L&T Finance Ltd (NSE: LTF) Q3 2025 Earnings Call dated Jan. 21, 2025
Corporate Participants:
Sudipta Roy — Managing Director and Chief Executive Officer
Sachinn Joshi — Group Chief Financial Officer
Analysts:
Sanket Chheda — Analyst
Digant Haria — Analyst
Kunal Shah — Analyst
Mahrukh Adajania — Analyst
Saurabh Kumar — Analyst
Nischint Chawathe — Analyst
Abhijit Tibrewal — Analyst
Chintan Shah — Analyst
Abhishek Murarka — Analyst
Subramanian Iyer — Analyst
Wuzmal Handu — Analyst
Presentation:
Operator
Ladies and gentlemen, good day and welcome to L&T Finance Limited Q3FY25 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 then zero on your touchstone phone. Please note that this conference is being recorded.
We have with us today Mr. Sudipta Roy, Managing Director and CEO, Mr. Sachinn Joshi, CFO and Mr. Raju Dodti, COO and other members of the senior management team. Before we proceed, as a standard disclaimer, no unpublished price sensitive information will be shared during the call. Only publicly available documents will be referred to for discussion during interaction in the call. While all efforts will be made to ensure that no unpublished price sensitive information will be shared in case of any inadvertent disclosure, the same would in any case form part of the recording of the call. Further, some of the statements made on today’s call may be forward looking in nature. A note to this effect is provided in the Q3 results presentation sent out to all of you earlier.
I would now like to invite Mr. Sudipta Roy to share his thoughts on Company’s performance and the strategy of Company going forward. Thank you. And over to you.
Sudipta Roy — Managing Director and Chief Executive Officer
Thank you so much. A very good morning everyone and thank you for joining us today. I would like to wish all of you a very Happy and Prosperous New Year on behalf of the entire leadership team at L and T Finance today. With me on the call are our CFO, Mr. Sachinn Joshi and the senior management team of L and T Finance. Today’s call is divided into two sections taken sequentially by myself and our CFO, Mr. Sachinn Joshi, who will be talking about the overall business matrix and financial performance at length. Post documentary we’ll be happy to take questions on the call.
Before moving on to the highlights of the quarter, I’d like to give you some flavor on the macroeconomic scenario and the sectoral outlook. The global backdrop remains uncertain at this point in time as possible policy pronouncements in the US Cloud Visibility of outcomes in global trade and financial markets in the meanwhile, strong growth momentum and high policy rates in the US Continue to drive flow of funds toward the US Dollar assets and adding pressure to the financial assets in the rest of the world. Sharp shift in external landscape has triggered tighter liquidity conditions and currency volatility in domestic financial market as well. In the meanwhile, delayed government spending, mixed demand signals and credit squeeze has hit the GDP growth momentum in the domestic economy. Slower urban consumption and moderate investment activity has only partly been offset by rural recovery, leading to a sharp dip in growth during the second quarter of FY25.
Government’s first advanced estimate of real GDP highlights a tempered pace of economic activity in FY25 at 6.4% annual growth well below the 8.2% growth in FY24. Acknowledging the headwinds to consumption demand and private investment in the economy, RBI has also revised down its real GDP growth projection for the current fiscal year. RBI has revised up its inflation projection, highlighting the challenges of bringing down the headline inflation to target level in the current financial fiscal year. While headline inflation has seen some moderation in November and December as improvement in Monday arrival of vegetables and bumper Kharif harvest help ease price pressure on volatile components. Core CPI inflation and WPI have seen some uptick indicating broadening of the inflationary pressure on the economy.
High inflation level and delayed government spending has hit the disposable income available with the consumers for discretionary spending. Urban consumption has shown signs of fatigue with the exhaustion of pent up demand, while rural consumption despite gradual improvement remains inadequate to offset the urban drag. Unexpected weather events, depreciating currency and worsening of geopolitical conflicts constitute major upside risks to the expected moderation in inflation levels going forward. Hence, monetary and fiscal policy interventions to support consumption are key to a sustained growth recovery in H2 in the quarter ahead. We expect rural recovery to continue and hope for uptick in urban demand as inflation levels drift lower. So the squeeze in economic momentum is always a reversing.
In Q3 FY25 and fiscal support has picked up as well, with further fiscal and monetary support expected in the upcoming budget announcements and monetary policy announcements. We keenly watch for these early green shoots to turn into strong growth drivers in the coming months. I would like to share that despite the challenging operating environment in the microfinance sector, our diversified franchise has enabled us to achieve the highest festive quarter disbursements of rupees 15,210 crore, a growth of 5% year on year and we have been successful in sustaining the trajectory. In line with the Laksha 2026 goals, our retail book now stands at 92,224 crore, a substantial growth of 23% year on year.
The numbers reflect the strong execution engine aided by a proactive portfolio management and prudent risk management that we have put in place over the last couple of years, and we will continue to bolster the execution bias in every initiative we take. Many of you have attended our Investor digital day in November 2024 along with race 24, our AI BFSI conference where we showcase several of our technology initiatives, some of which could be transformational when successfully completed. I’m pleased to share that the progress on these initiatives during the last quarter has been satisfactory. Our next gen credit underW engine, Project Cyclops was extended to 100% of dealerships in two wheeler finance and was also launched for the farm equipment finance business. In our pursuit of innovation and fostering partnerships within the lending landscape, we established a strategic partnership with AmazonPay to develop cutting edge credit solutions while also extending PhonePe partnership to personal loans, thereby delivering a seamless digital lending experience to our customers.
Additionally, we launched Knowledgeable AI Kai, an AI powered chatbot that revolutionizes the home loan experience. Furthermore, as announced in Investor Digital Day, we have commenced work on Project Nosodamas, a first of its kind AI driven automated portfolio management engine. We intend to release the beta version of this new technology engine in Q2FY26. As we look ahead, we remain dedicated to driving innovation and enhancing our offerings to better serve our customers. Now I would like to provide an update on our quarterly performance against the Laksha 2026 goals. The first milestone was to achieve realization of greater than 95%. I’m pleased to share that we have surpassed this target with 97% realization at the end of this quarter. We had earlier set ourselves a retail book growth target of 25%.
However, given our outlook of the business environment in different segments, we have consciously chosen to slow disbursements in segments where risk reward was not in our favor. Consequently, our retail book growth for the quarter stood at 26% year on year, a growth rate that we are satisfied with given the current circumstances. Specifically, as delineated in slide number 30, you will SA. The year had a challenging operating environment with certain macro events like prolonged heat wave, severe floods in several states and temporary slowdown of government expenditure and grants due to general elections leading to an increased credit cost for the rural group loans and microfinance business portfolio, thus warranting a case for utilization of the macro credential provisions created during COVID which was in FY21 and FY22.
We estimate based on current trends that before utilization of macro prudential provisions, the total credit cost in the rural group loans and MFI business will be in the range of rupees 950 to rupees thousand crores for the full year FY25. In light of the above, the Audit Committee and the Board have approved the utilization of an amount of rupees 100 crore out of the macro prudential provisions in Quarter 3 FY25. Our advanced estimate of the macro utilization in Q4 is in the range of rupees 300 to 350 crore based on a peak rate cost on the roll Forward book of Q4FY25. With the abating of the macro events and the early green shoots of stabilization of collection efficiency in December 24 and January 25 till date C being slightly better than the same time last month, we anticipate an improving collections efficiency trajectory for the rural group loans in the MFI portfolio during Feb and March 25, thus signaling sustained recovery trends in this business. Our analysis tells us that the onset of Mfin 2.0 guardrails from April 2025 will ultimately lead to the recovery of the credit profile of the sector, albeit at a marginal cost to growth. This norms would be value accretive for participants with high quality franchises.
As asked by many of you in our earlier calls, we have endeavored to give you detailed portfolio cuts on our RBF business in the Investor presentation. You may please refer to slide number 16 to 20 and slide number 35 of our investor presentation for the same. We are currently evaluating adopting the CGF MEO Credit Guarantee Scheme in certain geographies and segments to optimize the unforeseen event risks in the RBF business. Will be in a position to provide greater details around this in the subsequent quarters.
As mentioned earlier, we would now like to give a brief update on the five pillars of execution that we had enumerated over a year back and continue to be in implementation mode against the same customer acquisition. We are continuously working on deepening the customer acquisition funnel both horizontally as well as vertically and in the last quarter and this quarter as well, our focus has been on new customer acquisition, albeit with a necessary trait adjustments to maintain future portfolio quality. Accordingly, there has been a calibrated channel optimization in two wheeler and rural finance business vertical with sustained nd under leveraged customer acquisition. Hence we added a total of 5.8 lakhs new customers during the quarter. Further details around customer acquisitions here are available on slides 13 and 14 of the Investor presentation.
Shouting to Credit Underwriting Our proprietary credit engine Project Cyclops that was Operationalized in Quarter 1 FY25 has been extended now to the tractor business and which is currently live with 24 scorecards and having been scaled to 100% of the two wheeler dealership where it is currently live with 18 scorecards showcasing encouraging results with net zero plus reduced by 120 basis points in the two wheeler portfolio over a four month period when benchmarked to the non Cyclops portfolio. Cyclops will be implemented for the personal loans and SME business loans in the coming quarters Futuristic Digital Architecture we have spoken at length on our technology initiatives on our Investor digital day and granular details on our technology initiatives have been provided for each line of business.
Our biggest technology initiative for next financial year will be operationalizing Project Nostradamus, a state of the art first in industry AI driven Automated Portfolio Management Engine Brand Visibility we continue to focus on our brand building with Jaspreet Booma as a Brand Ambassador for LNT Finance products. Having successfully concluded Race India’s premier AI themed event in the BFSI sector which saw more than 8,000 registrations and reached an engagement level of 3 lakhs. An engagement level of 3 lakhs. We participated in the India Bike Week 2024 where the unveiling of the LTF Zoom two wheeler loans took place. As we move ahead, you will see a set of integrated marketing campaigns and targeted branding exercises in the upcoming quarters.
Capability Building on the capability building front, I’d like to inform you that the regional business structure was further strengthened during the process with institutionalization of periodic reviews and processes. Additionally, we worked upon capacitizing and upgrading on infrastructure at various branches across the country while also opening an integrated Technology Operations and Data Science facility at Mahape Nai Mumbai. On the employee initiatives front, we continue to work on performance and productivity with the introduction of integrated employee scorecards and took several employee engagement measures during the quarter, details of which have been provided in slide number 28 of the investor presentation. As part of our strategic growth, we are committed to building a well diversified asset profile minimizing concentration risk on any single line of business.
With that end goal in mind, we remain committed to growing our existing and new lines of business while also looking at synergistic opportunity amongst our new product initiatives. Our team has been successfully scaling our Microlab, warehouse finance and supply chain finance products. As we shared in our investor Digital day, our existing distribution is being leveraged to upsell this secured high ROA product to the cream of our RBF customer base. The Microlife asset book has crossed the milestone of Rupees 300 crore in Q3FY25. Some of you may recall in our investor Digital day we had called out a book size of rupees 214 crores for this business.
Exciting growth albeit on a low base. Similarly, our warehouse receive finance business housed under a pharma finance vertical also has shown encouraging initial traction. This business which operates on a first of its kind, completely paperless journey and digital workflows driven through a network of 25 branches and presence in 80 mandis has achieved cumulative disbursements of Rupees 350 crores in FY25 YTD. Lastly, our supply chain business housed under the SME vertical was launched in Q3FY25. And while it is still early days, we are optimistic that this business too can scale significantly and profitably.
I will now request Mr. Sachinn Joshi, our CFO to take you through the financial updates.
Sachinn Joshi — Group Chief Financial Officer
Thank you, Sudipta. As always I will be walking you through the financial performance of the company. For the quarter consolidated NIM plus fee stood at 10.33% versus 10.86% for Q2 FY25. Of course this was on account of conscious shift in the disbursement and book mix due to a challenging credit scenario in RBS. Consolidated PAT for the quarter stood at 626 crore. Healthy quarterly disbursements. Retail disbursements were seen 15,210 crores which are up 5% year on year. Our retail book stands at 92,224 crores. This is up 23% on a year on year basis. On the back of healthy retail disbursements during Q3 our consolidated book stands at 95,120 crore. This is 16% up year on year.
Consolidated ROAS stands at 2.27%. It is down 26 basis points year on year and consolidated ROE correspondingly is down is at 10.21% down 1.14% year on year. Coming to retail businesses, let me start with Rural Business Finance. The business registered quarterly disbursements of close to 4600 crores. This is down by 16% yoyo the trajectory aided by prudent disbursement strategy. The book size reached 26,231 crores. It’s down 1%, quarter on quarter, but up 14% year on year. In Q3, coming to Pharma Finance, the disbursement stood at 2. Crores in third quarter up 23% year on year better than average. Monsoon and festive season demand resulted in a double digit growth. This led to the book size reaching 15,075 crores reflecting a growth rate of 9% year on year.
On the urban segment Urban Finance the segment which comprises two wheeler personal loan home loan lap businesses, it saw 21% year on year jump in overall quarterly disbursements. As a result the overall book size increased to 43,957 crores in third quarter translating into a 31% year on year growth. The two wheeler business registered a quarterly disbursement of 2414 crore which is down 5% year on year partly due to strengthening of the documentation and credit guardrails taken by us during the quarter for sourcing of better quality credit tested customers and shift towards prime customer case. The book size increased to 12,676 crore which was up 21% year on year. On the personal loan front we achieved disbursement of 1,642 crore translating a growth of 94% year on year. With the book size at 7,820 crore, this book has increased by 22% year on year during the quarter. Double digit growth in this segment was led by scale up of Fintech partnership and expansion of physical distribution through the DSA channel with focus on salaried prime customers.
Our large partnership business has already started meaningfully contributing to our origination volumes. It was around 12% of the overall disbursements done during the month of December up from a mere 2% 3% contribution in September 2024. On HL Lab we achieved quarterly disbursement of 2004. 75 crore. This was up 24% year on year and the book size stood at 23,461 crore increase of 41% year on year while maintaining a pristine secured portfolio performance. Coming to SME Finance, our Q3FY25 disbursement stood at 1,249 crore up 29% year on year. The book stood at 5,817 crore. The growth in business volumes were aided by building additional channels to diversify the existing sourcing funnel.
Let me now hand over the call back to Sudipya to make a closing comments.
Sudipta Roy — Managing Director and Chief Executive Officer
Thank you Sachinn. In conclusion, Quarter 3 FY25 has been a challenging quarter for the entire industry. Our teams have worked extremely hard to deliver a reasonable outcome for us. We’re cautiously optimistic that the worst is behind us and we are hopeful going into an annual business planning exercise for FY26 that we will be able to continue delivering on our promises of asset growth, profitability and roe.
I thank you all for a patient hearing. We now open the floor to questions.
Questions and Answers:
Operator
Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question press star and one on the Touchstone telephone. If you wish to remove yourself from the question queue you may press star and two participants are requested to use handsets while asking a question. Ladies and gentlemen, we’ll wait for a moment while the question queue assembles.
The first question comes from the line of Sanket Chheda with DAM Capital. Please go ahead.
Sanket Chheda
Yeah. Hi sir. Good morning and congrats on a pretty good set of numbers. Also on MFI front where we have been meaningfully better versus peers. So my my query was on the one of the notes two accounts wherein we was to BNL account as it mentioned. But when we see the credit for EX of the overlay also it seems that the benefit has not been taken into bnl. So has that reach out for the SRS that we would have received against this arc? Just a clarity on that is what I would request.
Sudipta Roy
We lost majority part of the question. So for the benefit of others on the call, can you repeat the question once again?
Sanket Chheda
So then my question was regarding the ARC sale related notes to accounts wherein we have mentioned about 250 crores of provision reverse to PNL. But when I see the credit for X of overlay also it doesn’t seem that we have taken that benefit. So is it that that we have reserved that 250 which was available for reversal against the assessment that we have and once that SRS get monetized that’s the time when it will be reversed on pnl.
Sachinn Joshi
Yeah. Thank you Saket. Thank you for asking the question that there have been some queries on this. You’re right. Actually you know as for the India’s accounting we cannot take whenever transfer of assets happen to arc. The provision reversal is just a routine item which comes as a credit. But 85% of whatever asset goes to the ARC comes back as an investment on the book. So in this particular case 250 crores got first credited. It got reversed to the P and L and then the same amount of provision was created when the SRs were created on the books of the 85%.
I will just enumerate the exact chronology and the numbers that have been shown over there. So 776.37 crores was the principal outstanding of the loan transfer. This was the pot. The EAD against this was 815 crores. And this 815 crores of asset was actually sold at a gain at 833 crores. So about 18 odd crores of gain was made on this. And when we this 75% of this 833 crores was actually booked as an investment which comes to 708 crores. So against this 708 crores we have first of all adjusted the profit made on this because that also cannot be taken to the P and L. So 18 crores was adjusted and the 250 crores which was reversed to the P and L was also adjusted against this. So totally 268 crores has been adjusted against the 708 crores of HR value and the net carrying value in our books as of 31st December stand at 440 crores.
So what — because both are you know the assets under the loan book also is at is being accounted through the FBTPL route and the investments are also accounted for in the same way. You can’t see the actual provision which has been made which has actually got consumed into the financial. Maybe by when we do 31st March full fledged financial this will be difficult but yes, you’re absolutely right that there was no credit taken and adjusted against the credit cost. This is just a setting of just getting reversed from loan book and getting again adjusted towards the security receipt which has been booked in the book. I hope it clarified.
Sanket Chheda
Yes. And this was a real estate account right?
Sachinn Joshi
That’s also.
Sanket Chheda
Thank you.
Operator
Thank you. Next question comes from the line of Digant Haria with GreenEdge Wealth. Please go ahead.
Digant Haria
Yeah. Hi. Thank you for the opportunity. Two questions. First is that you know you mentioned that you know our. But in tractor and two wheeler we have significantly reduced the risk by going more towards the prime segment. So when I look at your provisioning even if I remove the whole micro finance related provisions of 170 crores this quarter we are roughly at a run rate of say 400, 450 crores of provisions for the quarter for the rest of the business. So do you think that the benefits of this whole moving towards prime and this better underwriting all of this is already showing in the provision number or, or you know the credit cost can still go down further in the non MFI part of the business. That’s my question one.
Sudipta Roy
Okay, so yeah. You know, in the sense that the full benefit of all the work that we have been doing is still not visible because it’s a gradual process. You have a legacy portfolio or at a particular credit profile and you have this new portfolio coming in at a lower credit cost trajectory. Obviously the new portfolio has to build and the old portfolio has to wash out for the entire benefit of this to be visible. So I would reckon that it will take a couple of more quarters for this to be fully visible. It is not fully visible yet. However, when internally when we monitor the credit performance of the new portfolio vis a vis some parts of the legacy portfolio that is already visible to us. But it will take a couple of more quarters to fully specify.
Sachinn Joshi
So just to add in terms of numbers, if you recall in the previous quarter we had made a mention that there were a couple of steps taken, especially on the farm portfolio. We had stop the reposition at 90 plus and there will be an impact on account of this through the roll forward for a couple of quarters. I think by Q4 that impact should get over. So one is on the farm portfolio. This is the impact on the two Wheeler. You know the tier two, tier three, tier four, those kind of cities. The impact which you saw in the micro loan piece we talked about the rural, there was some impact on account of each wave and all across the country. So Two Wheeler also after Sudipta has come in, we have already changed the strategy and started moving towards prime.
And as we speak I think 49 to 50% of our book now is prime. The impact on the credit cost will start because as this book starts seasoning you will start seeing the impact coming into the P and L and I think two to three quarters is what we will take to see the complete benefit of the pristine quality of the two Wheeler book which is being built now.
Sudipta Roy
Yes. And Digant, if you say we have put in two additional slides this quarter in the investor debt which is slide number 23 and slide number 24 where we have given our index representation of two wheeler portfolio bounce and you will see that our two wheeler portfolio bounce is already at about on an index basis at 84% in December 2024 compared to 100 index December 2023. So it is also trending down. And if you look at our sort of net non starter in our farm equipment finance business which is basically the number of people who bounce their first EMI, right? That is at 25% level compared to the same number in December 2023. That means in December 2023, hundred people bounced the first EMI in December 2024 only 25 people bounced the first EMI.
So we put this as an index form just to sort of demonstrate the better quality portfolio that we have been focusing on building and how some of it is showing up in the leading indicators which is the bounce rate. We consider bounce rate being the leading indicator of credit quality and that is currently trending well. Obviously this over a period of couple of quarters will find its way into the credit performance because as the new portfolio builds with this better credit parameters that should obviously translate into lower credit costs.
Digant Haria
Perfect, thank you so much for the detailed answer. Second question is Sudipta on this whole, you know, this NIM plus fees guidance, you know we have it in the corridor of 10 to 11%. But now you know, let’s say see we have done quite well in microfinance versus competition or versus what the general sector is. But that also, you know, maybe next 2, 3/4 the growth may not be as strong as it was in the past. So obviously that you know, fees and you know the fees plus interest income is highest in that division. How do we compensate that given that, you know we are seeing more growth in the lap home loan portfolio which are obviously at much lower IRRs. So how does this whole trade off work for the next 12 months? And then is the 100 crore of extra opex that we saw in this quarter related to collection efforts in microfinance division?
Sudipta Roy
Yeah, so I’ll give you the first, the answer to the OPEX question that’s very straightforward. You know the fact is that this being the festive quarter, we had certain, you know, festive related spends. Secondly, you know, as you are aware and we had informed last one is that we have actually beefed up our collections workforce so that has got an additional component. Plus there were certain technology related expense during this quarter because we have been operationalizing Cyclops across all our lines of business. So these are the drivers for some of the increased OPEX that we have seen this quarter and so on.
The Midland fees. Yes, there is no easy answer to this. This is a journey that we have told that we are going to travel. And obviously the sort of the ongoing trade challenges in the microfinance sector obviously does not help us sort of that does not smoothen the journey for us. Obviously there are a couple of things to this. First and foremost thing is that you know, we have to increase our fee base. We are working on increasing our insurance penetration. You know, right now we do insurance only at origination. However, we have a full institution in insurance distributor license right now.
Now we can sell through the life cycle that team is building. We are putting together a technology platform for the same. So we are hopeful that over the next couple of quarters, some more of those fee revenues will come in. In terms of growth, we are trying to grow our slightly higher yield secured business, for example, our microlab business, though albeit on a small base, we are trying to grow it. We already have 80 branches. We are going to grow it much more in the next couple of quarters.
You can see that personal loans have been growing quite well. Personal loans on a quarter, on quarter basis, on a year, on year basis have grown by about 94%. Our large partnerships are scaling up well and one of the things we have noticed is that in terms of digital delivery sometimes you can sort of work on increasing your interest rate without losing too much of expense on that. So we will work on some part of nullification to our personal loans growth. And we are hopeful that even though certain markets in the RDF business, JLG business, there is stress, there are certain virgin markets where actually you can safely grow. And I can give you an example. There are certain some markets that we have ventured into in the last couple of quarters, new markets like APN, Telangana, our collection efficiencies are 100% and we continue to sort of judiciously deploy our branches there.
We are focusing on western UP where collections efficiency, efficiency trends well. We are focusing on western Maharashtra where collection efficiency trends well. So we are finding those pockets in the JLG business where collection efficiency is trending well and where we can do safe non leveraged business. So it’s a tight balancing act and I do believe that it will not be easy but we will try to definitely be within that corridor. Obviously there’s one large sort of part wherein you know, if a possible RBI rate cut or a couple of cuts were to come next year, that will probably ease the, ease the challenge a little bit. But you know, we cannot obviously, you know, count on that completely. So overall a couple of irons in the fire and we will continue to work towards that trajectory.
Sachinn Joshi
Just to add in terms of the overall modeling, yes, last quarter we had mentioned that it could be in the range of 10 and a half to 11. But directionally, just like to your earlier question, we were talking about how we are moving more towards prime. So what would happen directionally over a period of time? Maybe the NIM plus it may actually be slightly downwards but at the same time the OPEX plus credit cost also will move downwards. So the ROA which is, you know, if you’re actually de risking yourself or bringing down the risk, you will find that the ROAs will overall exist. So the whole ROA tree would possibly move left where you will have, you will see that the 10.5 to 11 may actually come down slightly.
But at the same time you will find that the operating expenses because the productivity levels would increase and the overall OPEX as a percentage of the book as well as credit cost as a percentage of book on account of the steps being taken may move downwards thus actually impacting the ROI only positively. So we will still stick to you know over a period of time the ROA directionally to be in that corridor of 2.8 to 3 but the all other numbers may the percentage term they may actually change for the better because we will have a much stronger book with maybe slightly lower yield. But coupled with steps which we will be taking as Sudipta mentioned, there will be other line items of fees and all which will get added. There will be new businesses or products that we may get into over a period of time which we will start working on the next full year business plan. And we possibly come back to all of you after, you know at the end of when the results for Q4 come up.
Digant Haria
Thank you so much for the detailed answers. Thanks, Sachinn and Sudipta, all the way.
Sudipta Roy
Thank you so much.
Operator
Thank you. A reminder to all the participants, please restrict yourself to two questions. Next question comes from the line of Kunal Shah Citigroup. Please go ahead.
Kunal Shah
Yeah, thanks for taking the question. So firstly on maybe if you can just highlight how much has been the write off particularly on the two wheeler and PL because outside of MFI also we are seeing a slightly higher stress out there and still in terms of the growth in PL that seems to be quite aggressive. So would we look at pulling back growth at any point in time because of the higher delinquencies in plus?
Sudipta Roy
Kunal I’ll take the PL growth question and then Sachinn will give you take the rest of the part of the question see pl. We are very clear that you know we will not do PL to any leverage segment or any non prime segment. Our growth in pre primarily is coming from prime salary segment. So if you see our DDFA we do 99% salary in our DSA channel. If you look at our large partnership or targeting large partnerships is towards grant salaried. In fact some of the metrics are absolutely clean in this business. So we are very very clear that our PL scale up will be very very risk elevated. See on a percentage terms it might seem high but from an actual quantum perspective we are still doing about 550 to 600 crores of PL a month which is not very very large.
So we are gradually scaling up this business and the metrics are currently absolutely okay. And we do believe that as long as we do prime salaried business with a sharp eye on both aggregate debt burden as well as unsecured exposure. Overall metrics we should define. And we are implementing Cyclops for PL also this quarter. Parallel SME and PL Cyclops were implementing this quarter. So as PL and SMA Cyclops get implemented this quarter the unsecured business will I believe will be run in a far far more safer fashion.
Sachinn Joshi
Hi Kunal. Sachinn here.
Kunal Shah
Yeah.
Sachinn Joshi
On the write offs usually we don’t give these numbers. Last quarter we gave the number as an exception. But you know the overall write off like we mentioned on the call previously is a function of, you know it’s a technical write off, right? Because any asset which gets Provided up to 100% there is a pool of assets which which are taken up for writing up in the book. But at the same time that does not mean that business stops the effort on collection of the thing. Right? So yes rbf, you have seen that the roll forward have been happening and out of that pool, you know last quarter we had given, we had specifically clarified that the whole write off was not rbf. All I would like to say is that it is, it is distributed amongst products. So it is not one business where the write offs are very high. About 300 crore I can share for the micro loan piece is what we wrote off and rest all the businesses have been almost equitably done.
Kunal Shah
So more in terms of the credit cost, not particularly write off but if you have to look at it like credit cost is very clear this time in terms of how much MFI is contributing and maybe you indicated that from the wholesale side there seems to be like zero impact, no recoveries and no provisioning during the quarter. So how would be the breakup there between particularly two wheeler, two wheeler factor and consumer loans?
Sachinn Joshi
You know on the, you know Digant’s question we already responded to this that for couple of quarters farm, two wheeler and PL will see some challenge and thereafter you will start seeing things changing for the better. Because whatever challenges we have faced in the first quarter are not restricted just to rural business, right? I mean the election time as well as the feet wave, all this led to liquidity going out of the market, led to a situation of over leveraging and there has been an impact across businesses the most was felt of course in the micro loan market but the other businesses also got impacted to a level.
Plus at the same time we have been directionally moving ourselves more towards prime and all. So like we called out in the last quarter, it will be two to three quarters of something which will be. And it is not, not just one particular business. What I, what we would like to highlight is it’s not one business which is going through, you know, a major turmoil or anything. It’s just that certain key activities like form on account of repo stoppage, 2wheeler because of some challenges in certain states are the reason why the credit costs have been slightly on the higher side.
Kunal Shah
Yes. So the reason was the repayment rate in two wheeler was quite high. Okay. If you look at it 2,400 crores of disbursements and portfolio staying flat. So that suggests a very high maybe the rundown rate. So just wanted to check is it like a relatively higher credit cost and write off into Wheeler which is particularly leading to that. So primarily that was the question.
Sachinn Joshi
That is not the case. You know, the write offs have been as I mentioned across all the three, four products they are, they are distributed. So no specific major hit in one particular product.
Kunal Shah
The rundown could be on account of.
Sudipta Roy
Yeah. Kunal, if you would, if you would recall, you know we had started sort of the prime moment in two Wheeler journey, you know, sometime last year. Right. In September of last year when we started moving in towards the prime of two Wheeler. So actually some part of that. Actually if you look at our portfolio, 49% of our two wheeler portfolio is prime. Right. Which is basically half of our two Wheeler portfolio is now prime. And on an incremental basis, you know, as I said, you know in the month of January almost 75% of the through the door disbursement in two wheeler is prime.
So around April and May we saw some spike in two Wheeler delinquencies along with which is a continuous product along the microfinance. But we saw also stabilization of the same around August, September we saw stabilizer on the same and that downward trajectory continues and which is also portfolio bounce rate sort of indexed representation we have given in slide 23. And we are very confident that whatever credit costs that we have seen happen in Q2 and Q2 Q3 in the two wheeler business is on a sharp downward trajectory over the next couple of quarters.
Sachinn Joshi
Kunal, just to add, I was just looking at the numbers after you gave the breakup of two Wheeler. What has happened? This was a festive quarter and there is a trade advance book. Usually advances are given to the dealer. So there is a trade advance book which has reduced by 350 crores close to. So that is one impact because of which you are seeing that that is a. That is specifically for this. Hello.
Kunal Shah
Okay. Yeah, yeah, thanks. Yeah, it’s perfect. Yeah. So I think trade advanced unwinding is leading to that.
Sachinn Joshi
Yeah, yeah.
Kunal Shah
Thanks, thanks. And all the best.
Sachinn Joshi
Yeah, thank you.
Operator
Thank you. Next question comes from the line of Mahrukh Adajania with Nuvama. Please go ahead.
Mahrukh Adajania
Yeah, hi, I had a question that you know lenders plus three three plus lenders is around 7% and then four plus is around two and a half.
Sachinn Joshi
It is two and a half is only…
Sudipta Roy
Two and a half is LTA plus four if we take the entire block LTF plus four up to whatever. If the whole block is 4%.
Mahrukh Adajania
Yes. So if you just take LTF plus four which I guess is two and a half correct, not five, six and then if you take LTS plus three that’s seven. So basically you have a gap of five, five and a half which will have to convert by April 1st. So your all on picking up credit cost is driven by the fact that this five and a half will reduce to near zero or how do we think about it?
Sudipta Roy
See Mahrukh on this year to look at that, it has been resolving itself Quite well from 10% in quarter one FY25 it has come down to 7%. So you can see that on an average, on a quarter basis, average has been one and a half percent resolution on an average on a quarter basis. And the collection efficiency on this pool is also at 98.7%. The collection efficiency, the collection pressure efficiency is not know, not extremely bad on this. Now one of the things that we have to keep in mind that from April 1st the Leverage Guide, guideline comes into play which has more of an impact on disbursement actually rather than an immediate follow through impact on repayment capability of the customer. Right?
So what we expect is that this number which is there, that 4% and that 2.5% to orderly wind down over the next couple of quarters anyway we have pushed in about additional 900 collectors on the ground and one of the focus of those additional 900 collectors is to focus on the geographies where collection intensity is needed. So that effort is already continuing and we are reasonably confident that this, you know, the 7% plus 2.5% number will be reasonably worn down over the next maybe max to two and a half quarters.
Mahrukh Adajania
Got it. But basically if the run rate is 1 1/2 percent. Then it would require 3/4 to wind down or it does not work.
Sudipta Roy
That one of the things that Mahrukh, you have to keep in mind that the entire portfolio is not bad. The 7% portfolio has a 98.7% is close to 99% collection efficiency. So a majority of the part of the portfolio is good. So we need not panic on the portfolio that is good. A small part of the portfolio has strengths and the focus should be on that small part of the portfolio.
Mahrukh Adajania
Okay, makes sense. And then just one clarification on the SR provision. So the reversal and the additional provision that accounting is done through the same line. Right. Of provisions.
Sachinn Joshi
That’s right.
Mahrukh Adajania
Thank you. Thank you.
Operator
Thank you. Next question comes from the line of Saurabh Kumar with JP Morgan. Please go back.
Saurabh Kumar
So, just two questions. One is on the Micro finance portfolio. Number one, what’s the write off policy? And just in terms of number of customers, what will be the collection efficiency? Like how many of your customers are fully paying right now?
Sachinn Joshi
On the fourth part, like I mentioned earlier when a question was being asked, so write off policy actually once any asset is fully provided to the extent of 100% it qualifies for a write off. And the write off is more like a technical write off for us because after the write off also the efforts do not come down. The write off policy. Specifically on micro loans, the provisioning of 100% is the moment it crosses 90 for all the other products it all depends on, you know, the ECL model has been built in where the hundred percent provisioning happens based on a particular dpd.
The actual write off in the book happens. You know, basically the finance takes a call on when the technical write off has to be done in the book, like I mentioned earlier also. But the effort on account of write off should not be linked to the fact that we will, we will stop pursuing those customers in terms of collection. So we also have reasonable collections happening out of the assets which have been written up.
Saurabh Kumar
So if you will just detail the micro finances are 90 days 100%. Where will personal loans and where will two wheelers be reach? 100%.
Sachinn Joshi
Sorry, can you, can you repeat that?
Saurabh Kumar
Micro finance you provide 100% at 90 days.
Sachinn Joshi
Yeah.
Saurabh Kumar
When do you provide 100% on PL and on tubulars?
Sachinn Joshi
No, it’s an ACL model so I will have to check on that. Other piece which you talked about on the, you know, whether, whether it really is relevant on count. It’s not relevant. What is important is actually how is the customer levered and that we have already shown, you know, during our digital day. Also we clearly mentioned the portfolio that we have is, you know, how levered it is. Ours is the least levered book that we have.
Saurabh Kumar
So my limited question was your fee includes overdues. So basically, what I was trying to get is essentially all the customers which are paying on time. So the balance will be basically part paying or non paying. And that basically creates your overdue risk. So I just wanted to know if your collection efficiency is 99 in terms of customers, how much will it be? Is it 97? Is it 98?
Sudipta Roy
Yeah. So the in terms of see collection efficiency first input does not include over days. I know we report zero dpd collection efficiency and in terms of the number of customers it is 99.22% is correct. Right.
Saurabh Kumar
So including nobody’s.
Sudipta Roy
Yes, yes, 99.22 there are number of customers.
Saurabh Kumar
Okay, thank you.
Operator
Thank you. Next question comes from the line of Nischint Chawathe with Kotak Institutional Equities. Please go ahead.
Nischint Chawathe
Yeah, thanks for taking my questions. You know, one was on project Cyclops. You said that Cyclops is implemented in two wheelers and we are now looking at implementing it in personal loans and SMEs. So I mean I was just curious, why would you sort of, you know, scale up the book just as yet, right? You probably implement Cyclops and then kind of scale it up.
Sudipta Roy
Yeah. So you know, just to think, you know, Cyclops we are already implemented in two wheeler hundred percent. And in Tractor it is implemented, it is live. We are scaling up the number of dealer coverage slowly. The SME and personal loans, we are in advanced stages, stage of readiness to deploy. And the current sourcing that we are doing, we are very confident of the current quality of sourcing. We are only doing absolutely super prime salaried customers where the net non starter number is as low as 40 basis points. So this is not the number that we normally give out. But I am giving out the number because you asked the question. On our new palate sourcing, our net non starter number was only 40 basis points.
Nischint Chawathe
So does it mean that after implementing Cyclops you probably go towards slightly one segment lower or something of that.
Sudipta Roy
The thing is that Cyclops is designed in such a way that it targets a target pd. So you know, once we put the PD then the customers who qualify in the portfolio mix towards that PD is only what will go through. We are at any point in time not saying that, you know, it will help us go towards the more riskier mix. So that is not the impact. You know, one of our guiding principles of a personal loan business is that we will do a personal loan business with a majority salaried profile that will be the profile of a personal business. Cyclops helps us to sharpen the credit outcome in that segment even further.
Cyclops, I’ll tell you in terms of the maximum benefit for Cyclops will come in case of the two-wheeler business and the farm business and the SMA business. Primarily because this business have a large content of customers who are new to credit and the large customers of consent and who are thin bureaucrats. Right. So the way the Cyclops is constructed it helps actually underwrite NTC and thin bureau much better. Right. Whereas in personal loans we are actually going for customers with a little thicker bureau track. So probably the alpha on Cyclops on personal loans will probably be of an order of magnitude slightly lower than that we are seeing in the two wheeler business or in the farm business.
So for the personal loan business it’s age old experience that is driving the current sort of growth momentum. And though on a percentage basis, as I again I’m repeating myself though on a percentage basis the number might look large but on a real absolute amount basis 550 crores of qualified salary personal loans a month is not really a very large number.
Nischint Chawathe
Got it. I mean since we are on this, you know, maybe as a one off can you share the yield and ticket size and personal loan segment?
Sudipta Roy
Average ticket size in person loans is two and a half lakhs and the average yield is about 17% on.
Nischint Chawathe
Got it. More curious thing, you know, any specific reasons for change in chief risk officer?
Sachinn Joshi
Actually we have already put the…
Sudipta Roy
So the departure of the, you know, for better opportunities necessitated a change.
Nischint Chawathe
Okay, got it. And just one last data keeping question. You know you mentioned that you added 900, you know, collection official officers in the micro loans business. So what is the aggregate number as you speak?
Sudipta Roy
See in micro loans business the guy who sells is the guy who collects Overall, overall just second I’ll take everyone is a collector and everyone sells. But specifically your in terms of collections will be about two and a half thousand people dedicated. So there are two things, you know in our micro business we have the normal regular 1200. 1200, sorry, the normal 1200 collection for collections 1200. Additional for collection.
Nischint Chawathe
Got it. So basically we have the, the normal, you know, kind of microfinance employees who are collecting. In addition to that you have…
Sudipta Roy
A hard bucket collection team.
Nischint Chawathe
That’s around 1200 which we put up for the first time. Right.
Sudipta Roy
That’s it.
Nischint Chawathe
Got it.
Sudipta Roy
We have added to it. We had it. We have added to it.
Nischint Chawathe
No, that’s what I’m saying. How much do you have and how much have we added? That’s my question.
Sudipta Roy
We have it. So overall addition of people in the microfinance team has been about 900 now. Some of them have been deployed in the regular course of work. Some of them have been added to the hard bucket collections team. The reason, for example, let’s take this example. In a micro, in a meeting center you currently have five people. These five people are servicing thousand accounts. So the average accounts per connected is 200. We wanted to bring down the accounts per collector in a meeting center. So what we did is with the 900 people that we added some portion of. The 900 people went to a regular meeting centers so that our accounts per collector come down. Our account per collector came down from 560 to 480 and a small portion of the 900 was deployed to the hard collections bucket team is my answer.
Nischint Chawathe
I think that this helps. Yes, perfectly. I think we understand the magnitude of how people have been deployed. Thank you very much and all the best.
Operator
Thank you. Next question comes on the line of Abhijit Tibrewal with Motilal Oswal Financial Services Ltd. Please go ahead.
Abhijit Tibrewal
Yeah, thank you and good afternoon everyone. So my most questions have been answered. Just two questions that I had. Question is in May five from what we have put out in our presentation, the pre credit costs are likely going to come in 4Q. So first thing is, can you explain why is that now? Why I ask? This is what we have said. If you actually provide 100% on MFI loans after they are 90 bpd and maybe technically write them off and if your collection efficiencies are increasingly getting better in December and January, then why is it that a credit cost should come in the fourth quarter?
Sachinn Joshi
Yeah, Abhijit, let me take this. So usually the credit cost comes with a lag of a quarter because whatever the user, you know, we have already disclosed the collection efficiencies. The way they panned out in October, November and December from 99.43 it came down to 99.26. Finally it ended with 99.39 in December. So when the collection efficiency comes down which was the case for two months, October and November. There will be roll forwards which will actually keep happening. And also the roll forward happening out of the previous quarter customers. So you know whatever roll forward finally happen net of the collections because the collection effort is still on right. The those will ultimately lead to a credit cost panning out because the moment these customers move to 90 plus bucket we will have to start providing.
So we you know as we are seeing a sign that December has actually improved vis a vis November. We have said that there is we believe that what may happen assuming that this trend continues in Jan, Feb and March, the you know the collection efficiencies as they start improving, the roll forward will slow down and hence in the first quarter of next financial year the roll forward will slow down compared to quarter four. So on relative terms we have mentioned that quarter four may turn out to be the highest in terms of the credit.
Sudipta Roy
So the printage flows tend to get bunched up because you have stabilization efforts continuously going on. And then so some customers get stabilized, some customers roll forward for one month and then roll back. So this process continues. And typically what happens in retail portfolios most of this when the deterioration starts within a period of time, they tend to get bunched up at one particular point of time where across a couple you see high credit cost and then the curve shifts downwards. We expect that the peak of this curve will happen sometime between January, February, you know the advanced estimate of macro utilization that we have given for Q4.
Sachinn Joshi
Abhijit, just one more piece. We are all aware of the guardrail which is to be implemented by MPIN which will be effective 1st of April. We will have this and this is going to be across the industry. We already responded to one of the questions earlier that we will have to wait and watch how this guardrail impacts because the impact is going to be across the whole customer base in the industry. So much on that. Again the players who have least levered customers will be benefiting out of this compared to companies who have high levered customers in respective buckets that we have shared in our presentation. So we will have to see what will be the impact of that. But bearing that if the trend continues, if the December trend continues into January, then what we mentioned would evade.
Abhijit Tibrewal
Got it. And just to follow up on that, given that we are still looking forward to this infant garden implementation from April and whatever we just highlighted, can there be a scenario that this MFI stress or MFI credit cost which we think will pick out for us in 4Q can spill over to the next financial year as well?
Sachinn Joshi
So see the guardrail initially was supposed to be implemented on from 1st of January, so pushing it to 1st of April is going to only support all the industry players and it will also help customers figure out ways and means of making repayments and you know, getting alternate sources.
Sudipta Roy
Yeah. So let me add to that. See we can’t crystal ball glaze as to what what will happen. Right. But the fact is that you know, given the fact that in general the Kharif arrivals have been good, there is reasonable amount of liquidity which is building up. The Rabi sowing has been very, very good. So we expect that in month of March and April when the Ravi crop comes, it will also be reasonably good which will augurs well for the liquidity. We expect that there will be a soft landing, but we will have to wait and watch. As Sachinn said, the players with the better franchises will benefit because they have the less non divert customer. So the disbursement impact on repeats, etc. will not be impacted that much, especially for their exclusive customers. And I would like to point out that we have a very high proportion of exclusive customers or property customers who are again relatively non-delivered. So we are hopeful that the entire industry will have a soft landing post April and but we’ll have to see how it pans out.
Abhijit Tibrewal
Got it. Thank you. And just one last question because you just mentioned the better franchises. So just trying to understand. In the past even in our presentation we have called out that we picked up this leveraging early and which is where maybe we slowed down or maybe we didn’t go after leverage customers. Just trying to understand. I mean over the course of this last six, nine months have we had a chance to understand our model in rural business finance or mfi? Is it different from the other peers which has helped us deliver better asset quality outcomes than the industry?
Sudipta Roy
See I think comment on what others have but I will say some of the underpinnings of discipline that we follow and which obviously is up to the investor and the analyst community to analyze and benchmark with others. One of the things that we do is that obviously we do not rely on third party origination of MFI loans. Right? All our MFI loans and JLG loans are originated by our own people. We have a very close connect with the village distribution on ground. The second thing which we have is that obviously we have a very very tight leverage and as I’ve told earlier from January itself we started tightening our leverage conditions and started letting go of some portion of the repeat.
The last thing is third thing is that we have a very strong RCU network and a branch process vertical who goes and every loan that the field level officer books there is a second level check and out of the second level check there is a sample of third level check. So actually it almost goes through a three level check before the loan is granted. The second thing is that some of the discipline that we have been following for many many years, for example, if a particular meeting center dips below 98% collection efficiency, we immediately stop disbursement there and focus collection. Now this is a hard guard rail. That means in a meeting center if collection efficiency were to drop between 98%, the app freezes for those field level officers, even if they want, they can’t onboard a single loan in that particular meeting center and then the focus entirely shifts towards collections.
And last but not the least, we have extensive data analytics for geo selection and expansion. We only go in areas where we think has got less non levered customers, then we can get non leveraged customers on board. So and the last thing is that we also, because we understood that the industry was getting slightly leveraged, we said that we will invest in a channel that gets non leveraged and fresh customers which we call our FSO channel or fresh sourcing officer channel. Now we have a reasonable amount of people in about approximately thousand people. You want to take a couple of 50 or 100 here and there, approximately 1,000 people which we call fresh sourcing officers whose only job is to get fresh non leverage customers and to get into villages that are non penetrated. So in a way the business has been structurally designed to go after non leveraged customers.
And wherever there has been instance of leverage, the business has been structurally designed to take a pause before business starts again. This provides an automatic inbuilt, what I call a speed governor mechanism, right, Wherein you are not allowed to speed up in an area where you have sort of worrying asset quality, whereas in areas where you have rather non leveraged assets or opportunities sitting, the organization is designed to speed up on that areas, albeit safely. So in a way it is for the entire investor analyst community to benchmark and see whether this set of practices of ours has helped us sort of keep us relatively in a straight path during this trying period. And only time will tell us to who are the ones who have better franchises and who are the ones who do not have.
Abhijit Tibrewal
Got it. Thank you for the detailed answer. Thank you and wish you and your team the very best.
Operator
Thank you. Next question comes from the line of Chintan Shah with ICICI Securities. Please go ahead.
Chintan Shah
Yeah, thank you for the opportunity and congrats on good set of numbers. So firstly continuing on the insurance piece, I think we mentioned we increase the share of insurance the overall income. So currently what would be the total percentage of insurance income and the total fee income pool?
Sachinn Joshi
Can I have that number? If you don’t have this, just give us a couple of seconds. Do you have. If you can give us. I don’t have the number handy instantly.
Chintan Shah
Sure. And so on the margins front…
Sudipta Roy
Insurance is a percentage of average book would be about roughly average over the last three quarters would be about 1%.
Chintan Shah
1 percentage?
Sachinn Joshi
Yeah.
Chintan Shah
Okay, okay, sure. And so on the margins front I think we mentioned given the rate cut there would be some benefit flowing over there. Also in terms of our fixed book also largely what percentage of the book would be fixed in nature entirely almost?
Sachinn Joshi
Yeah. Except for home loan, all the other pieces will be.
Chintan Shah
Sure. And also on the PL part I think you mentioned we have a ticket size of tool at 50,000 and the yield of 17%. And so what would be the tenure, your average tenure also for these loan typically.
Sudipta Roy
About 30 months. About 30 months. See we are in the business of Prime Pl. We do not do STPN or anything like that. Absolute prime salary.
Chintan Shah
Sure, sure. And sir, just lastly to dwell upon the ROA piece again I think for the quarter we reported 2.3 and we are gradually looking at 2.8 to 3. So given that our yields will contract and similarly the credit cost or OPEX would contract and resultant benefit on ROAs, how does that ROA move from 2.3 to 2.8? So more benefits come from the income piece or the OPEX fee. And on the leverage then what would be the optimal leverage that we would be targeting?
Sachinn Joshi
In turn I think it’s slightly premature talking about because these couple of quarters are an aberration. Right. We have spoken earlier about the ROA trajectory that we wanted to move on. Now there is some shift which is happening. There is some impact specifically which has come up. So I think two to three quarters you will have to live with this aberration which would mean as I mentioned earlier, the 2.8 to 3% is what our targeted ROA. Now this was part of our LAKSHA 26 strategy. If there are going to be few challenging quarters, maybe it will move a couple of quarters down the line. But directionally we still want to achieve that.
We will be working as I mentioned we will be working on the business plan for the next financial year and also a long term plan for the next five years. We will, if there is a change in this as part of those discussions we will come back. But at this point of time we are still fixated on the fact that 2.8 to 3 is directionally what we are looking at. It may just, you know, if there are a couple of quarters which are challenging, it may just move ahead by couple of quarters. That’s it.
Chintan Shah
Sure that is helpful. And this last thing on the leverage part. So what could be the optimum or best leverage?
Sachinn Joshi
Debt equity of 5 is to 1 is what we would like to be at. But there is a BR right now at 3.4. So you know as a AAA I don’t think we will be would want to go beyond that at this point and the leverage will be six.
Chintan Shah
Sure. So that is very helpful. Yeah, yeah, that’s it from my friend. Thank you and all the best. Thank you.
Sachinn Joshi
Thank you, thank you.
Operator
Thank you. Next question comes from the line of Abhishek Murarka with HSBC. Please go ahead.
Abhishek Murarka
Hi, good afternoon everyone and congratulations for the performance. So just in terms of markers, you know trying to look at you know all the conversation that has happened so far looks like GS2 at least gross stage 2 that should start showing improvement or at least that should not increase going forward. Right. Because GS3 might go up or write offs might go up but forward flows into GS2 should not happen. And also looking at you know your net non starter and the bounce rates you have shared for two wheeler farm it looks like things should improve there. So ideally GS2 should not increase from here. Is that a correct understanding?
Sachinn Joshi
It will all depend on you know we specifically for micro loan as we mentioned that we have seen seen some green shoot. We have seen some improvement coming up in December. Right. But I think we have to wait for a couple of months more to see whether directionally it is panning out. So at this point of time we would not really want to you know commit that stage two nothing will be there because there are various businesses and all these businesses are enough sort of in a transition. So there is part of the book which has moved towards crime. There is part of the book which is still you know from the earlier before the strategy was changed.
So at this point of time I would just like in case you are asking this question from modeling point of view I would say that you know you, you should continue holding on to the assumptions because we will still need some kind of, you know, visibility coming out of this challenging time, which I think is one or two quarters away post, which we will be more, you know, we can possibly talk more firmly on how stage one, stage two, stage three would really pan out, but we believe the credit cost and all would be in line with last one or two quarter.
Abhishek Murarka
Okay. No, I was just trying to understand the direction of you know NPA and therefore grade cost to try and understand why it would remain elevated for two quarters when you’re showing good numbers on bounce rates and net non stock.
Sachinn Joshi
Yeah because the seasoning takes the two wheeler and palm as Sudipta mentioned the you know only the two wheeler book and that too over a period of has moved from 0 to almost 100%. Over on cyclops Farm we have just begun. We are yet to start off on the PL. So you know and then SME. So till the time this whole transition does not happen you will, you know we cannot pinpoint that this particular quarter it will be business by business. Right. Maybe one year down the line once every product moves on to Cyclops then we will be able to say firmly that yes now the transition has been over and the credit cost now will follow a particular trend. But till that time I think and then we also have a challenging time on the micro loan front where we have a 26,000 crore book.
So I think all these factors are leading to a situation where it will be difficult to specifically say the challenging time will you know on the other businesses the credit cost has been slightly elevated for various reasons pointed out earlier. So I think you need to give us couple of quarters and then you should start seeing so H2 which is quarter three onwards you will start seeing the impact of Cyclops in terms of the benefit which flows onto the credit cost line.
Sudipta Roy
Yeah see Abhishek, what I would like to add to what Sachinn said is all the leading indicators of the work that we have been doing a looking gold. So we are satisfied with all the leading indicators and we have put certain index representation of some of those leading indicators in the analyst. As I said earlier the portfolio washout and the replacement or the replenishment of the portfolio with better credit fundamentals typically you know takes a couple of quarters. Couple of quarters means you know four to six quarters. So obviously we are about three quarters into the journey. It will take for another two to three quarters for the full some headline impact to be start being visible which as Sachinn said takes us to about latter part Q2 early Q3 of FY26. Right. When you know you will start seeing the real impact of that.
The current macro situation does not help us also because the current macro situation, you know makes us also sort of adds a lot of noise into whatever we are seeing. Right. So you know I would like to add to What Sachinn said is that you know, for us it’s not a sprint. Right. And we are, we are, we are very satisfied with the progress that we have made on the journey. The build in place. What we are doing is that now we are process of optimizing those building blocks which have been put into place. So my only request would be that, you know, we should be a little patient and give us a couple of more quarters for that benefit to build out in terms of numbers.
Abhishek Murarka
Got it, Got it. Thank you. Thank you.
Sudipta Roy
Thank you so much.
Operator
Thank you. Next question comes from the line of Subramanian Iyer with Morgan Stanley. Please go ahead.
Subramanian Iyer
Hi. Thanks for the opportunity. So on microloans you have given a lot of texture on asset quality and that there are a few imponderables. But I had a question on micro loans beyond this current asset quality cycle. So how are you looking at loan growth structurally? I mean because of the changes happening at an industry level, do you see that loan growth here is going to be structurally lower than what it used to be in the past? And also are you expected to reduce loan yield given that the regulator had also been making comments on this all through last year. So essentially looking at structural growth and profitability beyond this current cycle. Your thoughts?
Sudipta Roy
Yeah, thanks. One of the things is that I do believe that this is a business and this is my personal opinion, industry opinion might vary. The safe speed of this business is anywhere between 15 to 20%, not more than that. So the industry probably for the last couple of years have been driving this business as 40% plus growth rate which obviously has led to some is sort of part contributory to this asset quality sort of challenge that we are seeing in this. So I do believe that, you know, after the infant guardrails come into being from full infant guardrails come into being from April, the industry structurally will have to adjust itself to. You know, if I were to use the old English pro of cutting the quote according to the cloth, which will mean somewhere between 15 to 20% growth rate on an annualized basis. And I think that’s a safe growth rate. So I do believe that on the longer term this industry will settle between this growth rate.
The second thing which I think is on the yield side, we have already sort of tempered down some of our yields and if you see and if you go to our website, our yield differential is now from 16% to 23%. The absolutely trade qualified fourth cycle customer, non leveraged fourth cycle customer end up getting a low rate of 16%, whereas most of the new customers coming into the fold will get a rate of 23%. So the average yield is closer to, you know, a little shade lower than 23% because we have a portfolio stock etc. Which is, which is priced at 24, which was our previous yield. You know, our average yield still remains high but over a period in time, you know, this is the sort of the interest range that the industry will move towards. So. Yes. So some of the supernormal yields that we might have seen in certain sort of franchises, probably those will get tempered over a period of time.
Subramanian Iyer
Thanks. That was a very clear answer. Just one more question. What is your guidance or your view on retail loan growth for you in FY26?
Sudipta Roy
I can’t really crystal ball glaze and say that, you know, what should be the retail loan growth by Q4. By Q4 we’ll be able to see we are guided by the Lakshya goals of 25% plus etc. But again what I said is that we will exercise caution and you know, and wherever the risk required equation is not in our favor, we will choose caution over growth. This is a very clear philosophy that we are following and we will follow this philosophy. So what we will need to see is that how the collection efficiencies for all lines of business pan out in this quarter Jan Feb March, which I think will be a quarter of stabilization for the entire industry and probably a much more clearer guidance is probably we should be able to give in sometime at the end of Q4.
Sachinn Joshi
Yeah, I think we should be. You know we would have by now by then finalized the business plan as well. Yes, finalized the business plan. And also the the growth rate would differ depending on the business we are in. For example, personal loan SME are younger businesses will grow at a much larger pace whereas the mature businesses will grow perhaps at similar lines. Barring MFI which is one piece which we will have to look and figure out what kind of growth we can consider we will be. We need some more clarity on that.
Subramanian Iyer
Thanks so much and wish you all the best.
Sudipta Roy
Thank you.
Subramanian Iyer
Thank you. Next question comes from the line of Wuzmal Handu with Goldman Sachs. Please go ahead.
Wuzmal Handu
Yes, thank you so much. Good morning sir. Just one question from my end. You spoke about the near term pressure on Men’s plus C as on account of the change in mix that you see right now. Just wanted to gauge your thoughts on when do you anticipate this trend would stabilize for your book and then eventually when do you potentially. See operating leverage playing out.
Sachinn Joshi
Yeah, so NIM P already we responded to this. I think depending on how when the, you know, the rural business loans piece actually stabilizes and which perhaps we believe that, you know, one more guardrail which is being implemented by MPIN will come into play from 1st of April. So we still see 2 to 3 quarters of turbulence at the market level, at the industry level, but we would like to state that we are still better off. So the impact may be lower is what we can watch on this because this is a large significant portfolio on our books as well as the fact that we are moving more towards adding to the change that we anticipate on the NIM fee, which may come slightly on the lower side, but that should actually get compensated or more than compensated by two things.
One is the increasing productivity and the lower effort on collection cost because that’s a significant part of our operating expenses as well as the reduction in the credit cost which we hope will start getting factored into our P and L from H2 next financial year. So 2 to 3 quarters is what we believe that we’ll have to continue with this and then we will start seeing the positive impact of it.
Wuzmal Handu
Okay, thank you.
Operator
Thank you. Ladies and gentlemen that was the last question for today. We have reached the end of question and answer session. I would now like to hand the conference over to Mr. Sudipta Roy for closing comments.
Sudipta Roy
Thank you, everyone and thank you for your participation. As I said earlier, us along with the entire industry is going through a little bit of, if I may use that word, this is not a very like deep rally downturn that we might have seen earlier. I do believe that this particular downturn, especially for the overall industry is. I’m not speaking only of the microfinance business, but speaking of other asset lines also is is a much shorter duration cycle that we might be seeing and we remain hopeful that the shorter duration cycle will probably see a bottoming out sometime between quarter one and quarter two of next year and then probably because you know, the deleverage has happened quite a bit as far as data available with us.
So I do believe that things probably will get onto a normalized trajectory sometime at the end of quarter two or starting quarter three of next financial year. So with that in mind, we remain focused on building all our capabilities. Even while we are going through some of this sort of on ground challenges. We have not stopped for a single day in sharpening our tools of execution, such that when things become normal, you know, we are able to race much faster than others and take a share of the market opportunity which is available obviously in a risk calibrated fashion, and deliver those returns for our shareholders.
So thank you so much and wish all of you a great quarter ahead.
Operator
Thank you. On behalf of L&T Finance limited that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.