Fedbank Financial Services Ltd (NSE: FEDFINA) Q3 2025 Earnings Call dated Jan. 24, 2025
Corporate Participants:
Parvez Mulla — Managing Director and Chief Executive Officer
Chattapuram Venkatraman Ganesh — Chief Financial Officer
Shardul Kadam — Chief Business Officer
Analysts:
Shreepal Doshi — Analyst
Renish Bhuva — Analyst
Vivek Ramakrishnan — Analyst
Shubhranshu Mishra — Analyst
Unidentified Participant
Presentation:
Operator
Ladies and gentlemen, the call will begin shortly. Please stay connected good, ladies and gentlemen, good day, and welcome to Fedbank Financial Q3 FY ’25 Investor Conference Call hosted by Equirus Securities. As a reminder, all participant line 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 then zero on your Touchstone telephone. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinion and expectations of the company as on-date of this call. These statements are not the guarantee of future performance and involve risks and uncertainties that are difficult to predict.
I now hand the conference over to Mr Shreepal Doshi from Equirus Securities. Thank you, and over to you, sir.
Shreepal Doshi — Analyst
Thank you. Thank you, Nive. Good evening, everyone. Welcome to the earnings conference call of Financial to discuss the 3Q performance of the company and the business updates. We have with us the senior management of the company, represented by Mr Pervez Mulla, MD and CEO; Mr Ganesh, CFO; Mr Rao, CEO for Gold Business; and Mr Amit Singh, Investor Relations Head.
I would now like to hand over the call to Mr for his opening comments, post which we can open the forum for question-and-answer. Over to you, sir.
Parvez Mulla — Managing Director and Chief Executive Officer
Thank you. Good evening, everyone. I would like to extend a warm welcome to all of you for joining the Q3 FY ’25 post-results earnings call. My name is Pervez Mulla, and I have recently assumed the role of MD and CEO of Fed Bank Financial Services. I have been in the BFSI industry for over 30 years with my longest tenure of being ICICI Bank. It is a privilege to talk to you today and share the update for the company. I joined Fed Bank Financial Services in mid-November this year. And during the last few weeks, I have actively engaged with the key stakeholders. These interactions included discussions with employees across various levels, Board members, investors, analysts and the regulator. Additionally, I had the opportunity to visit branches, meet customers, allowing me to understand our operations and on-ground realities. These experiences have provided me first impression insight into the strengths in areas to work on.,
Fed Bank Financial Services is an organization with a strong foundation built and majorly owned by Federal Bank, backed by a strong and committed Board, a diversified investor base and a robust business model. Has a compelling mix of secured play with a wide geographical presence and a diversified product portfolio. I believe this organization has a lot of untapped potential, which represents an exciting opportunity. Petfina is predominantly focused on mortgages and gold loans with a small portion of unsecured business loans.
Our gold loans, which constitute 38% of our AUR business continues to perform well, both on growth and profitability, aided by increase in tonnage and rising gold prices, our productivity ranks as one of the highest in the industry. In our lab business, which constitutes about 24% of our AUF, we have built a stable business catering to customers with prime and near-prime profiles who require a loan against property. It is a scalable and profitable business and runs with a strong focus on execution and through direct assignment allows us income with low capital allocation.
On the small mortgages business side, however, there are a few short-term challenges that the company has faced and these have required our immediate retention. Our small mortgages business is experiencing a moderate level of delinquency elevated. We have seen a delay and drop-in realization for deeper bucket NPA pool. However, we have identified the areas to focus on and are taking proactive steps to address them. First, we have appointed our seasoned leader, Mr Karam as the new Chief Business Officer. Sharthul has been handling various functions in our organization since 2011, including setting up and growing this business in its initial stages.
Second, we have reviewed and refined our policies, tightened lending norms and migrated to a robust new business rule engine supported by Salesforce as our loan origination system, providing objectivity and decision-making at-scale. Third, in certain locations, our collection infrastructure has not kept pace with business growth and we are strengthening our team from up. Fourth, we are implementing product-specific collection structures and have onboarded a dedicated senior collection Head for this business. Fifth, towards enhancing resilience of our balance sheet as a one-time exercise; A, we have showed up our provisions on NPL loans in the mortgage portfolio; B, undertaken a management overlay to factor for the increased delinquencies to take care of the delayed resolutions. We have also done our annual ECL refresh exercise in Q3 and taken additional provisions on that account. These conservative measures, we believe will strengthen our balance sheet.
Our unsecured business, around 12% of our loans has been sourced on an originate-to-sell construct. We have consciously slowed disbursal in this product and from a strategic perspective and at an entity level, we would be pivoting to a more secured construct, more than 90% to 95% and reduce emphasis on this product. We have taken additional overlays on unsecured book as a conservative measure. These measures are crucial to addressing current challenges while fortifying our operational and risk management framework, I am confident that these decisive initiatives will not only resolve immediate issues, but also position us for long-term growth, sustainability and value-creation for all our stakeholders.
With a clear focus, empowered team, a drive for excellence and tough decisions, and we are confident in our ability to navigate this phase of rebuild and revive successfully and bring in a period of predictable and consistent outcomes across the metrics of quality, ROA and sustainable growth. Some of the business numbers are as follows. Our AUM touched INR14,922 crores, seeing an accretion of INR704 crores in Q3, translating to a growth of 5% Q-on-Q, 39% Y-o-Y. Mortgage AUM reached INR7,581 crores and AUM growth of 5.6% Q-on-Q, 38.6% Y-o-Y.
Gold reached INR5,203 crores and AUM growth of 5.4% Q-on-Q, 52.9% Y-o-Y and disbursals have clocked to INR4,395 crores in Q3 FY ’25, up 31.4% Y-o-Y. On the profitability side, our operating profit has grown 30.9% Y-o-Y to INR144.6 crores. However, our net profit stands at INR18.8 crores in Q3 FY ’25, down 71.3% Y-o-Y. This profitability impact is on account of a one-time elevated provision of INR75.5 crores. Mortgage gross Stage 3 stands at 3.3 versus 3.2 Q-on-Q and gross Stage 3 is largely stable at 1.9 at an entity level, the net NPA stands at 1%.
I will now hand over to Mr. Ganesh to take you through the business numbers and the provisioning details.
Chattapuram Venkatraman Ganesh — Chief Financial Officer
Yeah. Thank you, Perve. Thanks everyone for your participation on the call. While Q3 was a challenging quarter for us, sharing a few highlights. We commissioned 28 new branches in the quarter, including 22 in gold loan and six for small mortgages. This takes our branch strength to 793 branches. Overall, AUM was INR14,922 crores as on December 31 31st. This is up from INR12,200 crores as of April 1. In the nine months ending December 31, our AUM has grown 22% in the first-nine months of this fiscal. Of this, gold loans and medium ticket lap have grown 53% and 45% year-on-year respectively, while small mortgages grew 32% year-on-year. The unsecured business loans, AUM has grown 15% year-on-year.
Currently, in terms of split, 51% of our AUM is in mortgages, of which INR3,980 crores is medium-ticket lab and about INR3,600 crores is small. Another 35% of the AUM is gold loans, which crossed INR5,000 crores in the quarter and ended December 31 at INR5,200 crores. Our gold loan AUM per branch increased from INR10.7 crores per branch to INR10.8 crores per branch in-spite of the addition of new branches. And overall tonnage at an entity level was 10.7. Now to new loan originations. Our medium ticket lab continued to clock high-growth with disbursements of INR561 crores in the quarter, up 55% year-on-year. However, there was a minor de-growth sequentially, partly due to a slowdown in Bangalore due to the government mandating ECAS about property records and some challenges with respect to the sale. We have been tightening the policy and process around our small mortgage product and this has resulted in a slowdown in new originations. New originations for the quarter came in at INR172 crores, a degrowth of 26% quarter-on-quarter. Quarter three is historically a weak quarter for gold. In-spite of the aboves, our gold loan AUM grew by INR269 crores, which is 5.45% sequentially quarter-on-quarter and 53% year-on-year.
As Parvesh mentioned, strategically, as we pivot to a more secured construct, we have gone slow on the unsecured business loans and have decelerated originations by 39% Q-o-Q to INR219 crores. On the P&L, our yields have increased by-20 bps and we have been able to hold and even improve cost of borrowings in the quarter. As a result, our spreads have correspondingly grown 20 bps sequentially quarter-on-quarter. Our net interest income is up at INR284 crores, which is a 7% sequential quarter-on-quarter growth and a 30% year-on-year growth. Our gross total income is up 6% sequentially and 27% year-on-year. We were able to hold opex flat quarter-on-quarter at INR178 crores. We had a steady operating performance. Our pre-provisioning operating profit came off better at INR145 crores, which is up 14.5% quarter-on-quarter and up 31% year-on-year. For the nine months of this fiscal, our pre-provisioning operating profit crossed INR400 crores, which is 40% up over the corresponding period of last year.
Now on credit cost. Our credit cost for the quarter stood at INR119.6 crores, which is about 4.2% of our average AUS. With this, the credit cost for the first-nine months of this fiscal stands at 2.4% of the average AUS. Let me deconstruct this for you. We had elevated delinquencies in Q1, which persisted in Q2. We have seen a continuation of the stress in some parts of the small broadgage book in Q3 also. Also, on the NPA pool, where we had seen a dry-up of cash realization, we saw further bureath in Q3, which has necessitated a reevaluation of provisioning on the pool. Out of this INR119.7 crores, our core credit cost is only INR25 crores, which is 88 bps annualized. As we guided last quarter, we have our annual ECL refresh in Q3 of every year. So when we did this exercise, we got a P&L charge of INR19 crores, which is incremental provisioning on the entire stock of the loan book. This, which happens annually accounts for another 67 bps.
We did a thorough evaluation of the NPA book and with a view to strengthening the balance sheet, have decided to do a one-time additional provisioning of INR75.5 crores, which is another 270 bps. It is primarily made-up of two-parts. There is a one-time additional provision on the NPA pool of INR57 crores. This is across our mortgage book and the receivable book on construction finance. With this, we believe our NPA book is adequately provided for. We have also taken additional management overlays of INR18 crores, primarily on Stage 1 and Stage 2 loans in the small mortgage book.
On the GNPA, since we have been able to hold our GNPA flat at 1.9% as a result of the additional provisioning on the NPA bucket, our net NPA stands at 1%, down from 1.5% in the last quarter. Consequently, our PCR on Stage 3 has moved up from 21.85% to 44.75% as of December 31. The provisioning on Stage 2 has also gone up from 11.5% to 12.84%.
On the treasury side, I’ll break it up into two-parts. One is on total borrowings and the second is on incremental borrowings. On a quarter-on-quarter basis, our weighted-average interest cost has gone down by-4 bps from 8.74 to 8.70. This is the 3rd-quarter of consistent decline in weighted-average cost of borrowing and has been facilitated by resets on our external benchmark linked borrowing book. About 88% of our total borrowings are floating-rate in nature. Of these, 41% of our borrowings are external linked benchmarks and another 47% are linked to MCLR. We added one new PSB lender to the relationship and our total partners now stand at 41%. On the incremental borrowings, our incremental cost of borrowing for the quarter was 8.75%, 79% of the incremental borrowings raised during the current fiscal are on floating-rate benchmark, which should help us as rates start going down.
On the balance, which are fixed-rate in nature also, another 17% are of short-term in nature and hence resettable on maturities. Consequently, our debt-equity ratio has also improved to 3.98 from 4.09 on September 30. During the quarter, the company continued to move forward in its policy of deleveraging through co-lending and direct assignment of installment loan. We added one new bank partner for gold loan CLM during the quarter. Our AUM grew by INR704 crores. On the securitization side, we did INR302 crores of co-lending and securitized another INR486 crores across the mortgage book and the unsecured. Through this, we have been able to improve capital adequacy and improve our leverage position.
Currently, our off-balance sheet book stands at INR3,471 crores, up from — up 86% from INR1,864 crore in the previous year. Of this, gold loans held in partner books account for INR875 crores, unsecured business loans securitized stand at INR554 crores and mortgage loans securitized account for INR2,042 crores. Our CRAR stands at 21.6%, up from 21.4% in September. Lastly, our shareholders’ equity as of September 31 as of December 31 was INR2,464 crores and our book-value per share stands at INR66.1.
With that, I hand it over to — to the operator for any questions.
Questions and Answers:
Operator
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press on the touchstone telephone. If you wish to remove yourself from the question queue, you may press R&2 two. Participants are requested to use handset while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Ranish from ICICI Securities. Please go-ahead.
Renish Bhuva
Yeah, hi, sir, and congrats on a good set of numbers during this challenging time. Sir, my first question is on the strategy side. So you did highlight it about relooking at some of the processing, the way business is structured currently. So just wanted to know what is your sort of initial assessment in what areas you know we have to sort of restructure the process, et-cetera? And does that require additional investment? And if yes, you know where do you see cost ratios settling down in near-term?
Parvez Mulla
Yeah. Hi, Renish. Thank you so much. See, as far as my strategic thoughts are concerned, one is, we want to look at capital allocation to-high ROE, ROE businesses. So and clinically look at it. So if business loans are — is not giving us the ROE that we want and if the appetite for a sell-down is not there for business loans, we want to take a tough decision on it and so be it. Then we want to pivot on a secure business construct. If the environment is not helping us make money on it, it doesn’t make strategic sense for us to continue — that’s why we are slowing down that business.
Second is, if you look even in the secured business construct, we want to double down on our lab and gold business. LAP includes our medium-ticket lab business and our small-ticket lab business. We would like to be known as a company which is doing lab. First, there are many players who are doing home loans and also doing lab. We want to be known as a company which is doing lab first. And our gold business is doing well and it is a twin engine strategy, which we have communicated earlier also and it helps us to hedge constructively. Even in the secured business side, we want to look at a mix of high-yield and low-yield. That is why we feel our medium-ticket lab and a small-ticket lab, both go hand-in-hand where one is a high-yield, one is a moderate yield business, one is a moderate-risk the other is a low-risk business.
So that gives us an adequate diversified hedge. We also want to be deep and invested in collections and that is where we were lacking. I personally believe we should have invested into collections. We want to be spending more money in terms of hiring people at the right strategic level as well as at the ground level. Collections in a lower bucket is very different from collection in a deeper bucket, especially when you’re doing the affordable segment. We want to be deep invested and there are models which have done well there.
At our opex side, we want to — we want to solve it by with the aid of tech. Obviously, you might not see it in the immediate — but directionally, we want to go there. We want to look at a frugal opex structure and which will encourage collaboration. So you will see by the next quarter, we telling you about our synergies between our gold branches and our MSCR small-ticket lab branches. Today, our small-ticket lab branches do business separately and our gold branches do separately. By next quarter or FY ’26, you will see us not putting so much investment on the ST Lab branches, but trying to do business through the gold branches and we will pilot some successful models through the gold branches. So more core business, less DA.
Overall, trying to focus on the quality of business followed by profitability and growth and trying to take these provisions so that we can make credit costs more predictable, putting processes, which will allow us to scale our making processes as lean as possible. So the standard stuff, but focusing more on execution and getting the collaboration right.
Renish Bhuva
Got it. So just a follow-up on that is that you know, once we go through this path, there will be a lot of AUM mix sort of will change wherein a small-ticket lab, medium-ticket lab incrementally will grow at a faster pace, unsecured business will grow at a slower pace. High-ticket HL lab might also grow at a lower pace? And of course, as you rightly mentioned, there will be investment towards collection infrastructure, et-cetera. So I mean, why do you see you want to achieve a steady-state ROA, you know, know after sort of restructuring everything. Or is there any thought behind that?
Parvez Mulla
No, definitely there is a thought. See, if you look at our three businesses that I spoke about, our medium-ticket lab business, our small-ticket lab business or our gold business. Our gold business is a good profitable business, very execution focused. We’ve invested well in it. It is operationally run very, very efficiently. And we have a definite ROA glide path to that and we are very happy with the kind of glide path that we are getting on our gold business. And that mix of gold business will always remain between 30% to 40%. So we will be between 30% and 35% and sometimes it might go to 40% when we are trying to slow-down on our BL business.
Our BL business in the next one year, you will see us reducing our contribution from 12% to 5% and then slowly it might slow-down. So that is where the piece will be. Our small-ticket business, which is the small-ticket lab business, you will see us pivoting more, allocating our resources and some of our best people that side. You will see us focusing more on this business, putting in processes, tech on this business so that we can scale this business. This business will grow at a much, much faster pace than all other businesses. But it will be grown with quality and that is why you have a seasoned leader who has handled risk as well as growth and, who is coming in there comes with a risk mindset as well as a growth mindset. So the idea is to scale it.
Today, initially, you will see higher-growth in that business, which we are trying to pay, but it will pivot to a decent growth rate once we put the processes in-place, once we put the tech in-place. And that is that is my only injured business. See, one of the advantages of being in a diversified setup is you have three, four businesses and then one business gets injured, you have the other businesses taking care. But once this business picks up, this will be our pivot business. And I personally think you can look at a 40 30 2010 kind of a ratio or maybe if our business loans slows down, it might go down to 5%. But in that ratio, you will see us putting our portfolio forward. Basically looking at quality then profitable sustainable growth.
Renish Bhuva
Got it. So just last question to Ganesh. So where do you want to keep the PCR? I mean, in this quarter with accelerated provision, we’ve been able to improve our PCR to 40%. Now, of course, this is a one-time exercise, but going ahead on incremental flows, you guys want to keep PCR at 40 or let’s say, you know, typically in mortgage business is lower, maybe at around 25 30 gold literally zero or maybe 15%. So how does one see the PCR moving going ahead?
Chattapuram Venkatraman Ganesh
So no, thanks for that question, Ranish. See, our current PCR rise is incidental to the provisions we have taken. Correct. Our ECL model has shown a rate of — the impact of the ECL refresh exercise is INR19 crores. Now on-top of that, we have taken a management overlay of another INR19 crores. Now that is based on the current empirical data which we see with respect to our delinquencies. If the delinquencies improve based on the investments we are putting on-the-ground, then there is a case for a reevaluation of these provisions. Now on the PCR, it’s not that we will stay here, but what I can tell you is it will not be as low as it was in the past, but it will also not be as high it is as we are reporting for December 31.
Renish Bhuva
Got it. Got it. And would you like to guide us for a credit cost for next year?
Chattapuram Venkatraman Ganesh
See, what I can do is I can guide you for a credit cost for this year. For FY ’25, our credit cost you know we might change. Only on the credit cost, Ranish, I can assure you that in the Q4, we will keep it sub 1%. So this provision that we are taking is a one-time provision for this particular time and Q4 we should normalize. And the idea of taking this one-time is to get a predictability to the credit cost. There is — see, you have to also understand that I am slowing down BL and that credit cost BL is a part of my credit cost, almost — I mean, if I have to give you some number about 20% to 30% of my credit cost comes from BL. So that is the piece. Once it goes slow-down, you will see a far more predictable credit cost.
Renish Bhuva
Got it. Got it. Okay. No, that’s it. Good enough, sir. Thank you and best of luck, sir.
Chattapuram Venkatraman Ganesh
Thank you.
Parvez Mulla
Thank you, Renesh.
Operator
Thank you. The next question is from the line of Vivek from DSP Mutual Fund. Please go-ahead.
Vivek Ramakrishnan
Good evening. And Ganesh, thank you very much for giving the split between the various provision numbers. It is very useful. So I wanted to ask about the economic situation, especially in the special mortgage — in the small mortgage business and you said there’s elevated delinquencies in select pockets and delayed realization and deeper bucket NPAs. So my questions are which — is there an income shock or which — where-is there specific geographies or specific client clients who are facing this problem and how is the situation on the soft market collection efficiencies in the same areas?
Parvez Mulla
See, Vivek, typically, I don’t want to attribute it to the environment. We are in a secured environment. The environment for unsecured is very different and secured is different. There could be inflationary pressures there, but our issue is our own operational issue. The provision that we are taking is because we were underinvested in collections. We personally believe the segment that we are operating in requires a constant touch with the customer, consistent engagement and proactive follow-ups. It is a collection intensive business, our small-ticket mortgage business. And that — so I don’t want to attribute it too much to the environment. There could be some factors of the environment definitely. And, you want to add about the environment.
Shardul Kadam
Yeah, hi. So the way we’ve seen it is that this particular the stress build has been in certain select pockets of a few states. See, the customer segment which we deal with is typically an assist income program and these are relatively underbanked customers. So it’s very important that we need to have the last mile collection reach in-place, which as Purvesh mentioned, in some pockets, we are falling short of that because of which we’ve seen some flows. And typically after this kind of a customer has some two or three EMI spending, then obviously the resolution, the rollback becomes that much difficulty. So in anticipation of that basis, our grounding feedback is where we prudently believe that we should shore up the provisions.
Having said that, 96% of our borrowers are having — I mean, the properties which are mortgaged with us are self-occupied residential properties. And more often than not, these are the primary assets of these families. So the way we look at it is, while there has been a shore-up in the provisions, we will see resolution subsequently coming in here, but it may possibly get delayed as compared to what we’ve seen in the past. Hence this particular showup.
Vivek Ramakrishnan
Thank you very much. And now I can see the confidence that you all say about keeping the credit cost lower going-forward because it’s your own effort? The second is a more trickier question and Mr Ganesh, with the bank-owned NBFC guidelines out there, are there any thoughts on the management of either yourself or your parent that you want to convey to us? That’s the last question. Thank you and wish you the best.
Chattapuram Venkatraman Ganesh
So thank you for that question, Vivek. So we have been in correspondence to — with RBI as have many of the other impacted parties as well. So broadly, the way we see it, the October four guidelines had four stipulations, okay. One is that the upper layer restrictions will apply. The second is that you have to be listed. The third is that the — there will be no regulatory arbitrage in the NBFC. And the fourth is that you will follow rules and regulations applicable to loans and advances as applicable to banks.
Now we take most of those boxes, right? And for us, so what we have, again, I think the RBI letter is confidential, I can’t speak much. But I think at the end, we already seem to be at much of the end-state there, which is why the — the — if the destination is where we are, then we have possibly reasoned that maybe there is the opportunity to relook in terms of the differential niche, the priority sector segment we lend to. And we are confident RBI will apply mind. As of now, we are interacting on in a constructive manner. So we’ll keep up.
Parvez Mulla
Yeah, Vivek, but just to add there, see, this is a space where the regulator will take the final call. And we are cognizant of that. And as a regulated entity, we have represented our side of the story and we are hopeful that the regulator will look at it because we are a listed entity and there are certain challenges of a listed entity going through those things. So it is — it is a representation, a representation both from our parent as well as from us. And we are seeking the regulators exception for this and we believe that we have a case for representation. We strongly believe we have a case for representation.
Vivek Ramakrishnan
Thank you very much. And again transparent answer and wish you all the best.
Parvez Mulla
Thank you.
Chattapuram Venkatraman Ganesh
Thank you.
Operator
Thank you. The next question is from the line of Shublan Shu from Capital. Please go-ahead.
Shubhranshu Mishra
Hi, thanks for the opportunity. I just have two questions. The first one is around this change in the mix that we spoke of just a bit earlier. That was not very clear to me. Second is that, is there a regulatory pressure to change gold loans from a bullet repayment product to an EMI product, which could be yield mitigating? Thanks.
Parvez Mulla
Hi, Shu Ram. So the mix that we have today is in our mortgages business, our mortgage occupies about 50% of our AUM, so 25% is medium-ticket labs, small-ticket lab is about 25% and about 35% to 38% is — 35% to 38% is gold and about 12% to 15% is our business loans piece. The only piece which we are changing there is business loans, we are slowing down. So you will see the percentage contribution of business loans going down from 15 to 10 then slowly to 5%. And that additional increase will for the short-term might go towards gold, but eventually it will go towards our small-ticket lab business. So you will slowly see small-ticket lab business occupying more percentages and business loans occupying lesser percentage. That’s the mix change. As far as gold is concerned, not regulatory.
Chattapuram Venkatraman Ganesh
Is there a regulatory for the question. Regulatory pressure to move to a towards the question.
Parvez Mulla
No, there is no regulatory pressure to do that, although the regulator has issued guidelines in terms of how gold loan companies as well as NBFCs doing gold have to follow those regulations and we also have had a gold loan audit and we have successfully complied with most of them. Wherever we had certain concerns about we engaged with the regulator and the regulator clarified to us and we complied with it. So we have — we are on complete sync with what the regulator wants and we have complied with most of the pieces on the gold loan side, including the LTV piece, which the industry was interpreting it differently. But as of 1st January, we have complied with the way regulator has said that we should maintain it completely. At a sourcing level, we have reduced our LTV.
Shubhranshu Mishra
So gold loan won’t become an EMI product in the future. Is that a fair understanding?
Chattapuram Venkatraman Ganesh
So basically, we do a mix. It’s not that we don’t have the EMI product. I think the limited answer was that there is no regulatory pressure. In fact, we had an annual RBI inspection for the last two years, which happened for us about two months ago. And we have had a very satisfactory outcome. So I think I think RBI pretty much is giving us the freedom to choose. And we are very clear of what RBI wants us to do and we will adhere, but there’s no product construct level stipulation being guided by the regulator.
Shubhranshu Mishra
Sure. Thanks.
Parvez Mulla
Thank you.
Operator
Thank you. Participant are requested to press star and one on the touchstone telephone to ask questions the next question is from the line of Chirag from Fastwater. Please go-ahead.
Unidentified Participant
Hello. Yeah. So I just wanted to ask regarding, let’s say, next two years, where do you see cost-to-income, ROA and ROE? Just wanted to loyal guidance on that.
Parvez Mulla
Chirag, I would like to jump on that question, but if you could give me Q4 to give you those numbers because I am right now guiding on the credit cost for Q4. Directionally, I can tell you that FY ’26, you will see us driving cost-to-income. There is a definite number in our head where we want to chase an ROA ROE for FY ’26, but it will be too early for me to give you that number right now.
Chattapuram Venkatraman Ganesh
So Chirag, I’ll add. No, I think the point being made here is that we will be agile and nimble and calibrate our strategy according to the environment. I think that’s what we are saying. We have very clear large numbers in our mind, but we will go 1/4 to another in terms of that number.
Unidentified Participant
Got it. That is it from my end. Thank you.
Operator
Thank you. The next question is from the line of Pranav from Alpha Investment Manager. Please go-ahead.
Unidentified Participant
Yeah, hi. Hi, and good evening. Just a couple of questions. One clarification for, sir. So you mentioned the breakup of credit costs where INR75 crores is about INR75 crores is one-time and INR19 crores is for the management overlay but the math is sort of not adding up, maybe you can clarify or maybe misunderstood it’s the first bit.
Chattapuram Venkatraman Ganesh
Yeah. So I’ll just maybe just — I’ll make sure that I clarify appropriately. So our total credit cost was INR119.6 crores, right. Of that, the core credit cost was INR25 crores, which was the normalized credit cost for the quarter the annual refresh exercise we did, the ECL refresh exercise, which we do once a year, right. Now in light of the elevated delinquencies we had, it led to an increase and that we do on the entire stock. So that led to an additional charge of INR19 crores. Right. Now that leaves INR75 crores.
Now that INR75 crores, so both of these are normal. So I wouldn’t call the ECL refresh also as a one-time because that anyway we are supposed to do annually. Correct. Now apart from this, what we did that 75 was the one-time element. Out-of-the INR75 the INR57 crores was towards the NPA pool, where we have taken-up — showed up our provisioning there and another INR18 crores has been on account of management overlays across the small mortgage and the unsecured business loan book.
Unidentified Participant
Understood, understood. Now that’s clear. And thank you for that. Sir, the second question is on the opex, while obviously the guidance that you would want to give is probably a next quarter, but just qualitatively, you know,, you mentioned that you want to take — you want to get more synergies out-of-the gold branches wherein a more lab business can happen through those. So could you just give us a qualitative sense of a few of the things that you think are low-hanging fruits where you can reap benefits on the cost side probably through ’26? Not asking for any numbers, but just qualitative guidance.
Parvez Mulla
Yeah. See, qualitative wise, you can look, first is the BL construct and there will be an opex which will change there. Second, as I told you, they — we will look at gold branches and not putting the MSME branches or very few MSME branches is the second construct, which we look. Third is we will look at a at manpower wherever we can use a certain I mean there is an industry which is using the apparentice model and we want to explore that model in certain functions and that is where we personally believe there could be a cost-saving.
Technology already has — there is an investment of technology, which we have done on the MSME side and there is a digital flow which is happening and which will give us certain process efficiencies once we start scaling our MSC lab business as well as on the lab business. Next quarter, we should implement sales force on the lab business. We will also reevaluate certain branches which are not giving us the revenue, but our cost-to-income is not correct in certain branches. So we will look at that. We want to look at frugal construct when we are constructing the ST Lab business. And when I told you that Shardur is coming in, is also looking at the kind of construct that is there in the ST Lab business and the kind of cost-to-income that we are incurring on the ST Lab business, he’s looking at everything there including incentives, including the tenure yields where we can — we can get the better cost-to-income.
So you will also see — one is obviously the back-office — lift got a productivity lift on the individual businesses also will give us certain pieces there. We will also explore some synergies, which we can get with certain partners, which should give us another upside. So these are broad level thoughts, but I will be able to it to you in a more constructive manner. But there are opportunities for us to take it directionally with a number that we have in mind.
Unidentified Participant
Fair enough, fair enough. That’s pretty useful. The last question, sir, on credit costs. While obviously again you mentioned that maybe guidance is something that you will look at in the 4th-quarter for FY ’26. But again, looking at all of the changes in terms of tightening of a tightening of underwriting standards and imposing correction infrastructure in the small-ticket lab business. On a more longer-term basis, you know, where do you want this business to settle? Because if you look at what was guided to us earlier, you were looking at about 75 to 80 basis-points. But with this improved construct, is it fair to assume that the steady-state credit costs for this business once that are settled, could be a lower number than that.
Parvez Mulla
See, as I told you, even with my business loan construct, I’m telling you that my Q4 we will try and do a sub 1%. And then in that sub 1%, I’m telling you that my BL is there and my BL as a construct will slowdown and that is a compo that is almost 20% 30% of my credit cost today. So it will come to the number that you have in mind.
Unidentified Participant
Sure, sure. Thank you. Thank you for the opportunity.
Operator
Thank you. The next question is from the line of from Bandan Mutual Fund. Please go-ahead.
Unidentified Participant
Hello. Yeah, am I audible?
Unidentified Participant
Yes, Adity.
Unidentified Participant
Yes, sir. I had a question. So in last quarter, we had mentioned that there is some stress in our small-ticket lab book. This quarter we have built a contingent provision to manage that stress. So I just wanted to understand what are the possible reasons for this stress and like are these the same as the reasons for the microfinance players and what time could it take for this to normalize? So because this is a secured product and the level of stress that I’m expecting should not be as high as other unsecured products. So what is your outlook on this loan book right now.
Shardul Kadam
Yeah. Hi, Aditya. I’m Shardil. I’ll want to take this call. So first of all, the customer segment which we deal into does not have so much of an overlap in the microfinance segment because my average ticket size is ranging at about, say, INR13 lakh, INR14 lakhs. So we are talking about a collateral which is mortgaged is roughly in the range of about 25 lakhs to 30 lakhs of a property. And we’ve done our checks also through the bureau scrubs. So we are really not seeing too much of an overlap in the MFI segment. We do have our borrowers who have taken unsecured loans elsewhere, but then again, a large portion of them continue to remain current with us or less than 30 DPD, though they may be deeper buckets with unsecured loans. And we remain watchful on those accounts from a potential stress build. But because as I said earlier that 96% of our collaterals offered are self-occupied residential properties.
To that extent, we believe that while we may see delays in our EMIs, but ultimately, we should be able to get our monies back up. Now to address as to what has been the reasons for the stress. So clearly, this is a relatively underbanked customer segment. So it’s important that your last-mile collection reach also needs to be in-place because we price our mortgages roughly in the range of about, 17% 17.5% kind of yields. That is where in some pockets we found that we were not adequately capacitized on collections, which resulted into certain flows and we are taking corrective actions in terms of strengthening our collection infrastructure grounds up.
Unidentified Participant
So if there is no like issue with the borrower capacity, so they should normalize within next how many quarters?
Shardul Kadam
So the way we are looking at it is, see, there has not been any systemic risk as such which you are seeing. I mean there have been delays on the borrower side, yes. The sense what we get from the ground is, wherever we felt that there was a reason to shore up of provisions, I think we’ve done that. The way we are looking at it is with the collection infrastructure falling in-place, we already got a dedicated collection head onboarded and you’re putting a structure under him. So by Q1 is where we should start seeing a good pullback.
Unidentified Participant
Understood, sir. Thank you.
Operator
Thank you. That was the last question. I will now hand the conference over to Mr Shreepal Doshi.
Shreepal Doshi
Thank you thank you. Thank you everyone for attending the call, and thanks to Fed Bank Financial Services Management for giving me the opportunity to queu. Thank you everyone and have a good weekend. Thank you.
Parvez Mulla
Thank you.
Chattapuram Venkatraman Ganesh
Thank you.
Operator
Thank you. On behalf of Equirus Securities, that concludes this conference. Thank you for joining us and you may now disconnect your lines. Thank you