Operator: Ladies and gentlemen, good day and welcome to Bajaj Finance 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 this conference call, please signal an operator by pressing star then zero on your touchtone phone. I am pleased to welcome Mr. Rajeev Jain, Vice Chairman and Managing Director, and Mr. Sandeep Jain, COO and CFO, and other senior members of the management team. I now invite Mr. Rajeev Jain for his opening remarks, post which we will open the floor for the Q&A session. Thank you, and over to you, Mr. Jain.
Rajeev Jain: Thank you, Morgan Stanley team for hosting us. Very good evening to all of you or good morning, depending on the geography you are in. Welcome to the BFL Q2 earnings call. The investor deck for Q2 has been uploaded on our website. I hope you have had a chance to go through the same. I will quickly focus on key updates for the quarter and our management assessment before Q&A. I expect to take between 15 to 20-odd minutes. Let us quickly jump to panel 4 in terms of the quarter gone by. Overall, I would say it is an excellent quarter with strong performance across all key metrics of AUM, new customer addition, credit cost, profit growth, ROA, and ROE. AUM, as you can see, grew by 26.5% to INR 5,84,624 crores, delivering net AUM addition of close to INR 38,000 crores in a quarter.
Rajeev Jain: PBT grew by 29% to INR 8,537 crores in Q2. This is before the macroeconomic provision that we have created of another 320.
Sandeep Jain: 337.
Rajeev Jain: INR 337 crores to grow by 34% to INR 8,874 crores. PAT grew by 29% to INR 6,367 crores. Before macro overlay provision, it grew by 34% to INR 6,619 crores. in Q2, the company booked just a tad below 13.5 million new loans and added 4.5 million new customers. Overall customer franchise stood at just a tad below 129 million customers. ROA for the quarter came in at 4.6%, and ROE came in at 20.6%. OPEX to total income was at 33%, and net NPA came in at 40 basis points. Overall, I would say a pretty good quarter for the firm and H1 for the firm. AUM growth was pretty secular.
Rajeev Jain: I will quickly go through. I jumped actually to Panel 52. If you see, the growth is pretty secular. Urban consumer finance grew by 43%, rural consumer finance by 63%. MFI, though on a low base, grew 54. CV and tractors are on a low base, grew 89. LAS grew 42.
Rajeev Jain: Captive book, as you are aware, as I have been talking for the last two quarters, continues to wind down and would create significant tailwinds for us in terms of credit costs as we move forward. It is now down to just INR 2,400 odd crores. MSME grew by 3%. It should now start to grow actually. So we should start to see, as we get into the H2, a double-digit kind of growth momentum in the business. Gold Loan book portfolio continued to grow. It is now 4.1% of the balance sheet. It was just a tad above INR 24,000 crores as of Q2. We added 320 odd Gold Loan branches during the quarter. Total network has now crossed 2,000 branches. It is at 2,022 branches.
Rajeev Jain: And we remain quite clear about ending the year with close to 2,800 odd standalone Gold Loan branches. The rest of the business, as you can see, grew in the corridor of 20% to 30%. So overall, pretty secular growth across all lines of business. If I look at the gross loan growth, because captive book is dialing down, you should add another thousand odd crores. That is virtually INR 39,000 crores of book growth that we are principally talking about. These are fascinating numbers even for me, I would say. I did not imagine we will be growing quarterly between INR 38,000 and INR 39,000 crores on a run rate basis, because that has been the case for the last two quarters now. I will go back to panels 5, 6, and 7 to quickly give you highlights of the quarter. New loans grew 11% to 13.5 million.
Rajeev Jain: There is some level of noise in year-on-year number because last year's season was earlier. This year's season is later. We are well on track to deliver between 60 to 62 million new loans in FY27. We added, as I said, 4.42 million new customers during the quarter. We are clear about adding between 18, 19, 20 million customers, between 18 to 20 million customers to the franchise in FY27. Overall franchise I talked about stood at 129 million and cross-sell franchise stood at 82 million. Liquidity buffer remains strong at just a tad below INR 20,000 crore. Cost of funds came down sequentially by nine basis points and came in at 7.31%. Deposit book is 14%. We have increased rates in Q2, and hopefully we will see some momentum here as we move forward.
Rajeev Jain: OPEX to total income improved to 33% despite continued investments that we are making in Gold Loan branches, MFI branches, and technology transformation. We remain pretty comfortably placed to deliver a 25 to 40 basis point improvement in FY27 on OPEX to NTI. On credit quality, loan loss to average AUF improved to 1.56% from 1.88% last year. As a measure of prudence, we recognized, as I said, a macroeconomic overlay of INR 337 crores. Excluding this provision, the loan losses and provisions actually declined year on year by 12%, and loan loss to average AUF in the process would look to be like 1.32%. You may see here that the Stage 2 and Stage 3 assets actually increased by INR 1,601 crores.
Rajeev Jain: It actually includes a INR 1,047 crore increase in Stage 2 in the Gold Loan business due to the short-tenor schemes that we had actually launched when the new RBI guidelines came out, and that has had an impact. We have since August stopped doing short-tenor schemes as a firm. We do not see any credit cost impact as a result of it. Already out of the INR 1,099 crores, which is close to INR 1,100 crores came from Gold Loan in Stage 2. INR 550 crores has already been resolved and has flown back to Stage 1. So it is a transient movement for a quarter, is really what we see it to be and do not see any impact on credit cost or even otherwise or in terms of auction and so on and so forth.
Rajeev Jain: Vintage credit performance across our 3MOB, 6MOB, 9MOB continues to reflect significant and sustained improvement in the portfolio.
Rajeev Jain: We are reasonably comfortable with the credit cost outlook for FY27. Of course, we remain in a VUCA world, so we will take quarter at a time. GNPA and NNPA, of course, if H1 is to go by, we remain pretty comfortably placed on credit quality at this point in time for FY27. PCR remained pretty strong at 60%. GNPA, NPA came in at 1.06 and 42 basis points. ROA, ROE, I talked about 4.6 and 20.6%. Let me just cover now on capital raise because that is something that we announced recently. on 1 October, as you are aware, the board approved, subject to shareholder approval, INR 11,700 crores of QIP and preferential warrants by Bajaj Finserv to the tune of INR 5,800 crores. In accordance, of course, with subject to approvals and by the shareholders.
Rajeev Jain: The board's decision of raising additional capital is principally driven by mainly growth story of India and of the company, and its subsidiaries. That is the principal reason why we are raising capital. We are also very clear that without having to dilute in any given manner, the sustainability of the medium-term goals of ROA and ROE that we have actually outlined to shareholders. It is pretty much for growth that we are looking to raise capital as we move forward. Quickly, let me now cover panel 9 to 11. I will not cover too much, but we continue to double down on FinAI transformation. We now have scaled our AI unit to 328 odd people, given the breadth and the depth of the work that we are doing. The facial recognition camera technology is now deployed in close to 535 stores and 1,163 service branches.
Rajeev Jain: We are getting a lot of learnings from these deployments. AI bots are now handling 75% of our DIY customer service volume. Disbursement, you can see the numbers grew year-on-year, 111%. As we deepen our understanding of enterprise AI and deploy it, we get experience, we get learnings. We are becoming more and more effective, both in terms of cost and in terms of experience of the customer and of the employee. Overall company has now 129 odd agents and 65 agentic applications. We are well on track to deliver 180 odd agentic applications and 600 odd agents for the year. I will not cover panel 13 and 14. The only point I will cover on panel 13 and 14 is that we are launching our first custom risk model from a risk management standpoint.
Rajeev Jain: We will book 500,000 accounts in our B2B business, look at its 3MOB performance and based on that start to evaluate that for other lines of businesses. It is in a testing phase. Overall, from a modeling standpoint, it does show a 15% to 20% improvement in terms of our risk outcomes. Let us see how the models perform in reality, and based on that, then we will start to take a view. We are working on our B2C model as well at this point in time. Subject to the 3MOB performance, we would launch our B2C model as well, if the performance by January for our B2B business holds based on our assessment at this point in time. Quickly, BHFL on subsidiaries, panel 14.
Rajeev Jain: Good quarter for them as well. Their disbursements and AUM grew 25%. Sum of loans, which are affordable loans, crossed INR 500 crore in monthly disbursements.
Rajeev Jain: Opex to NII continues to improve. They continue to make progress in terms of, on a year-on-year basis, it improved from 19.7% to 19.1%. Their PAT grew 18% despite a very intense competitive environment that they continue to face. ROE improved as a result of improving leverage to 12.7% from 12.2%, and their asset quality remained pretty healthy. BFSL had a good quarter. PAT grew 36%. It added 121,000 customers. To summarize and then open it up for questions. Overall, I would just say that the H1 principally demonstrates the strength and scalability of our business model. At this scale to grow 26% is, I would say, good growth to be in. While maintaining credit cost at, as I have said, that probably it is likely that in the four years, this is likely to be one of the lowest years on credit costs.
Rajeev Jain: We are well on track for that. FinAI is moving rapidly from individual deployments to enterprise-wide transformation, both for employees and for consumers as we move forward. That is really from me. Just last point on portfolio quality, which is panel 59 to 62. We principally remain green on all business metrics. You may see a Gold Loan variation there, but I have already explained the point. As I said, 55 odd percent is already got resolved. So it is a transient point. With that, I am happy to take questions.
Operator: Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Please limit yourself to 1 question so we can accommodate as many as possible. We will wait for a moment while the question queue assembles. First question is from Piran Engineer from CITIC International. Please go ahead.
Piran Engineer: Yeah. Hi, team. Thanks for taking my questions, and congrats on the quarter. I may slip in 2 questions because they are short to answer. Just firstly on Gold Loans, why are you all offering short-term Gold Loans? Is not that easier from an LTV perspective because you are discounting only, say, 3 months or 6 months of interest versus 12 months?
Rajeev Jain: Go ahead with the second one, Piran.
Piran Engineer: Yeah. The second one is, historically, two-wheeler customers you all have been uncomfortable cross-selling other loans to. They were never part of the cross-sell franchise.
Rajeev Jain: Yeah.
Piran Engineer: Given the fact that your open market two-wheeler customers have significantly lower asset quality, significantly better asset quality performance, do you consider them to be part of your cross-sell franchise?
Rajeev Jain: No. Fair. Gold loans, Siddharth, you want to answer?
Sandeep Jain: Yeah. The exact issue, what we face in Q2, and that's the reason why stage 2 has gone up to about INR 1,100 crores in Gold Loan business is on account of short tenure schemes. See, for a customer to come every 3 months to the branch for making full payment/payment of interest, coming for rollover becomes very cumbersome.
Sandeep Jain: Accidentally, customer gets into delinquency. Once a customer gets in delinquency, the only way the customer can resolve the case is by making the full payment of principal and interest, which is not necessarily the most appropriate thing for the customer. As a result, I think what is more appropriate, and we are working on that as Bajaj Finance, is to offer a longer scheme, let's say of 12 months that we were offering always. But to set up customers who want to pay regular interest, give them option of making monthly and quarterly interest payment as well as a resale option. This will solve both the issues. One is customer can make frequent payment of interest and reduce obligation. At the same time, need not have to come to branches again and again for rollover of the loans.
Rajeev Jain: On two-wheeler, answer is yes, Piran. On two-wheeler, answer is yes, because we are clear we want to run open architecture two-wheeler at 30% to 35% of our credit cost. But the customer segment principally doesn't change. So in principle, the answer is yes. Pool is likely to be low. That's how I would answer it. Yes. Sorry, you had a follow-through on question one, I think.
Piran Engineer: Yeah. The only follow-through was what percentage of the Gold Loan customers would take bullet loans versus, say, quarterly or monthly installment loans? Because I would presume bulk of them would be bullet.
Sandeep Jain: Piran, today, you are right. The bulk of them, 99% of them are today under bullet repayment.
Rajeev Jain: They can continue to take bullet, but take nine months to 12 months. They can always come and prepay earlier prior because there is no friction except for exit cost.
Sandeep Jain: Except for exit cost so they can always do it in three or six months.
Rajeev Jain: It is better not to push the customer into delinquency and then auction and so on and so forth. The wiser thing to do is to give him a longer tenure. It has the flexibility to repay rather than anything else. So that is at least our assessment and learning and we will principally stick to that.
Operator: Thank you. Piran, I will request you to come back for a follow-up question. Participants, please limit yourself to one question per participant and rejoin for the follow-up. Next question is from the line of Chintan from Autonomous. Please go ahead.
Chintan Joshi: Hi. Thank you. Can I ask one on the I have got three, four, actually. I am just trying to prioritize. Let us go with asset quality. In MSME, you have seen GNPA continue to deteriorate. What sub-book is driving that? Also broadly, GNPA going up 10 basis points in the quarter. Which areas, you have talked about Gold Loan. But any other areas that we should be thinking of in terms of where stress might be building? Related to that, broadly, how should we think about consumer debt to asset kind of capacity? In which areas do you think consumer leverage is still low enough that you could comfortably lend? Because it does feel like, coming out of the last cycle, consumer leverage was high. It slowed down a bit, but like you highlighted in the last quarter, not a lot. Just wondering how you think about this philosophically.
Rajeev Jain: Look. The first point is on asset quality. On MSME specifically, we are seeing it is nothing else but growth. There is no denominator growth. You should actually see this number as a peaking number. It is a pure mathematics and nothing else. That is how I would answer the MSME flat growth. You are likely to see GNPA and NNPA go up. When we look at the 3MOB, 6MOB, 9MOB, we are looking at numbers principally closer to 2019, which is really, I have articulated many times, better than that, as Siddharth is saying. We are seeing better than that, actually. So we are very comfortable with the MSME, 3MOB, 6MOB, 9MOB, and 12MOB book because we started to make changes in the nature of origination from last July onwards. I think that is just point number one to your first point.
Rajeev Jain: On your second point, we do not see at this juncture any blind spots. It is a learning. We realized in August sometime that while in April we launched based on the set of changes that came in from a regulatory standpoint, and the entire industry launched 3 months, we also launched in 3 months. It is a learning we have taken and changed track quickly. It has not been an easy one, I must make that point to you because industry still continues to do 3 months. We are clear we do not want to push the customer into default stroke delinquency and the regulations and the guidelines are very clear. If you flow into default, you have to pay fully. Otherwise, you do not come back into regularization and so on and so forth.
Rajeev Jain: There are other unintended consequences for a non-monoline company that I then cannot lend to that customer if he flows into delinquency for any other product as well. We do not want to be in that space. On your third question, which was related to-
Chintan Joshi: Actually, just before that-
Rajeev Jain: Look, consumer leverage remains. Sorry, Chintan. Consumer leverage remains a consumer-by-consumer play rather than a generic point. As you are aware, we continue to see consumer debt to GDP grow a little slower but continues to move forward. We are in public domain over the last three years, that 3PL is a single univariate metric that continues to trouble us. We have brought that down from 14% to 7% in terms of origination. My mandate to the team is to bring that down to 3.5% in the six months' time. That's really where we are principally headed. Despite, as I said, I am looking at ultra-low credit metrics because we have seen that a customer who has multiple pieces of points of leverage has a higher probability tendency to flow into default. So we will keep bringing down the 2PL, 3PL number business by business further.
Rajeev Jain: Further means by half or we'll halve it by March again.
Sandeep Jain: By Feb.
Rajeev Jain: Yeah. Siddharth's saying by Feb. So that's really what our proactive stance is. It's bottoms-up customer, and leverage as a central dimension of our risk assessment process.
Chintan Joshi: That's fair. On the GNPA, the 10 basis point increase, it's in a number of areas that's adding up to it. Clearly, your target metric is 1.4. I don't want to make a big deal out of it, but there are a number of areas showing increase. That's why I asked a general question on that GNPA.
Sandeep Jain: Chintan, I think the right metric from a comparison perspective, as you do compare between Q1, Q2, Q3, and Q4, is to look at stage 2 and stage 3 together, which has actually improved from 1.9% to 188 basis point, including Gold Loans, is what we have also communicated in the presentation. The movement in the GNPA, it goes up in Q2, mainly on account of number of days being higher in Q2 compared to Q1, which means that one additional month of GNPA flows in Q2.
Rajeev Jain: Always.
Sandeep Jain: Always. That has been the case always. If you look at past record also, that's how the numbers would show up. This is mainly on account of number of days, nothing to do with portfolio quality or any kind of stress getting built up in the balance sheet.
Rajeev Jain: Q4 is the lowest.
Sandeep Jain: Yeah.
Rajeev Jain: Because number of days are lesser.
Chintan Joshi: 90 days, yeah.
Rajeev Jain: Due to February, yeah.
Chintan Joshi: Thank you. Thank you for that.
Operator: Thank you. A request to all the participants, please limit yourself to one question per participant. Next question is from the line of Kuntal Shah from Oaklane Capital Management. Please go ahead.
Kuntal Shah: Hi, team. Thanks for the call. My specific question is, what are the reasons you see this overlay, and how does it relate to earlier overlays or a permanent change in the ECL models, basically? How do we think about frequency and size of such discrete overlays going forward versus embedding them in ECL model itself? How do we visualize it?
Rajeev Jain: This is over and above ECL model, Kuntal. Point number one. That is why it is overlay. I think that is just a first point to clarify, which means it remains available to the management to use. I think that is just first point from a clarification standpoint. I will let Sandeep respond to-
Kuntal Shah: No. Is it a policy to have overlay in good times to release in bad times?
Rajeev Jain: Okay. I'll just make a point before I. Okay. Is it to build resilience? Answer is yes. The fundamental reason for creating overlay, let me articulate, is not because we see stress building. But I want us to remember always that this is bulletproofing of the business. It is for resilience. We are a cyclical business. We will see credit costs go up marginally, credit costs go down marginally. It is for those marginal periods of when we go to 2 point. We went to a peak of from 1.75% to 2.15%. Let me give you a cycle view of us as a firm. That's a very low cycle view. Somebody could argue that we go from 1.75% in a low period to historically, now the number would reduce further, as I've said, to 2.15%.
Rajeev Jain: If you see last two years being, that's really a cyclicality for us as a firm. We would like to further strengthen that, I would say. Narrow the band further, so that we can, in a cyclical business, reduce cyclicality. Which is what we call resilience is the way we are thinking about the business model. Sandeep, you want to add something else?
Sandeep Jain: Yeah. Kuntal, very clearly, we continue to rest our model on empirical data, which is what anybody would build a model on. That's point number 1. Point number 2 is while we do look at forward economic factor and guidance to look at what kind of overlays one should have from macro perspective, which is an internal part of, I would say, ECL framework itself. At times, it fails to capture the potential effect of what's happening in the real world. Let me give a clear example. El Niño that we are seeing in the country, we are at 87% monsoon at this point in time. On the oil price, which is now constantly hovering at $100 to $110 kind of price. The cascading impact of this on the economy, on the interest rate, on the inflation is very difficult to factor in the macro model.
Sandeep Jain: That's where the management judgment comes into picture. Let me also be very clear. It's not a perfect science. It's an estimate of the management in terms of which portfolio could get impacted. We believe at this point in time, unsecured businesses barring salary because salary may not get impacted so much because of oil price and inflation, but the self-employed customers could really get impacted. We have done stress testing on those set of customers and propose a higher provisioning on the customers who are in stage 1 in the unsecured non-salary portfolio. We have also done stress testing of stage 2 outstanding of the customer and propose additional provision even there.
Sandeep Jain: We did not do stress testing specifically on stage 3 because stage 3, if you remember last year in Q3, we have already introduced LGD flooring, which captures, I would say, significantly higher provisioning coverage than what is required for the kind of portfolio that we manage. I think keeping in mind all of those things, we keep doing this on a quarterly basis and based on the evolving and emerging situation, we decide if there is a need for us to have overlays.
Rajeev Jain: The statistical modeling technically could argue the 60% floor probably needs to release today.
Sandeep Jain: Correct.
Rajeev Jain: Let me make that point. I will compound your point further. You will say that means you have more than even this. The answer is probably yes, but we have just focused on the resilience. I want to make one last point, Kuntal. Sometime very soon, we will cross the point of where the largest non-bank merge into bank. One, we would be proud of that moment as and when it happens, but we are also seized of the importance of resilience in our balance sheet that is needed to continue to grow from there on and get to, as per last year, I say INR 11 lakh crore number by FY28. That is all I would just say from a last point standpoint.
Kuntal Shah: Thanks. This really helps. Can you just quantify what is the current stock as of today of macro and management overlays?
Sandeep Jain: The overall macro provision stands at about ₹226 crores. If my memory serves me right, that's the number. On the management overlay side, we have created a provision of ₹512 crores. ₹185 crores was taken in last quarter, and ₹327 crores we have taken in the current quarter. Apart from that, the LGD flooring that we have created would also carry a number between, say, ₹350 crores to ₹500 crores of additional provision that is already sitting in stage 1, 2, 3 assets. Mainly because, the actual number of the empirical data may suggest a lower number, but because we have applied a principle of LGD floor, we continue to make provisioning at a higher rate. So that number could be in the region of ₹350 to ₹500 crores is what our estimate at this point in time is.
Kuntal Shah: Wow. Thanks. This is good conservative stance, and thanks for this clarification.
Sandeep Jain: Thank you.
Kuntal Shah: I will join the queue.
Operator: Thank you very much. Participants, please limit yourself to one question per participant. Next question is from the line of Kunal Shah from Citi. Please go ahead.
Kunal Shah: Yeah. Hi. The first question is on growth guidance. Last time you said, you would review post the Q2. You said it is very fascinating to see almost 26% growth plus the capital raise is also up for the growth story. So what would be the growth guidance here onwards for near and medium term? That is the first question. Second, in terms of the overall margins, cost of funds are down 9 basis points. But given that we are in the rate hike scenario, we had still seen some margin compression and NIMs on calculated basis appear to be down. So how do we see once cost of funds start to see up? What is the outlook on margins here?
Rajeev Jain: So I would say FY27, two quarters gone. We are seeing the early onset of festival first 9, 10 days. I would say probably between 26% and 27% growth we should deliver now on a full year basis. I think that is just medium term. We maintain a guidance of 23% to 25% on a year lower here and a year higher there. So that is the second point. On NIM, clearly at this point in time, we are baking in two more increases in the current year that would take us to 6% kind of rates. You would see marginal moderation on NIM as you move from here. We should be able to manage comfortably is what I would say in terms of NIM. Because part of that would come from OpEx to NTI.
Rajeev Jain: Part of the save would come in from, of course, from credit cost, as you are seeing. Overall profitability and return ratio, we should be able to continue to navigate is what I would say to you.
Kunal Shah: Moderation in NIM would be only marginal. That is what you are suggesting.
Rajeev Jain: Yes, at this point in time, yes.
Kunal Shah: Okay.
Rajeev Jain: Until June.
Kunal Shah: Got it.
Rajeev Jain: You have seen, I think, 10, 12 basis points compression in Q1 to Q2.
Kunal Shah: Yeah.
Sandeep Jain: I think H1 NIM over March is about 5 basis point lower. Q1 was marginally higher. Q2 was 10, 12 basis point lower than Q1. We are seeing moderation in NIM. It remains manageable. We remain confident
Kunal Shah: From Q2 level, not much of an impact on margins.
Sandeep Jain: I am not saying that. That is what you are saying. I think we continue to remain in a cost of fund increase environment. We are mindful of it. In the last quarter, we have done significant amount of interest rate hedging. That has brought down the cost of fund effectively in the last quarter at BFL and BHFL level, and that is what you would have seen in BHFL as well. As the repo rate goes up, it will also have its cascading impact coming in Q3 and Q4. I would bake in, at this point in time, a marginal additional compression versus what we had given as a guidance at the beginning of the year. So far, we are 5 basis point down versus beginning of the year on H1 basis. I had given a guidance of 10 to 15 basis point compression the current year.
Sandeep Jain: I would say carry a marginal headwind to that number other than anything else.
Kunal Shah: Perfect. This is useful. Thanks for answering all the questions.
Rajeev Jain: Thank you, Kuntal.
Operator: Thank you. Next question is from the line of Viral from IIFL Capital. Please go ahead.
Viral Shah: Yeah. Hi. Thanks for the opportunity. I had basically, I would say, two parts to this question. One is on the fee and the non-interest income, right? Currently we are running at 20% growth run rate, significantly ahead of what we have guided. The other part to this is basically there are some, I would say, headwinds or overhang on this number. May not be from maybe, say, this year's perspective. One is basically some bit on, say maybe Flexi, most importantly on, say, the insurance piece, which is there. How do you see this, say from FY28 onwards, if the current insurance norms remain where it is? Given that we do have some benefit that can come through from the MDR on UPI as well, right? Given finally we can monetize the entire network that we have built. How should we think about this?
Rajeev Jain: Well, the H1 non-interest income has grown by 20%, right? In general, our guidance was 16% to 18%, but as we outlined in Q1, and same is true for Q2 because of stronger growth in our B2B businesses. I think that's just point number one, Sumir. Overall fee base is diversified. Includes some parts of discussion documents, which are in public domain. Some parts of draft regulation. We are continuing to strategize. We remain comfortable in the longer term. We should be able to sustain a 15% to 18% fee income growth, is what I would just say to you, Viral. At this juncture, given that both papers are regulatory in nature, we have a set of strategic thought process that we are working on, which we'll deploy as the regulation comes, is what I would say.
Rajeev Jain: At this juncture, it is very premature, but we are working on it as management and have our plans ready.
Viral Shah: Got it. Just one more follow-up on one of the previous questions, Rajiv, which is the Gold Loan. Over there, I understand you are focusing on the longer tenure product, keeping customer interest in mind, but that will also effectively curtail our LTVs or rather the ticket size that we can offer to the customer, right? Because of the embedding of the entire interest in the loan. Do you think that this can be a challenge, say, from a customer acquisition standpoint in the near term, given that competitors-
Rajeev Jain: I mean, see, we have to run a business, keeping in mind interest of the customer, interest of the company, and what is long-term sustainable, right? Just today, that is really how we build businesses. We are very clear that a short-tenor loan doesn't work for the customer, doesn't work for the company, and is not sustainable. We fundamentally remain focused on organic expansion. That is one part in terms of distribution expansion. Two, mining our franchise. Three, as I articulated last time, focusing on our mining franchise through digital infrastructure, which is a differentiation, is really how we have chosen to build the business. We remain comfortable that it can navigate through the competitive intensity without compromising on the margin profile of the business. That is the last point. Given the intense competitive activity, there is significant noise on the pricing.
Rajeev Jain: This business is supposed to be fundamentally a profit builder. That is really the goal of the business rather than AUM builder. So that is really how we have organized ourselves in terms of the business model, and that is what we intend to remain focused on, irrespective of the noise on what it means. We make the choices. I am very clear about businesses that we build, that we make the choices. Makes it a little harder, makes it a little longer to play through. We will take the long route.
Sandeep Jain: Yeah. Viral, from a customer sensitivity perspective, that is something that we laid out very clearly as part of last year's LRS. We are very clear that we will do what is right for the customer. We believe that structurally a longer-tenor bullet repayment model serves the customer better versus a short tenor, which may give more LTV, but eventually puts the customer into default position, which is not necessarily the objective of working with the customers for Gold Loan business. So I think we are very clear. Irrespective of what market does, we would prefer offering a little longer tenor scheme to the customer with a bullet repayment option the customer is used to even if it comes at a smaller, slower growth, we are quite okay with it.
Viral Shah: Got it. Just one last piece I think you mentioned about. Sorry, I think this is just completing Kuntal's question. I think Kuntal asked you on growth and you responded on growth and margins. Just one piece that is remaining is on the credit cost front, right? Given that we are significantly, I would say, including the overlays also running closer to the lower end of your guidance, how do we kind of foresee the rest of this year?
Rajeev Jain: Rest of the year, we should look at it in the same corridor, is what I would just say to you. A similar corridor.
Viral Shah: Thank you.
Operator: Thank you. Next question is from the line of Avinash Singh from Emkay Global. Please go ahead.
Avinash Singh: Good evening. Of course, on capital raise, you have outlined the growth as underlying thing. But if I look, your profitability, also the possible stake sale from your subsidiary Bajaj Housing and also the timing in the past at Tier-1 level when you had I think looks, I would say, much of a in advance or too prudent. So what exactly what kind of a growth because you have too many questions including your current Tier-1. That is kind of course, such a large capital raise plan at this early stage. Second, on insurance thing, if at all this regulation assuming it is were to come through, will you remain an open architecture or there will be some kind of a rethinking, kind of a distributing your own group's product or like, irrespective of commission regulation, you remain an open architecture? Thanks.
Rajeev Jain: Yeah. I will take the second one first. We will wait for the final regulations to come to make a decision. Is what I would just say, it is a discussion paper. It has to get converted into draft regulations and then regulations. No point in speculating at this point in time, is what I would just say to you. As I said earlier, we are creating multiple scenarios for us as a firm as to how will we navigate while protecting our fees and margin. So that is the only point I would make. We are clear about the medium-term guidance on fees and margin. So that is point number one. Point number two, your question is principally on capital. As I said, it is principally for growth. As I said, we added close to INR 38.5 thousand crores in the quarter itself with 26.5% growth.
Rajeev Jain: I am not changing, I must say to you, the longer-term growth guidance of 23% to 25%. I think it is important to make that point clear because that is a good number to compound at the levels we are in. In a year, we may grow 27%; in a year, we may grow 23%. But long-term compounding is really what we are principally focused on coming from underlying quality of the business and the margin profile of the business. So just at a philosophical level to make the point. The third point which is important which I would like to highlight and we have been covering that in our Investor Day for a long time actually, and I will break this into two parts because as you said, we could use it to dilute, do dilution in BHFL rather than raising capital. One, we are raising, last three years ago, we raised INR 10,000 crores.
Rajeev Jain: Since then exactly the balance sheet ending this year would have grown 90%. So I should double actually. So in 3 years, we have actually doubled, so I should be raising 20. I am raising or looking to raise 17.5. So I think that is point number one. So in absolute the number may look large, but in terms of previous raise to balance sheet growth and during this period we have continued to deliver, if you take core ROE of between 19% and 20%. So on a 3-year basis. So size or the quantum is actually smaller than what we raised last time around.
Rajeev Jain: We could very well raise part of this, you are right, from BHFL dilution. We have 3 years' time. That is point number one. It remains we are on track within that timeline. We have to do this. This would give BHFL some more time as well to transition their business model closer from super prime and prime to prime and near prime.
Rajeev Jain: Allow them to migrate their business which would be eventually a lot more beneficial to BFL shareholders because at the end of the day, we intend to remain 75% holder. We today are 87% holder. So when we take a longer-term view and look at the transition that BHFL is undergoing at this point in time, we think we want to give them a little more time to repivot the business which they are very well on track to. That is why I articulated that some of our loans are now INR 500 odd crores a month. I think exiting the year, they would be at INR 800 crores a month. Should continue to probably get to INR 1,300, INR 1,400 crores a month sometime by Q3 of next year. That is really how their plan is organized around.
Rajeev Jain: Hopefully, that gives you answer to all the three questions in terms of quantum, one. Two, why not raise through BHFL dilution? And three. Last point, leverage. I made the point and then I passed it. We show in our resilient business model that we have historically raised capital. We have kept bringing down the rate at which when do we raise capital? The leverage ratio has kept coming down. We used to raise at six. Last raise was at 5.4? 5.4. We think from a sustainability of the business model, given the size of the firm, we will probably start to raise at between five and five and a half. So we will lower the corridor from five and a half to six, to five to five and a half. We are right now at 5 point?
Avinash Singh: One. That is really the thought process, in terms of wanting to raise capital, become more resilient, make the balance sheet really bulletproof, is really the principal objective.
Avinash Singh: On RBI revolver loan, any update? Based on that amendment described, what could be any exposure of yours kind of falling under the definition of revolver? Thanks.
Rajeev Jain: It is a draft, as you are aware. Comments have been submitted by everybody. The product that we hope that RBI would find a middle path, which benefits, which creates sustainability on one hand, protects the customer centricity on the other, and helps innovation from a way forward standpoint for non-banks. Now, that is my expectation. We will see what it comes out to be. Let us assume for a moment that RBI decides that it is a complete ban. There will be transient impact on AUM and a marginal compression in NIM and profitability. We will abide by what RBI has to state and work along. We are already launching a set of different variants of term loans on 1 November which do not allow, of course, withdrawal, but has some more attractive features to ensure that we can find a middle path in the term loan structure.
Rajeev Jain: That is something that we are looking to launch by 1 November as well as a firm. Both insurance is, we would like to act as a firm rather than wait. Least it does is, it creates greater diversification and more resilience. Most it does is it augments growth. Either way, I would say, we are in a better place than just probably wait, is what I would just say. I hope that answers your question.
Avinash Singh: Thank you.
Operator: Next question is from line of Abhishek from HSBC. Please go ahead.
Abhishek Murarka: Yeah. Hi, good evening, and congrats for the quarter. One question on Gold Loan. I think one of your peers just said that in this calendar year, around INR 4.5 lakh crores of disbursements have happened to customers who are deeply delinquent. That is 90 DPD plus. What are you seeing if you looked at this number? Second,
Rajeev Jain: Sorry, can you repeat? Sorry, repeat the number, Abhishek.
Abhishek Murarka: INR 4.7 lakh crore of disbursement.
Rajeev Jain: Yeah.
Abhishek Murarka: So far in the calendar year. Right. In Gold Loans. So, one, what are you seeing in your numbers? Are you seeing this in the overall industry numbers, and are you seeing a progression of your customers into, say, GS2 or even GS3? Apart from the INR 1,047 crores that you mentioned is short duration, et cetera. So underlying trend, is it worsening or are you seeing delay payment, anything of that sort?
Rajeev Jain: Okay. Abhishek, the rightful metric is not disbursal in this business. The average book itself is 6, 7 months.
Abhishek Murarka: Yeah.
Rajeev Jain: I think that's the point to remember. Disbursement is a vanity number. AUM is the rightful number. If you ask me the better number from a core underlying growth is tonnage. We actually track tonnage.
Abhishek Murarka: Sure.
Rajeev Jain: Is my tonnage growing or not? Okay. That's I think the fundamental metric is tonnage. Real metric because gold price go up or down, what is the franchise value is tonnage, or growth in tonnage to determine growth in business. Second is AUM. Disbursement doesn't matter. Disbursement is actually quite inconsequential. Now coming to delay metrics, we don't see any. We are in that sense, this stage 2 moment is a little bit of learning for us. And that's why we've taken what I would call a tough action that we've taken, that this is how the business should be organized. Whereas I must say, Abhishek, this is for the record, that in general, Gold Loan companies are not organized this way. They are very comfortable with stage 2. They wait for things to go into stage 3 and then do auction.
Rajeev Jain: In general, our assessment is that auction is not a rightful metric. Auction is not liked by any constituent, is how I would simplify it.
Abhishek Murarka: Right.
Rajeev Jain: So, it is better to manage it through risk rather than manage it through auction is how we have taken a position to be, and that is how we will build the business out. We remain committed to continue to grow the business, as I said, organically and using our franchise and using our digital infrastructure.
Abhishek Murarka: Yeah, I guess, Rajiv, the intent was to understand what kind of tonnage or what kind of customer is getting the loan. Are they already leveraged somewhere else?
Rajeev Jain: Yeah.
Abhishek Murarka: So that you do not see any adverse.
Rajeev Jain: No, we do not see. We are not seeing any movement. We are not seeing any movement in that metric. The average ticket size remains between 2.2.4, 2.5 lakhs. We are not seeing any structural change versus a year ago to today. At this point in time and during this time, gold has dropped off from 5,400 to.
Sandeep Jain: Forty-one
Rajeev Jain: 4,200.
Rajeev Jain: Right. We continue to hold LTV of 75% at this point in time.
Sandeep Jain: Inclusive of interest.
Rajeev Jain: Inclusive of interest as Siddharth has clarified.
Abhishek Murarka: Got it. Rajiv, the second question is, if I look forward into 2028, 2029, couple of headwinds to revenues are there, right? Just, maybe something on the revolver piece, insurance piece, maybe even cost of funds wise. Do you think you can protect this at the operating profitability level, that is through maybe cost or yield? Or do you think you can lean on your credit cost, which is anyway running below where you are guiding for this year, and that will come in use to protect your ROA. So which part of the ROA tree would you have more control on?
Rajeev Jain: Okay. As management, we are paid to deliver long-term guidance. I think that is point number one I must make to you. So far, we are supposed to find answers. Let me simplify that point. Since COVID, there has been no dull moment. Either credit cost is going up, or growth is stronger, or profit is stronger, or ROA is stronger, or ROA is weaker. So I think there is no dull moment since COVID. We are now used to, we or all management should be used to no dull moment in building businesses or running businesses. For every action, there is a reaction. For every action, we have to find a strategy. We are committed to find a strategy. We will hold to our long-term guidance. It may mean acceleration in top line, it may mean marginal slowdown in fee income.
Rajeev Jain: It may mean OPEX growth is slower. It may mean never say never, loan loss go further down. See, we have to deliver the long-term 20% to 25% profit growth to investors and 19% to 21% return on equity. We are reasonably agile as a firm. We will mobilize to deliver that. Long-term shareholders, you have to just wait for a little bit of time if action is very significant, is all I would just say. You may say I am talking philosophy, I am not talking philosophy. I have run the firm for 20 years, so trust me.
Abhishek Murarka: Sure.
Rajeev Jain: I know what I am saying.
Abhishek Murarka: Of course. No, thanks for answering and all the best for the future. Thank you.
Rajeev Jain: Thank you.
Operator: Thank you. Next question is from Nayanshree Hashvani from Nomura. Please go ahead.
Nayanshree Hashvani: Yeah, thank you for the opportunity. I have just one question. It is on your rural book, both consumer finance and personal loan. Now, the portfolio credit quality on slide 59, 60, I do not think there is a very dramatic change for September. Little bit of uptick in stage 2 for rural consumer finance sequentially. But any color around what is our thought process going into the H2 for our customers from the deeper pockets, given that we have heard some noise around droughts in certain states, et cetera. How are we thinking about disbursals in these segments? Probably geography wise. Any color on that would be useful. Thank you.
Rajeev Jain: It is a fair question. We have been watching the El Niño movement. We have been tracking all the 720 districts. We are aware of the districts across the country where drought is declared. We have been pruning business, watching the monsoon movement now for the last three, four months. This includes reduction in MFI business in some of the districts. It includes a reduction in business in our B2B business. Not only rural, even urban, because to us, urban is 500 plus cities. Anything after 125 cities, I would say to you is rural at one level.
Rajeev Jain: At a fundamental level, if I may make the point. So actions have been wherever 3MOB starts to move, which means it starts to reflect the underlying pressure point, we act. So actions have been taken. As I said, no dull moment. You see all this, do not believe it is in a cruise mode.
Rajeev Jain: We have been pruning back, as I said earlier, that we have taken a proactive call that CPL will drop from where it is today at 7%, in terms of origination to half. Business by business. In some business, zero. Where I have no margin, it will be zero. Is the decision management is made, and we are going about it. We still think, given our relative size to size of the retail or total business in India, we can still continue to grow comfortably. So we have acted. At this juncture, it does seem Maharashtra is probably most impacted, and Maharashtra is very large for every lender. Whichever part of the business you take, given the just the sheer per capita and its GDP contribution to the country. There are certain parts which are more affected than otherwise.
Rajeev Jain: We have acted in some, we are acting in some, we are continuing to take a whole host of actions to manage the prone business and navigate through that.
Nayanshree Hashvani: Right. 26%, 27% loan growth.
Rajeev Jain: I would just say, thankfully. Sorry. Thankfully, I would say it is still better than what we were originally estimating four months ago. That I would just say it covered ground. Till June it was looking much worse, quite honestly. So coming in at 87% LPA is a much better number than it seemed as a 30-year biggest El Niño. So it is much better than it was expected to be, but some districts are much more affected than we would have liked them to be. Sorry, your point.
Nayanshree Hashvani: Yeah, I was just saying 26% to 27% loan growth guidance is inclusive of all these calibrations that you have already made and are planning to make.
Rajeev Jain: Yes.
Nayanshree Hashvani: Thank you, and have a good day.
Rajeev Jain: Thank you.
Operator: Thank you very much. Ladies and gentlemen, we will take that as our last question, and now hand the conference over to Mr. Rajeev Jain for closing comments.
Rajeev Jain: Yeah. Hello. Thank you. Good night, and talk soon at the end of Q3. Thank you. Thank you all. Thank you for patiently listening. Thank you for your questions. Thank you.
Operator: Thank you very much. On behalf of Bajaj Finance team, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines. Thank you.
