Ladies and gentlemen, good day and welcome to the Q2 and H1 FY 2027 earnings conference call of Utkarsh SFB hosted by ICICI Securities Limited. As a reminder, all participants' lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I would now hand the conference over to Mr. Renish from ICICI Securities. Thank you, and over to you, sir.
Yeah, thank you, Muskan. Thank you. Good evening, everyone, and welcome to Utkarsh Small Finance Bank Q2 FY 2027 earnings call. On behalf of ICICI Securities, I would like to thank Utkarsh SFB for giving us the opportunity to host this call. Today, we have with us the entire top management team of Utkarsh SFB represented by Mr. Govind Singh, Managing Director and CEO, Mr. Sarjukumar Simaria, Executive Director, Mr. Amit Acharya, Chief Risk Officer, Mr. Manmohan Shetty, Chief Financial Officer, Mr. Virender Sharma, Head of Micro Banking, Mr. Sourabh Ghosh, Head of Consumer Banking, and Mr. Abhay Kataria, Head of Assets. I will now hand over the call to Govind Singh for his opening remarks, and then we'll open the floor for Q&A. Over to you, sir.
Yeah, thank you very much, Renish. Thanks a lot, as always. Yes, good evening, everyone, and thank you for joining us for our quarter two FY 2027 earnings call. Let me begin by reflecting on the evolving operating environment for Utkarsh Small Finance Bank. Our business momentum is recovering, fresh stress formation has reduced substantially, collection efficiency remains strong, credit costs have moderated, and funding costs are declining, and the contribution of diversified businesses is increasing. At the same time, our operating profitability is improving every succeeding quarter. These are important developments because they demonstrate that the improvement is not dependent on any single factor, but is being supported by multiple levers moving in the right direction. Albeit our growth has been a little slow but steady, and the same is ready to pick pace now.
Our pre-provisioning operating profit increased to INR 85 crore in quarter two FY 2027 compared with an operating loss of INR 3 crore in quarter two FY 2026, registering a sequential improvement of 34% over quarter one FY 2027. For H1 FY 2027, PPoP stood at INR 149 crore. Alongside this, credit costs have reduced sharply to 2.8% in H1 FY 2027 from 9.1% in H1 FY 2026. Consequently, the bank's net loss declined by close to 80% year-over-year to INR 70 crore in quarter two FY 2027 and INR 104 crore for H1 FY 2027. While the reported loss in quarter two was higher than quarter one, the previous quarter benefited from certain one-off items like CGFMU provisional reversal and ARC transactions. Adjusting for these non-recurring items, the underlying net loss in quarter two was significantly lower sequentially.
The combination of improving operating earnings and a substantial moderation in credit costs is strengthening the underlying earnings profile of the bank.
The improvement in portfolio performance further reinforced this trend. Collection efficiency in the X bucket of JLG segment remained strong at 99.6% during the quarter compared with 98.6% in quarter two of FY 2026. The SMA pool within micro banking has contracted to 1.7% from 4.9% in September 2025. Fresh NPA slippages net of recoveries and updation declined to INR 175 crore in quarter two FY 2027 against INR 415 crore in corresponding quarter last year. For H1 FY 2027, this stood at INR 300 crore compared with INR 810 crore in H1 FY 2026. Consequently, GNPA as a percentage of gross loan portfolio improved to 5.9% as of September 2026, reflecting an improvement of almost 630 basis points year-on-year.
These developments indicate that strengthened collections infrastructure, enhanced monitoring, and more disciplined credit practices are transferring into lower incremental stress and better portfolio performance. Another important positive is the recovery in business activity.
Total disbursement during H1 FY 2027 grew by 52% year-on-year, with JLG disbursement increasing by 2% and non-JLG disbursement registering growth of 94%. This supported gross loan portfolio growth by 7.5% year-on-year and 2.3% sequentially. The improvement reflects a gradual restoration of business momentum while maintaining a calibrated approach towards customer selection and underwriting. Our focus remains on growing the portfolio through quality incremental lending rather than pursuing volumes at expense of risk-adjusted returns. On the liability side, the bank has made meaningful progress in strengthening its deposit franchise. Total deposits grew by 7% year-on-year, supported by 14% growth in CASA deposits and 12% growth in retail term deposits. The CASA plus retail term deposit ratio improved to 82% from 78% a year ago, while the CASA ratio reached 21.4% as of September 2026.
This improvement in funding composition is already reflecting in our cost of funds, which declined by 50 basis points year-on-year to 7.4% in H1 FY 2027. With the benefits of deposit repricing and the improving liability mix expected to flow through progressively, we see further support to funding costs and margin and stability. Taken together, improving business and momentum, lower credit cost, and declining funding costs are providing a stronger foundation for sustained earnings improvement. Let me now touch upon the structural changes underway in our business model. Portfolio diversification continues to be our most important strategic priority. The JLG portfolio, which constituted 88% of the gross loan portfolio in March 2020, and 90% including BC JLG exposure, has now reduced to 24%, and 26% including BC JLG exposure. In contrast, secured lending has increased to 52% of the gross loan portfolio from 47% a year ago.
This transformation is reducing dependence on traditional group lending and creating a more balanced portfolio with multiple growth and earning drivers. Within micro-banking, our micro-banking business loan portfolio product continues to gain traction. The product enables us to graduate customers with demonstrated repayment discipline into individual lending relationship. Further, we have expanded the product to cater to new-to-bank customers as well. The micro-banking business loan portfolio registered growth of 146% year-on-year and 15% sequentially during quarter two FY 2027, and now represents 35% of our micro-banking portfolio. With penetration currently around 20% of our customer base, there remains considerable opportunity to scale this business further. We believe MBBL will play an important role in strengthening customer relationship, improving product penetration, and diversification of the micro-banking franchise. Our other lending businesses are also contributing to the portfolio growth.
The MSME portfolio expanded by around 8% year-on-year to INR 4,489 crore, with micro-lending contributing to deliver disbursement yield of 18%. The housing loan portfolio grew by 4% year-on-year to INR 984 crore, while the BBG, the Business Banking Group portfolio recorded strong growth of 13% year-on-year. In the commercial vehicle and construction equipment segment, we are maintaining a calibrated approach towards asset selection, with used vehicles accounting for around 30% of disbursement. We are also expanding gold loan penetration through a digital loan origin system, which is expected to improve turnaround time, process controls, and operation efficiency. These businesses collectively provide opportunity to deepen our presence across customer segments while creating a more diversified and stable earning base.
To further strengthen the quality of incremental microfinance lending, the bank registered under the CGFMU Credit Guarantee Scheme for eligible JLG and micro-banking business loan disbursement with effect from January 17, 2025. 48% of our microfinance book relating to disbursement up to quarter four FY 2026 is already covered under the scheme, increasing up to almost 80% upon including H1 FY 2027 disbursement. The CGFMU window is currently not open for fresh loan guarantees as the scheme is undergoing the government approval process for its next phase. We expect the window is about to reopen soon and have already accrued the requisite 1% guarantee fee towards the eligible disbursement. This additional risk protection, together with strengthening underwriting and portfolio monitoring, supports our effort to build a more resilient microfinance franchise. From a capital and liquidity perspective, bank continues to maintain comfortable buffers.
As on September 2026, surplus liquidity stood at around INR 2,540 crore. The LCR was 177%, and CD ratio stood at 81%. Capital adequacy remained at 17%, comfortably above the regulatory requirements. The bank had planned to raise INR 500 crore through NCDs during the current financial year. Of which, INR 300 crore was raised in September 2026 to support growth initiatives and reinforce capital adequacy. Additionally, on August 13, 2026, the bank exercised the call option and redeemed its INR 195 crore tier two NCDs ahead of scheduled maturity after obtaining the requisite regulatory approvals. These initiatives reflect our focus on maintaining adequate capital strength while optimizing the overall funding structure. On the proposed amalgamation of the holding company, Utkarsh CoreInvest Limited, with and into the bank, the NCLT, during its hearing on October 22, 2026, took note of the NOCs and responses received from the concerned regulatory authorities.
The matter is scheduled for its next hearing on November 19, 2026. The reverse merger is expected to be completed over the next few months, subject to NCLT proceedings. Operational efficiency and technology-led transformation remain important enablers of our strategy. We have strengthened the collections infrastructure, operationalized a specialized call center for overdue accounts, and enhanced branch-level monitoring and customer engagement. Training programs for new frontline employees have been reinforced, with particular emphasis on center meetings, customer onboarding, and consistent field-level execution. Our collection workforce supported JLG and MBBL business now exceeds 1,400 personnel. For the secured portfolio, our focus is on containing fresh slippages and improving recovery from the existing NPLs. We have strengthened collection teams, field coverage, and account-level monitoring, while also strengthening litigation and recovery framework, also with focused efforts on reversal and settlements.
These initiatives are helping improve execution standards and strengthening recovery outcome across the portfolio. Through the Utkarsh 2.0 Technology Transformation Project, we are progressively integrating automation, data-driven decision-making, and stronger monitoring mechanisms across the organization. Digital underwriting tools are helping identify and avoid over-leveraged borrowers, while 360 degree control parameters mapping is enhancing visibility across the credit life cycle. The Bank also launched its new core banking system during the quarter. In parallel, we are improving the quality of new account sourcing and leveraging liability focused general banking branches to cross-sell asset products, thereby increasing product penetration and customer wallet share. Our cost optimization strategy is centered on improving productivity rather than expanding through additional branch and infrastructure. Employee headcount was rationalized by close to 1,100 year-on-year, while the existing branch network is being leveraged more effectively.
Workflow automation, digitization of customer journeys, reduction in manual intervention, and simplification of product and process are expected to further improve turnaround time, service quality, and operational efficiency. Looking ahead, our focus will remain on sustaining the improvement in collections, further reducing stress formation, expanding secured lending, and accelerating growth across diversified asset classes. We will continue to strengthen our deposit franchise, optimizing funding cost, and improving operating productivity while maintaining disciplined underwriting and prudent risk management. Our medium-term aspiration remains focused on achieving our loan book growth of around 25%-30%, increasing secured lending to around 55% of the portfolio, maintaining NIM of around 8.8%, and delivering a ROE of 15% for FY 2028. We believe that the structural changes undertaken across all our business, coupled with improving operating indicators, provide a strong foundation for achieving these objectives.
To conclude, FY 2027 represents a pivotal milestone in the Bank's journey to restore sustainable earnings and strengthen the financial foundation. Having closed FY 2026 with a substantial loss, the Bank has since executed a focused business revival strategy, and that has positioned the current financial year for a return to profitability. Our continued focus is on sustaining this positive momentum and building a stronger, more resilient, and well-diversified franchise that delivers consistent and long-term value to all the stakeholders. With that, I would now like to hand over the call for the Q&A session. Thank you very much.
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 touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets for asking a question. Ladies and gentlemen, please wait for a moment while the question queue assembles. The first question is from the line of Raj, an individual investor. Please go ahead.
Hello, can you hear me?
Yes, sir.
Hello, everyone. I was seeing the results, and I could see that there is a considerable improvements on the NPA, deposits, and on the core revenue. Just two questions. One is on the provisions part. Last quarter, we were seeing that it was around INR 109, and in the current quarter, it was increased to INR 166. Even though there are improvement areas on reducing the secured, non-secured loans and multiple improvement areas, the provision part increased in the current quarter, so which directly reflecting on the final loss of around INR 70 crore, so minus INR 70 crore. The first question is on the provision part, and the second question is on the upcoming quarters. Can we expect profitability on the reduction in the provision?
Yeah, good evening, Mr. Raj. Mr. Raj, I guess, if you recollect the results of Q1, and we had started earlier from January 25, covering our entire micro-banking portfolio under the CGFMU Credit Guarantee Scheme, and that obviously is a premium cost. What we did in Q1, that once you have a premium cost, do you have an ability to give a provision of only 28% of the provisioning that is required, and 73% provision credit you can take because the portfolio is guaranteed. Now, that provisioning that we did in Q1, as you see, it was INR 109 as you speak, but actually, had we not taken the credit, my real cost provisioning is INR 190 crore. So, in that sense, it's INR 190 plus INR 109 now, which has become INR 166. So actually, the credit cost has come down.
Just that one-off credit that was taken in Q1, and that was taken pursuant to the regulatory norms available for credit available for the CGFMU cover that we have. Had we not taken that, then the provisioning as we speak would have been higher by INR 75 crore, and there was also a INR 65 crore of ARC sale.
If I add both of that, then my provision line that you see as 109 in the previous quarter would have reflected as 250 or 240. It is a provision of 240 coming down to 166, and therefore what I am trying to say that there is also a continued kind of an improvement in provision beginning from almost last Q4 onwards, you will see complete provisioning reversal happening. In fact, at a point in time, our peak provisioning was in MB portfolio 401, which was in Q2 FY 2026, with today in Q2 FY 2027 is just INR 92 crore. Therefore, the point that I am saying that there is a complete trend drop on slippages. Even our collection efficiency has remained above 99%, which is X bucket, above 99.6%, 99.5% through and through for almost last six, seven months.
The point that I am trying to drive, there is a significant improvement as part of the commentary Govind Singh .
On the other point that in terms of profitability, yes, certainly I think we are looking much better trajectory from here onwards. As you mentioned that next year we do expect that our numbers will be much better the way we mentioned, and certainly coming days will be much better in terms of profitability also.
Sure. Yeah. Thank you.
Okay. Thanks.
Thank you. The next question is from the line of Sagar Shah from Spark PWM. Please go ahead.
Thank you for the opportunity. First of all, congratulations to the management for at least posting, for holding the ship actually for holding a better set of earnings. My first question was related to our sequential uptick in slippages actually. In this quarter, we did see slippages actually inching up to INR 239 crore. It was up on a sequential basis as well. Can you highlight that which of the segments is actually facing stress in this scenario, or is it because of drought or West Asia crisis? What is the reason? Can you throw some light on that, sir? That is my first question.
Yeah. Hi. Amit Acharya.
Just only one statement before Amit, our CRO, he will speak about the overall NPA. I want to make only one statement. I said drought and these people have very temporary impact on sometime collections, especially in JLG collections, especially when it happened in Bihar and those states. It has not impacted the NPA trajectory as far as NPA trajectory in any significant manner. That is not the reason for any drop. In fact, our collection efficiency remains almost same level. Some geography, there might have been some delay in collection, but overall it remains the same level. Amit can talk about the overall trajectory what he can say.
Yeah. Hi. Just to share the breakup of INR 239 crore, if you will see from MFI MB business, it came INR 66 crore out of INR 239 crore, and non-MB was around INR 173 crore. Out of that, CV/CE contributed INR 30 crore, MSME contributed INR 64 crore, and WSL was the outlier this time that we had INR 33 crore fresh slippages, though we recovered INR 8 crore also. In this WSL, if you will see, this is a book of now close to six years old. Almost five years we operated at a nil NPA basis, but as the book gets matured, it is bound to have some delinquencies there. All these, be it this WSL I am talking about or CV/CE or MSME, are backed by securities, so either by immovable properties or by the vehicle itself.
We have that collateral security efficiently covered, and all the recovery processes are on the track. Though it takes some time, so that is why you see the recovery a little slower. Otherwise, all in control as such.
Okay. Is it the reason behind the increase in provisioning, sir? From INR 109- INR 166, is it the reason for higher slippages? Is that the reason for providing more in this quarter? The credit cost going high?
I just explained a while ago, and I will try to once again explain, is that if you really look at INR 109 crore of the provision, which is Q1, there we have taken a credit of CGFMU benefit that is available under the RBI regulation, and that credit is percent to the premium and the coverage that we have the guarantee, and that credit was INR 75 crore. If that credit would have not been there in Q1, this INR 109 would have been gone up by INR 75 crore. As well as I mentioned that in Q1, we did mention we did an ARC deal of INR 65 crore.
So INR 75-INR 65, if you add, this INR 140 crore is a June event, quarter one event, which gives, it is just given a credit, and therefore INR 140 + being INR 109, had these two credits not been taken, and it was, as I said, mention of an act of ARC and the benefits available under the RBI norms, actual provision would have been around INR 249 crore. Now, INR 249 crore you have to compare with INR 166, which is where there is absolutely a normal event of slippages or the credit cost.
Okay. Okay, fine, sir. Got your point.
Yeah.
My second question was related to your other retail loans, actually. The other retail loans has seen a good pickup in the disbursements actually. I wanted to understand in the other retail loans, which are the segments actually this bank is targeting, especially towards the secured space?
In secured, largely, what we call, we have a multiple type of where the largest space will be, where we talk of LAP. LAP can happen in multiple ways. We talk of micro LAP, which is below INR 25 lakh, then the normal LAP, which is INR 25 lakh upwards, in fact. And then we sometimes we have a prime LAP also, which is INR 1 crore plus. Plus we also have a business banking group. Again, all the loans are covered through bank by collateral only, hard collateral only. The biggest focus for the bank remains that we are able to secure through hard collateral, and little bit also we are trying through gold also. Our gold portfolio is around INR 400 crore plus right now. Efforts are that we should have either property or gold backed, the moment we are talking about secured part.
There are two prime, but in LAP you are aware that there is, based on ticket size, the segment changes. That is with us also currently. And even future also, I mean, obviously we have a micro banking, which is almost one-third of our portfolio right now. But beside this, LAP will be the biggest segment in various forms for us.
Okay. Within the secured space, MSME, affordable, and CV loans, why is our disbursement or even our portfolio is not growing, sir? Especially if you compare to the March 26 numbers and separate September 26 numbers, we have seen hardly any growth in these three segments actually. Why is the reason for that? Are we targeting only LAP or what is the reason actually that we are lagging behind in these three segments?
I mean, I will not use the word only LAP, but yes, LAP is the primary driver for us. As I mentioned, we have micro, we have mid-segment, normal segment, and then we have a premium segment as well as MSME, where we are getting through LAP only. The disbursement for last, actually Q2, got little impacted because we launched our new CBS. During that period, sometimes the business gets little slow. August month became little slow, and because there is a disbursement number that goes little lower, that reflected in the lower growth for, you can say, MSME and HL type of portfolio. I think our focus remains at these portfolios. We are almost from 90 odd locations, we are operating for MSME and HL type of loans. You will see a good pickup in these cases also.
Okay. My last question now related to our digital initiatives. You have highlighted in one of the slides that the kind of measures that you have taken, especially on the AI side. Especially for underwriting, for our MFI customers or even for with regards to MBBL loans, what are the AI-led digital initiatives exactly have we taken? Have we developed a separate app for our customers, for our vendors? What exactly are they, how are they functionalities that you have done?
See, the AI usage is largely, we have been calibrated as you will see the other news is also that RBI is giving thrust on putting framework on the cyber threat generating from AI usage as well. We have been very calibrated in our approach. It is the internal usage. In our internal processes, we have defined certain use cases where we can do using the technology on the underwriting part, on the due diligence part. It is not for the customer directly, but it is for using for our own underwriting space, doing some RCU activities, some other, getting the summary on the bureau reports, putting those rules in the rule engine and using those product norms automated. All that stuff we have worked. We were working on the rule engine, LOS, all that stuff already on the JLG side.
We have moved on to our retail lending loans also completely on the LOS and a lot of things have been automated using the leverage on banking, using the Perfios, the banking analysis, using the Probe42 where you get all the financial or the other details about the companies, etc . That is how we are using it in a calibrated manner.
Okay. Just last suggestion from my side, sir. I highlighted in the first quarter as well. In this quarter, unfortunately, you have not actually done. If you can highlight the segmental-wise asset quality in the slides, in the MSME, CV, and especially housing, what is the GNPA and net NPA of the particular segment? That would be quite good, sir, at least for clarity for investors, that how are we progressing on the secured loans?
Point taken. We will ensure that part. Sorry, missed it, but we will ensure that part, yeah.
Okay. Thank you, sir, and all the best.
Thank you.
Thank you. The next question is from the line of Kunal Kochar from PhillipCapital India. Please go ahead.
Yeah, can you hear me?
Yeah, yeah, please go ahead.
Yeah. My question is related to the equity raise plans and also from the asset quality point of view, from the provision coverage that we have, how much would be covered under the stage one and the stage two?
Our CRO and CFO will talk about the second part. On the first part, obviously, we are at 70% capital adequacy. We have adequate coverage for this year, and our idea is not to raise capital immediately. I mean, there is no plans to raise immediately capital. I am talking equity capital. As we mentioned in my earning initial opening remarks also, we raised INR 300 crore as tier one capital during quarter two. We still plan to We have approval for INR 500 crore, so our plan is to raise INR 200 crore odd tier two capital during this quarter, based on obviously on market conditions. But we will not be going to equity market immediately unless there is some very specific transaction or something like that. We will be looking, going for equity sometime next financial year only, not this financial year. We may not be requiring this.
This you can talk about.
Okay.
Overall provision coverage ratio, and if you need, I will give the breakup on secured or MBBL unsecured as well. The overall PCR for September quarter stood around 55.5%. Out of that, if you will see our MFI book, PCR was 67.7%, and on the secured book, it stood around 36%. On the unsecured book, overall unsecured, including the retail unsecured, it stood around 65.1%.
Okay. But just on the overall book, like on the stage one and stage two assets, like how much would be the coverage there?
See, ECL, if you will see, ECL is not applicable to small finance banks. So, that we do not create provisions based on that methodology, but we create as per the IRAC norms, which are driven by the regulatory norms as per RBI circular. whatever standard provisions are there or NPA provisions are there. On NPA provisions, if you will see, we do a little higher as compared to the regulatory norms. it moves on every quarter as the bucket moves. The bucket movement within the NPA happens. So, every quarter it then increases.
Okay, got it.
Thank you.
Thank you. The next question is from the line of Vinay Nadkarni from Hathway Investments Private Limited. Please go ahead.
Yeah. See, my focus is basically on your branch network. You have one of the biggest branch network among the small finance banks. Why is the throughput from the bank so low, branches? Because your quarterly, I mean, your past is now past, but going forward at least having a 2.3% quarter-on-quarter growth for a branch network of 1,100 when your other peers are growing at 5.5%, 6% quarter-on-quarter. What exactly is stopping you from growing faster there?
No, I think there is nothing which is stopping us, but we had challenges which were higher than many of our peers. In fact, we are aware of this part. Some of the portfolio, because last year we had some ARC transition, which will move out from our portfolio also. So growth net of ARC would have been certainly higher than what we are showing. But I take your point, and in fact, that is what we are trying to do right now. We have the largest, one of the largest network, and it is a mature network because we have not opened any branch during last 18 months plus now. It is a mature one.
And that is why when I say 25%-30% growth, it will come automatically from the technology, from the manpower, from the product and services we have got, and from the network we have today, extensive network. And you will see significant improvement on a month-on-month basis, quarter-on-quarter basis, and year-on-year basis henceforth. Because I think it has taken some time to stabilize various things. And we also have a good product bouquet, whatever is required for a small finance bank. All which are relevant products are also there available. Technology we have changed wherever it was required or upgraded wherever it is required. So that is why you will see a significant improvement from here onwards.
Just wanted to add, I mean, if you really look at FY 2026, and largely as we spoke about MFI, it was more collection, collection, correction first, and then the disbursement. But if you really look, the green shoots have already begun from the last. And this is probably to say that disbursement actually creates a good interest accruable AUM. We grew by disbursement in Q4, 30% YoY, which means Q4 over the previous Q4. We followed it by growth in the disbursement in Q1 at 50%, which is again YoY Q1, this Q1 to the previous Q1. And it was almost 72% in the non-MFI book. And in Q2, we grew by 55% disbursement. Of that, the non-MFI book grew by 77%. I guess when you said set of branches, yeah, we have about 770 types in the MFI, and we have around 330 in general banking branches.
But the traction of growth has already come back. As I told you, there is green shoots, and you will see the momentum coming up as the quarters come. I guess I can also add that if I really look at H2 FY 2026 over H1 FY 2026, generally the H2 disbursements are reasonably higher. I guess it was almost 60% of incremental disbursement deposit in H2 FY 2026 over H1 FY 2026. Even this H2, which is the two quarters coming, we will see those disbursements keeping pace to what we have done earlier. Now the opportunities are back. So, we will look forward for a disbursement growth keeping up the pace and the portfolio growth that Govind Singh mentioned around 25%-30% for the full year basis.
So, you are expecting FY 2027 to be, full year growth to be around what? 10%, 15%?
No, no. We mentioned 25%-30% is our growth expectation for this year. So it will be 25% plus.
Okay. Because you have done 7.5% as of now, H1 to H1. So you are expecting a real bumper growth in the next quarter, next half?
Yes. Yes. Certainly, yeah.
Which is what I think we've done last year also. Then, it catches up with the previous year.
Yeah. That's good to hear. Now the second thing is, what is little intriguing is when I look at your secured portfolio increasing steadily, and rapidly in fact, your yield on advances also is going up. I can't understand this. Generally, when you see secured going up, your yield on advances either stagnates or slightly tapers down. What is driving this yield on advances, with your secured book also growing?
This is yield on portfolio advances. It is a combination of microfinance yield and yield of non-micro banking as well. As we see the disbursement is going up, including micro banking, if you really see there was a de-growth our early few quarters of last year. Therefore, when you do an embedded growth, you will see yield and advance growing up.
Okay. You have given your wholesale banking yield on advances, but I do not see any mention of retail banking. Is it possible for you to share that numbers?
Yeah, certainly we will share.
Yeah, yeah.
We will share. Yeah, yeah. Certainly.
Okay. Okay. I think that is it from me. I will join back in with you for any further question.
Sure, sure. Thank you.
Thank you. The next question is from the line of Darshil Jhaveri from Crown Capital. Please go ahead.
Hello. Hi. Thank you so much for taking my question, sir. Sir, I just wanted to ask, sir, regarding your ROE target for this year and next year, sir?
Sorry, just repeat your question. ROE?
ROE target for this year and next year, sir?
We generally, I guess, when we say ROE, it is one way to display. We have said that we will be an ROE of 15% in FY 2028, because that is the building of profitability for FY 2027. I remember mentioning a two-digit ROE in exit of FY 2027, which will become the base for the next year ROE of 15%. I mean, I have not worked out the ROE as we speak, but I guess that is an overall indication of the returns on the equity numbers.
Oh, fair enough, sir. And sir, just wanted to understand, like, in the current scenario where repo rates is increasing, we have been able to reduce our cost of funds. But if there are more hikes, will there be pressure on cost of funds and will our target of 8% NIM come under certain pressure? Because right now we are at 6.3%, right? With the increase of secured, that will also not be very NIM accretive, right? So what is our pathway to reaching our targeted NIM, sir?
Two things will happen. One is that some of the cost will also get passed on to customer because almost 50% of our portfolio, I mean, broadly speaking, will be under floating rate of interest. When the rate of interest for deposit go up. Second, because we have also completed cycle where the rate of interest were lower, so the repricing of fixed deposit will take some time, even if the rates go up tomorrow, because we are not dependent on any market borrowing. Our market borrowing is nil. I mean, for almost many years now, we have not any market borrowing. Normally when you have a strong market, high market borrowing, your cost of fund immediately gets impacted. But because you have largely term deposits, almost 80% plus your term deposits only, and till the tenure is over, the rate remains the same.
The hit because of the increasing rate of interest will not come immediately. That is one part. Second, the cost of funds in many of the cases will be passed on to the customer also. So that's another aspect that will happen. Obviously, I mean, when this remains on a sustained basis, there will be some impact. But overall NIM will be productive either because of lower cost of funds or because of the passing on of the cost to the end customer.
Okay. That's helpful, sir. And sir, just wanted to understand, like, secured, what are the yields that we are getting currently, sir? Rough also will do, right?
On an average, this is your disbursement yield that I'm talking. Your retail MSME is giving me around 13%. Housing loan is about 11%. Your commercial vehicle and construction equipment is around 12.15%. Wholesale is around again 10.9%-11%. Personal loan is 16%, and gold loan is around 12%.
Okay. Fair enough, sir. That is it from my side. Thank you so much. All the best.
Thank you. A reminder to all the participants, you may press star and one to ask question. The next question is from the line of Ashlesh Sonje from Kotak Securities. Please go ahead.
Thank you. Good evening. Sir, just a few questions from my side. Firstly, on the asset quality side, if I heard the numbers correctly, the CV slippages have remained high. When should we expect these slippages to come off meaningfully? Because right now, if I see, the slippage ratio seems to be somewhere around 12% annualized.
Yeah. Hi, Ashlesh. Amit this side. So, if you see, wheels mein slippages in the previous quarters were pretty high, which has come down from INR 44 crore levels to last two quarters were INR 27. A marginally higher this quarter was around INR 30. But at the same time, recovery and upgradations have also been increased. When initially we had a spurt in the delinquencies, last time also I think I updated that we did lot of policy and product norms intervention, and we do track the portfolio which we are building up post those interventions. If you will see from April 25 onwards, around INR 400 crore is the outstanding, whatever we disbursed beginning April 25. Out of that gross NPA or slippages, SMA-2, if you will see, it is below close to 1.2%, and NPA is below 1% out of that particular portfolio.
Whatever slippages still comes from the legacy book, and we have strengthened the entire collection network framework in terms of repossession of the vehicles. The collection agencies have also been appointed so that we have a better collection and recovery percentage from the NPAs coming out of those legacy book.
You would expect the next quarter slippages to come off meaningfully, or you expect this to continue for some more time?
It should come down. It should come down because if you will see, for CV/CE, the starting buckets are very, very important, that what are the flow rates from your zero DPD or SMA- 1 bucket to SMA-2. That is where last two months we have seen that we are able to do much better, and the flow rate from SMA- 1 to SMA-2 has come down drastically. Collection team is pretty much focused on those buckets so that flow into NPA should be very, very minimal going forward.
Understood, sir. Sir, second one is on MFI. The 67.7% PCR that you have quoted, does that include the CGFMU guarantee? If you can also share any color on the state-wise collection trends that you are seeing in the month of October, if there is any deterioration over there.
Yeah. Sarjukumar, please.
Ashlesh, 67.5% includes CGFMU guarantee. The only point I want to be caveating is that that guarantee is up to March 31. After April 1, since the point as I, in earlier introductory earnings call that Govind Singh mentioned, here we had to open the premium for the two quarters. Therefore, whatever is CGFMU credit that we have taken is only up to March, but it includes the CGFMU adjustments.
Hi, this is Virender. Just to give you a perspective, we are still holding onto the collection efficiencies, and except a little drop on the Maharashtra side, where we are less than 5% of the portfolio, we are sustaining on the collections, and our collections look stable, and we do not foresee any changes or any deterioration in the collections. Majority, even after the impact of, say, some floods in Bihar in the last month, we have been able to bounce back, and we do not see any unforeseen event happening. Looking forward to a stable collection efficiency in microfinance piece.
Understood, sir. It would be great if you can quantify the Maharashtra numbers on the collections front.
We have a portfolio of around 5% of our book. Percentage was close to 98.83%, which was for the month of October, whereas prior to that, we were averaging around 99.5% for full year.
Understood, sir. Sir, and just lastly, if you can indicate how the ROE trend improves from here.
Sorry, can you repeat the question? Ashlesh, I did mention about the ROE guidance. I would want to look at ROE in more perspective than ROA. As again, as I mentioned about CGFMU credits and all, we look at ROE more closely, which we say that we will exit two-digit in Q4 this year, and for the whole year, 15% ROE. FY 2027.
Sir, just talking about FY 2027, if I have to build it in the model, which lines do you think would show an improvement broadly?
I mean, Ashlesh, all the lines, we spoke about the NIM going up, and you would have seen that even as we speak from 5.1 in Q2 FY 2026, we are at 6.3. So you will have an interest yield, you will have a cost which will add up to the NIM. You also have an advantage of higher disbursement, which will give you a good other income because processing fee will go up. We did mention, and I reiterate it, that the cost of extension is zero because we want to do the productivity with the existing infrastructure and with additional benefits that is derived from the core banking system and the LOS that we just spoke about. It is improving the productivity and the debt.
And the most important part, if you really look at the drop in the, or to say sorting out the entire past legacy book. In fact, on a half yearly basis, my provision, which was INR 872 crore for the half year last year, is INR 275 crore. So there has been a constant drop in credit cost. My credit cost at a point in time, you would have noticed, Ashlesh, as a part of your analytic research that you do, from a 9.7%, we are at 3.3%. I just clarified again that Q1, when it is showing a credit cost of 2.3%, while it is increased to 3.3% in the current quarter, it appears that the credit cost has gone up.
But if I were to add back in my earlier answer to one of our colleague's question, if I had to add back the benefits taken on the CGFMU and ARC, actually my credit cost was 5.1% in Q1, which is improved to 3.3%. We are looking at the trajectory improving even in Q3, Q4. As a result of all of these factors, this should lead to ROA and ROE both moving from, say, negative zone to a positive dot bit by bit.
Understood, sir. Thank you, sir, for answering all my questions.
Yeah. Thanks a lot, Ashlesh.
Thank you. The next follow-up question is from the line of Vinay from Hathway Investments Private Limited. Please go ahead.
Yeah, just two questions. You have now built a substantial write-off book. What is your recovery target for H2 and for FY 2028? Because your recovery so far has not been anything substantial compared to the book that you hold.
On the recovery side, we have been able to get around INR 50 crore in this financial year. We expect that to be slightly growing higher in H2 for this piece. Normally, in the last two quarters, we nearly will be able to close to do, I won't like to number, but substantially higher in the next two quarters. We'll be recovering that part of it.
What is the total write-off book?
On JLG side, if you will see, if we exclude the ARC part, which we did for the write-off as well as a combination, I think the total write-off book for JLG available would be close to around INR 700 crore-INR 800 crore, kind of.
And non-JLG?
Non-JLG, not so much because hardly the unsecured portion, the legacy book, which we must have done the write-offs, that is the book. On secured side, it happens very minimal. That should be entire, if I take all the 10 years horizon of the bank, so must be close to another INR 60 crore-INR 70 crore. Though I will have to check, but I am just giving you a ballpark number.
Okay, so not a very large sum. So around INR 700 crore-INR 800 crore, you are recovering roughly around INR 50 crore-INR 100 crore in a year.
Yeah, just to add what Virender said, there is a large collection team now deployed on the MFI side also, and their core target, apart from doing the normal NPA, the recovery or bucket flow movement control, they have a huge focus on this legacy book of write-off, and to crack down these customers in terms of settlements or in terms of getting the entire recovery also. Both the parts, and that is being tracked by Virender and his entire collection leadership team.
Okay. The next one was on Sorry.
Just on the cumulative, total cumulative write-off that we have done on the book since inception, that's about INR 855 crore.
Okay.
Since inception.
Okay. The last thing was on the cost-to-income ratio. If we are expecting the bumper H2, if you are targeting 20% growth from a 7.5%, I am expecting a real good H2 for you. How would you look at your cost-to-income ratio? Because your cost will not go up, right, what you said just now. So what kind of cost-to-income ratio are you expecting exit FY 2027? What would be projected for FY 2028?
You are right. I guess, it was at a point in time, almost 110%. You will appreciate that it is a factor of income that determines and we said the cost versus the income over the previous quarters has been low by virtually by all the reasons of slippages and all that. I guess the cost correction has already happened. So now it is going to be a fraction of the income with the cost remaining same. We had in Q3 FY 2026, 110% cost-to-income ratio, which is already improved to 84%. We are looking at further improving this over the next quarter, two quarters, hoping to get this around 70s, in 75s in this year, and maybe going back to 60-65 to 70, because then we will have to catch up for the growth as we speak, as we go along in the next year.
Around 60-65 would be a sustainable one in FY 2028.
Yeah, that would improve your ROA and ROE also.
Indeed. Certainly.
Thank you very much, sir. All the best for your H2 numbers. Looking forward.
Thank you.
And very happy Diwali to all your team.
Happy Diwali.
Thank you. The next question is from the line of Devora Das from Avash Capital. Please go ahead.
Hello, am I audible?
Yeah, yeah, please go ahead.
Yes, sir. Thank you for the update on Q2. My question is around Q2 FY 2027 provisionings. While the pre-provisioning operating profit has gone up from INR 65 crore- INR 85 crore quarter-on-quarter from Q1 to Q2 because of the provisioning expense, your PBT is looking worse off. If you can help us understand or contextualize the Q2 provisioning, why it has gone up, and what is the outlook going forward?
The Q2 provisioning looks gone up or seems to be incrementally higher than Q1. As I mentioned again, there is the actual Q1, if we really add back and the right sizing of the provision on account of CGFMU benefits that we took and ARC deals we did. I repeat that INR 109 crore of the provisioning in Q1 is actually to be added by INR 140, so it is actually INR 240. So our provisioning Q1 was INR 240, which is actually improved to INR 166. It is actually improved by INR 90 crore, and it is not gone up. This is kind of to correct the events that we spoke in Q1. Similarly, I did mention again that my credit cost is 2.3%, which has gone up in 3.3% in Q2.
But technically, if I add back the events that I just mentioned, which is the credit, then my credit cost is 5.1%, which is improved to 3.3%. So provisioning across the last five, six quarters, and particularly little bit tail remaining in the micro-banking, otherwise it is through and through improved significantly. Could I answer your question?
Got it. So I am getting that H2 provisioning, you have already done most of your cleanup, and H2 provisioning will be much lower, hopefully.
Yeah, it will be on the improvement trajectory.
Yeah, decline. It will be a decline trend, yeah.
Thank you, sir.
Yeah. Okay, thank you.
Thank you. The next follow-up question is from the line of Sagar Shah from Spark PWM. Please go ahead.
Yeah, first of all, thank you for the, again, for the opportunity. Sir, my question was related to our CGFMU scheme actually. Now, till Q1 FY 2027, you highlighted that the incremental disbursements from January 2025 to Q1 FY 2027, 80% of the loans were covered actually for JLG as well as MBBL. So, what is the figure as of September 30, sir, out of the total loan book that we have for group loans that stands at INR 4,747 crore and MBBL stands at INR 2,586 crore? So, actually, what is the book that is covered under this scheme as on today?
One second. Oh, it's close to INR 6,500 crore, which is covered under CGFMU. Close to INR 6,500.
Almost INR 7,000.
Okay.
This is September 30 of this year.
Okay, yeah, INR 6,500 crore.
Correct. That's the right figure.
Okay. Out of that, how much has gone into NPA, sir? Have we claimed that amount under this scheme, at least till date?
INR 209 crore is the NPA out of the CGFMU covered portfolio.
Okay. When are we planning to claim, sir?
We have done, we have put up our first claim because we started last year mid-January. The claim got due only in this quarter, and I think close to-
INR 80 crore plus we have already submitted for claim. Obviously, it is under process with the agency. Around INR 80 crore plus is already submitted for claim.
Okay, fine. My last question was related to our employee strength actually. In this particular quarter as well, our headcount actually went low to almost 18,300. Now, since we are rationalizing our employees and moving to collections, I think that is the driver, if I am not wrong, for the lower cost-to-income ratio as well. What is the headcount that are we targeting at least for the end of the year, and how are you planning to put into for disbursement center, especially for MSME, CV, and the affordable housing front?
Yeah. We have done a lot of rationalization of employee, and in some places we might have increased also based on the requirement. Normally, typically what happens, there are a lot of, you can say, non-business departments where we must have done the rationalized part. Sometime in the operations department type of places where we have done a lot of automation, so there are a lot of rationalizing in those places. Sometime we might have people, excess people in the middle management, so that rationalizing also be done. Going forward, I think our number may not be significantly different from what it is today. There may be some increase at the FOS level. For example, in terms of collections, especially in the micro-banking part, there may be some increase in the collections part.
But more or less, the number should be in the same range for next six months time also. We do not expect much significant change in this 100, 200 number plus-minus on the current number. The plus, if at all it happens, it will happen in the FOS segment, the field-on-street segment, where we require people to go to either for collection or for bringing the fresh business. But in the middle and senior management, we are not looking any increase in the manpower at all. If at all, there may be at the FOS level in some cases. But probably the same range will be there. There is no any significant increase in the employee cost or employee number, will not be significant.
Is it safe to assume, sir, that our H2 FY 2027, the recovery will be largely led by income and not by reduction in OPEX?
OPEX reduction, we have done a lot of initiative during last, not only the employee cost part, but even on various expenses which undergo in case of any institution. We have done a lot of work on that part. The plus will be that the employee cost will not go up. I mean, largely in the same range. I mean, 1%, 2% plus-minus is always there. Similarly, the OPEX will remain almost in the same range. But our business number will go up. I think in terms of ratio or in terms of overall percentage, these will come down because the numerator and denominator effect, the ratios will come down. Absolute numbers may not come down significant from here because we have already done that part during last two years.
Okay. Fine, sir. Thank you so much. Happy Diwali to the entire team.
Yeah, thank you. You too.
Thank you. As that was the last question for the day, I would now hand the conference over to the management for closing comments. Over to you, sir.
Okay, thank you very much. Thank you very much, the ICICI team, and thank you all the investors for coming on this call and your all support throughout this period. There have been tough time, we all know that part, but now we are seeing that the trajectory is much, much better, and we can see much better performance on a month-on-month basis and quarter-on-quarter basis on all the parameters we discussed today also. So once again, thank you very much, and happy Diwali to all those who joined this call. Thank you very much.
Thank you. On behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your line. Thank you.