L&T Finance's personal loan book likely to see more thrust from next quarter amid new fintech partnerships

He also said that the company would issue retail bonds between the second and fourth quarters of the current fiscal because the company wants retail investors to invest in the company.

Joshi further added that the company may see 30-35 basis points (Bps) increase in cost of funds.

Edited excerpts:

You have achieved a 95 percent retailisation, is this enough or do you want to make it 100 percent retail?

The balance 5 percent book is a standard book and we have been getting around 12 percent yields. Now that there are certain assets on the books which are like IL&FS assets and have gone to Real Estate Investment Trusts (REITs). Now if I go to the market to try and sell it, people will offer me 30 percent, so that’s a 70 percent discount which I would not be keen on.

I am receiving money on a regular basis. So it is just like an investment for me now, So I would not be desperate now going forward to really run down this book at any cost. Yeah, but if there is any interested party who's able to give me a reasonable amount for the same, I would like to keep bringing it down. So the idea is that over the next couple of years, we should be in a position to keep bringing down.

If today I go to the market and say that I am completely exiting the wholesale book, then the next quarter I will have to show this as discontinued operation on the accounting. I have certain challenges on making that statement because then the Auditors would insist that show it as a discontinued operation.

Your personal loan disbursement and loan book grew marginally in this quarter compared to other segment, is this is an effect of RBI’s risk weight norms which prompted you to go slow?

This is the first quarter where we have now gone back to our original levels of a  year ago. So in between those three quarters, we have actually brought it down last quarter. And now this quarter we have actually almost equalled what we did last year.

A significant part of this is a cross sell, which is to our tested two wheeler customers and over a period of time there are going to be new types which we are working on. So, from the next quarter onwards you will see more thrust on personal loans due to a few fintech partnerships we are working on, but the quality of this book will going to be much better.

Recently you had tied up with Phonepe and the are 3-4 more tie-ups pending. Where are they right now? Early or end stage?

So, they are at different stages. One of them is in the last stage, which we will announce maybe sometime in the next quarter and the others are in the early or mid-stage.

In all the quarters we have seen some incremental increase in your borrowing. So in next quarter how much are you going to borrow?

In this quarter what has happened is we have actually made a comparison on a year on year basis which has clearly been the focus at least for the last 18 to 24 months on getting money through the priority sector lending (PSL) route - the tractor and as well as micro loans, both these asset books actually are eligible for PSL.

So, there has been a big push from our regulator that banks exposure to NBFC should keep coming down. They also keep nudging us towards getting out of the banking exposures and taking more market exposures or find other diversification opportunities. Now if you look at the total banking exposure is actually close to 51 percent, but out of that 51 percent, 23 percent is actually the PSL borrowing. RBI has absolutely no issue with that. Now our non-psl is 28 percent. This percentage needs to be compared with a 50-55 percent, which the other and large and NBFCs have in terms of exposure.

So we are looking at going in for retail bonds which we used to do. So we are restarting with it. We used to do this during Covid when we had done about three or four issuances and we got 100 percent subscription. These are public issues of bonds. We don’t have a retail fixed deposit license so when we talk about realisation utilisation it can't be restricted only to the asset side, on the liability side also we want retail investors to invest in us and we will give them that opportunity to invest through our retail bonds. So we will be coming up and tap bond issuance, the timing of which will depend on when we really need that liquidity.

We already have lines ready for drawdown, through the ECB route. There are at least two to three sanctions which are available. We will be very opportunistic till at least March. We will see which is the least cost line available and first draw it down. Then when there is a need we can go to the market but I am hoping that between Q2 and Q4 that will be at least one retail bond issue that will start off with and then it will be on tap.

We dont really feel the need to borrow from the overseas market. At least till March 31, we have enough options available.

Why is your cost of funds rising every quarter, is this a warning that you should change the borrowing mix?

In fact, between 2022 and 2023 our weighted average cost came down by four bps to 7.46 in 2023 and in 2024 it went up by about 34 basis points, and so on a two-year  combined basis, we just went up by 30 bps. Now this is in the background of RBI increasing the repo rate by 250 basis points.

So, whatever transmission banks have made,  the moment repo rates increase the market rates also increase so we know the treasury has done a pretty decent job of ensuring that the overall cost of borrowing has gone up by just 35 basis points.

We expect that even this financial year. We should see another 30 to 35 basis point increase, out of which you have seen a three basis point increase in Q1.

You mentioned CoF should grow by 30-35 bps.  Currently CoF stands at 7.85 percent… so with this it will go beyond 8 percent, so you think at that rate the current level of NIMs will be protected?

We always look at NIMs plus fees and directionally, if you recall about a year back, we were saying that the NIM plus fees will be in the range of 11 percent to 11.25 percent. But we were fortunate that it was 12 percent plus now directionally as our retailisation is coming to an end. I mean in terms of degrowth of the wholesale balance sheet, the NIM plus fees  will now stabilise at somewhere around 11 percent.

How did the election year affect your operations in the rural business?

Naturally we had some impact in the months of April and May, when it was very hot. It was very difficult for our team members to go and personally meet, this was more in the rural areas where you have to go personally and collect the money, especially for the rural business loans. There is some cash collections also in the farm business. So there, May was also impacted to some extent but we had to really go all out by June to get the collection efficiencies back on track.

I would say that, 99.8 percent collection efficiencies, which were in rural business loans came down by about point one percent to 99.6-99.7 percent in the month of June.

How is L&T Finance looking at RBI’s revised framework on Fraud Risk Management, and how is the company coping with the new updates?

For us, compliance comes right at the top and we have been ensuring that we keep investing more and more in compliance. We strengthen our risk and compliance. We as L&T Finance have always been giving priority to it. But with changing times,  we also have to change. We can't say that whatever we do is the best - the requirements change -  our inspections showed that clearly five years back.