Stress in MFI business led to dip in profitability in Q3FY25, says L&T Finance CEO

Sudipta Roy, managing director and chief executive officer of L&T Finance

L&T Finance’s profitability in the third quarter of the current financial year has taken a hit due to stress in the microfinance sector, said Sudipta Roy, managing director (MD) and chief executive officer (CEO) in an interview with Moneycontrol.

“In the microfinance business, overall in the industry, there has been an ongoing asset quality challenges for the last couple of quarters...Post our recovery efforts, the credit costs in the microfinance business has increased and that has found its way into the P&L,” Roy said during an interview.

Amid stress in the sector, L&T Finance has reduced their disbursements in rural business finance by 16 percent on-year and 15 percent on-quarter. As per investor presentation, the disbursements in rural business finance stood at Rs 4,599 crore in Q3FY25, as compared to Rs 5,435 crore in a quarter ago period, and Rs 5,476 crore in a year-ago period.

Following this, rural business finance book has seen a dip of 1 percent on-quarter to Rs 26,231 crore in Q3FY25, from Rs 26,539 crore in Q2FY25.

In October-December quarter, L&T Finance reported a 2.2 percent fall in its net profit at Rs 626.40 crore. On sequential basis, net profit fell 10 percent.

On the collection efficiency front, Roy said that should start improving in the fourth quarter of the current financial year, and may normal by the Q2FY26.

Edited excerpts:

How has collection efficiency been during this stressed period in MFI?

Our collection efficiency have kept dipping from 99.43 percent in September, to 99.33 percent and 99.26 percent in October and November, respectively, but after that it started inching up from the month of November, and it closed at 99.39 percent in December.

Our efforts of focusing on identifying the right customer and various other drills that we have in place over the last four years, have helped us maintain collection efficiency.

We are confident that in the Q4, collection efficiency should start improvement further.

The monsoons have been good, the rabi crop has been good. There is already a reasonable amount of liquidity in the markets. The government grants and the income generation schemes have started once again and we are expecting a good rabi crop as well. On back of this, we believe that the collections efficiencies will probably improve over the next couple of months, from the current levels it should normalize around middle of Q2FY26.

Why margins have reduced sharply?

Margin dilution is actually self-generated because we do not want to go ahead and disburse during a difficult scenario. So, in a way, we have deliberately slowed down our rural business finance disbursements, which is high yielding business, when you slow down the disbursement, obviously, it has got an impact in the NIMs and fees.

Once the situation improves, NIMs and the fees to improve in a phased manner over the full year FY26.

Why profit has taken a hit in this quarter, what went wrong?

In the microfinance business, overall in the industry, there has been an ongoing asset quality challenges for the last couple of quarters. The flows of those portfolios become GS3 and NS3. Post our recovery efforts, the credit costs in the microfinance business has increased and that has found its way into the P&L.

Overall credit cost has become 2.91 percent before the initialization of macro provisions, up from about 2.59 percent previous quarter. This is one reasons for increase in credit cost.

The increase in credit cost has found its way into a little reduced profitability this quarter.

Your LTF plus 4 has gone down, what are the future projections?

Overall bucket of LTF plus 4 is about 4 percent and it is running down at a fast rate. Overall it is running down by about 1 to 1.5 percent depending upon the quarter. I would expect that this would almost come to 0 percent in the next 4 to 5 months.

We have stopped disbursements to this segment 9 months back. Going ahead to bring this down further, we are going to just focus on collections in this segment. Now only our step will be to monitor this portfolio and make sure that the collections come regularly.

Is 100 percent retailisation on the cards in Q4?

Retailization, will go from 98 percent to 100 percent slowly, it won't go that fast. Now, when there are Rs 2,897 crore wholesale assets, it will go very slowly. It is so negligible and there is no need for us. These are standard assets.

Any plans for ECB?

We already have sanctions in place, part of which have already drawn down. The balance we will draw down as per the requirements.

Approximately, $700 million were in placed, of which we have drawn down $450 million. Balance to be drawn is $250 million. We can draw it down at any point of time, depending on the requirement.