Ladies and gentlemen, good evening and welcome to the Tata Capital Limited Q3 FY 2026 earnings conference call, hosted by IIFL Capital Services Limited. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I will now hand the conference over to Mr. Viral Shah from IIFL Capital Services Limited. Thank you and over to you.
Thank you, Swapnali. Good evening, everyone. This is Viral Shah from IIFL Capital. Welcome to the 3Q FY 2026 earnings conference call of Tata Capital Limited. On behalf of IIFL Capital, I would like to thank the management team of Tata Capital for giving us this opportunity to host the call. From the management team today, we have Mr. Rajiv Sabharwal, Managing Director and CEO. Mr. Rakesh Bhatia, Chief Financial Officer. Mr. Sandeep Tripathi, Head of Strategy and Investor Relations. And other senior members of the management team. We will have opening comments from the management team, post which we will open the floor for Q&A. With that, I would like to transfer the call to Rajiv for his opening remarks. Over to you, sir.
Thank you so much, Viral. Good evening, everyone, and thank you for joining us for our Quarter 3 FY 2026 earnings call. This is our first call in the new year, so wishing all of you and your family a very happy and a prosperous 2026. This is also our second call post listing, and we appreciate your continued trust and support. Our financial results and investor presentation are now available on the NSE and BSE websites. I'm joined today by Tata Capital's senior management team with me. I will begin with a brief macroeconomic overview, followed by a discussion on our performance for the quarter, after which we'll be open for questions. India remains one of the fastest-growing major economies despite global volatility from both trade policy and tariff uncertainties.
Against this backdrop, GDP growth of 8.2% in quarter two highlights strong domestic demand and resilient fundamentals, creating opportunities for well-capitalized players. In December 2025, RBI reduced the policy rate by further 25 basis points to 5.25%, marking a cumulative 100 basis points reduction in this fiscal year. This calibrated easing was underpinned by sustained moderation in inflation and reflects RBI's assessment of a durable disinflationary trend while maintaining a strong focus on financial stability. RBI has reiterated its data-dependent and vigilant stance and continued active liquidity management to ensure orderly transmission and stable funding conditions. Credit growth has been on a slightly increasing trend during quarter three, led by the retail and the MSME segments, with improved asset quality and resilient profitability across the system. RBI also mandated weekly collection and maintenance of credit information, which will enhance borrower feasibility and speed up underwriting.
I personally believe this is a very significant step and will hold us very well in the long run on credit quality. At the same time, the rollout of new labor code aims to simplify compliance and promote formalization despite some near-term cost impact. Overall, business sentiment remains constructive, supported by improving consumption, steady industrial activity, and a gradual revival in rural demand. Retail loan growth is expected to remain steady, driven by the auto segment, while housing finance will continue to be a key contributor with some moderation due to high base. Looking forward, we remain cautiously optimistic that a consumption-supportive and a tax relief-oriented Union Budget would further bolster discretionary spending, particularly in the retail segment, supporting sustained credit growth. Against this environment, I'm pleased to share our quarter three performance, marked by robust AUM growth and stable asset quality, operating metrics also being better across key segments.
I'll highlight the quarter's key numbers from the investor presentation and cover financial performance on both a consolidated basis and excluding Motor Finance, which is the business of Tata Motor Finance, which we merged into Tata Capital. Performance snapshot, please refer to slide 3. Looking at the quarter gone by, excluding Motor Finance business, our AUM stood at INR 2.34 lakh crores, reflecting a 26% Y-on-Y growth and a 9% sequential growth. Profit after tax for quarter three was INR 1,285 crores, up 39% Y-on-Y and 14% quarter-on-quarter. Adjusting for the non-recurring item related to labor code, profit after tax grew 36% Y-on-Y to INR 1,258 crores. Credit cost for the quarter was 1% as compared to 1.1% in quarter two of FY 2026. Net NPA remained stable at 0.6%. Return on assets improved 30 basis points Y-on-Y to 2.3%.
Including the Motor Finance business, our AUM stood at INR 2.61 lakh crores, with 7% sequential growth. Credit cost for the quarter, including Motor Finance, was 1.2%, a 10 basis points reduction from quarter two of FY 2026. Profit after tax for the quarter, including Motor Finance, was INR 1,257 crores, up 15% sequentially. Excluding the labor code adjustment, profit after tax stood at INR 1,290 crores, reflecting 18% growth. Return on assets improved 20 basis points to 2.1% from 1.9% in quarter two of FY 2026. I will now take you through our performance across five key themes, highlighting progress against our guidance and providing deeper insights into the business. This will be followed by a brief overview of our technology and digital initiatives. I will then share updates on our housing finance subsidiary and Motor Finance business.
Let's first talk about book growth. Kindly refer to slides 4, 5, 14, and 15. I'm pleased to report that we recorded our highest-ever quarterly AUM growth of INR 16,800 crores, driven by festive demand and benefits of GST reduction. Our diversified portfolio enabled timely opportunities, efficient disbursements, and balanced growth. Excluding the Motor Finance business, our AUM grew by 26% Y-on-Y, with housing finance recording a 30% growth. On a sequential basis, the AUM grew by 9%. Disbursement growth was broad-based across all segments, including unsecured retail. Overall, retail and SME loans continue to account for 87% of our total AUM. While our focus remains on granular high-quality growth, the modest increase in corporate loans in quarter three FY 2026 reflects a few strategic opportunities we were able to capitalize on during the quarter.
Retail momentum strengthened meaningfully in quarter, and we remain confident of sustained growth in the coming quarters. If you recall, during our quarter two call, we had highlighted that the asset quality challenges in unsecured retail were behind us, and we expected growth to return in this segment. Within retail, unsecured loans saw a healthy broad-based recovery, with both portfolio growth and disbursements reaching a four-quarter high. We have added a slide on unsecured retail. Please refer to slide 16, highlighting the scale-up in unsecured retail disbursables and improvement in slippages. The slide has been included in our investor presentation for additional clarity. We may keep adding such additional information in our future presentations. We basically wanted to highlight how the disbursements have started to scale up over the last few quarters. Also, we had mentioned that once the disbursements scale up, the AUM growth will follow soon after.
I'm pleased to report that quarter three disbursements were 30% higher on Y-on-Y basis and 13% over quarter two. With unsecured retail exposure currently at 10.4% of AUM, it leaves us with ample runway to achieve our stated vision of increasing it to 15% of the AUM. Including the Motor Finance business, our AUM increased 7% sequentially. The Motor Finance AUM stood at INR 26,584 crores, reflecting a 6% sequential decline. I will provide an update on the transformation in the upcoming section. Given the strong traction seen in Q3 in book growth and remaining conscious about the prepayment pressure, we are on track to meet our FY 2026 guidance of 18% to 20% AUM growth. As of December, we had a robust network of 1,505 branches across 27 states and union territories.
Combined with our comprehensive digital capabilities, this enables us to effectively serve a growing customer base of 8.1 million. The second theme I want to cover is on asset quality. Kindly refer to slides 4, 22, and 23. Excluding the Motor Finance business, Stage 3 assets stood at 1.6%, net Stage 3 at 0.6%, and provision coverage ratio at 64.5%, broadly in line with quarter two levels. Credit costs declined to 1% for the quarter, reflecting a 10 basis points improvement over quarter two. We witnessed lower slippages during quarter 3, including in the unsecured retail segment, and this improvement is expected to translate into a better Stage 3 metrics over the coming quarters. The marginal uptick in Stage 3 within the unsecured retail is expected to normalize as disbursement momentum has returned and portfolio growth resumes.
Including the Motor Finance business, Stage 3 assets were at 2.2%, net Stage 3 at 1%, and provision coverage ratio at 53.6%, again largely unchanged from quarter two. Credit costs improved by 10 basis points to 1.2% during the quarter. Slippages have moderated here as well, and the increase in Stage 3 is primarily attributable to the ongoing degrowth in the Motor Finance book rather than any incremental stress. Overall, asset quality remains robust, coverage levels are strong, and credit costs continue to trend downwards, underscoring the resilience of our portfolio and keeping us well on track to meet our FY 2026 guidance on credit costs. The third theme I want to touch upon is cost of funds. Kindly refer to slide 34.
Our funding profile is well-diversified and competitively priced, providing a strong foundation for growth. We maintain an optimal borrowing mix through a disciplined ALM framework, effectively managing liquidity and refinancing risks. Supported by our strong credit ratings, we have access to a broad and diversified lender base across banks, capital markets, and institutional investors, both in India and overseas, enabling us to secure funding at competitive terms. The benefits of the policy rate easing are flowing through steadily, and cost of funds are declining each quarter since the start of this financial year. For quarter three, overall cost of funds stood at 7.2%, down 14 basis points from quarter two. The next theme I want to cover is margins.
We continue to operate in a stable NIM plus other revenue corridor, with NIM for quarter three at 6.6%, up 14 basis points versus Q2, including a 17 basis points contribution attributable to the proceeds from the IPO. During the quarter, while we benefited from lower cost of funds, a significant portion of the easing was passed on to customers, keeping margins at stable levels. Looking ahead, we see potential for margin expansion over the medium term, supported by further optimization of our product mix, with a rising contribution from higher yield segments such as unsecured retail, affordable housing, and secured business loans, as well as growth in fee-based businesses and continued benefits of lower funding costs.
On operating leverage, our continued investments in technology, data infrastructure, and branch expansion over the past three years are steadily enhancing operating leverage. We are beginning to see tangible efficiency gains in both productivity and turnaround times across our businesses. In quarter three, our cost-to-income stood at 38.4%, improving by approximately 129 basis points versus the last quarter, excluding the one-time impact of INR 44 crores related to the recently announced new labor codes. The profit after tax impact of this new labor codes is INR 33 crores.
For FY 2026, we remain confident of closing the year with a cost-to-income ratio in the range of 38%-39%, as we had communicated earlier. Talking about the balance sheet, please refer to slide 35 and 57. Our balance sheet remains well-capitalized and highly liquid. As of December, total assets stood at INR 271,936 crores, with a net worth of INR 43,153 crores. Capital adequacy remains robust at 20.3%, comfortably above regulatory requirements, supported by a healthy common equity Tier 1 ratio. We have continued to de-risk the balance sheet, with debt-to-equity ratio declining from 6.1% in September to 5.1% in December 2025, positioning us well to fund growth while maintaining prudent leverage. In addition, we maintain a strong liquidity buffer of approximately INR 35,000 crores, comprising cash and cash equivalents, mutual funds, LCR investments, and undrawn bank lines.
Together, these factors reflect a strong, liquid, and well-capitalized balance sheet, providing ample flexibility to pursue growth opportunities while supporting business resilience. A quick summary of our technology and digital efforts. Please refer to slides 42 to 46. At Tata Capital, our digital DNA is integral to how we serve customers and build a scalable, future-ready franchise. We are a digital-first NBFC with technology embedded at the core of decision-making, operations, and execution. With the customer at the center, technology now spans the full lending life cycle. 97% of customers are digitally onboarded. 97% of our disbursements are digitally decided. 98% of our customer queries are resolved digitally, and 99% of our collections flow through digital channels, demonstrating sustained value creation at scale. Over the last few quarters, we have moved decisively from AI pilots to enterprise-wide deployment across marketing, sales, credit, operations, service, and collections, delivering measurable business volumes.
Our voice-based Agentic AI platforms deployed across sales, customer service, and collections have matured and are driving cost efficiencies through higher agent productivity, automation, and intelligent call handling. We were early investors in GenAI-driven underwriting ahead of the broader industry adoption. Today, AI underwriting co-pilots and AI-generated credit memos are used across business segments, improving credit manager productivity while enhancing speed, consistency, and risk governance. In parallel, AI-led automation in operations has enabled us to process significantly higher volumes with lower manpower intensity, reinforcing operating leverage. The transformation is anchored in a robust AI and data architecture, strong in-house engineering and data science capabilities, and a selective ecosystem of strategic technology partners. Together, these capabilities are enabling us to build a scalable AI-enabled operating model that supports disciplined growth, cost efficiency, and resilient risk management. A little more on our housing business. Kindly refer to slide 26-28.
We had another strong quarter for our key subsidiary, Tata Capital Housing Finance Limited, with AUM growing 30% year-on-year and profit after tax increasing 25% year-on-year. This is excluding the one-time impact of the labor code. Total AUM stood at INR 81,585 crores. We continue to prioritize affordable home loans and loans against property disbursals, which support better margins and portfolio diversification. Tata Capital Housing Finance Limited also continues to make meaningful progress on cost efficiency, with cost-to-income improving by 114 basis points from 32.9% in quarter two of FY 2026 to 31.8% in quarter three of FY 2026. On the asset quality front, Tata Capital Housing Finance Limited remains best in class with credit costs of 0.1% and net NPA of 0.4% in quarter three.
These metrics, combined with disciplined operations, have positioned Tata Capital Housing Finance Limited as one of the top-performing HFCs in the country, delivering a stable ROA of 2.4% across all quarters of FY 2026. We remain optimistic about sustaining this strong performance as we continue to execute our growth and margin strategies in the housing finance business. Talking now a little more about the Motor Finance business, please refer to slide 30-32. Our primary focus in the Motor Finance business is on reorienting the portfolio rather than pursuing near-term growth. The integration is progressing as planned across all key dimensions. In quarter three, AUM declined by 6%, reflecting this deliberate repositioning. Importantly, our disbursements increased by 17% in quarter three over quarter two, and we are confident that disbursement momentum will build sequentially from here as the business stabilizes and transformation gains traction.
The commercial vehicle market showed strong growth driven by GST reforms, logistics expansion, infrastructure activity, and rural recovery, creating favorable conditions for CV sales. While benefiting from these trends, we are transitioning from a captive model and reshaping the CV finance mix to align with the evolving ecosystem and improve risk-adjusted returns. We are making strong progress on Motor Finance transformation. Our non-Tata OEM share in the new commercial vehicle disbursements rose to 19%, reflecting early success in our multi-OEM strategy. We have realigned the product mix by increasing used commercial vehicles and LCVs while reducing heavy commercial vehicle exposure. The credit costs have declined with fewer slippages, supported by tighter risk controls. Operating efficiency is improving through branch rationalization, manpower redeployment, and IT integration.
The business is now aligned to Tata Capital's operating model with dedicated sales, credit, and collection verticals, and enhanced underwriting standards and collection practices, reinforcing portfolio resilience. We are not chasing near-term AUM growth but are instead focused on strengthening the fundamentals of underwriting and process discipline. With these actions in place, we expect growth to resume from the first half of financial year 2027. Motor finance business is a seasonal business, typically experiencing lower delinquencies and stronger book growth in quarter three and quarter four. Our performance reflects this strength, with credit costs declining and business achieving break-even in Q3. This was an important thing for us. Our business and Motor Finance business broke even in quarter three. We will continue to monitor performance over the next year to assess steady-state outcomes.
With this backdrop, we expect a progressive improvement in ROA during FY 2027, and we remain on track to achieve our targeted ROA by FY 2028. FY 2026 guidance, please refer to slide 39. Our focus remains on quality-led growth, prudent capital deployment, and sustained improvement in returns, while staying true to our purpose of enabling inclusive and sustainable financial solutions. On a consolidated basis, we delivered 18% AUM growth and a 1.9% ROA for nine-month FY 2026. Strong quarter three results and a positive quarter four outlook reinforce our confidence in meeting FY 2026 guidance across all key metrics. In the end, to conclude, quarter three reflects disciplined execution and continued strengthening of Tata Capital's fundamentals. We are encouraged by the moderating credit costs, resilience in retail and housing portfolios, and early signs of stabilization in Motor Finance. We expect this momentum to gather further steam in quarter four.
Thank you to all our investors, analysts, lenders, partners, and all our teams for their trust and commitment. With that, we'll be happy to take your questions.
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants, you are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Raghav from Ambit Capital. Please go ahead.
Hey, hi. Thanks for the opportunity and congrats on your result. I have two questions. One, I see that there is an increase in the home loan Stage 3. I just wanted to understand which segment is this coming from? Is this the affordable piece or the prime home loans? That's the first question, and I have another question.
Yeah, why don't you go ahead, Raghav? What was your question?
In the Motor Finance business, I see that you have about 5,300 employees. I just wanted a function-wise breakup of these employees, like how many are in sales, how many are in credit and collections, and so on. Those are the only two questions that I have.
Yeah, so on the home loan, Raghav, there has been a very marginal increase of around 2, 3 basis points. So on the rounding of it, shows an increase. We have not seen any stress in the home loan portfolio. Slippages also have been very minimal and well-controlled. The housing book is very robust in this quality, and you can see from all asset quality metrics. It's just a very marginal 2, 3 basis points increase on the rounding of which has taken to 0.8%.
Yeah, so actually, because of rounding off to one decimal point, it is showing 10 basis points. 10 basis points, but it is significantly lower than that.
The other question was on the breakup of the employees in the Motor Finance business, 5,300 across credit, collections, and sales.
Yeah, we'll give you the breakup just a minute. So if I look at as of December, we have approximately let us.
There are around 5,276 people in the Motor Finance vertical, out of which I think around 95% are in sales and collections and 3%-4% in credit and rest in operations.
Yeah, that's right.
So you're saying 95% are in sales and collections, is it?
Yeah, about 84%. Just a minute.
I'm adding operations.
So approximately 83%-84% are in sales and collection. And if I count operations and credit, that will take up another 11%.
Operations is roughly 11%. So together, sales, collections, and operations would constitute roughly 95%. That's what I mentioned.
Yeah.
Understood. That's all from my side. This is useful. Thank you.
Thank you. The next question is from the line of Avinash Singh from Emkay Global Financial Services Limited. Please go ahead.
Yeah, hi. Thanks for the opportunity. Couple of questions. The first one on credit cost guidance, I mean, hitting below 1%. So now, I mean, if we were to look maybe, let's say, one, two years from here onwards, your credit cost in motor vehicle finance, that I mean, currently 10%-odd of your book may remain so, will of course improve a lot. But then we will have with a bit of, I would say, seasoning or reversal in home finance book, whatsoever, low number. But of course, there will be some bit of a pickup from where it was last year or even from here. Then from where other, I mean, which other segment you see kind of a turnaround that will take credit cost eventually at aggregate level from like 1.3%? That's already a very respectable level to be honest, to under 1%. So that's one.
One, I mean, which segments, particularly when you are growing at the pace you are guiding, say, at 20%, 30%, 25% kind of a rate, which segments can see improvement in credit cost from here onwards? So that's question number one. And on motor vehicle finance side, now, of course, the break-even has happened, and most likely the growth should start to come back. Structurally, that piece, I mean, you are also going away from being captive. Will that book, I mean, match your overall guided growth of 23%-25%, say, in FY 2028, if not 2027? Thanks.
So two things. If you look at the credit cost in quarter three for us, it's about 1.2%. When we look ahead, our stated objective is to be at around 1% on our credit cost. The reduction from here will come from two areas, one on Motor Finance and the other on retail. And retail, more it is on the unsecured side, which we are already seeing a decline. As we mentioned, quarter two was lower than quarter one. Quarter three is lower than quarter two. And we've given some sense of guidance in quarter four also on an overall basis. So the reduction will come from both Motor Finance and retail unsecured.
As far as the book is concerned of Motor Finance, yes, Motor Finance, we have started to see traction in that business buildup on the new credit standards which we have set for ourselves. December disbursement was good, and we expect Q4 should also be picking up. As mentioned, quarter three disbursements were 17% higher than quarter two disbursements, and quarter four, hopefully, will be better. As far as the composition of the book is concerned, this book, when we took over the business and merged it, was about 12%. It was contributing 12% to the total book on an AUM basis, which has now come down to about 9.5%. We believe that this book of Motor Finance will grow, but not grow at the same pace as the rest of the Tata Capital book.
So in terms of proportion, it may come down because we've stated that over the next couple of years, till March 2028, between 2025 to 2028, we have said that we will grow at about 23%-25%. We are sticking to that guidance. And since Motor Finance will grow at a slightly lower pace than that, that proportion may come down to about 7%-8%.
Yeah, so quickly on this Motor Finance piece, I mean, just like now you're also going into open market incrementally. So how is your sense? I mean, there have been a kind of, I would say, a mixed data point and talk around the long-awaited CV/MHCV cycle recovery, where some comment is suggesting that, okay, after many years of muted, there is a growth bouncing back for many reasons. So how do you see overall sort of that segment growth? Are you experiencing growth returning, or is it still sort of a bit mixed?
No, no, clearly we are seeing growth returning. The GST cut was a significant cut, brought down vehicle prices in a big way. And that has also brought in viability for a lot of vehicles. We are seeing good demand on both medium, small, as well as on the heavy side. The demand has improved. In fact, if you look at the used, that was a little muted in this quarter because when the GST cuts happened, while it could immediately reflect in terms of a lower price for new vehicles, for used, there was some uncertainty because those prices logically should have gone down, but people were holding on, not sure what change will come to those prices.
So for a month or two, there was some subdued business on that side, but it has now started to pick up again. And we saw this momentum building up in December, and we are seeing the same momentum continuing in January. So I would say growth was good, coming back on new vehicles, used a little muted, but now is picking up.
Got it. Thank you.
Thank you. Thank you. The next question is from the line of Nischint Chawathe from Kotak Bank. Please go ahead.
Yeah, hi. This is Nischint from Kotak Securities. Congrats on a good set of numbers. I actually have two or three questions. One is on loan against property. What's giving you confidence for such high growth in this business? I have one or two more questions I'll follow up.
No, this business, we have seen this business for a very long period of time. Within Tata Capital, we have seen this business for now about 14, 15 years. And the team which manages this business has over 22 years of experience. I have seen this business for about 25 years or so. As long as you've got your valuations right and you have funded it based on the cash flows which the borrower has and not relied only on property as security, this portfolio has continued to deliver. And we are seeing the same trend here. We are not seeing any increase in delinquencies or any challenges on bounce rates happening in this business. So that is what is giving us confidence. Basically, we've got vintage data on ourselves, plus the people who have seen this business for a much longer period of time.
We have got dedicated credit team for this business, and that is what gives us confidence.
Is it something that you are gaining market share? Maybe some other players or banks are slowing down, or is it something that the market itself is growing at 35%-40%?
I think very tough to get market numbers on this, but when we talk to leading players in this industry, everybody is showing a strong growth in this business.
Sure. Similar on.
Nischint, what also happened now? When some bit of people went conservative on the unsecured side, a lot of business did move to the secured side. So maybe that is also helping. And these loans are largely taken by self-employed people, people in the MSME or the SME segment who are basically using this collateral to draw money at a more competitive price than an unsecured loan. And I would believe that whenever there is tightening on the unsecured side, you will see a slightly better growth rate happening on this side.
Is it similar for SME loans as well, which is, I think, classified separately for you, where you, I think, almost grew INR 10,000 crores in the last two quarters?
The SME business always has been strong in Q3 and Q4. I think this year it got a major boost in Q3 post the GST cuts. Our supply chain business is also a part of SME business, and it has seen a huge spurt during this period. In fact, quarter two became muted because though GST cuts were announced, but they were announced from a later date. So in fact, quarter two became more muted. So quarter three over quarter two looks even more stronger because Q2 was muted and Q3 was very good.
Got it. And just finally, there is a, I think, as you mentioned in your remarks, there is a spurt in corporate loan book. So is it something that these are kind of episodic facilities? These are any specific loans, and does it have any implication on the margins?
No, actually, what we try to do in every business is to ensure that we don't chase growth for the sake of margins. You would have seen this for us over the quarters. While we do pass on the benefits of what we see coming to us in terms of lower cost of funds, we have certain minimum spread targets for each business and average targets for each business, which we ensure are met. So it is not at the expense of margins, but we felt that there were opportunities.
And some of these opportunities were also arising because of some spurt in demand happening on account of GST cuts. So I would say we felt there was an opportunity for us, and we did take that opportunity. This is something which Nischint, we've always said that our approach is to be well-diversified. We want to be, and we are strong players in each segment. We don't consider any business to be the most important and others around it to serve that, to be, I would say, the next-in-line businesses. Each business for us is very important. We have business leaders in each business who've seen multiple business cycles and are well-entrenched in the market. And in each segment, we want to be best in class. That is what we aim for.
Got it. Got it. This is very helpful. Thank you very much and all the best.
Thank you so much.
Thank you. The next question is from the line of Sucrit Patil from Eyesight Fintrade Private Limited. Please go ahead.
Good evening to the team. I have two questions. My first question to Mr. Rajiv is, as Tata Capital builds on this momentum, how do you see the company balancing expansion with asset quality? Over the next two years, what opportunities do you see mostly in terms of digital transformation, customer experience, and financial inclusion? How will Tata Capital differentiate itself against the peers in the NBFC space? That's my first question. I'll ask my second question after this. Thank you.
So as we've always stated, Sucrit, that for us, risk comes first, and that's embedded clearly in every business leader's mind, as well as how he knows he or she will be evaluated. We will never chase volume at the cost of asset quality, and this will be our strategy going forward too. If we find in any segment there is a challenge, we will pull back, set things right, rather than chase growth. We will not try to use denominator as a means to lower ratio. That is not what we do. In terms of digital transformation, I think digital is key to what we've been doing. In the past few years, we have digitized all asset journeys for ourselves. We've embedded digital in every, actually, functions within the organization.
Going forward, I think the bigger benefit to us will come from this early adoption of AI and GenAI, which we have done. We have spoken about our projects which we have implemented in these areas. The good part is the ones which have gone into production are showing us good signs in terms of the benefits which they can create, and equally importantly, we've identified new areas in which we want to invest in this area, and we are working on the same, which hopefully should see the light of the day during the following financial year.
Thank you. My second question is to Mr. Bhatia. With profitability improving and investment in technology underway, how are you planning to build on this success while keeping the margins healthy? As new products and platforms scale up, what steps are you taking to ensure financial strength and efficiency so that the growth remains sustainable and profits remain on a higher end? Thanks.
Yeah, so thanks. I'll take that. So I mean, you have seen, I mean, just as a backdrop, we had made deep investments in expansion of our branches and digital assets three years back, and we have seen the benefits of that coming into our operating leverage. If you see, cost-to-income ratio across businesses has been coming down Y-on-Y sequentially also. And we have stated guidance of 23%-34% cost-to-income ratio, bypassing 28% is very much on the radar across all expense lines and business lines. As we expand our products and as we do digital journeys, we have a very robust mechanism of making sure that we budget for IT costs and differentiate between run the business and change the business spends.
And we also look at optimizing each spend in terms of whether it brings in customer efficiency, operational efficiencies, and also helps us to reduce TAT as far as customer deliveries are concerned. So with that, I think we kind of look at each business and each trade very carefully and make sure that each spend which we do on the IT and digital is returning something either on the customer delight side or reducing the operating leverage.
Thanks for the guidance, and I wish the entire team best of luck for the next quarter.
Thank you. The next question is from the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.
Yeah. Good evening, everyone, and thank you for taking my questions. Rajiv sir, first thing, just trying to understand, third quarter, obviously, there have been some tailwinds from the GST rate cut. I'm sure the festive season had its role to play. So are there any segments in vehicle financing where you have seen things tapering off in the months of December and January, and likewise on the consumer durable side, while we saw good spurt immediately after the GST cut? How have things trended in the months of December and January?
So GST benefits were a big plus in Q3, and that momentum in certain areas is continuing, while there is some moderation in the other areas. Consumer durables is not a segment which we are present in or have any significant presence, so I won't talk much about it, except for the fact that we still see continued demand from the supply chain side. We are there in financing the supply chain of consumer durables, and that seems robust for us.
But individual products, I won't have as much clue to talk to you about. As far as the vehicles are concerned, we are seeing strong demand continuing in PV. We are seeing strong demand continuing in commercial vehicles. We have seen some amount of moderation in two-wheelers, which is happening in terms of sales. In tractors, we don't have any significant presence. So I do believe that two-wheelers, PV, as well as CV, will continue to be strong in Q4.
Got it. So the second question I had was around asset quality, and basically, two subparts to this question.
Mr. Abhijit, you are not audible.
Am I audible now?
Yes. Please proceed.
Yeah. So I was trying to understand the strength in asset quality that we are typically used to seeing in 3Q, and particularly the second half of the fiscal year, somehow seems to be absent in this third quarter. So what is your view on that? I mean, asset quality, obviously, holding stable the headline Stage 3 numbers. But other than that, do you think that things are improving on the macro front, which would help in asset quality improvement, not just in Q4, which is a seasonally strong quarter, but even when we move into the next fiscal year?
In fact, Abhijit, we have seen a very strong quarter in terms of asset quality. And kindly look at asset quality from a few data points and all of them. For example, gross NPA is just one indicator, which is a function of assets which have moved to Stage 3 . You should also look at how the proportion of assets is in Stage 1, Stage 2, and Stage 3. If you look at it, you will notice that the proportion of assets in Stage 1 have grown, and within that, we have seen a much better growth on ones which are at zero DPD, so consequently, it is leading to lower credit costs.
On a consolidated basis, in one quarter, our credit costs are down by about 10 basis points. In fact, excluding Motor Finance, they're down by about 20 basis points, so there's been a significant reduction there. The other thing which we are also seeing, the missed payment rates have also improved in quarter three over quarter two, so collection efficiencies are also showing a better trend. If you notice in our presentation on slide 16, we have also shown the slippages in the unsecured business, and they also show a significant improving trend. We've given the numbers there. So I would say we definitely have seen on asset quality, quarter three being very good.
So basically, that confidence of accelerating unsecured retail is pretty much there, right? I mean, basically, like you mentioned on your slide number 16, right?
Yes.
There's a down of SPL, [audio distortion] NPA. So the trend of acceleration in unsecured retail should continue.
Yeah. See, Abhijit, the other point we have stated also there, besides slippages, we have also stated on that slide the trend on disbursements. If you notice, the trend on disbursements has improved. There is a lag always between seeing that impact on AUM. So that impact on AUM will become visible in the next few quarters a s the AUM grows, because disbursements precede AUM growth, and you will see AUM growth happening in the subsequent quarters. As and when that happens, you will see the gross NPA ratio also dropping.
Sorry to interrupt in between. Abhijit, your voice is not audible.
Is it better now?
Yes.
Yeah. The only last question I have was, [audio distortion] as we discussed a while back, why is such strong growth that we are seeing in the rest of the industry? The only thing which kind of I wanted to understand here is that, I mean, you remember just a quarter or two quarters back, we were talking about some stress in unsecured business loans. And then at that same point, we heard that a lot of unsecured business loans are now getting converted into lap loans now, which is obviously good, a win-win for everyone, for the lender as well as for the customer, because the longer-term product, the more [audio distortion]. So I mean, what are your thoughts on this part? I mean, do you think this could really be the case, or do you think this is just organic demand coming in this LAP product?
I actually am not able to get your final question. Sorry.
Is the line still on?
Your voice is somehow breaking off in between.
Oh, it's still breaking off. Maybe I can take it offline there.
Okay. Okay.
Thank you so much.
Thank you.
Thank you. The next question is from the line of Himanshu Taluja from Aditya Birla Sun Life Asset Management Company Limited. Please go ahead.
Thank you, sir. Thanks for the opportunity and congrats on the quarter. Just one question at my end. If I can just help you understand, how has the margin profile of the Tata Housing business, given I could not see the margins, but when I look at when the AUM growth is around 30%, your total net income growth is around 29%, can you just help me how has been the margin profile and how are you not seeing any competitive pressures, given you also have a prime book, both prime housing and the prime LAP, where one is rate transition is also there, and second, competitive intensity also remains high? And so overall, how one should expect these trends over the coming quarter? Yeah, that's it from my end. Thanks.
So you're absolutely right. There is competitive intensity in this business, and more so, it is there in the prime business. What we have seen over the last two quarters, let's say Q2, Q3, our margins have been stable at similar levels. So we did get some benefits of a lower cost of funds, but they have actually got translated into them being passed on to the set of borrowers. So to that extent, we have seen stable margins in this business. Competitive intensity remains high, but equally important is the fact that the market continues to grow, and there are opportunities to lend. We are investing a lot more in the affordable market and also looking at expanding our distribution in those markets. So to that extent, we believe even if there is competitive intensity, we should be able to retain or improve margins.
Okay. So one should expect your stable margins even in the coming quarters as well from this portfolio of housing.
Yes, that's right. As Rajiv alluded , the growth is not just in prime, but also we are focusing on the affordable as well as micro housing. And all our branch expansions in the last one year have been in the affordable and the micro housing space. So along with prime, we are looking at near prime, affordable, as well as micro housing to see that our margins are protected.
This was Sarosh, who's the MD of the Housing Finance .
Yeah. Sure. Just one small, if I can just ask one more question. On the personal and the business loan, which is put together close to 9%-10% of the book, how you are seeing the incremental business momentum? Sorry, I joined this call late. If you have already answered, so if you can just highlight brief how you are seeing the incremental trend from a momentum perspective, both in personal loan and business loans, and how is the asset quality things are also panning out in these segments? So thanks.
So Himanshu, if you would just also look at the slide 16 of our presentation, we have stated here the momentum which we have seen on disbursements. As you would remember, we had gone conservative in this business last year, where we had slowed down and made our policies tighter, more so in personal loan as well as microfinance business, because that's where we faced more stress. However, as we had mentioned before, we started seeing things improving from Q2. So Q2 was better than Q1. Q3 was better than Q2.
Plus, all early indicators of the new business booked over the last 15 months were showing better metrics, which gave us the confidence to, again, invest in distribution and grow our business. And that's the trend which is visible on slide 16 on all our unsecured businesses. Parallelly, we also have seen slippages go down. That data also we have stated on that slide. So we are clearly seeing improving trends on quality as far as slippages are concerned or bounce rates are concerned, and we have been able to build momentum for growth.
Sure. Thank you. Thank you. Thanks a lot.
Thank you.
Thank you. The next question is from the line of Shubhranshu Mishra from PhillipCapital. Please go ahead.
Hi. Good evening. Three questions. The first one is, what are the EMI rates in personal loans and business loans? Second.
What rate?
First, EMI bounce rates. The second is on the housing piece. What is the LTV and the folio on prime, near prime, and affordable? And the third is when we talk about the transformation in Tata Motors, sorry, the Motor Finance, my bad. The used vehicle presently that we have is of Tata Motors vintage. And when we're talking about new OEMs, non-Tata OEMs, this would be in commercial vehicles as well as passenger vehicles. That's a little hazy if you can speak about the Motor Finance transition in these two aspects. It will be really great. Thanks.
So when we talk about Motor Finance, we are referring only to the commercial vehicle business. And when we say that non-Tata proportion for quarter three for new commercial vehicles is about 19%, it is all about commercial vehicles and not PVs. On the other point on Motor Finance was.
The used vehicles in that is.
Used vehicles, yeah. So used vehicles as a proportion on Tata Motors was about 30% their used proportion on their book. And we've tried to increase that proportion on incremental sourcing, and we were close to about 45%-47% in quarter two. In quarter three, as I stated earlier, there is some moderation on that because we have seen a better demand in new vehicles consequent to the GST reduction and some amount of going down in demand in used in October, November, which is again picked up in December. And so going forward, we have stated that we will increase the proportion of used commercial vehicle in our total disbursements. As far as your question on FEMI is concerned, we have not stated FEMI numbers for product-wise, but I can only tell you this that FEMI numbers have been coming down over the last, I would say, 14, 15 months.
We have seen a gradual reduction happening because we had tightened our credit policies and increased the number of checks, which have helped us in getting the credit quality better, which is now showing in terms of lower slippages. If you would also notice on slide number 24, we have also stated collection efficiencies for different products. And if you would notice, collection efficiencies for personal loans have also been inching up as well as for business loans. So all that has been positive for us. So both personal loans and business loans, we're clearly seeing the bounce rates on FEMI continue to come down. I would request my colleague, Sarosh, to talk a little bit about LTVs, which you asked for.
So LTV depends on what is the quality of the sorry, what is the size of the loan. But on an average, the LTV is below 60% on most of our loans. In the prime segment, it is slightly higher, but in the affordable segment, as well as in our home loans, our average LTV is 62%. And as well as home equity, it is around average LTV is around 45%. So that's for the housing finance business.
Affordable housing is how much you said? 60%?
Affordable is much lower. Affordable housing is lower. Here we have a classification for home loans as well as home equity. But when home loans is 62%, the affordable will be much lesser than 62%.
Just one follow-up question on used vehicles. That is presently also a Tata Motors OEM used vehicles?
No, no. No, no. Actually, even when Tata Motor Finance was doing used commercial vehicles, they were agnostic to the brand. So. Okay.
So used vehicles are agnostic to OEMs?
Correct. Correct. Correct. Right. Right. Right.
And FEMI is now in single digits? And the FEMI is in single digits?
FEMI? No, we have not stated FEMI numbers for.
Don't give the number. Just say if it is in single digit or a double digit. That's all.
I will have to get back to you. I don't have it ready in front of me, but I will try to get back to you.
Right. Right. Right. No worries. Thank you so much. Best of luck for ensuing quarters. Thanks.
Yeah. Yeah. Just as we spoke about our affordable business, the LTV is 57%.
Right. Thank you so much. This was really helpful.
Ladies and gentlemen, that will be the last question for today. I would now like to hand the conference over to Mr. Viral Shah for the closing comments.
Hello. Thank you, Rajiv, Rakesh, Sandeep, and the Tata Capital team. Rajiv, do you want to make any closing comments?
No, thank you so much. I've covered most of the things. I'll just like to say that we have started to see good momentum all across in all segments, and we expect it to continue in quarter four. In fact, as we are planning for the next year, we do believe the momentum will continue. As far as credit costs are concerned, we are coming close to what our guidance is. And in terms of what guidance we had given for FY 2028, I think we should be able to reach there much before than what we had stated. We are seeing the benefits on operating efficiency play out, and as more of our AI and GenAI projects come into play, I think the benefits will become even more stronger. So we remain bullish as we move forward, and we would be performing as per what the guidance has stated.
Thank you very much. On behalf of Tata Capital Limited, that concludes this conference. Thank you for joining with us today, and you may now disconnect your line.