank you all for your patient hearing, and the floor is now open to questions.
Thank you. 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 their handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We take the first question from the line of Shreya Shivani from Nomura. Please go ahead.
Yeah. Thank you for the opportunity. I have two questions. First is on the NIMs or cost of fund trajectory. While this quarter has been good, if you can help us understand how are we going to manage the repo rate hike that has come through, how much change will we make in our floating home loans book right away, or maybe any color around maybe we will change the pricing after one month, two month, or strategy on fixed asset book, all of those. The second question is on the underwriting strategy that you have spoken about, that you are recalibrating it. So there are droughts in couple of states.
So if you can throw some color on how you are going to manage the rural segment underwriting quality, whether it be state by state, what all changes you are making, and also similar comment on the LAP segment, because the LAP has been slightly weaker as well, though it is a part of the urban segment. So any color on the LAP segment as well would be useful. Thank you.
Thank you. This is Sachinn here. Let me address your first question on NIMs and cost of funds trajectory. Yeah, this quarter, as you mentioned, we have actually given a very good result in terms of 25 basis points reduction in the overall weighted average cost. Part of this was on account of getting our strategy right. The liquidity in the system was pretty decent in the months of July, August, when the interest rates were also quite low. We have actually used this to our advantage by changing to some extent the mix as well as giving up on some high-cost borrowing and incremental borrowings also were mobilized at lower rates. We took advantage of our specific benefit, which we achieve out of our PSL-based borrowing. We also did some PTC transactions during the quarter. We increased our commercial paper overall funding.
We went in more for six-month to one-year kind of CPs. Finally, even the markets borrowing were done keeping in mind the medium to long-term requirement. This has actually placed us in an advantageous position because we would have at least taken care of next three to four quarters. Yes, the interest rates will continue to keep increasing. We believe that this was just the first repo rate hike. More would follow. At max, we may have two more coming up in December and Feb. Max two to three is what is expected, which would naturally lead to increased overall rates. The yields have already started firming up. But the base has been brought down to 6.95 and any increases will keep us in that advantageous position.
The increases would be there, but we will be less impacted and we would be in a position to continue to have the NIMs plus fees trajectory in the range of 10% to 10.5%. Last two quarters we have been at 10.47% and 10.48%. I think over next couple of quarters also, we will be somewhere around mid of this 10% to 10.5% trajectory, is what we believe.
Right. Are you repricing any of your assets? Any color on that?
As far as repricing is concerned, only our mortgages, the home loans book is one which is variable in nature, which is about INR 25,000 odd crore. Yes, we will wait for the market to react to these repo rate increases. Yes, over a period of time, we will do that. I think our overall mix in terms of fixed and variable, we have maxed both on the asset and liability side, so not really majorly worried on that. In fact, this will only give us an advantage by repricing our home loans book. We did not have the luxury to change the yields when it came to decreasing interest rate scenario. Now that interest rates are increasing, yes, we will surely over a period of time take advantage of that.
Sure.
Yeah. On your second question, especially on the underwriting strategy, obviously, if you see the progress of the monsoon, the progress of the monsoon has been actually varied. The northern and the northeastern part of the country has received reasonably okay rainfall. If you look at the central part of the country, the rainfall is little below average, but it is not really alarming. Some parts of especially in Karnataka as well as in Maharashtra, some of the districts, some parts in AP Telangana, especially the southern part of the country has received a patchy rainfall or below average rainfall. Obviously the governments of these particular states have declared certain districts as being affected by drought.
We have taken cognizant of this early on and in our underwriting parameters, some of the guardrails have been strengthened in all these district and the rural disbursements, whether it be tractors, et cetera, have already been tempered in this particular district. One of the important thing that we noticed is that the customer demand also was sort of relatively muted. It is not that the customers also came and demanded loans and we denied them. In view of the postponed rainfall, we found that the customer demand is also muted. You have to keep in mind that majority of the industry just has recovered from a asset quality cycle, especially the microfinance industry. The period post the asset quality cycle is typically a very benign credit period.
Infact too, our guardrails have been rigidly implemented by most of the lenders and actually all the lenders. The fact is that people are adhering to that. There literally has been no risk buildup, especially visible risk buildup during this intervening period in the rural and people have been careful. We are also being careful and that is why you saw a near flattish QoQ performance on our rural disbursements. However, you will see a little upward bias in our rural disbursements in Q3, which is primarily the festive quarter. You will see some upward bias in that because knowing the progress of the monsoon, and the outcome of the kharif crop will be very clear towards the last weeks of October, first week of November. We expect rural cash flow to improve after the kharif crop comes.
We are growing this business in the rural areas in a risk-calibrated way and we are very certain that there is at least as of now, there is no pocket in which we really think there is risk buildup. The other thing what we are doing is that we have subscribed to the CGFMU program as well as we have taken parametric insurance just to make sure that we have additional bulwarks available against any unforeseen eventualities. On the other hand, also in our rural businesses, we are also taking our sort of secured micro LAP business up because also that has been performing very well in almost 99.9% collection efficiency. It has been working very well.
I would like to point out that our collection efficiencies in rural business finance remain in the corridor of 99.7% to 99.8%, which is in line with the best ever collection efficiencies that we have ever seen. Month-on-month, these collection efficiencies are sort of on the ball. In the month of October, we are seeing very good progress in the first 15 days. What I would like to sort of talk about the notion that, as of now, there is no visible emanating immediate risk pocket that we see in some other rural geographies. We are being careful and we are doing calibrated disbursements, but I do not foresee any sort of risk accentuation in the coming quarters. I think it will be managed very well. The second thing you asked on LAP. LAP, at least for us, continues to perform very well.
There is one particular slide in our analyst deck where we have given some of the sort of data on performance of our business vis-a-vis in slide 31 of our analyst deck, which you will see that LTF's index representation of delinquency is 10% of industry delinquency. For us, LAP remains our least concern and the fact is that in LAP also we are implementing our AI-based sort of underwriting tool, Helios, both in LAP and mortgage we are implementing. Which will give us our underwriters a far greater capability to underwrite LAP very well. Overall things are normal. Yes, we understand that there are climatic issues, there are geopolitical disturbances. But as far as L&T Finance's business is concerned, I think we are in ship shape.
Right, sir. Just one follow-up. The Karnataka, Maharashtra, South, all those states you mentioned which have a drought issue, how much of your rural mix would they make up? I mean, any rough ballpark number would be useful over there.
Maharashtra is very small for us. In Maharashtra, we do not have a very large microfinance presence, neither do we have an extremely large tractor presence. Maharashtra is not actually really very large for us. Karnataka, we have a reasonable microfinance presence, but we probably can give you the number. We can give you the percentage number offline. We can give that to you. Our investor relations team will give that number to you offline.
Sure. Thank you, sir. That was useful. Thank you for the answers.
Thank you. We take the next question from the line of Kunal Shah from Citigroup. Please go ahead.
Yeah. Hi, sir. A couple of questions. In terms of this entire cost of borrowing 25 basis points, if I look at the mix, in fact, PSL is still coming down sequentially from 26% to 23-odd percent. CPs is something which is going up from 5% to 8%. Is it more of CPs rather than like maybe you have mentioned, like we are leveraging the rural franchise, so that should have actually got reflected in terms of the PSL or not really?
Hi, Kunal. Sachinn here. Yes, in percentage terms, the PSL has come down, but like I mentioned, CPs have increased but across all the products. For example, we also have working capital demand loans. The demand loans keep expiring and the new ones have come in at a cheaper rate. That was one. The PTC transactions that we did, which is part of the other, that also has gone up to about 5-odd percent. That also has come in pretty cheap. That is, I would say, the cheapest source of money today for me. Even markets borrowing, see, it all depends on what was the timing of raising these resources.
When the FCNR(B) deposits were coming in, we had seen perhaps the yields bottoming out, and we actually timed our raises appropriately, not just short-term, but medium to long-term as well, and which will actually keep us safe at least for next three to four quarters. Even the CPs, usually we would go for a 45-day to 60-day or 90-day. We have actually gone for six months to one year. Try to ensure that next three to four quarters we are in safe zone as far as the short-term money that we have raised. All other medium to long-term in the range of three to four and a half years also has been raised. We also had raised some sub-debt during the period. If we had done the same thing in Q3, maybe the rates would have been completely different.
All in all, I think the timing matters. There was anyways an expectation that the repo rate hikes will begin, and we were able to take advantage of the FCNR(B) mobilizations which were happening, which took the liquidity to over INR 5 trillion and which gave us that advantage.
Sure. Now maybe in terms of the optimization levers, largely, we have used most of them. Just assuming that rates remain where it is, no doubt there would be a hike, but just assuming then we expect that 6.95% can still be sustained. There is no one-off. It will not go up to again 7.1%, 7.2% over next two, three quarters.
See, a couple of quarters, it will naturally not remain at 6.5%. If that's the case, then I have to assume that there will be no growth which will lead to further borrowings. Whatever incremental borrowings I do in this quarter, naturally even the CPs that I raise in this quarter will be higher, right?
Okay.
Because the base has come down to under 7%, which has happened for the first time actually in LTF history, we are in an advantageous position vis-a-vis the market. So the base being lower, naturally, whatever increase is only going to be on that incremental borrowing. As I mentioned, we have also taken to some extent care of medium to long-term requirements. So, it is going to be only that incremental borrowing that will lead to that increase.
That is at what rate average?
Which one?
Incremental. Average incremental borrowing now.
See, the yields have gone up anywhere between 30 to 50 basis points, depending on, there are some commitments which are still in the pipeline. The sanctions have already been in place, and we have to just go ahead and execute them. The yields, initial increase that we have seen and the markets have been choppy, so we have to decide on when we exactly go and hit. One thing which we have tried to do is we have tried to ensure that we do not get into any desperate situation that we have to borrow at very high rates. If you plan very well, we are able to get further incremental borrowings at decent rates. We have enough room to raise further short-term, like I mentioned in my earlier calls also.
Our ALM permits us to go right up to 14%, 15%, because even the gold loan business you saw the growth this quarter was INR 3,000 crores, and they are all one-year products. Incrementally going further up on the CPs front is actually very easily permitted. There is enough room for me to play and the short-term resources that I raise will anyway come cheaper than the medium to long-term that I will have to raise. I am in a very good position to time the market.
Got it. A couple of more questions. On overall overhead cost, how much would be more of an infra and the collection cost? Is it like the collection intensity would have gone up and that is leading to the higher OpEx because that has grown and OpEx to asset is also up. What would be our outlook on that? The second question is, we have seen collection efficiency softened a bit across most of the segments when we look at it like two-wheeler, tractor, MFI as well. Anything to worry on that front? Maybe it does not appear to be seasonal because second quarter, maybe we still see some kind of a stability out there. This time there is a decline, so be it in terms of two-wheelers and tractors as well. How should we look at that and any risk to the credit cost?
Okay. Let me first address the initial question on OpEx. The collection costs have been only going down, primarily because the more the Cyclops underwritten book is coming into play, the roll forwards have been coming down. Very clearly, this is actually putting us in an advantageous position. Number two, the bots that are coming into play in terms of collections, I think that also is helping us in terms of bringing down the cost. The operating expenses that you see, the range is a mix of business as usual, as well as the investment that we are making in setting up branches. Like Raju had mentioned on the call that 172 branches have been set up in the first half. Similarly, we are also rolling out branches for rural LAP business and setting up meeting centers.
In addition to this, the technology work continues, because we have been going ahead with the rolling out of Cyclops for all the products. Plus, Nostradamus also is being implemented. All in all, the investments being made actually are getting taken care of through the savings which are coming up on account of the efficiencies which are building up. We really don't see any major movement of this OpEx to book in the near term. We will continue to ensure that our branch rollouts will continue. We want to set up 500 branches for gold. We want to set up 200 branches for micro LAP. Rest of the branches will get rolled out pretty quickly. As the last year whatever branches were rolled out, the top line is getting beefed up with the branches getting into the break-even zone.
Yeah, this will continue for at least a couple of more years, yeah.
Yeah. Kunal Sudipta here. I would like to add a couple of things. First and foremost thing, our collection efficiency in our rural business finance vertical is rock solid. It's 99.8%, 99.7%. One basis points here and there in our large portfolio will happen. The second thing is that in a farmer equipment finance also, if you see typically May, June, et cetera, which is the fag end of the rabi crop, there is a lot of liquidity that comes into the market and then that gives it a jump in collection efficiency, which goes through a little bit of norming during Q2 and again comes up. As the kharif crops comes in. You shouldn't read too much into it, right? If you look at compared to last year, we are ahead of last year and by 90 basis points.
Actually, the tractor business is doing very well. We have got offline questions after we published our analyst deck on why did the two-wheeler collection efficiency drop in the month of September. I want to preempt this because there might be further questions on this on the call. In the month of September, we tried to do a little bit of aggressive experimentation on our AI-based collection curings, right? Actually, because now our self-cure is almost close to 43% in the two-wheeler business. We wanted to check whether we can push the self-cure to 50%, 55%. There was an aggressive attempt. Now, obviously, we realized that beyond the point, probably the marginal utility of AI processes flatten out. It is also a learning for us, right? That's exactly what happened, especially in the zero DPD collection efficiency in the month of September.
It is born out of an experiment, and it is nothing structural. In fact, we are back to similar collection efficiencies exactly in the month of October. We will end the month of October with a 99% collection efficiency, probably a little better than 99% collection efficiency in the month of October. It is nothing structural. It is not a sign of worsening credit quality. It is just a simple experiment that probably did not deliver the intended results. I would like to leave it at that. I would like to reiterate that the credit quality of all our lines of business remains strong. The credit quality, the credit outlook of all our businesses remains strong.
As of now, every business is showing improving credit metrics as we move from quarter to quarter, and we are very confident of hitting that 2%-2.2% corridor of credit costs as promised in Q4 FY 2027.
Just to add, there was earlier a question also on the impact on collection efficiency on account of lack of rainfall and all. Kunal, again, this pertains to the collection efficiencies, I am just responding. The drought-declared areas, we have tried to see what the PIN codes that have got impacted. We have a INR 31,500 crore book. The drought-declared areas, especially in Karnataka and Maharashtra, about INR 1,033 crores is the total book relating to this, which is 3.3% of the total book. Really no impact on account of that is the reason why we do not see any major impact coming out of it.
Thanks. This is very helpful. Sharing all the data points. Thanks and all the best.
Thank you. We take the next question from the line of Abhijit Tibrewal from Motilal Oswal Financial Services Limited. Please go ahead. Abhijit, please unmute your line and proceed with your question.
Yeah. Am I audible now?
Yeah.
Yeah. Thank you for taking my question. Sachinn, sir, the first question for you, I think you have deliberated and explained to us at length on what helped us reduce our cost of borrowings, the portfolio cost of borrowings by 25 basis points. But I think one thing I didn't understand is you said that going forward, it is only the incremental cost of borrowings. And like you mentioned, these are up by anywhere around 30, 40 basis points, which will maybe lead to the trajectory of cost of borrowings going up. But even this quarter, despite FCNR, with such a large balance sheet, only the incremental borrowings that they do, and even if they come at lower cost, how will they reduce the overall portfolio cost of borrowings by 25 basis points? Unless, of course, even the existing lines that you have with your banks get repriced.
Yeah. As I mentioned earlier, there are lines when you look at the bank borrowings, you have two types of bank borrowings. One is the PSL and one is non-PSL. The non-PSL borrowings also includes lines of credit and against which we take working capital demand loans. These are of shorter tenures. And when they come up for repricing, you have a choice of either drawing it down or you have a choice of not drawing it down. So last quarter, if you recall, we had drawn down about INR 4,000 crores additional in terms of incremental liquidity, which we had created, on account of which the interest cost overall also had gone up, and those naturally could be immediately paid off. So our overall liquidity has come down. Average liquidity has come down to INR 9,500 to INR 10,000 crores in this quarter.
Whatever money went back, that money was naturally high priced, and that money got replaced. We got an opportunity to replace high-cost borrowings with lower-cost borrowings, in addition to whatever I spoke on the CPs and raising money through PTCs. I hope I have addressed the question. Thank you.
Yes, sir. Thank you, sir. The second question I had is for Sudipta. Sir, while in your opening remarks, you deliberated on this IRDAI consultation paper, insurance commissions. I am just trying to understand, as we speak to more leaders like you, I think there is a conversation that is happening that we already know what is the impact on the revenues from cross-selling this insurance and from insurance commissions. Are there any cost levers which are there which will offset the impact? Because within your opening remarks, I remember you saying that there is significant scope for consultation with the regulator to make sure it is viable for the BFSI companies to distribute this insurance commission. I also remember you spoke about some glide path which can be there for insurance commission rationalization, just like it was done for EOM for insurance manufacturers.
But sir, let us just assume even if they give us a glide path, then also very clearly there will be an impact which will be there. When you say that we still reiterate our Lakshya 2031 goal of getting to a 3%-3.2% RoA. I remember Sachinn sir saying that the NIMs plus fees is expected to be in that mid-range of 10%-10.5%, which is 10.25%. Then if there is that insurance impact that comes over a period of time and credit cost, maybe we have another 25 basis points room. What are the other levers which are there to get to that 3% RoA? Any cost lever offsets on the insurance commission side?
Yeah. See, Abhijit, the thing is that this thing is currently, I would say, under discussion. For us, we would obviously engage with the regulator and try to see if the industry. We are part of the industry. Whether the industry, as I said, gets a soft landing is what we. We obviously as an organization, as a responsible member of the financial services industry, are completely aligned with the regulators' objectives of Insurance for All. Obviously, we will have to play a part in that particular role. The only ask is that the industry be given time to adjust. That is the reason why the regulator has given time for feedback and I am sure after the feedback goes in written format, there will be some discussions with the participants as well.
I do believe that there is a significant scope for a softer landing than what is put forward in the consultation papers. Having said that, obviously as an organization, we will have to what we call saying that there will be obviously a change in business model in the way we do this over a period of time. As an organization, we are already working on what are the components of that plan B, and what are the sort of revenue drivers, what are the sort of revenue profiles of that plan B. Because as an organization, we will not sit down and do nothing. Obviously, our objective will be to attenuate that revenue loss. The fact is that right now, if you ask me, basis the consultation paper, there is an estimate, but we just don't want to overreact to that.
I am being very candid on the call. We just don't want to overreact to that at all because it is currently under discussion. In many of the cases as previously we have seen, from a discussion paper what comes finally, what comes there is a lot of middle ground which is covered during that particular period. We are also hopeful that the regulator being reasonable, there will be some middle ground which is covered. As and when the final guidelines come, obviously we will come out with obviously an official guidance as to what sort of possible RoA impact that would be there on the immediate basis. What I am really confident about, and I want to reiterate that in L&T Finance over the last couple of years, we have had a strong track record of execution.
The fact is that over a Lakshya 2031 period, our objective is to make sure that whatever is this reorientation of the business model which is there from an insurance cross-sell, we are able to sort of spread the impact across new lines of business, across new lines of revenues, new products. For example, we are talking about the payments product. I talked about the PPI product. Prepaid products, for example, can bring in a large amount of fee revenues as well, as we see in banks. Obviously, these are businesses which will build over a period of time. You cannot expect that from day one these businesses will. The fact is that these are all planned, and these are all planned as part of Lakshya 2031 sort of our plans.
As this plays out, we are reasonably confident that on a Lakshya 2031 basis, our AI initiatives will give us large operational efficiencies which will finally show up in OpEx. If you see our cost to income ratio actually has been falling. Cost to income ratio right now is about 39%. It has fallen below 40% and our objective is to drive it further downwards. We are working on a large cross-sell platform. The cross-sell platform is an agentic cross-sell platform, which means that it really does not require additional manpower to that extent that a physical cross-sell platform would require. Obviously we are looking at optimization of origination, acquisition cost, as well as incremental fee revenues there. There will be obviously scope for revenue optimizations in our different lines of business.
I do expect that over the medium to short term, we will be reasonably be able to sort of paper over any sort of impact that comes from this particular guideline. There is also the possibility. Anyway, we were setting up a one-to-one retail insurance distribution channel. We had already started on building that this year. Now we are starting to accelerate that build-out also, and H2 will see an accelerated build-out of that. Obviously multiple motions are in progress and as an organization, given our strong execution track record, we are reasonably confident that our stated objective of Lakshya 2031, which is delivering an RoA profile of 3% to 3.2%, will be met. I hope that answers your question.
Thank you, Sudipta sir, for that detailed explanation. With your permission, I just wanted to squeeze in one last question.
Okay, sure.
Sir, just one thing. In this call itself, we have spoken that asset quality is holding up well. You also explained why there were some blips in collections in the product where we were trying to see if self cure in AI can work. All those points are well received. But now that we have rolled out Cyclops and the expectation is that the last couple of years, the credit cycle was actually very benign. Now that this year monsoons have been bad, there are various states across multiple districts they have called out droughts. This is where I think we will all look forward to what actually Cyclops can deliver. The fact that we have also implemented Nostradamus in two-wheelers and PL, and I think it is already a work in progress in MFI and Farm.
You also called out there is no early warning signals that we are seeing right now. But at the same time, sir, I remember in the RBI's MPC public statement that they made, they also said that there are risks to the rabi crop now because of weak monsoons. Any views on that? Any early warning signals that we are picking up that Nostradamus is helping us?
Okay. So two-wheeler portfolio remains extremely stable. I not disclose individual business-wise granular 90+ risk numbers, but I will make an exception today. My two-wheeler 90+ number remains at around 1.2%.
Yes.
Which is the Cyclops 90+ numbers. The Cyclops 90+ numbers remains around 1.2%. And Cyclops is almost close to upwards of about 85% to 88% almost close to 90% of my two-wheeler base. So frankly, in a two-wheeler business where we are underwriting 92% to 93% prime customers, I really do not see whether there is a drought or anything at all on our portfolio quality to even shift even a little bit also. And Nostradamus, to your question, Nostradamus has already helped us identify about INR 50 crores of possible, especially in the two-wheeler and the personal loans business, INR 50 crores between collections cost save and between early resolution of hotspots during H1. We quantified this yesterday for our board. And I'm happy to share that information. So these tools are working well.
We are implementing Nostradamus in the rural business finance vertical also for this particular quarter, this particular half. These are all very tough implementations. This take a lot of time and effort and a couple of reworks before we finally get it right. So our credit administration frameworks are working well. For example, in the SME business, I would tell that in the SME business, our bounce rates from the Cyclops-related portfolio is exactly the 50% of what now our legacy portfolios are. And you have been seeing that we have been growing the SME business between 20% to 25%, we've been growing the SME business. So it is working well. It is giving us the results for those of the investor community who have visited us, and we have had the chance to demonstrate these tools transparently to them.
Also have acknowledged that these tools are indeed powerful in terms of helping us isolate risk much earlier than probably a traditional implementation process would have done. This is all giving us good dividends. Having said that, I really do not know how the rabi crop will proceed. The fact is that we are seeing a good buildup of retreating monsoons in the south of India. You can see a very, very large cloud cover over Kerala, Tamil Nadu, Karnataka as we speak. I do believe that some of these rain shadow areas which probably will get rain as part of the retreating monsoons. Our rabi crop, the overall reservoir levels are at about 71% pan-India. I think they are sufficient to support rabi crop. I also foresee that the rabi crop should also be near normal. That is what my forecast is.
The fact is that, look, I am not an economist or an agricultural scientist that I will be able to give a completely on-dot forecast. At least, on-ground feedback for us is that rabi crop will be near normal. One thing you have to acknowledge is that the state governments as well as the central governments have been reasonably proactive about handling the drought-affected areas. Many of the state governments have talked about extraordinary payout to some of the farmers in these particular areas. Obviously, the government machinery is also being focused on this, and I do believe that the government interventions will also go a long way in softening the blow, especially in the rural areas. We are seeing a very strong start to the October season.
Across all our lines of business, we see significant uptick in business momentum, especially in the month of October, in the early part of October. I expect the business momentum to pick up during Navratri, as Navratri is currently going on, and during the Diwali period. So I see a reasonably strong Q3 as well.
Got it. Thank you for patiently answering my question. I wish you and the team the very best.
Thank you so much.
Thank you. We take the next question from the line of Avinash Singh from Emkay Global Financial Services Limited. Please go ahead.
Yeah. Good afternoon. Thanks for the opportunity. A couple of questions. First is, again, continuing on the asset quality and all. Among the states where you have a sizable exposure in microfinance and possibly in two-wheeler as well. Bihar has seen a very, I would say, extreme deficit in monsoon first, and then that Nepal flood extent leading to flood in a large part of the state. How do you see, and now the festive season will come. How do you see your collections and the asset quality outlook in this rural finance and two-wheeler in the state of Bihar? Secondly, this CGTMSE and parametric cover, if the cost of that cover would be visible or material in your OpEx line item. If that is the case, if I were to look at the overall cost to AUM, where it is trending currently.
Thirdly, on gold loans right now, very quickly and impressively, you have reached almost INR 10 crore per branch average, and especially when a significant part of the branch has come up in the last 6 - 12 months. How do you see, eventually in a steady state, at what level AUM per branch and in the growth, how much of it is going to be still contributed by the improving AUM per branch and another factor, the branch expenses? Thanks.
Okay. First question, Bihar got good rains in the latter part of the monsoon period. There have been some floods. But the fact is that in Bihar, we really do not see much of significant impact from the ongoing whatever. Bihar actually is quite okay for us. I expect credit quality in Bihar to remain relatively stable. So no concerns on that, both in microfinance and two-wheeler. Also on the parametric insurance we have, Bihar is one of our states in which we have covered two parametric insurance, and I think we already got some amount back as part of this particular Bihar flood.
In fact we have recovered most of the premium was about-
No need to give details about what the premium was. But the fact is that we have got significant amount back from Bihar, from this parametric insurance in this recent flood in Bihar. So it's working well. For the CGTMSE and CGFMU, they are not very large ticket sizes that we are not able to absorb. What is the important part is that they give us capital efficiencies, especially on the SME side. Because our risk weights go down on CGTMSE coverage on the SME portfolio, we actually get a lot of capital efficiency, and that leads to a capital release, actually. One of the reasons you see our capital adequacy going up this quarter is also because we have boosted our Tier II capital as well as because of the CGTMSE. Actually, there has been a capital release because risk weights have gone down.
In a way, it is beneficial for the organization from a risk point of view as well as a capital point of view. As well as it helps us to convert the hitherto unsecured portion of the SME book into a quasi-secured portion. Which helps us to grow the SME book with a larger degree of confidence. What was the last question?
Gold loan.
Gold loans. The gold loans have actually improved quite well in terms of. Our branches are attaining critical size very fast. Branches are attaining critical size on an average of six months, is what the branches are attaining critical size. This growth will continue for us. The fact is that we will not stop it. By the end of this year, we are expected to be about 800 branches. We have a plan of expanding until about 2,000 branches. Post which we'll probably take a pause and then try to consolidate.
I believe that this year and next year will also be a strong growth area for gold loans because on an overall strategic perspective, we want gold loans AUM to hit about 14%-15% of our overall AUMs by the end of Lakshya 2031, which is gold loan AUM between INR 40,000 crore-INR 45,000 crore over our total AUM. That is what we want to hit. This is a strategic business for us. One of the important thing which Raju said in his part of the call is that the gold loan branches are also now not standalone gold loan branches. A large number of gold loan branches are also Sampoorna branches. That means the gold loan customers who are coming in are also being used as a catchment for cross-sell of other products as well.
It's an overall holistic model that we are playing up and we'll continue investing in it.
Just to add on the gold loan piece. The biggest advantage why we have been able to, A, roll out new branches and also achieve a break-even quickly. Usually, it takes eight to nine months. The business actually throughput is much faster, primarily because these are also the locations in and around where we have already been doing our other businesses. It's not that we opened a branch. It may be a new branch, but then we have been in these geographies, both rural, semi-urban presence is already there. Getting the business set up and the footfalls into the branch is much easier, especially because of the brand value which L&T brings with it.
Because this whole business is done especially on trust, and that's what we have been able to attract talent, we've been able to get the infrastructure quickly set up as well as the footfalls from the customers.
Got it. Thank you.
Thank you. We take the next question from the line of Abhishek Murarka from HSBC. Please go ahead.
Yeah. Hi. Good afternoon, everyone. The first question is on disbursements in consumer loans. Now, this would not, I am assuming, have any kind of seasonal element. But if you see on a sequential basis, it has been flattish, actually slightly lower. Is it a risk-guarding issue, is it a demand issue, or is it something different? Going forward, how do you see this disbursement trend for the rest of the year?
Good question, Abhishek. It is something different. Let me tell you, the implementation of Cyclops in personal loans business is an extremely painstaking process. Right?
Okay.
What happens is that in, say, two-wheeler or say mortgage or for SME or for that matter, tractors, your guy holds the distribution channel, right? You do one implementation and the entire funnel goes through that one implementation. In personal loans, you have partners. You have PhonePe, you have CRED, you have Amazon, you have Google Pay. Each of them have their own priorities. Each of them have a different customer pool segment, right? It is not one single funnel it goes through. It is a bespoke implementation, partner by partner. Right? What happens is that when you do that, and as you know, when you touch things digital, it goes through a little bit of stabilization process. Right? Because for example, when we implemented Cyclops in one partner, we over-corrected.
That led to a slight drop in the disbursements, which we then calibrated. Right? Then we got it back to whatever the initial expectations were as to what it would deliver. Right? This is a overall process of implementation, and that is why, because Q2 of FY 2027 has been a significant Cyclops implementation quarter. Typically, when we implement Cyclops is also very sharp in terms of cutting out the bad as well. Right?
Right
Typically, even when we two-wheeler, when we implement Cyclops, we actually saw a contraction of market share in the first six to eight months, after which it started climbing up. Right? This is because the system took a pause for implementation of Cyclops. It is not a credit issue. It is nothing else. It is basically, we have gone through a very tough period of Cyclops implementation in Q2, and that is why you see a flattish profile.
Is the implementation now over across partners and now-
It is almost over. It is
going to be building from here.
Yeah, it is almost over. I think one partner is left. It is almost over. One partner is left. It should be BAU from here.
The partner that is left, is it responsible for a large amount of the sourcing or is it marginal?
Okay. It's a relatively large partner, so it will go through.
Abhishek, just to clarify, what is not visible when you look at the overall disbursements is the large partnership share
It's 40%.
as pointed out. It has come to 40%.
It will go up further.
Which means that something is being given up to replace that, right? This share is increasing and the other share, the DSA sourced and all is proportionately coming down.
Yeah. Abhishek, going forward, all the partners who are coming on board, they are coming with a priori Cyclops. That means we do not take into any old algorithms. They have to implement on Cyclops. What has happened is that the implementation pathway with some of the new partners is also a little more elongated because they have to go through this full integration process and the testing process. Prior to that, where we could implement, get up with a new partner live in about a matter of two months. Now, the same partner to take them live takes anywhere between three to four months because the Cyclops implementation process is a little difficult. Right? It requires a lot of legs to run. That is why it is. You will see, though on a year-on-year basis, book size growth on personal loans is still 72%.
It is not small. Right? However, on a sequential basis, the disbursement is flattish. You will see this growing in Q3 as well as Q4 again.
Where should we reach now? As in, let's say Q3 would be reasonable growth or what is the run rate now, say in October so far, or in the last month? Just to get a sense of where we can get to.
I don't have the numbers handy.
INR 1,400 crore, INR 1,500 crore is the monthly run rate.
Only INR 1,500 crore is the monthly run rate now. We intend to take it to an interim to about INR 1,700 crore, INR 1,700 crore to INR 1,800 crore before we do one round of calibration once again. This is a step function jump. We will grow, we will calibrate, we will grow. This is a business on which periodic calibration is as important as growth.
No, that is perfect. That gives an understanding of where we are headed, and thanks for this clear explanation. The other question is in gold loans, very particularly, are you seeing more GS2 formation, as in more people are delaying payments? Is the rollback slowing down or is it still BAU? How are things going on there?
I will ask Raju to take this call.
Okay. I will snatch the word from your mouth. It is BAU at the moment. At this point in time, almost 15 months into the business, we have not had any episode of a loss so far. The actual way to monitor this is in the form of auctions which we hold. In last one year, we have not had more than three episodes of a uction, and the recovery is in excess of 140% of the amount that is due. As we speak-
Sir, I am not worried. Sorry to interrupt, Raju, but I am not worried about the loss. I am more interested in what is the customer doing now. Are they, say, coming back to pay a little later than earlier? Which is why I am more interested in the GS2 component.
No, we are not seeing that trend. In fact, we follow three-pronged approach. One is the SMS/WhatsApp message, followed by the call, and the actual visit. We have seen a good amount of traction of regularization of account once these three nudges happen.
Okay. Just finally, to Sachinn. Last quarter, we were expecting that on a full year basis, the cost of fund would be 4, 5 basis points higher. Now you have managed to rebase. There is further possibility of raising CPs. On a full year basis, should you actually end a little lower or flattish in terms of cost of funds?
Yeah, I would not to mention where we would be. All I can say is two quarters left, two repo rate increases expected now. It will all depend on whether it happens, doesn't happen. Number two, what is going to be our growth rate? Number three, yes, the only possibility vis-a-vis what we were earlier, we never expected to go below seven. Since we have gone below seven, we stand a better chance compared to where we were earlier.
Got it. Okay, thanks so much. Thanks for answering those questions, and all the best going forward.
Thanks, Abhishek.
Thank you. We take the next question from the line of Nischint Chawathe from Kotak Institutional Equities. Please go ahead.
Hi. Thanks for taking my question. Just continuing on gold loans. The slight delinquency or the rise, which I would agree is probably would be BAU. Is this kind of seen in bullet loans or is this sort of seen in the EMI loans?
We have actually bullet loan as the main product, and the monthly schemes got rolled out just three to four months ago. What we have seen this only in the bullet loan because the RBI new norms, which became effective on 1 of April, requires us to reckon the interest even if it is not paid. Only in that product this has been observed and the regularization happens.
Sorry, you just broke up. You said, recognize interest or collect interest? Sorry, you just broke up when you said.
As per the new RBI norms, whether the interest has been paid or not, you have to reckon it for the purpose of calculation of LTV. That norm came into effect on 1 of April. This has happened for the loan book, which is booked after 1 April.
Yeah, so that portfolio is not really mature.
That is not mature, yes.
Wherever the LTV is-
It is a very recent portfolio, Nischint.
Got it. The other question actually is on margins. You have done a wonderful job in terms of getting your cost of funding down. But now given the fact that we are proactively cutting risk across cohorts of risk, especially in rural India, what implication can it have on margins, given the fact that some of these have been high-yield portfolios?
Yeah. Nischint, one of the things is that we are doing risk-calibrated disbursement, but I am not saying that my disbursements will go down. Whatever I disperse, I will disperse at current rates. I will obviously try to maintain my yields as far as possible. In fact, our entire teams are tasked with the task of taking the yields up, as part of due normal operating procedures of business. I really do not see a reason why our yields would fall in any way.
No, just for example-
Yeah. Let me complete maybe after that. Nischint, when we were implementing two-wheelers, for example, the Cyclops underwriting, at that point of time, our assumption was that since we are moving more towards prime, we will actually end up reducing the overall rates. The tool has matured to a level where we are able to clearly segment the customer, and the risk-based pricing is absolutely been working on the full portfolio. Whatever customer comes in, depending on the type of risk, the yields are accordingly adjusted. The yield is appropriately allocated for that particular risk. This has actually helped us in not just bringing the overall yields up from where they were, because we actually started off with about 75 to 100 basis points lower interest being charged when we actually migrated to Cyclops. Out of that, almost 70, 75 basis points has already been recovered.
And now we are, like Sudipta said, we are almost 90%-
92% prime.
92% prime.
Yes.
The balance portion of 8% is which actually helps us in terms of playing around to figure out whether we can go a notch or two below, take slightly higher risk, but still within the overall guardrails and charge more, and that has led to the increase in the yields on the two-wheeler. The same thing will play out when we fully migrate for PL, for farm, SMEs already we have started working. The earlier thought process that moving towards prime will be a big hit to the overall yields is actually not really the case. Similarly, microfinance, we moved to risk-based pricing and these customers who have been with us for third, fourth cycle, not only have they benefited, but at the same time, the new customer base gets whatever has to be charged based on the risk that prevails.
Actually, depending on the riskiness of the customer, we decide on what pricing should be adopted, and that will hold true going forward across all businesses and segments.
I appreciate that your risk-adjusted pricing gets optimized with the technology tools. The point I am trying to make is that your yield plus fees today is around 16.3% on a reported basis. Probably your yield on the microfinance business would, let's say, be higher than this. So, if that part of the segment comes down, then probably that has some impact on the margins. I think that's what I was coming to.
Okay. So you are talking about the yields going down because of the overall change in mix, right?
That's right.
For the change in mix, that would come true if the highest yielding, which happened actually last two years when the microfinance book, we had slowed down on growth. We actually grew only by 5% when the whole market de-grew. That was the time when our yields had come under pressure. That was also because the higher yielding products like micro LAP, which is growing, personal loan, which is growing, as well as gold loans, and SME. These are the four businesses which are growth businesses for us. As we transition, the biggest challenge comes if I continue to grow my mortgages, the existing mortgage book, which is the lowest yielding. If I keep accelerating that growth, then I have a challenge.
Over there also, we have introduced the economical housing product, which actually gives me much higher yields compared to the normal HL LAP book, which we have currently. Yes, we have to ensure that as we start growing the book and move towards a 20% CAGR growth up till 2031, the de-growth that will happen in microfinance will be not because we are actually slowing down, but on account of other businesses picking up. Automatically, we have already come down by a couple of percentage points from where we were earlier. And you have seen that we have been able to maintain and manage this 10%-10.5% kind of range in terms of NIMs plus fee. I am sure that we also have a few other fee-generating businesses that we have been talking around, the payment platform being set up, the cross-sell coming into play.
Over a five-year period, it is not that we will not do any change to the way we do business or the new things that we will be doing. All those will keep adding. Some of the things may go off, but some other things will come up and as per plan, we will keep working on that over the five-year period.
Got it. Thank you very much for answering the questions, Sachinn. Thank you.
Thank you.
Thanks.
Thank you. We take the next question from the line of Vikram Subramanian from Marshall Wace. Please go ahead.
Hello. Hey, thanks for taking my question and thanks for all the outlook you have given. Glad to see that we are on path to the Lakshya goals. A couple of questions. Firstly, on the cost of funds, I think in one of the earlier answers or discussion, you had mentioned that a portion of non-PSL bank borrowings is usually in the form of a line of credit, like WCDL. Generally, at what proportion of borrowing have you been maintaining this line of credit? I mean, what is the usual mix for these, and what would have been the rate at which we would have been able to raise this? And what was the lower cost borrowing we were able to raise? Just some data on that.
Vikram, maybe we can do this on a one-on-one basis because it is too granular. We can always get the data for you. The total bank borrowing, which I am referring to, is the 28% bank loan non-PSL. Part of this will be in the form of lines of credit. Part of these will be the term loans. Even the term loans which come up for maturity would be the high-cost borrowings, which would have got replaced with low cost. So if you want exact breakup of this, we can discuss one on one.
Yeah, but some of the initial headline data is available in slide 38, which is the breakup of how it has moved over quarter course.
Yeah. That he is talking to you.
Sure. Got it. We can take it up. Just another question on the non-interest income in your revenue. That seems to have slowed down a bit this quarter. Just wanted to check if there are any movements there.
Yeah. You are talking of fee and other income, right?
Yeah, fee income and other income. Yes.
Yeah. Fee and other income in quarter one, we had mentioned on the call that we had about INR 4,000 crore odd of excess liquidity kept because of the external environment getting worse. That had led to interest costs actually going up in INR crore and also those monies are part of the liquidity surplus that we kept. This liquidity surplus is invested in various instruments, which actually are the income of which is captured in the form of other income and fee and other income. That is about 20-22 basis points. That was one of the key differences on account. Usually, it is about 180-185 basis points. That has been the range for us. Major difference that you see in terms of reduction is on account of that.
On a YoY basis, if you look at, there have been the disbursements and processing fee. It depends on which particular business you are actually growing. The gold loan disbursement, we have not yet initiated the insurance on the gold loan disbursement that we make. Depending on which disbursement you are doing, the CLI income goes up or in percentage terms, it may go down.
Understood. Got it. That is clear, sir. Thank you. Thanks for taking my question.
Thank you. Ladies and gentlemen, we take that as the last question and conclude the question and answer session. I now hand the conference over to Mr. Sudipta Roy for his closing comments.
Thank you, thank you everyone for attending our investor call. I trust we have been able to address all your queries. If you have any further queries, please reach out to our investor relations team and we will be very happy to answer them. I thank you all for joining us today. Best wishes from L&T Finance to all of you and your families for the festive season ahead. Thank you so much and we would like to close the call.
Thank you. On behalf of L&T Finance Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your line.