Operator: Ladies and gentlemen, good day, and welcome to the Shriram Finance Limited Q2 *FY27 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Umesh Revankar, Executive Vice Chairman, Shriram Finance Limited. Thank you, and over to you, sir.
Umesh Revankar: Yeah. Thank you. Good evening, friends from India and Asia, and a warm welcome to all of you. Greetings also to those who have joined the call from the western part of the world. To present our Q2 FY27 call today, I have with me Managing Director and CEO, Mr. Parag Sharma, Joint Managing Director and CFO, S. Sunder, and Sanjay Kumar Mundra, Executive Director, Investor Relations. It has been a good second quarter of the year for Shriram Finance under current circumstances. Let us first look at the broad economic indicators that have a direct impact or indirect impact on our business. First, on the GDP growth. India's Q1 GDP growth of 7.8% in FY26/27 has highlighted the resilience of the country's economy, with the data pointing towards strong consumption, rising investment, and sustained government capital expenditure as the key drivers of the expansion.
Umesh Revankar: The stronger than expected performance has reinforced expectation of broad-based economic momentum across multiple sectors. The IMF has raised India's GDP growth forecast to 7% for 2026/27, up from 6.4% in July. The revision in the estimate comes on the back of stronger than expected momentum, supported by resilient domestic demand and robust services activity. India's headline retail inflation rose to 5.54% in September from 4.8% in August, adding pressure on the country's central bank to further tighten monetary policy. Inflation has been on the rise for 11 straight months in the world's fastest growing economy and has touched 22 months high in September. This increase is mainly due to higher fuel and food prices, which rose amid West Asia war-driven supply disruption and delay in seasonal rains. India's food inflation climbed to 7.74% in September from 5.97% month prior, with prices rising faster in rural areas than cities.
Umesh Revankar: India's wholesale price based inflation climbed to 11.39% in September from 9.92% in August. Among key drivers of wholesale inflation were mineral oils, food articles, crude petroleum and natural gas, coal and lignite, basic metal, chemicals, textile, rubber, plastic product, and electric equipments. Now, coming to the key takeaway of RBI policy. Repo rate increased by 25 basis points to 5.5%. Policy stance shifted from neutral to calibrated tightening. GDP forecast revised upward to 7.1% for FY26, 27. CPI inflation forecast 26, 27, raised marginally to 5.2%. Coming to the rural economy, which has a major impact on our business. The 2026 Southwest monsoon concluded at 87% of long period average, with sharper shortfall hitting regions like South Peninsula, Northeast India. India received its lowest rainfall in the more than decade owing to El Niño effect.
Umesh Revankar: The below normal and erratic rainfall has triggered moisture stress, hurting major kharif crop like rice, soybean, corn, cotton, and pulses, coupled with fertilizer shortage due to war. That will lead to some food issues in coming months. India's drought monitor said in 23 September that 51.2% of India's geographical area was abnormally dry and/or was India's weak monsoon is beginning to weigh on rural consumption ahead of crucial festive season, with companies seeing pressure on demand for entry-level two-wheeler and cars, discretionary FMCG products and also consumer appliances. However, India's rural economy is becoming more resilient to weak monsoon as growing share of non-crop activities, diversification into allied sectors, rising irrigation coverage and reduced dependence on the rains. The RBI report said empirical findings suggest that while rainfall shortfall remains important for agricultural output, their association with allied activities and other rural activity has moderated over time.
Umesh Revankar: Other significant indicator is the GST collection. India's gross GST collection rose by 14.7% year-on-year to INR 2.04 lakhs in September, compared to INR 1.77 lakh crore. On cumulative basis, gross GST revenue for April to September reached INR 12.46 lakh crore compared with INR 11.17 lakh crore during corresponding period of 2025, 2026, increase of 11.6%. Increased government spend on infrastructure is one positive indication and GST collection has really helped the infra spend. OEM sales side, there has been a positive impact throughout the last one year post the GST rate cut. The commercial vehicle sales has increased by 28.7% in Q2 FY27 and stands at 3.09 lakh unit against 2.4 lakh units sold in the Q2 FY26. Within commercial vehicle, medium and heavy commercial vehicle sales recorded growth of 37% in Q2 FY27 and stands at 121,171 units against 88,431 units sold in Q2 FY26.
Umesh Revankar: LCVs sales recorded a growth of 23.8% in Q2 and stands at 1.88 lakh unit versus 1.52 lakh unit sold in the Q2 previous year. Passenger vehicle has recorded highest growth of 30.7% and stands at 13.61 lakh unit against 11.41 lakh unit in Q2 2026. Two-wheeler again seen a record growth of 15.2% with sales of 64.33 lakh unit in Q2 against 55.86 lakh unit. Three wheelers also have recorded a very good healthy growth of 23.6% in Q2 with sales of 2.85 lakh units sold versus 2.31 lakh units sold in Q2 2026. Tractor again has recorded a good growth of 18.26% with 2.91 lakh units sold as against 2.6 lakh units sold in Q2 2026. Transportation equipment has started the growth after a decline in growth in the previous year, with a 23% growth, with 29,289 units sold against the 23,758 units sold in Q2 2026.
Umesh Revankar: Coming to the EV, we are seeing a robust growth in EV throughout all the segments. In the passenger vehicle, it grew by 106% to 99,752 units against 48,250 units. In three-wheeler, it recorded 30.61% to 2.53 lakh unit against 1.94 lakh unit. Two-wheeler, it increased by 90.93% to 5.95 lakh unit against 3.11 lakh units in the previous year. Now I shall ask my colleague, Parag, to take us through the operational performance for the quarter.
Parag Sharma: Thank you. Good evening to everyone and welcome to our Q2 FY27 earnings call. I trust you had the opportunity to peruse our results and the related investor presentation, which has been posted on the website of the stock exchanges. We registered disbursement growth of 25.71% year-on-year. Our disbursement in Q2 FY27 this year aggregated to INR 54,079.02 crores versus INR 43,019.17 crores in Q2 FY26. Our AUM, as on 30 September 2026, registered a growth of 16.96% over Q2 FY26, and 4.85% sequentially. Our AUM stood at INR 3,29,021.72 crores as against INR 2,81,309.46 crores a year ago, and INR 3,13,798.39 crores in Q1 FY27. Our net interest margin in Q2 FY27 registered a growth of 38.2% year-on-year. We earned a net interest income of INR 8,661.04 crores in Q2 FY27 this year as compared to INR 6,266.84 crore in Q2 FY26.
Parag Sharma: Our profit after tax grew at 59.37% and stands at INR 3,677.03 crore in Q2 FY27 as against INR 2,307.18 crore in Q2 FY26. The profit after tax was INR 3,444.56 crore in Q1 FY27. Our net interest margin in Q2 FY27 was 9.52%, as against 8.19% in Q2 FY26 and 9.04% in Q1 FY27. Our earning per share for the quarter stood at INR 15.63 as against INR 12.27 in Q2 FY26, and INR 14.83 in Q1 FY27. On our asset quality, gross stage 3 in Q2 FY27 stood at 4.65%, and net stage 3 at 2.31%, as against 4.57% gross and 2.49% net in Q2 FY26, and was 4.64% gross and 2.33% net in Q1 FY27. Our credit cost on total asset for Q2 FY27 stood at 2.03%, as against 1.68% in Q2 FY26 and 1.66% for Q1 FY27.
Parag Sharma: Our cost to income ratio was 22.52% in Q2 FY27, as against 27.76% recorded in Q2 FY26. Our cost to income ratio in Q1 FY27 was 25.48%. The board also declared an interim dividend of INR 6.5 per share. That is 325%. The record date for the entitlement thereof has been fixed at 29 October 2026. On the liability side, the total liability stands at 2,36,271, broken up into public deposits, which is 31%. Non-convertible debenture, that is capital market borrowing at 15.71%. ECB loan and bond at 16.5%. The domestic bank borrowing and institutional borrowing is at 21%, and securitization at 14%. The cost of liabilities on balance sheet is 8.41% versus 8.56% in the previous quarter, with a reduction of 15 basis point. From March, it is down by 18 basis point.
Parag Sharma: The incremental cost of fund for the quarter was 7.3% versus 7.7% in the previous quarter. The liquidity coverage ratio was 303% versus 262% in the previous quarter. The liquidity buffer continues to be strong to repay our next quarter's liability. Leverage ratio was 2.16 times versus 2.14 times in the previous quarter. In March was 3.82. The capital adequacy ratio is at 33.24% versus 34% in the previous quarter. I think with this, we will open the forum for question-and-answer. Thank you.
Operator: Thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask a question may press star and then 1 on their touchtone phone. 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. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Your first question comes from the line of Chin Tan with Autonomous. Please go ahead.
Chintan Joshi: Hi. Good evening. Thank you for taking my question. Could we start with asset quality? There is a step-up in Stage 2, Stage 3 loans across construction equipment, gold, MSME. Could you help us understand what is kind of creating this increase in Stage 2, Stage 3 loans? How do you see provisioning costs play out for the full year? Your guidance from the previous quarter was around 200 basis points. What is your expectation given that we have seen some deterioration this quarter? That is my first question.
Parag Sharma: It is basically the seasonal and also from certain geography where there are less rainfalls. We do not expect this to be a widespread thing. It should contain itself in the festive period if the overall demand remains good. So we do not really see any kind of alarming situation in increase in the Stage 2 or Stage 1. We have sufficient provisioning to manage this. Our guidance will remain at 2% credit cost. In the beginning itself, we said that in case of deficient rainfall, it can go up by around 30 basis point for a short period of time. It will be temporary. I do not really think it is across. It is mostly in the area where it has seasonal impact.
Chintan Joshi: Okay. Just to be clear, on the credit cost, is the guidance still 2% for the full year? Because you are already 2.5 this quarter, it must be higher than 2% for the current year, correct?
Parag Sharma: It is 2.03.
Chintan Joshi: Yeah.
Parag Sharma: On the loan book, it is 2.3. It is not 2.5. I think it will remain at this level for next one or two quarters. Our overall guidance, we said that it is 2%, but in select areas and select products, it can go up to 30 basis point more.
Chintan Joshi: Okay. Fine. In the big scheme of things, where your margins are, these are not the biggest moves, but still, thank you for the color. On the NIM and NII, there has been good development there. How should we think about NIMs going forward? What is your take on evolution of cost of funds over the next year? How should we think about your loan yields? If you could give some color there as well.
Parag Sharma: Net interest margin is because of the capital infusion, there is a temporary increase in the NIM. It is likely to remain at this level maybe for another one quarter or two, then slowly coming down. In the medium term, it should come to around 9, then maybe in the long term, it will come to around 8.5.
Chintan Joshi: Could you explain the drivers of that as well? What drives that movement?
Parag Sharma: See, basically what happens is as the fresh capital is there, the capital cost being less, or no cost, the NIM expansion happens. As the interest rate environment also will play some role here, as the cost of fresh borrowing goes up, then NIM can come down to some extent. But we will be able to increase the lending rate from the fresh loans, not on the existing loans.
Chintan Joshi: Okay. So it is the typical ALM that is causing the moderation. Could you give some color on where your incremental cost of borrowing is likely to be over the coming quarters? We have already had one rate hike. I am sure that has been passed on to you with perhaps more rate hikes on the way. What is the starting point of cost of funds, and then we can adjust it for incremental rate hikes.
Parag Sharma: Cost of liabilities on book is 8.4, and I do not expect the incremental cost to be more than 8 as of now. That is, be it our bank borrowing or the retail borrowing and other instruments like securitization and all. But if the rate hike happens and capital market rates move up, I think that can slightly go up, which is as of now, close to around 15% of our liabilities. Incremental cost can slightly go up from 8% to around 8.35% level. But still, that overall liability is being at 8.4, I do not expect the overall liability cost to go up for us for the entire liability book.
Chintan Joshi: Okay. Thank you. One final question on MSME, if you can give some more color on what is causing the increase in stage 2, stage 3 loans. What is happening in that product area? I know that you are trying to get into mid-ticket items product. Could you give some color in that MSME area?
Umesh Revankar: See, MSME is a huge opportunity, and we are getting into more geography. Initially, our MSME was mostly focused in the southern market. As post the merger, because MSME lending was done through earlier Shriram City Union book, then we are now expanding it to all India. We expect MSME book to grow much faster than other segment because of the bigger geographical reach. It is only bigger geography will give us higher growth, and that is how MSME book will be growing faster.
Chintan Joshi: Okay. So it is more geographical or you are also increasing your ticket sizes?
Umesh Revankar: Ticket sizes-
Chintan Joshi: Or combination.
Umesh Revankar: No, it is the combination of both, but wherever we have a comfort, then ticket size will go up.
Chintan Joshi: Okay, got it. Thank you so much.
Operator: Thank you. The next question comes from the line of *Zhihui Tao with Sanford. Please go ahead.
Zhiyuan Tao: Hello. Am I audible?
Umesh Revankar: Yeah.
Zhiyuan Tao: Yeah, thanks for the opportunity. Just on growth strategy in the current situation, given the uncertainty of rural income in the H2, are we still going aggressive to push growth or are we thinking about maybe tightening some filters? How should we think about the growth for this year?
Umesh Revankar: The growth, we have been cautious, even though our initial guidance was 18% growth. Looking at the impact of the war situation in West Asia and the weak monsoon, we have been growing a little less than that. in Q1, our growth was around 15%, in Q2 it was 17%. We will be growing anywhere between these two, 15% to 17%. So we are very cautious in our growth.
Zhiyuan Tao: Okay. Just to double-confirm, your credit cost guidance for the current year is 200 basis points plus 30 basis points temporarily, so 230 basis points, right? Then we expect to come down after maybe a couple of quarters.
Umesh Revankar: The credit cost, we had given a long-term guidance of 2%, but temporary, maybe certain geographies, it may go up by 30, 40 basis points is what we indicated. Being a seasonal and monsoon being weak, we have seen a little increase in stage 2 and stage 1 in certain geography. I believe that it will be seasonal, and it should get normalized to overall expectation of 2%.
Zhiyuan Tao: Got it. Thank you so much.
Operator: Thank you. The next question comes from the line of Piran Engineer with CITIC International. Please go ahead.
Piran Engineer: Yeah. Hi, team. Thanks for taking my questions and congrats on the quarter. Just one or two clarifications. Firstly, sir, this MSME lending growth, which has just suddenly picked up this quarter, is there an ECLGS portion of it also?
Umesh Revankar: No, we are not aware of any ECLGS.
Piran Engineer: Okay. This quarter we disbursed almost INR 10,000 crores. In the peak, it has been INR 7,500 and last few quarters we are doing around INR 6,000 crores. Just a sudden 50% jump, what drove that?
Umesh Revankar: See, we have been
Piran Engineer: In disbursements.
Umesh Revankar: I know. We have been informing in the previous quarter call also that we are focusing on MSME and we are reaching out to larger geography. Earlier, our focus was mostly in the southern market and to some extent in the western market. Now we are growing across India. The MSME growth is mainly because of larger geography we are reaching out.
Piran Engineer: Okay. And sir, just one more. Other comment that you made that near term for one or two quarters NIM will be at these levels, and then in the medium term it will decline to 9%, because the equity capital gets utilized. But on the other hand, our borrowing cost will also keep going down, right? Net NIM should not decline.
Umesh Revankar: No. We are talking about increasing interest cost. That is one thing. Also, as we lend to more new vehicles, there the yields are little lower. Definitely there will be some NIM compression.
Piran Engineer: Okay. And just last one from Parag, sir. What proportion of our bank borrowings have been migrated to EBLR? Or we are still on MCLR with some banks?
Umesh Revankar: We will get back with the numbers through Sanjay.
Piran Engineer: Okay, sure. Thanks, and wish you all the best.
Operator: Thank you. The next question comes from the line of Raghav Garg with Ambit Capital. Please go ahead.
Raghav Garg: Hi, good evening and thanks for the opportunity. I just have two questions. One, in your total disbursements and your AUM, what is the contribution from new vehicles, and if you can split that between commercial vehicles and passenger vehicles.
Parag Sharma: The breakup of new and used will be provided through Sanjay, so you can reach out to Sanjay post the call. He will help you out.
Raghav Garg: Sure. What would be the yield differential between the new and used vehicle financing?
Umesh Revankar: Normally, it will depend upon segment to segment. It will be between 200 to 400 basis points.
Raghav Garg: Understood. One more question, if I can ask, please.
Umesh Revankar: Yeah.
Raghav Garg: Here I see, I heard you out on the asset quality bit. If I look at the slippages which have gone up some 50% YOY, you would attribute that entirely to the geographical disturbances because of, I think you are saying weak rainfall or less rainfall. Is that the only reason, or there is something else also to it?
Umesh Revankar: It is largely due to that, and we cannot have a pinpoint reason everywhere. India is such a large country, there will be fluctuations in the income. But drought-prone areas, we see it little higher.
Raghav Garg: Understood. Any data that you can give, how much of your slippages would have come from, say, the drought-prone states or areas, if you would have worked that out?
Umesh Revankar: I do not have it right across. I will ask Sanjay to provide.
Raghav Garg: Sure. That's all from my side. Thank you.
Operator: Thank you. The next question comes from the line of *Dheeraj Mali with Verifive. Please go ahead.
[Analyst 1]: Good evening, sir. Thank you for the opportunity. My question relates to the reports of alleged unauthorized loan account in Kerala. Could management clarify the current status of investigation and the root cause of this incident? Given the company branch expansion plan, what measures are being taken to ensure that expansion does not compromise KYC verification and employee oversight?
Umesh Revankar: This question will take it offline, so you may reach out to Sanjay and then he will assist you in this.
[Analyst 1]: Okay, fair enough. My second question is, what progress have you seen in the construction equipment segment? Since your previous guidance that the loan book would start growing from Q2 FY27. Is the recovery demand progressing as expected?
Umesh Revankar: The construction equipment sales have grown up and the demand is picking up now. Last year, our overall construction equipment book came down because of the government spent on infrastructure came down and demand came down. Now in the last quarter, we are seeing the government spend is going up and slowly the demand for construction equipment is coming back.
[Analyst 1]: Okay, fair enough. Yeah, that's it from my side.
Operator: Thank you. Your next question comes from the line of Kunal Shah with Citi. Please go ahead.
Kunal Shah: Yeah. Hi, sir. Firstly, as you indicated in terms of the credit cost, it might be elevated for a couple of quarters, and we are seeing higher slippages in a few of the geographies. What are the tightness in the credit filters, if you had done in any of these, and should it actually impact the growth momentum? Because this quarter, when you look at it with the credit cost, still the growth is much higher. It is almost like 5-odd percent quarter-on-quarter. Would this lead to some kind of a moderation in the overall growth momentum as well, with the tightness in the credit filters?
Umesh Revankar: See, the seasonal impact has nothing to do with the credit filters. We will have normally proper credit filters done at every geography, have a separate credit filter. But a sudden effect, I had done some loan at 2 years back, and there is unseasonal negative impact because of certain reason, that will have some impact on the performance of the loan. So definitely, whenever the environment are a little against, like economic activity is slowing down, only then we decrease our LTVs and tighten the lending. Otherwise, we don't really change the LTV norms.
Umesh Revankar: Our credit filters, for example, will remain almost same for the full year, unless there are certain reasons to believe that the economy is slowing down. Our particular segment is not doing well. So we don't see any of that, and all the economic indicators say that India is growing well. Demand is quite good. We are also witnessing the demand. In fact, the demand from rural was much higher in the last 2 quarters. Only now, in the last 1 month, we have been a little cautious on certain drought-prone areas.
Kunal Shah: Okay. Overall, in terms of growth, you still indicated you would be growing at 15% to 17-odd percent. Maybe this quarter-on-quarter run rate was 5-odd percent. Generally, H2 is better than that of H1. We are already more than 8-odd percent or so. What is making us guide slightly slower? Maybe even if we assume, like I said, this is 5% this quarter and it picks up in Q3 and then maybe similar level, then also it takes it to a slightly higher percentage. So I was just trying to gauge whether maybe credit cost is slightly making you more conservative on the growth side, or this 15% to 17% is a relatively conservative growth guidance.
Umesh Revankar: See, basically because of the impact of the monsoon, we are a little cautious in certain geographies. That is the main reason to give a conservative numbers.
Kunal Shah: Okay. How much would this drought-prone area be as a proportion of AUM, if we have to look at it?
Umesh Revankar: I do not have the number, but generally Maharashtra, Karnataka, Telangana are the largest hit now. We have a reasonably large size there. But exact numbers I can give to Sanjay.
Kunal Shah: Sure. Then in terms of the utilization of liquidity, to what extent are we done? When I look at cash plus investments, maybe it is down to like INR 31,000 crores, INR 32,000 crores from INR 38,000 crores. How much of utilization and what level we would be comfortable in this kind of a macro environment? In terms of borrowings, is it like now we should start to see the increase in the borrowings also coming through, or maybe there is still the room to repay the borrowings going forward and manage the maybe overall, at least on the borrowings side and not have too much of an impact on the funding cost, yeah.
Parag Sharma: Yeah, I think this quarter we have started our borrowing program, be it bonds, bank borrowing, it is back to the pre-March level. We have borrowed around INR 27,000 crores in the last quarter. Liquidity-wise, we have brought down the liquidity and it is now at our 3 months of future liability level. Nothing of excess liquidity now, and our borrowing program will continue the way it was in the previous quarters.
Kunal Shah: Okay, so now it will be almost equivalent to the AUM growth. Whatever AUM, maybe now we will have to borrow and there is no excess liquidity which would be applied towards the growth.
Parag Sharma: Correct. That is right.
Kunal Shah: Okay, got it. Perfect. Yeah. Thanks. All the best, yeah.
Operator: Thank you. The next question comes from the line of Shreepal Doshi with Equirus. Please go ahead.
Shreepal Doshi: Hi, sir. Thank you for giving me the opportunity. My question was on, again, on the increase in GS2 and GS3. Is it purely because of the drought situation in the states highlighted by you, or is it also because of the heavy monsoon or flood-like situation in the northern part of the country? If you have to attribute a weight, how would it be, the impact?
Umesh Revankar: See, flooding is something very normal in the monsoon season. It will not have any negative impact. It is temporary, some 2, 3 days impact will be there. That will not impact the overall progress or economic activity. The drought-prone areas only will have a lower income due to the aggregate output being lower. When the income slows down, consumption comes down, overall demand and economic activity comes down. These are the main reason where the businesses slow down and cash flow gets stressed. Yet people normally miss out on 1 or 2 EMI. That need not really worry us because most of our lending is against the asset. The asset values have remained very strong throughout. There is real value of every asset has been quite good. Nothing really to worry about a long-term prospect or increase in the credit cost.
Shreepal Doshi: Got it. The second question was on the construction equipment segment. While we have seen strong bounce back in disbursements, the GS2, GS3 indicators here also show an increase. What is it that is giving us comfort on the incremental side that we have got back to high disbursement phase?
Umesh Revankar: Repeat again, please.
Shreepal Doshi: In the construction equipment segments, there is a strong bounce back in the disbursements. However, if you look at the GS2 and GS3, the asset quality indicators that continue to go up. What is it that is giving us comfort or how to read into these two data points?
Sunder Subramanian: If you see the absolute amount, it is still coming down quarter-on-quarter, even though the disbursement have been better this quarter. The previous quarter's gross stage 3 was INR 874 crores absolute amount, and this quarter it is INR 862. Similarly, gross stage 2, if you see it is INR 953 previous quarter, this quarter is INR 953. Not much of a difference as such. It is more of a denominator effect, which is causing the spike in the percentages.
Shreepal Doshi: Okay. Got it. Got it, sir. Thank you so much for answering my question, sir.
Operator: Thank you. The next question comes from the line of *Vivek Singh with Trading Securities. Go ahead.
[Analyst 2]: Hi, sir. My question is on the cost of funds. Earlier we had guided a 100 basis points compression in cost of funds because of the various factors. Does that guidance still stay or is there a revision on that part?
Umesh Revankar: We also mentioned that in case the rates don't go up, we will be able to reduce. As of now, this quarter, it has come down by 15 basis points. If rate further goes up and continues even at the current level, we may not be able to reduce our borrowing cost, but we are confident of maintaining it at the current level.
[Analyst 2]: Okay. Sir, in terms of the asset quality, if I look at the accretion from the MSME segment in terms of the GS3, it is coming at incrementally the accretion on GS3 from the MSME is quite higher compared to its share in the disbursement. Any color, what cohort or is there any specific geography which is not performing as per our earlier report or what we had envisaged earlier?
Umesh Revankar: *What is that? No, basically, as I was explaining you, in certain geographies, the seasonal impact is there, therefore there is an elevated stage 2 and stage 1. We believe it is a temporary one and it gets normalized in the subsequent quarters.
[Analyst 2]: And sir, what will be the share of unsecured exposure in MSME?
Umesh Revankar: Unsecured?
[Analyst 2]: Yeah, unsecured MSME.
Sunder Subramanian: 28% is unsecured and-
Umesh Revankar: 28% is unsecured.
[Analyst 2]: Okay. Got it. Thank you.
Operator: Thank you. The next question comes from the line of Abhishek Murarka with HSBC. Go ahead.
Abhishek Murarka: Yeah, sir. Good evening. Am I audible?
Umesh Revankar: Yeah.
Abhishek Murarka: Yeah. So sir, my question is on gold similar to what was just asked on MSME. GS2, GS3 growth for the past 3 quarters, if you look at the Q2 movement, it is very high. I understand there will not be losses, so obviously I am not worried about that. Have you looked into reasons why GS2, GS3 are going up? I mean, apart from the macro reasons or rain-related reasons, any micro reasons specific to your book why GS2, GS3 are going up?
Umesh Revankar: No, it is basically because we had introduced EMI and interest servicing gold loans.
Abhishek Murarka: Okay.
Umesh Revankar: People are habituated to servicing only Bullet repayment. We are trying to introduce because they can get little more loan if they opt for EMI and interest. That is the only thing. Once people get used to it, then I think there may not be a challenge, since they are used to only bullet payment. The servicing is not on time. That is the main reason.
Abhishek Murarka: So, sir, when a loan gets into delay, it gets into 0 to 30 or 30 to 60. At that time, what is the measure you are taking? Because that is the time when you have to tell the customer that you have to pay on time and not delay, right? What do you do at that time, and why is it that you cannot arrest it even 90 days later? Because GS3 means that 90 days have passed at least. After you start calling these people-
Umesh Revankar: Abhishek, we can always take action and sell the gold and appropriate it. So we do not have any credit cost in the gold loan. You understand?
Abhishek Murarka: No, I understand that, sir. So I am not worried about losses.
Umesh Revankar: For the first time.
Abhishek Murarka: Like I said upfront.
Umesh Revankar: Yeah, upfront. We have to educate the customer.
Abhishek Murarka: But-
Umesh Revankar: It is educating the customer. We have to educate the customer saying that interest has to be serviced every month. So the communication, educating takes time.
Abhishek Murarka: Okay. So by when do you think this stabilizes?
Umesh Revankar: No, it will stabilize. As we are now increasing our communication with the customer, it will stabilize and it become normal. People will understand that paying EMI and interest servicing will help them in taking the gold loan much more, what you call. They also have a higher amount of gold loan because LTVs are little higher for that. Also their credit score will improve when they pay it on time.
Abhishek Murarka: Sure, sir. These customers you are lending to, these are existing customers for other products, or these are freshly sourced customers?
Umesh Revankar: It could be both. But we have what you call exclusive branches also for gold loan, and we also have gold loan as a product in our existing branch. It could be both.
Abhishek Murarka: Predominantly INR 9,000 crores would be to. Do you have just a broad split to understand where this loan is going?
Umesh Revankar: Pardon. INR 9,000 crore?
Parag Sharma: Total.
Abhishek Murarka: INR 9,000 crore AUM.
Umesh Revankar: Yeah, AUM.
Abhishek Murarka: Predominantly it would be to fresh customers, or what is the proportion of let's say existing customers to fresh customers? Just a broad ballpark split.
Umesh Revankar: I don't have number right now. Probably Sanjay will help you to get it.
Abhishek Murarka: Okay. All right, sir. Thank you. Thank you and all the best.
Umesh Revankar: Thank you.
Operator: Thank you. Your next question comes from the line of Renish with ICICI. Please go ahead.
Renish Harishbhai Bhuva: Yeah. Hi, sir. Sir, just one thing on the margin trajectory. When can we expect the entire excess liquidity to get absorbed? When we look at the pre-deal margin trajectory, which used to be between 8.5% to 9%, and then, sir, we know you were expecting the structural decline in the cost of fund by almost 100 basis points, and I can understand that the rate cycle reversal might be a challenge on that. First of all, how does 9.5% mean in near term moving? Structurally, where do you see ultimately NIM settling when all the excess liquidity gets absorbed?
Umesh Revankar: See, I cannot have the exact number because the repo rate increase, they have done after a long time now, and there is an indication that it may go up further in the next policy rate also. We do not know. If the food inflation does not go up, it may not go up. So there are so many ifs and buts. Also there is a view on the war being stopped, crude going down, so many things. How can I exactly tell you the-
Renish Harishbhai Bhuva: Yes, sir.
Umesh Revankar: How it will move? It is not. That is why we are telling you in the medium term, it come down to around 9%. In long term, it will settle down at around 8.5%. But exact timing is not possible to calculate.
Renish Harishbhai Bhuva: Okay. You are saying that steady state NIM will be 8% to 8.5%. Factoring our entry into large ticket, new vehicle, et cetera, is that the kind of thing?
Umesh Revankar: The new vehicle will keep growing in our book because we would like to retain our customers. That is one factor. But the other factor which is not in our control is the interest rate environment.
Renish Harishbhai Bhuva: Correct. But in that case, doesn't our pricing policy factor those changes and still give us a closer number to our, let us say, the planned NIM, et cetera, or our nature doesn't allow us that flexibility?
Umesh Revankar: Pricing I can do only for the new loan that I am booking. For existing loan, I cannot do it.
Umesh Revankar: I can price it only for as the new loans. We do not have a floating rate scenario. NBFCs normally have fixed rate lending.
Renish Harishbhai Bhuva: Got it. Okay, sir. Thank you.
Operator: Thank you. The next question comes from the line of *Aditya Tiwari with MKL Research. Please go ahead.
Aditya Tiwari: Yeah. Hi, good evening. My first question is regarding the gold financing that has accelerated around this quarter. In previous quarters, the management has stated that the gold book will grow faster than the loan. But there are some signs of concerns in the gold loan segment in terms of there has been a rising instance of multiple borrowing against gold loans. Few of the companies have also stated that there has been on an industry level, the gold loans are emerging as a and few of the banks have also deliberately moderated their gold loan growth. In fact, for the Q2 NPA assets for our company has also increased. Is there any signs of concerns that you are seeing on an industry front in terms of gold loans?
Umesh Revankar: No, we don't really see any kind of challenge as far as proper care is taken in identifying the customer or credit process, and also valuing the gold properly. As I was explaining you, main reason for increase in the stage 1, stage 2 was the interest and EMI products, customers not understanding the product and waiting for the 30 days. That's the main reason. We don't really see any challenge, and we feel that gold loan industry or opportunity in gold loan is very high. Therefore, I don't want to speak on behalf of the industry because we are having a small portfolio, but we feel that there's a very bright opportunity in growing our gold portfolio.
Aditya Tiwari: Okay. In Q1, the management had stated that the target of the gold financing is to grow the book double in the next three years from around 2.5% to around 5% of the book. Does that guidance remain intact or any kind of changes or revisions are there?
Umesh Revankar: There's no change. We'll go as per the plan.
Aditya Tiwari: Okay. Just wanted to confirm regarding the AUM growth guidance for FY27, which has been cut to around 15% to 17% from 18% earlier. Right?
Umesh Revankar: Yeah.
Aditya Tiwari: The credit cost guidance for FY27 has increased to around 2.3% to a range of around 2.4% from 2% earlier.
Umesh Revankar: I said there will be temporary increase of 30 to 40 basis points and not for the full year. So I feel the full year credit cost can be much lower than the 2.3%. Temporarily, it may be for this quarter and next quarter.
Aditya Tiwari: Okay, got it. Just wanted to confirm one last thing. In the MSME segment, the stress is predominantly because of the drought-affected regions, right? There are not any other reasons for this stress in MSME.
Umesh Revankar: I do not really see any other reasons because other factors like increase in cost of raw material, increase in labor cost, all those things have been already factored. So only in certain geographies there are some challenges because of seasonality.
Aditya Tiwari: Okay. Got it. Thank you so much.
Operator: Thank you. The next question comes from the line of Pranuj Shah with 3P Investment Managers. Please go ahead.
Pranuj Shah: Hi. Thanks for taking my question. First question is on the OpEx growth has been quite benign despite your disbursements picking up pretty sizably. Is there any reversal? What is driving that?
Sunder Subramanian: Well, the previous quarter, we had the annual bonuses released for the back office team, and hence the staff cost was slightly elevated. The current quarter was more normalized. Having said that, the medium to long-term guidance will be the cost to income will be around 25%.
Pranuj Shah: Sorry, when you say 25%, it is on the current base of your NIMs, right? Because your NIMs also you are saying will come off pretty meaningfully in the medium term.
Sunder Subramanian: Yeah.
Pranuj Shah: That is you are considering an 8.5% NIM, right?
Sunder Subramanian: No, that is for the long term. That is what Mr. Revankar had mentioned. In the medium term, it will be hovering around 9%, is what he had mentioned.
Pranuj Shah: Understood. Even if I look at your OpEx to AUM, that has fallen off pretty meaningfully. If I were to just look at in terms of OpEx growth relative to AUM growth, should that continue to trend downwards, or how should be the trajectory there?
Sunder Subramanian: It should be in the same level.
Pranuj Shah: Sorry, your Q2 is at 2.5% level. Do you expect that kind of an OpEx to AUM to continue?
Sunder Subramanian: See, what will happen is that there will be additional cost on the technology front, and that may have an impact on the overall OpEx.
Pranuj Shah: Okay. Second question is, can you disclose what is your disbursements in gold loan this quarter and what is your LTV this quarter and last quarter?
Sunder Subramanian: We have the disbursement. The current quarter gold disbursal was INR 5,443 crores.
Pranuj Shah: Understood. What is the LTV on your book, including the previous accrual?
Sunder Subramanian: It should be around 72% to 73%.
Pranuj Shah: 72% to 73%. What would this be last quarter?
Sunder Subramanian: Should be the same region. There is nothing significant change in that. The disposal for the previous quarter was INR 5,153 crores.
Pranuj Shah: Yeah. Thank you. Thanks a lot. That is it from my end.
Sunder Subramanian: Okay.
Operator: Thank you. The next question comes from Hardik Shah with MLP. Please go ahead.
Hardik Shah: Hi. Thank you for the opportunity, sir. My first question is, in terms of your assessment of the IRDAI circular that has come through, what could be the potential impact for us in terms of insurance income? Number one. Number two, to clarify the understanding on credit cost. You guided for 2.3% for full year. If you can kind of clarify in terms of how that would trend directionally from Q2 to Q3, and how are you assessing it for the H2? Because your H1 credit cost is around 2.1%. Full year 2.3% would imply more than 2.4% credit cost for H2. So, how to think about this?
Umesh Revankar: On the second question, I told very clearly that it will be temporarily elevated for this quarter and next quarter. We cannot be giving you, at this stage, a number 2.3 for the full year. We can't be. I said it's a temporary 30, 40 basis point for one or two quarters. We would like to wait and see how it will impact. Generally, affected period only it goes up. That's one. As far as the IRDAI is concerned, it's a draft guideline. There's a representation from the manufacturers on the distribution income to the distributor. Because the growth in insurance is dependent on distributors, major impact on the distributor's income will impact the growth in the insurance business.
Umesh Revankar: I believe that IRDAI will look into it and probably come out with revised guidelines or revised rates. We are waiting for the same. However, given current state of affair, the income may come down by 50% of what it is now. For Shriram Finance is concerned, the fee income due to distribution is very insignificant, very small portion of our total income. We are not majorly impacted.
Hardik Shah: Can you quantify that?
Sunder Subramanian: The previous year, full year, the insurance commission that we received was around INR 350 crores. If the proposed guidelines come, there may be around 100 odd crores of impact on that. For the size of our balance sheet, it is not material.
Hardik Shah: Understood. Very clear. Perfect. Thank you.
Operator: Thank you. Ladies and gentlemen, we will take that as our last question for today. I now hand the conference over to Mr. Umesh Revankar for closing comments.
Umesh Revankar: Thank you everyone for joining. As you are aware, there were multiple headwinds for us in last two quarters. One, due to West Asia crisis, where the petroleum product prices went up and so many other raw material prices went up. Secondly now, due to El Niño situation, monsoon being weak. In spite of that, the company has performed very well, and we are very confident to do much better in the busy season. Normally, second half of the year is much busier, and we are confident of outperforming and coming back to you again. Thank you very much.
Operator: Thank you. On behalf of Shriram Finance Limited, that concludes this conference. Thank you everyone for joining us, and you may now disconnect your lines. Thank you.
