Ladies and gentlemen, good day and welcome to the Tata Capital 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 conference call, please signal an operator by pressing star then zero on your touchtone phone. I now hand the conference over to Mr. Rajiv Sabharwal, Managing Director and CEO of Tata Capital. Thank you, and over to you, sir.
Thank you very much. Good evening, everyone, and thank you for joining us today. Let me begin with a brief overview of the macroeconomic environment and its implication for the financial services sector. The Indian economy continues to demonstrate resilience, supported by domestic demand and investment. GDP grew by 7.8% in FY 2026 and sustained the same pace in Q1 FY 2027, reflecting strong economic momentum. While external uncertainties remain, the underlying growth outlook continues to be constructive. However, a subpar monsoon and El Niño are affecting food prices, while prolonged tensions in West Asia continue to exert pressure on fuel prices. Headline inflation has subsequently firmed up to 5.54% in September. We are monitoring these developments closely, particularly their implications for consumption and the interest rate environment.
Credit momentum remained healthy through the second quarter, with bank lending growing by over 19% in September and NBFC lending by about 16% in August. Activity remained broad based, aided by sizable FCNR(B) inflows and strengthened banks' deposit base. Growth in bank credit was also partly supported by funding substitution, as elevated bond yields prompted corporates and NBFCs to increasingly turn to bank borrowings. Overall, underlying demand across the lending channels remains healthy. In October, the MPC raised the repo rate by 25 basis points to 5.50% and shifted its stance from neutral to calibrated tightening amid rising inflationary pressures from food and energy prices. Given the evolving inflation outlook, we anticipate about two further rate hikes in this financial year. Liquidity conditions remained comfortable in surplus during the quarter, averaging nearly INR 5 lakh crores, supported by robust foreign currency inflows.
More recently, RBI has been calibrating liquidity conditions through the open market sales and daily CRR maintenance requirements, resulting in surplus liquidity moderating to a level below INR 1 lakh now. Consequently, we expect marginal funding costs to rise progressively and overall funding conditions to become less accommodative over the following months. Looking ahead, the RBI's upward revision of its FY 2027 growth forecast to 7.1% signals continued economic momentum, although the pace is expected to moderate from the first quarter. While geopolitical tensions in West Asia pose risks to inflation and currency stability and an uneven monsoon could exert pressure on food prices and rural demand, industrial activity and festive season demand are expected to provide support and partly offset these headwinds. In this environment, disciplined underwriting, prudent pricing, sustained asset quality and capital efficient growth will remain key priorities for lenders.
Now let me turn to the key highlights for the quarter. Performance snapshot. Quarter 2 FY 2027 saw broad-based growth, stable asset quality and improved operating efficiency, reflecting disciplined execution across businesses. as of September 26, consolidated AUM crossed the INR 3 lakh crore milestone and stood at INR 3 lakh 8,030 crores, up 26% year-on-year and 6% sequentially. Excluding the motor finance business, our AUM grew by 32% year-on-year and 7% sequentially. Consolidated profit after tax for the quarter stood at INR 1,660 crores, registering a growth of 51% year-on-year and 7% sequentially. Return on assets stood at 2.3%, which excluding motor finance was 2.5%. Our ROE stood at 14%. as far as housing finance business is concerned, Tata Capital Housing Finance continued its strong performance trajectory during quarter 2 FY 2027.
AUM reached INR 95,098 crores, growing by 26% year-on-year and 6% sequentially. The portfolio remains well diversified across home loans against property, construction finance and affordable housing. The affordable and micro-housing portfolio within Tata Capital Housing Finance grew at 22% year-on-year and 5% sequentially. as we continue to deepen our presence in under-penetrated markets, we expect affordable housing to progressively become a larger contributor to our overall growth. During the quarter, Tata Capital Housing Finance Limited reported a profit after tax of INR 552 crores. ROA stood at 2.5% and ROE at 18%. Let me take you through our performance across our four key themes and updates on our digital and AI initiatives. Book growth. I'm pleased to share that Q2 saw sustained disbursement momentum across all our businesses. Consolidated disbursements increased by 29% year-on-year to INR 51,665 crores, supported by healthy growth across businesses.
Our consolidated AUM grew by 26% year-on-year and 6% sequentially. Excluding motor finance, AUM grew by 32% year-on-year and 7% sequentially. Within this, our housing finance segment continued its strong momentum, delivering a 26% year-on-year AUM growth. Retail and SME portfolio account for 85.4% of our AUM, remains the cornerstone of our strategy, driving sustainable growth, greater resilience, and superior risk-adjusted returns. Our high-margin businesses continue to show robust growth. Disbursements across these businesses grew by 40% year-on-year, while AUM growth increased to 14%, up from 10% in Q1, while maintaining healthy yields. With disbursements continuing to outpace AUM growth, we expect these businesses to contribute increasingly to margins and ROA. Distribution and customer reach.
During the quarter, we continued to grow our branch network with net addition of 24 branches and expanding our footprint to approximately 1,515 branches across 1,094 locations in 26 states and union territories. The additions were primarily focused on scaling our growth businesses with affordable housing and micro-housing expanding into 23 new locations during the quarter. We will continue to deepen our presence across these businesses by expanding into newer geographies. Our digital distribution model enables us to expand efficiently across existing and under-penetrated markets while leveraging our customer base of over 9.2 million to deepen customer relationships and unlock cross-sell opportunities. Overall, our growth remains healthy and diversified, supported by strong focus on portfolio quality. Our continued investments in distribution, technology, data, and product capabilities strengthen our ability to navigate business cycles and withstand external shocks. The second theme I would like to cover is asset quality.
Credit costs declined 17% year-on-year, driven by improvement in the retail portfolio. The annualized consolidated credit costs for quarter 2 FY 2027 stood at 0.9% compared to 1% in quarter 1 FY 2027. Gross Stage 3 assets remained stable at 1.9% as of September 2026, while the provision coverage ratio improved to 59%. Slippages remained benign across the portfolio. This performance reflects the strength of our portfolio, disciplined underwriting, and robust collections infrastructure. Our portfolio remains diversified and granular across secured and unsecured retail, housing, SME, corporate, and motor finance segments. We continue to closely monitor evolving macroeconomic conditions and business trends. Based on current indicators, we remain confident in our risk-calibrated approach and the underlying resilience of our asset quality. The third theme I would like to touch upon is our funding, capital, and liquidity. Our AAA credit rating continues to underpin a well-diversified and stable funding profile.
Through a disciplined ALM framework, we continue to optimize our borrowing mix while proactively managing liquidity and interest rate risk. Our cost of funds increased marginally from 7.28% in quarter 1 FY 2027 to 7.33% in quarter 2 FY 2027. Total borrowings stood at approximately INR 2.61 lakh crores as of September 2026. The borrowing mix remained well-diversified, with bank loans accounting for approximately 39%, NCDs 35%, ECBs and MTNs 12%, and commercial paper and WCDL at 9%, and NHB borrowings another 3%. NIM declined marginally, primarily due to a modest increase in cost of funds and a slight moderation in yields at mortgage business. Our asset liability mix provides us flexibility to manage interest rate movements with 48% of our liabilities on floating rates and 66% of our loan portfolio on floating rates, enabling us to reprice our floating assets in response to benchmark rate increases.
In response to the repo rate hike and the evolving interest rate environment, our ALCO has approved a 20 to 25 basis points increase in PLRs across products in the floating rate portfolio. This is expected to help sustain NIM plus fee in quarter 3 and support an improving NIM plus fee trajectory from quarter 4 onwards. Our strong capital position, diversified liability franchise, and prudent liquidity management provide us with sufficient headroom to pursue growth opportunities while absorbing potential market volatility without compromising on financial discipline. As of September 2026, consolidated equity stood at INR 47,778 crores and debt to equity at 5.5x. Tata Capital standalone capital adequacy stood at 17.3%, with CET1 at 14.7%, comfortably above regulatory requirements. We continue to maintain prudent liquidity position with total available liquidity of approximately INR 36,400 crores. Our fourth theme is operating leverage.
Our cost-to-income ratio improved by 438 basis points year-on-year to 35.3% in quarter 2 FY 2027, while cost to average assets remained well contained at 2.3%. As of September 2026, our on-roll employee strength stood at 31,655 with over 80% deployed in frontline sales and collection. Against year-on-year AUM growth of 26%, our headcount increased by just 6%, reflecting sustained gains in employee productivity and operating leverage across the organization. Our investments over the past few years in technology, data infrastructure, artificial intelligence and distribution are increasingly translating into structural improvements in productivity, operating efficiency and scalability. Looking ahead, we remain on track to deliver our medium-term guidance, with operating leverage expected to be an important lever of further improvement in ROA.
At Tata Capital, talking about our AI initiatives, technology is deeply embedded in our operating models and AI has become a key pillar of our digital first strategy. We are building an AI first NBFC, leveraging AI across lending value chain to enhance customer experience, improve productivity, strengthen risk management, and create a scalable operating model for future growth. The focus is no longer on isolated use cases, but on enterprise-wide AI-led transformation. Our strong digital DNA is reflected in the scale of adoption across the customer life cycle. Today, 99% of our customers are onboarded through digital channels. 98% of retail disbursements are enabled through scorecard and business rule engine-based decisioning. 99% of collections are through digital channels and 98% of our customer queries are digitally addressable. We have also built a network of over 180 digital partnerships, significantly enhancing customer reach and accessibility.
AI is now embedded across customer acquisition, underwriting, operations, servicing and collections. In customer engagement, AI-generated content powers the majority of marketing creatives and campaign communications. AI-led onboarding initiatives have enabled over 30 lakh customer interactions. In underwriting, our AI-powered credit intelligence and decisioning engines have processed over 7.8 crore documents and have achieved over 95% adoption across personal loans and business loans underwriting, resulting in meaningful improvements in productivity and turnaround times. Across operations, AI-led workflows now process approximately 70% of retail applications, driving productivity gains, faster turnaround times and lower operating costs. In servicing, AI-powered voice and email platforms are enabling automated customer interactions, same-day query resolution and significantly lower cost to serve. AI is also strengthening portfolio monitoring and collections through automated risk surveillance, stock audit monitoring and AI-assisted customer engagement, contributing to stronger collection effectiveness and operating leverage.
Importantly, we continue to invest in the foundations of an AI-led organization through enterprise AI platforms, robust governance and workforce enablement. Together, these initiatives are helping us deliver faster turnaround times, higher productivity, better customer experience, lower cost to serve and stronger risk monitoring. Alongside these transformation initiatives, we remain equally focused on navigating the evolving regulatory landscape. On the regulatory front, we continue to engage proactively with evolving regulators across key areas. On the revolving credit, the SRO FIDC has submitted its recommendations to the RBI. We await the final guidelines and hope they will adequately address practical customer requirements. In parallel, we are also evaluating alternate product structures to mitigate any potential impact. On insurance, the draft proposals are under discussion and we have submitted our feedback to the regulator both directly and through the industry forum.
While the proposed changes could have implications for the industry, it is premature to quantify the impact until the final regulations are issued. Insurance remains an important risk cover for our customers and an integral part of our underwriting framework. We therefore continue to see a strong underlying need for these products and will assess the implications more clearly once the final guidelines are available. To conclude, quarter 2 FY 2027 was another quarter of healthy, diversified growth underpinned by strong disbursement momentum, resilient asset quality and disciplined execution. We remain focused on building a larger, stronger and more resilient franchise through prudent risk management, customer-centric innovation and consistent execution. We are on track to deliver on our guidance across all parameters and remain confident in our ability to sustain growth and create enduring value for all our stakeholders. Thank you for your continued trust and support.
We will now 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 please press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets and also to limit their question to two per participant. Ladies and gentlemen, we will wait for a moment while the question queue assembles. First question is from the line of Shreya Shivani from Nomura. Please go ahead.
Yeah. Thank you for the opportunity and congratulations on a good quarter. My first question is on your FY 2028 guidance. You have spoken about how you are expecting two more rate hikes, and we are in a rising rate environment. Any thoughts on or any revision that you would like to make on the ROA, ROE guidance that you have given us for FY 2028, given that in a rising rate environment, we can never be sure if you will be able to grow your new portfolio in the deeper geographies by hiking lending rates? That is my first question. My second question is on the rural exposure.
While we know that MFI is about 0.9% of your mix, is there any other segment product via which you are exposed to the rural or to the agri markets or if you can give us any details of how much exposure do you have in the states which are hit by drought, Maharashtra, Telangana, Andhra Pradesh, Gujarat, Rajasthan. That is my second question. My last question is on the Tier 1. We are under 15% now, so any commentary around that would be helpful. Thank you.
Thanks, Shreya. First of all, talking about the guidance. We had given a detailed guidance on growth, cost to income, credit costs, as well as PAT growth and ROA and ROE. We are fairly confident of meeting each of these requirements. In fact, some of them we have already met. We see no challenges on meeting all of them. I do not think so we have any doubt on the same. We do not want to revise anything. We will look at the end of the year if we want to revise on the upward side, but we are not looking at revising anything below. As far as the rural portfolio is concerned, our presence in rural is only through the microfinance business. If we look at the microfinance business, it forms less than 1% of our book.
In fact, we are seeing an improving trend on portfolio quality, in microfinance, as well as, on the growth side in microfinance business. So that is positive for us. We do not have any presence in tractor or farm loans, so that does not impact us. In fact, we have also looked at our portfolio in Maharashtra. That portfolio is, we hardly have any presence, even in microfinance in Maharashtra. So we are not concerned on any impact of drought or any other thing as far as rural portfolio is concerned. On the capital, based on the current growth plans, we expect to raise capital sometime towards the second half of FY 2028. We will keep evaluating our capital position as the business grows, and we will take a call at an appropriate time. But that is the plan as of now.
Right. Thank you. And sir, just one follow-up on the PLR increase of 20 to 25 basis points that you have received your board approval on. Is that from today, or did you already do it from 1st of October?
PLR, that decision is taken by the ALCO, and ALCO took a decision of increasing it by 25 basis points. That is what the Tata Capital ALCO decided. Tata Capital Housing Finance decided to increase it by 20 basis points. Both the increases would be effective from 1st of November.
All right. Okay. That is useful. Thank you so much, and all the best.
Thank you so much, Shreya Shivani.
Thank you. Ladies and gentlemen, we would request you to please limit your question to two per participant. The next question is from the line of Avinash Singh from Emkay Global Financial Services. Please go ahead.
Yeah. Hi, good evening. Thanks for the opportunity. Just two questions. One, of course, I am cognizant of the fact that your motor finance book is still shrinking. But if we see over the last few quarters, the GNPA or GS3 trend was on a declining even on a percentage basis. But there has been a kind of a material jump in this quarter. So what is happening there, and now when do you expect this motor vehicle book to start growing? That is one. Second, with the kind of, for the remainder of FY 2027 and FY 2028, the rate environment that you kind of alluded or guided. Also, you will have your product mix changes taking place. Also, you will have some kind of impact, like your mortgage business, where the large bank will still continue to compete in the prime segment.
So on the NIM, how do you see the NIM trajectory going forward in the H2 of FY 2027 and 2028? Thanks.
Thanks, Avinash, for those questions. Let me answer the motor finance first, and then we will talk about the NIM. As far as motor finance business is concerned, as we had mentioned in the calls before in the previous quarter also, that we are proceeding very well on all parameters except growth. So in terms of the credit cost slippages, they have all been coming down. If you look at our move towards non-Tata vehicles also for diversifying the portfolio, that is also proceeding very well. The cost to income is also coming down. However, the portfolio growth was lagging by about 2 to 3 quarters compared to what we had thought. And this is the same situation as of now. If you look at the portfolio rundown, it is coming down with every quarter.
The rundown in Q2 is lower than Q1, and Q1 was lower than the Q4 of last year. We expect the portfolio to stabilize in Q3 and start growing from Q4. That is the plan as far as motor finance is concerned. The growth in NPA, if you look at our overall NPAs, we have been stable at 1.9% compared to last quarter and same time last year, we have come down. But if you look at motor finance, that has gone up. It looks as increasing for two reasons. One, because the book is following, the denominator is coming down, and second is the fact that it is seasonal also. If you notice from our numbers also in the past, Q2 is the quarter which has the highest growth in NPAs and which moderates down in Q3 and then further in Q4.
The same trend we are seeing in this year also, that it is more seasonal in nature. If you look at the absolute slippages and all, they are significantly lower in Q2 compared to Q2 of last year. We are quite positive on the fact that we are on the right track, except portfolio growth, where we are lagging behind by 2 to 3 quarters. As far as NIM is concerned, I want to tell you a little bit about how our liabilities are constructed and then come to the NIM. If you look at our liabilities, 48% of our liabilities are floating-rate liabilities. On the asset side, 66% of our assets are floating. Structurally, we are very well-positioned in a rising rate environment. What the ALCO decided, as I mentioned before, is to increase the interest rate for our floating-rate liabilities.
As far as NIM is concerned, we have seen a drop in Q2 compared to Q1 by about 10 basis points. This is primarily coming in because of two reasons. About 5 bps happening because of increase in cost of funds, which is also in our investor presentation. And another 5 bps impact is happening more because of competitive intensity in the prime home loans business. As far as our Q3 assessment is concerned, we expect the NIM plus fee in Q3 not to have any further drag. In fact, we expect it to be stable or marginally getting better, but more towards being stable. And based on all the measures which we have taken, our Q4 NIM plus fee should show an improving trend.
We are quite positive on Q4, and this is what we had mentioned before, that Q2 will see some moderation, Q3 will see stability or marginal improvement, and Q4, a distinct improvement as far as NIM plus fee is concerned. It is coming on account of other things also. Our high-margin business has shown a growth of 40% on disbursements and 14% on AUM growth. And this AUM growth of 14%, we expect it to increase with every quarter. And by Q4, it should be mirroring our overall portfolio growth and should start getting better from the next financial year.
Thank you. Thank you a lot for the
Thank you. The next question is from the line of Anuj Singla from JP Morgan. Please go ahead.
Yeah. Good evening, Rajiv and team. Thank you very much for the opportunity, and congratulations on a good set of numbers. Two questions. The first on the growth side. I think outstanding performance. If I look at the sequential basis, a lot of that has come from SME. I see maybe there is a component of channel financing there as well in the run-up to the festive. Can you just give us some flavor of where are you growing in the SME segment? I think it contributed 45% of the incremental growth in this quarter. If there is a significant portion of channel financing in that. That is the first question, please.
Thanks, Anuj. As far as growth is concerned, it is well-diversified. But you are right that SME has shown a better growth. The big areas for growth there are two, actually. One is on the supply chain side, where we have seen good demand emerging. We had also looked at, in the past, of increasing our number of locations where we offer our SME products. That has helped us to get new clients and increase our term loans also towards this segment. I would say the growth is from both term loans and supply chain, but supply chain obviously has had a better quarter significantly compared to other products.
Also, Rajiv, the follow-up to that is this will also turn into retail assets next quarter. Basically this will decline and retail asset goes up. Should we expect that the growth number which you have shown and it should moderate to your guidance number, which is 25%? Is that the way we should expect the trajectory to be?
Actually, if you look at our supply chain, our supply chain has got extremely diversified over the last four years or so. From a stage four years back where auto used to constitute about two-thirds of our supply chain, it is now down to about 40% or less than 40%, 35% I am told. It is down to about 35%. To that extent, it is well-diversified. Even if there is a challenge on any particular sector, we do not expect the overall supply chain business to suffer. That was more from a diversification point. As far as what will convert into retail, yes, as far as on the vehicle side, it will help us to convert. But our retail story is not guided by this alone.
Our retail story continues to be guided by the same factors of expanding geographically, bringing down our turnaround times, and being fairly competitive as far as product structuring is concerned. We in fact expect retail momentum growth to further pick up in Q3 and then further even more pick up in Q4. So we are clearly on a trend where the retail business will pick up more. Same is true for our housing business in retail. We've expanded in Q2, but our Q3 and Q4 expansion of number of locations is even stronger as per our plan compared to Q2, and that should help us as far as affordable as well as both micro-housing is concerned.
Got it. The second question is on-
Sorry to interrupt you, Mr. Singla.
Yeah.
Okay. Please go ahead with the second question.
Yeah. The second question is on asset quality. I think we draw a lot of confidence from your statement on the slippages across the portfolio. Can you explain the logic or the thought behind increasing the PCR? I see a significant jump in personal and business loan, and I think there is a bit of that in the other retail loans. What is the thought process around that? Thank you, ma'am.
Yeah. This is Rakesh. I will take the question. PCR is on stage 3 assets, and it often depends on the mix or the aging of the assets which have kind of moved into stage 3. So we apply the ECL rate and the staggered provisioning over and above when the asset moves into stage 3. That gives you the PCR. So it is more of the aging of the assets within the stage 3, which kind of derives the PCR percentage.
Got it. Thank you.
Thank you. Next question is from the line of Nischint Chawathe from Kotak. Please go ahead.
Yeah. Hi. Two questions. One is, I think there is a small item of around INR 186 odd crores, de-recognition of associates. Maybe if you could explain that. The second one is that have you done any tightening of screens in the last couple of weeks, given the tough situation in India?
Let me take the second one, and then I'll request Rakesh to cover your first point, Nischint. As far as tightening is concerned, we monitor our portfolios at a pretty short frequency, looking at the trends and looking at what we need to do. We've been obviously watching out for the impact of the war. While fuel prices have not increased, obviously there are many products which are supported by crude prices, and there has been a cost increase there. In certain SME segments, both unsecured, which is our business loans, and the secured, which comes under SME, we have tightened our screens in lending to these SME sectors, which are part of our secured and unsecured business loans. I'll let Rakesh answer the question on the-
Yeah. So Nischint, your question on the de-recognition of INR 186 crores. As you're aware, we have priority sector business with Tata Capital, and we hold investments on our balance sheet. During the quarter, one of the funds made an exit of one of the portfolio companies which was classified as associate. That's why you have a separate line coming in the LODR, which had a gain of INR 186 crores. But if I take out the amount which pertains to the other LPs, only INR 27 crores of it flows into the PAT of Tata Capital.
Got it. Thank you very much, and all the best.
Thank you so much, Nischint.
Thank you. The next question is from the line of Raghav Garg from Ambit Capital. Please go ahead.
Hi. Thanks for the opportunity and good evening. I just have one question. I am looking at some of these data points for the motor finance business, like increased dealership presence, completion of IT integration, rollout of the CV products and more TCL branches. Then on the other hand, you have the oil price risk and the risks from a deficit monsoon, which could impact utilization. In this backdrop, for FY 2028 maybe, how do you ensure that the CV finance portfolio continues to scale up without throwing up asset quality issues?
CV industry is cyclical, and we need to monitor the impact of fuel prices on the same. As far as we are concerned, we are on a different stage as far as our business is concerned. As Raghav we had mentioned before, we are clearly looking at how we can improve our ROA through a mix of yield, cost efficiency, and credit costs for us. We remain on track for that. In terms of our approach towards this business, we are conscious on growing it in a moderated manner. As I mentioned before, we expect to bring down the degrowth in this book in quarter 3 and then start growing it. We have tightened or made our collections stronger. In fact, all collections in CV business is managed in-house, which allows us to be more, I would say, proactive as far as collections are concerned.
We've also, in this quarter, created a macro provision of about 30 crores in CV business, and we will monitor how it goes ahead in the future. That is what our approach is as of now. We will be calibrated in our approach, working on improving efficiency. The whole idea behind going to more dealers is this that we can then be more selective in choosing which proposals which we do. Similarly, our investment in creating an integrated tech model allows us to be more efficient and on our turnaround time. All of this is something which is important, and it all flows from the fact that we are chasing improvement in profitability rather than volumes at this point of time.
In fact, proportion of that book used to be 14% in our total book in March 2025, which is now down to about 7.5%.
Understood. Just one more question. Basis your disclosures on the motors, finance NPAs and the book, it seems that the problematic portion is somewhere around INR 2,000 crores-INR 2,100 crores. Have you possibly thought that you can probably offload this portion to maybe ARC and then channel all your energy and efforts on growing the book without actually putting in a lot of efforts for collection because that is something that the ARC can do?
No, we've not looked at that. Our philosophy in all businesses has been that we know our business well, whether it is credit or whether it is collections. I would be surprised if any other ARC would be more efficient on collections than us. We probably have a very good collections team, which is helping us as far as our approach is concerned. Our general philosophy also on collection has been to keep increasing our collections done by our own team, and within our own team to be done more digitally. That's been our approach, and we would like to stick to that approach. We've not looked at the options. But since you've suggested, we will again reevaluate and see what we need to do.
Can I ask one more question, please? Just related to this.
Sure.
So this INR 2,000 crore of GNPA that you have with the motor finance book would mostly be coming from, say, the book before March 2025, most of it. Is that the correct understanding? And hence would mostly be comprised of, say, the Tata vehicles?
You are right. Majority of it does come from a portfolio of before March 2025.
Right. Then, maybe when I deduct the disbursements of last four, five quarters from the current book, maybe that's how one should look at the GNPA on the older book, just to sort of see how the older NPA book is moving.
While what you are saying appears right, but we will be happy to engage with you separately and go through these numbers.
Understood. Sure. Thanks a lot for answering my question. Thank you.
Thank you so much, Raghav.
Thank you. The next question is from the line of Kunal Shah from Citigroup. Please go ahead.
Yeah. Hi, thanks for taking the questions. A couple of questions. Firstly, in terms of the yield optimization, which we have been talking about, be it in terms of optimizing it within various segments as well, plus our high-yielding segment is still growing as a proportion of AUM. What is actually not reflecting in terms of the yield increase and what will change getting into second half X of maybe the PLR increase, which you have done. But if we broadly have to look at it in terms of the yield optimization across the AUM, what will work over the next 18 months, which has not actually worked this quarter?
So a few things. One, I think whenever interest rates are dropping, what happens is the pressure for BT and the pressure to reprice is much more. This changes when interest rates are stable or they start rising. We saw some impact of this in Q2 over Q1 in more price-sensitive products. So one, I think an increasing interest rate environment will reduce the pressures on balance transfers and repricing. That is one which will help us. Second is, you are right, that our increasing proportion of high-margin business will also be supportive. As we had mentioned that our growth in high-margin businesses on AUM is about 14%, though the disbursement growth is 40%. We expect this 14% to almost mimic our overall portfolio growth by quarter 4 and exceed that from the next financial year.
We have also looked at, as we had mentioned before, our other products which do not figure in this high-margin list. Because the list which we have given you is for high-margin retail products. There is separately high-margin corporate products, which is all fine. But there are others beyond these high-margin retail and corporate products, where also we have looked at how we can increase our yields. So each of the business leaders have put in a plan in place which is already in motion from Q2 onwards, which will start showing more in terms of output from end of Q3 or from Q4. That is how we look at it. So that will help us. That is the way we are looking at things. See, I think I mentioned it before, that our floating rate assets are much larger than floating rate liabilities.
Yeah.
That also will be supportive for us in the future if interest rates increase.
And this reset happens immediately? This 25 basis points and 20 basis points, is it like the very next month, or how is the reset period?
For us, this will happen for almost all the portfolio from 1st November. It is the date we decide to change the rates from.
Okay, got it. A few more questions. On fee income side in Tata Capital Housing, what is leading to almost 30% quarter-on-quarter, year-on-year growth? Is it the sell downs or something which is there, which is leading to a much higher fee income? When you look at it, is there any extraordinary out there? Maybe in terms of the rundown on the Tata Motors, we are still confident that maybe it will stabilize in Q3 and it will be positive in Q4. But when we look at in terms of the rundown, it is almost similar to that of Q2 level. Were you expecting a similar repayment run rate in Q2, or it is slightly maybe this instead of like 940 should have got towards 500, 600 odd crores and then stabilized in third quarter? Yeah.
So actually in Q2, as we had mentioned before, when this whole war happened, we had become a little conservative and we felt that the government will pass on the fuel price impacts. We had gone a little conservative. But post that, when we realized this is not happening, we tried to pick up on our disbursements. Looking at now the month-on-month trend, we believe that Q3 should be flat for us and growth should be back from Q4. That is our reading of the situation, and that is how we have invested in different markets and different dealerships at this point of time. As far as the housing finance is concerned, I request Rakesh to comment on that.
Yes, Kunal, you are right. If you look at the total fee income, it has increased by 30% year-on-year, and sequentially it has also gone up. But if you dissect the fee income, the DA income has increased by 50% on a year-on-year basis. That is what is contributing on the assignment which we do to make-
Which income, sorry?
The assignment income.
Basically, as far as non-assignment income is concerned, it has remained at the same level as it was-
40%
Yeah, in Q1 as a percentage. It has remained at similar level. The increase has been contributed by assignment.
Assignment. Okay, got it. Perfect. Thanks.
All right.
That answers the question.
Thank you. Next question is from the line of Mr. Viral Shah from IIFL Capital. Please go ahead.
Yeah, hi. Thanks and congrats on good set of numbers. Rajiv, I have two questions. First thing is on the NIMs front, and probably I'm weaving in couple of points over here. You mentioned with regards to clearly also the pricing pressure on the HFC part, and when we dissect the NIM also between the two, standalone and HFC, that is pretty much visible. How confident are you this 25, sorry, the 20 basis point PLR increase that you have taken will kind of sustain, especially in the context of competitive pressures? This other, I would say, sub-part to this question is we have taken this increase on PLR from 1st of November. It should basically have two months of impact in this quarter. Then should we not expect, say, greater support to NIMs and probably even say slightly expanding NIMs, not just NIMs plus fees in third quarter?
The third sub-part to this NIM is when I look at, say, you're talking about total cumulatively 75 basis points of rate hike. This 20 and 25 basis points of PLR increase that you have taken, this is just for the current 25 basis points or in anticipation of something more? What could be the trajectory or the cumulative quantum in the event of a 75 basis point rate hike? The second question that I have, Rajiv, is right now we are at 26% growth, including the rundown still of the TMFL book. OpEx is already at 2.2% of AUM. Credit cost is less than 1% in the first half itself. You mentioned that there can be some risk on the upside to FY 2028 guidance as well. Do you anticipate, say, being able to reach FY 2028 guidance itself in the first half of FY 2028?
Viral, thanks first of all. I'll comment on few items and I'll request my colleague Sarosh to add more. As far as PLR hike is concerned, it's effective from 1st November and in this PLR hike, this is only because of the impact of the repo rate increase of 25 basis points, which became effective from October. So that's the only thing. If in future there are more hikes which happen, we will evaluate based on the mix of our assets and liabilities. We will evaluate the impact and then pass on the increase. That's what we have done in the past and that's what we will do in the future. Since our floating rate overall, on an overall basis, floating rate assets are higher than floating rate liabilities. So to that extent, we are structurally well-positioned in an increasing interest rate environment.
As far as the 20 basis points increase in housing is concerned, the team has looked at all segments so that it can pass on the same to the incremental customers also, not only to our existing customers. We do believe by trying to understand what other people are doing in the market, that everybody needs higher interest rates in home loans. The competition had led to a situation where interest rates were dropping, but everybody is conscious. At least all leading players, as we understand, are conscious of the fact that they need to increase rates and because of cost they need to maintain their margins. We do expect that will happen and from our perspective, we want to make it happen.
The other thing which we are doing is increasing our proportion of affordable and micro-housing as well as LAP so that we do not have a negative drag is concerned. As far as negative drag is concerned. The other thing which is helping us also is the fact that our costs are moving at a much slower pace than our income and we expect the same trend to continue in the future. As far as the year is concerned, we expect if incomes will grow at about 25%, we expect costs to grow at about 15%. That should help us. But I will request Sarosh to add.
Yeah. Thanks, Rajiv. Viral, this is Sarosh here. So in our housing portfolio, 95% of our assets are floating and roughly 40% of our liabilities will get repriced because of the rate increase. So this will give us an advantage as we go forward that on practically the entire portfolio this 20 basis points would give a lift. Secondly, we have pivoted towards a segment which is near prime, which is between our prime and the affordable. So our near prime as well as affordable growth in our AUM will be faster in the second and the third and the fourth quarter, which will also help to keep the NIMs going either flat or slightly better as we go ahead.
Right. Rajiv, just incremental question on that front. Since the second quarter, of course, the market rates had been pricing in or are already pricing in a lot more rate hikes and given that 48% of our liabilities are floating, I would believe that some part of that would be not just repo but also T-bills. Again, just specifically focusing on, say, third quarter onwards, do you see a similar kind of an uptick on cost of funds or the lead lag effect between cost of funds and yields?
Lead lag meaning? I could fully fathom. From our perspective, what we want to do is try to time it even better from the time when the increase happens and when we pass on the impact. In fact, the regulator, if you look at their draft guidelines, are also wanting the transmission to happen faster both ways, whether increasing or decreasing. Our endeavor through our PLR would also be the same. I couldn't understand beyond that what exactly, Viral, you want to know.
I'll probably take it offline, Rajiv, if that's okay.
Okay. No problem.
Thanks.
Thank you. Next question is from the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.
Yeah. Good evening, everyone. Thank you for taking my question. Raju, sir, the first question I had was around these flexi loans. So what proportion of your book is flexi in nature? I think I heard you during your opening remarks, based on the representations that you have done to the regulator, do you think that the regulator might allow NBFCs to continue offering flexi loan products, perhaps with little higher cut rates? Also, during your opening remarks, I think you alluded to an alternate product which can offset if flexi loans dispersed by NBFCs are banned by the regulator. So what is the difference in profitability between the flexi loan product and this new alternative product that you are working on?
So, let me answer to the best of my ability. First of all, I have no ability to predict upon what the regulator will finally do. We've been trying to convey our viewpoint to them, and they've been very receptive in terms of listening to what the industry has to say. My view is they will also take a balanced call, hopefully, which reflects their regulatory needs as well as what is good for the borrowers. Because I would say 90% of what we do here goes to SME customers and more so MSME customers. To that extent, this is what they will look at.
When we had evaluated our portfolio and looked at what is being called flexi and what proportion of that we will be able to convert into our modified product without having a revolver capability, we felt that more than half of that we can do here. We have already been testing some of the alternate products which we have created in the market, and the balance we will start testing in the beginning of November. As far as the interest rate are concerned, obviously, flexi used to come at a higher rate than the normal term loans, but our modified products are almost at a similar price like the flexi loans.
First of all, I do not believe that the guidelines will be similar to as was in the draft, and we expect the regulator to take into account all feedback and then make a decision, but finally it is their call of what they wish to do. But from our side, we want to be prepared for everything so that the impact is minimized, and that will be our effort to ensure that the impact of the same is minimized. But I can comment more on this once the guidelines are known.
Got it, sir. What proportion of our loans are flexi in nature now?
So, as far as flexi loans are concerned, they will form about, it will be a very small portion, about 2% of our book.
Got it. The last question that I had was-
2%. Between 2.5, I would say, to be honest here.
Okay. Got it. And sir, the last question that I had was, you have had a lot of discussions on margins already where you have said the PLR increases that you have taken in the standalone as well as the housing entities. I am just trying to understand when you said that NIM plus fee would not have further dragged margins plus fee plus remain stable 3Q and then show an improving trend in 4Q. I am just trying to understand what is the sensitivity of our NIM to the speed of increase in repo rates. Because 25 basis points increase in repo has already prompted us to think about margin expansion. If the repo rates are higher by, let us say, 100, 125 basis points to be made, how we can benefit our margins? So just some sensitivity there.
From that perspective, we do believe that if there is an increase in repo rate because of the composition of our assets and liabilities, it should be, I would say, accretive or balanced, I would say. So I would say normal to positive. That is the way I would put it.
Got it. And then lastly-
Sorry to interrupt, Abhijit Tibrewal. May we request you to please rejoin the queue. We have participants waiting for the turn.
Sure.
Thank you. Next question is from the line of Anand Dama from Nuvama Wealth. Please go ahead.
Yes. Sir, thank you for the opportunity and congratulations on a great set of results. Sir, you have now clocked almost about 26% AUM growth in this quarter, and your guidance was somewhere about 23%-25%. Is it more of an opportunistic growth that you had in the second quarter, and you would go back to 24%-25% kind of run rate and try and manage the margins than change the growth? If your comments on that could be helpful.
I do not think that there was any opportunistic one-off or something which happened. However, we are very conscious of the fact that we want margins to improve, and we have looked at certain deals which we have passed because they did not meet our margin requirement. We would want to be on the guidance which we have given of 23% to 25%. While we will focus definitely on growth, but we do not want growth at the expense of margins.
And sir, have you called out what will be the impact of the insurance commission capping, which will come, and any mitigating factors that you have internally, which basically you can use? Because there are companies like Piramal who has called out 20 to 24 basis point impact in terms of ROE. Any number that you can put out?
See, we've not put out any number because we honestly don't know what the final guidelines will be and when they will be effective from. Once we have that, we will look at things. Parallelly, we've been thinking through of what we can do in terms of which insurance products which we can sell, whether the retail product makes more sense than a group product. So we've looked at those options. We've also looked at how we can improve our NIM-plus fee on our normal business, which does not come with insurance. Also, if we do not sell insurance, it will also bring down our operating costs, which will also be beneficial. So it will be through a combination of all of these things and some more which may emerge, which we are at an early stage of working out.
Our effort will be to minimize the impact in all situations. However, I should admit that insurance is an important product. We do believe it is extremely useful for the borrower, and we have seen this in many instances in our portfolio. So we would honestly want to be in a situation where the regulator comes out with a commission which more than covers the cost and gives us margins also, because this is a product which is good for customers. So we are engaging with them on the same. Parallelly, we are working on what we can do to minimize the impact. But I will be able to give you a better answer once we come to know of the final guidelines, because there are other things also which are work in progress at our end.
Sure, sir. That's helpful. Thank you.
Thank you. Next question is from the line of Jay Betai from NBIE. Please go ahead.
Hello, sir. Good evening, and thanks for the opportunity, and congratulations on good set of numbers. Sir, my question is more pertaining towards CRAR. CRAR has fallen by an average of around 100 basis points per quarter since IPO. Even at a 50 basis points per quarter, it would be near around 15% minimum by second half of 2028. When do we plan our capital raise?
We keep on looking at capital adequacy very closely, including Tier 1 capital, and also the mix of the liabilities, whether we will raise sub-debt. If you look at the current growth trajectory, we think we will be required to raise capital by second half of FY 2028, more towards Q3, Q4.
Okay, sir. Understood. Thank you. Thank you very much, and best of luck.
Thank you so much.
Thank you. Ladies and gentlemen, we will take that as the last question for today. I now hand the conference back to management for closing comments. Over to you, sir.
Thank you very much. We are very excited about the quarter which just ended. It gave us strong growth across all segments of the business. The good part was that it was well-diversified growth for us. We have seen the benefit of operating efficiency play out for us because of the investments which we have done on the tech and the AI side. Credit cost continues to hold very well. In fact, all our early bounces tell us that there is no cause for worry. It is holding on very well for us. We have had a strong growth on profitability. All seems good. We are also excited about what is going to happen in the rest of the year. We have a plan in place to manage the same. Obviously, there are certain regulatory things which we are watching out for.
We will always be compliant with whatever regulation the regulator comes in. We are also being proactive in terms of thinking through on what we need to do so that we can manage this whole change. I would want to thank all of you for all the support and want to wish all of you and your family a very happy Diwali as we end this call. Thank you very much.
Thank you. Ladies and gentlemen, on behalf of Tata Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.