Bajaj Finance Ltd

NSE:BAJFINANCE

Earnings Call Analysis

Bajaj Finance Reports Strong Growth Amid Elevated Credit Costs

Bajaj Finance experienced a solid quarter with assets under management (AUM) growing 29% to INR 374,000 crores. They booked 9.7 million new loans, adding nearly 4 million customers in Q2. Despite facing elevated credit losses, with net loan loss estimates for FY '25 between 2% and 2.05%, profit before tax rose 14% to INR 5,401 crores. The company aims for 15-16 million new customer additions this fiscal year, optimistic about surpassing 100 million customers by year-end. They are also focused on operational efficiencies, targeting a cost-to-income ratio improvement, supported by growth in new business lines contributing 2-3% to AUM.

Strong AUM Growth Amidst Mixed Performance

Bajaj Finance reported a strong quarter with an impressive growth of assets under management (AUM), reaching ₹374,000 crores, representing a year-on-year increase of 29%. The company added almost 4 million new customers and booked 9.7 million loans, marking a 14% increase year-over-year in loan bookings. These achievements are indicative of solid demand for Bajaj's financial products despite overall economic headwinds.

Profitability Metrics Show Promise

The company's profit before tax (PBT) increased by 14% to ₹5,401 crores, with profit after tax (PAT) growing by 13% to ₹4,014 crores. Return on equity (ROE) stood at 19.1%, reflecting efficient capital utilization. Notably, the net interest income (NII) rose by 23% to ₹8,838 crores, while total net income surged by 24%.

Challenges in Loan Losses

Despite the overall growth, credit costs remain a concern with gross loan losses remaining elevated at ₹1,934 crores for the quarter, which has subdued profit growth. The company projects that the loan loss ratio will stabilize and expects a reduction to around 2% by the fourth quarter of FY '25. Currently, the net non-performing assets (NPA) ratio stands at 0.46%, which is commendable in comparison to industry standards.

Future Growth Projections and Customer Expansion

Looking ahead, Bajaj Finance anticipates adding between 15 million and 16 million new customers in FY '25 and is optimistic about crossing the milestone of 100 million customers by the end of the fiscal year. The company is targeting a full year AUM growth rate of 27% to 28%, driven by new business lines, which are expected to contribute approximately 2% to 3% of growth.

Strategic Improvements in Operational Efficiency

The company intends to leverage improvements in operating efficiencies to optimize expenses. Operating expenses to net interest income improved to 33.2% from 34% year-over-year. Additionally, management is focusing on the use of technology, particularly generative AI, to enhance productivity and reduce costs, aiming for continuous efficiency gains in the coming years.

Cautious Optimism Around Asset Quality

As for asset quality, while some pressures exist, management believes that the current credit cost cycle might have peaked. The guidance for net loan loss to average assets has been revised to 2% to 2.05% for FY '25, which reflects an increase from previous estimates. This cautious optimism arises from a series of risk management actions taken to protect the portfolio from potential defaults.

Business Transition and Diversification Efforts

The business is in a transition phase as Bajaj Finance pivots from exclusive reliance on Bajaj Auto financing. The company expects to fully mitigate the decline from this segment by increasing its focus on non-Bajaj business areas, which are exhibiting half the risk cost compared to their captive lending.

Conclusion: A Balanced Outlook

In summary, while Bajaj Finance faces challenges in credit costs, its robust growth metrics, operational focus on expense optimization, strategic expansions in customer base, and emerging business lines present a balanced outlook for investors. The company's ability to navigate through these challenges while maintaining healthy profitability metrics solidifies its position as a leading player in the financial space.

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Bajaj Finance Limited Q2 FY '25 Earnings Conference Call hosted by JM Financial Institutional Securities Limited.

[Operator Instructions]

Please note that this conference is being recorded.

I now hand the conference over to Mr. Sameer Bhise from JM Financial. Thank you, and over to you, sir.

[Sameer Bhise, analyst]

Thank you, Nirav. Good evening, everyone, and welcome to the 2Q FY '25 Earnings Conference Call of Bajaj Finance. First of all, I would like to thank the management of Bajaj Finance for giving us the opportunity to host the call. From Bajaj Finance management team, we have Mr. Rajeev Jain, Managing Director; Mr. Anup Saha, Deputy Managing Director; Mr. Sandeep Jain, COO and CFO; as well as the entire senior management team of Bajaj Finance and its subsidiaries. As always, we will have opening comments from the management team post which we will open the floor for Q&A.

With that, I would now like to hand over to Mr. Rajeev Jain for his opening comments. Over to you. Thank you.

[Rajeev Jain, executive]

Thank you, JM. Thank you, Sameer. I also have with me Atul Jain, Managing Director, BHFL, with me on the call. Very good evening to all of you or good morning depending on the geography. I'll just take you through the presentation that we have put on the Investors section of the website. I jump straight in on Panel #4.

On a consolidated basis, I would say a mixed quarter for us as a firm. Good quarter in terms of volumes, assets under management and operating efficiencies. Loan losses remain elevated in Q2 as well as they were in Q1. As a result, profit growth and return on assets were muted for the quarter. The overall delivered AUM growth of INR 19,732 crores in the quarter. booked INR 9.7 million loans and added just a tad below 4 million new customers to the franchise in Q2. Bajaj Finserv app now has 61.7 million net users.

In terms of AUM, the overall consolidated AUM came in at INR 374,000 crores just a tad below that. OpEx to net NII continue to improve, came in at -- so expenses remain control came in at 33.2%. PBT grew to INR 5,401 crores, a PBT growth of 14%, that as a result of last year's deferred tax 14% to 13% is not -- PAT came in at 13%. This is as a result of the minority interest in BHFL, okay, understood, sorry. PAT came in -- PAT grew by 13% to INR 4,014 crores. ROE came in at 19.1% and net NPA came in at 46 basis points.

I'll quickly take you through some of the highlights on Panel 5. As I said, AUM grew 29%. New lines of businesses that we have launched in the last 5, 6 quarters have now started to contribute 2% to 3% of AUM growth. Overall, AUM composition, which is appended in the latest section of the presentation on a year-on-year basis remain largely stable. AUM growth, I've talked about, new loans booked were up 14% to 9.7 million as against last year, we did 8.53 million.

In terms of customer franchise, we added 4 million customers. We now estimate that our overall new customer addition to be 15 million to 16 million. in FY '25, which will be in line with what we originated last year, marginally higher. Last year, we did 14 million customers. This year, we foresee between 15 million to 16 million new customer addition. Customer franchise as a result of the first half of the year having added 8 million new customers stood at 92.1 million customers.

And we are optimistic of crossing a milestone of 100 million customers -- customer franchise in FY '25 as we finish the year. Cross-sell franchise, which is a key measure of good to not so good, was at just a tad below 58 million customers.

In terms of liquidity, liquidity buffer stood at INR 20,200 crores. Cost of funds came in at 7.97%, an increase of 3 basis points on a sequential basis. In general, our assessment is that the cost of funds for the company has actually peaked now. Deposits growth grew by 21% and stood at INR 66,131 crores. Deposit book growth is obviously softer given that there is a significant amount of price war that's happening from -- across the system. And given the fact that the company has raised -- has found other alternative sources, which are more attractive in terms of coupon, we are -- the deposit book growth is slower than expected.

On the next Panel in terms of operating efficiencies, the net interest income grew by 23% to INR 8,838 crores. Overall NIM in our assessment has now stabilized. Between Q1 and Q2, there's hardly any drop. We think the NIM has now stabilized at these levels from here on. Total net income -- net total income grew by 24%. So NII grew by 23% and net total income NTI grew by 24% and OpEx to net total income grew to -- improved to 33.2% versus 34% last year same time.

We continue to optimize operating expenses, I would say. As I've said in the past calls that it's one of the levers that we have to continue to pull through both by optimization on one hand and continue to invest in technology, which is mainly GenAI to improve productivity.

Employee headcount stood at 59,400 people on a consolidated basis. We added 4,007 staff in Q2. Annualized attrition was marginally higher than last year at 16.4%.

Credit cost, which was the dampener for the quarter, I would say, because when I look at the PPOP number, came in at 24% -- 25%. PPOP number was good. So we managed to do well on AUM, managed to do well on NII and managed to do well in managing expenses, but credit cost was a dampener for the quarter. It was so in the last quarter as well. I'll give you some update on that over the next 4 or 5 points.

Gross loan loss and provisions came in at INR 1,934 crores. They remained elevated in Q2 as well. If you break up the loan losses in terms of Stage 1 and Stage 2, in Q2, Stage 2 assets have actually reduced by INR 357 crores. And because of elevated Stage 2 in Q1, the Stage 3 increased by INR 900 crores. And as a result, the net increase in Stage 2 and Stage 3 assets, on a consolidated basis was INR 542 crores. It is lower at one level than the previous quarter. It was across all, as you'll -- as I'll take you through the panel later, across all retail and SME lines of businesses. So it's not restricted to the any one segment or any one geography or anyone.

There's marginal inching up across all retail and SME lines of business. We, as a prudent company, continue to take risk actions by either cutting segments or pruning exposures. The gross loss came in at 2.16%. In Q1, that number was 2.12%. So there's a sequentially a 4 basis point movement, it was 2.16 -- same number, sorry. Gross loss to average assets was 2.16% as it was in Q1 as well.

We are cautiously optimistic looking at the portfolio movement or gross flow rate methodology. The loan loss to average AUF has hopefully peaked. And we -- the estimate loan loss to average AUF to go down to 2% or so by Q4. That's really what our estimates at this point of time is. We'll, of course, continue to watch the environment and continue to invest in debt management and risk management to sharpen the pencil.

Net loan losses as a result of 2.16% came in at INR 1,910 crores. We utilized the management overlay of INR 25 crores. And as a result, net loan loss to average AUF came in at 2.13%. If you recall, we had estimated that our net loan loss to average AUF should be in the corridor of 1.75% to 1.85% for FY '25 with improvement projected in H2.

At this juncture, from a guidance standpoint, I would say that we estimate the FY '25 net loan loss to average assets to be between 2% and 2.05%. t's more likely to be 2.05% than to be 2%. The -- as a result of this, the GNPA and NNPA stood at 1.06% and 0.46% as against 91 basis points and 31 basis points. They still remain amongst the lowest in the industry. But we've seen on a year-over-year basis, slight inching up.

When we look at the portfolio movement across secured, unsecured portfolios, one thing I think jumps out in general is that those clients who have more than 3 or more live unsecured loans are showing higher propensity to default. And, in general, have lower downstream, lower collection efficiencies. So as we look at this data, we are continuing to tighten our underwriting norms for such cohorts of customers across all our products in an intelligent manner. I think that's really the update on credit costs.

In terms of profitability, consolidated pre-provision profitability grew by 25%. Consolidated profit before tax grew 14% to INR 5,401 crores, and PAT grew by 13%. The ROA came in at 4-point -- just a tad below 4.5%. And ROE came in at 19.1% and capital adequacy remain -- continue to remain reasonably strong. Tier 1 capital was just a tad below 21%.

I just wanted to provide 2 important updates as additional updates standpoint. As you would recall that we, as Bajaj Finance, started doing non-Bajaj Auto 2-wheeler financing business in June '22. In September '22, Bajaj Auto also decided to set up its own captive financing unit, namely Bajaj Auto Credit. BACL started its operations in Q4 of FY '24 which was 6, 7 months ago.

In FY '24, Bajaj Finance financed 864,000 2-wheelers for Bajaj Auto and 199,000 3-wheelers for Bajaj Auto. In H1 so far, BFL has financed 217,000 2-wheelers and 55,000 3-wheelers of Bajaj Auto, principally meaning that the rest of the business has been booked in by Bajaj Auto in Bajaj Auto Credit Limited. And as a result, the company's financing to BAL customers has reduced considerably post start of business operations like BACL. I thought it's important that we provide this update.

As you're also aware that we have grown our -- we started our non-Bajaj Auto 2-wheeler financing business in 2022. And it's already grown to around 35,000 accounts per month. That means we have run rate at this point of time of 480,000 accounts on a non-Bajaj Auto 2-wheelers. We expect to disburse -- just a tad below 500,000 accounts in the current year and scale to 720-odd thousand accounts in FY '26. And we -- so as the -- as Bajaj Auto products AUM goes away, this AUM will replace it fully by FY '27 -- by end FY '26/FY '27.

On the 3-wheeler business, we're still evaluating what our strategy should be. So that's something that's still open. But the 2-wheeler business volumes, we hope to fully mitigate and make up for by March 26 or so. That's just an additional update as it has financial implications. I thought we'll just provide an update.

Just the last point on that we had so far investment-grade rating for our international borrowings from S&P. We were rated investment grade for by S&P. We are happy to inform you that Moody's has also assigned a Baa3/P long-term rating, which is the sovereign rating to Bajaj Finance as well. So these are the 2 additional updates that I have.

I'll just quickly run through some of the panels for BHFL, you would have listened into the call yesterday that the management did. So I'm just skipping that. I'm on panel number -- in terms of rest of the panels are reasonably routine.

If there are any specific questions, we'll be happy to answer either it's important, I open the call for Q&A. All other panels are completely routine in nature.

[Operator]

[Operator Instructions]

First question is from the line of Chintan Joshi from Autonomous.

[Chintan Joshi, analyst]

So 2 questions, one on asset quality and one on NII. On asset quality, could you give us some more color on what gives you the confidence that slippages and credit costs may have peaked out here? It would be interesting to get some idea across different products and different trends that you are seeing, both in your data and perhaps industry data that you observed.

And then on net interest income, if you could please help us think about where NIMs might go over the next year with the rate cut likely, what would the timing benefit be in terms of NIM speaking, would be helpful.

[Rajeev Jain, executive]

So let me use this to principally just take you through the portfolio quality. The main interesting thing that we are seeing in the cycle is actually that the bounce rates are still lower. The portfolio quality when you see on the panel is still holding, the flow rates are higher. I think it's a -- so people are still defaulting lesser. I keep telling people prior to COVID, people think it's too far away. The default rates are still lower, the flow rates are higher.

So one of the things that we've done is looked at the capacity planning and the debt management infrastructure out of 4,007 people that you principally saw that we've added in Q2, close to 2,000 people have been added in deeper geographies. as a result of our sharpened capacity planning. So that gives us one level of confidence.

Two, the underwriting actions that we have taken in the last 4, 5 months also gives us the confidence that as we move through the leverage point that I made should start to result in benefit from Q4. These are the -- but as I use the word, we are cautiously optimistic. We hope that the environment continues to remain stable. I would not call it, I would say, the current -- if the current state was to remain, given these 2 actions, one on underwriting and 2 on further investments in debt management, we are cautiously optimistic that we should -- if I give you a texture that at a point in time in terms of clients who came onboard non-B2B, non-B2B loans are shorter than the loans. at this point is not relevant.

If you have 13% of the clients who came in with 3-plus personal loans when we gave them, now it's only 8%, 9%. So that's the impact on volumes we have taken. It doesn't mean they're bad. But as we have cut exposures on them, as we keep doing more and more such actions, we should see the book start to come back to 185 to 195 basis points of credit cost. That's on the one part. Second part is the NIM, look, I mean Sandeep?

[Sandeep Jain, executive]

Yes. I think very clearly, as the cost of funds starts to go down, I think with a lag of 1 or 2 quarters, we will start to see the benefit very clearly emerge to us as well. We forecast that on a 12-month trailing basis, a 25 basis point drop in, let's say, repo rate should clearly be -- lead to a 10 to 12 basis point improvement in the NIM. However, we would like to use the NIM improvement to our advantage to grow some of the secured and new lines of businesses that we added in the last couple of years.

Idea would be to not take it through the P&L. Idea it would be to use this opportunity for improving the quotient of secured balance sheet in the overall portfolio and continue to create a resilient balance sheet, focusing on the new lines of business that we have launched in the last 2 years.

[Chintan Joshi, analyst]

Wouldn't that lead to ROA pressure once the cycle peaks?

[Rajeev Jain, executive]

At this point in time, I mean, as Sandeep said, we'll use the reduction. As I said, okay, if you go back to my earlier comments, so the NIM is stabilized, that is one part. We think cost of funds to speak as the cost of funds. So it's about management of portfolio. At a portfolio management level, our intent would be to use the reduction to grow our low-margin secured businesses, and we otherwise keep the composition very, very steady.

[Sandeep Jain, executive]

And I think it's important Chintan that I make this point as we get into FY '26, Rajeev you didn't make a point on operating efficiencies getting created by rationalization of operating expenses. At the same time, GenAI leading to a lot of areas where we could significantly increase deployment and reduce operating expenses for us. Some of these will become very, very important mix for us to play over the next couple of years.

So operating efficiency will be a dimension that we would like to explore in FY '26. And beyond that, I think Rajeev did make a point saying that preprovisioning operating profit still remains strong at 25%. So even if the environment were not to improve, we have a good tailwind coming from preprovisioning operating profit that should ensure that any NIM improvement, even if it goes towards fueling the secured by the balance sheet of new lines of businesses, should still be able to assist us in terms of delivering rightful ROEs and ROEs for the shareholders.

[Chintan Joshi, analyst]

That's fair. Just a clarification, Rajeev, you said 185 to 195 previously. I presume you meant 175 to 185.

[Rajeev Jain, executive]

No, no, no. Yes, as we said earlier, that principally the 172 basis points that we used to be pre-COVID based on the regulatory changes and our write-off policy changes adds up being 185 to -- between 185 to 195 basis points. That's really what our go forward forecast is at least for the next, I would say, next fiscal, and then we'll take it forward from there.

[Operator]

Next question is from the line of Dhaval from DSP.

[Dhaval Gada, analyst]

Three questions. First is on the rural B2C business and also the business and professional loan, both of them are color-coated yellow. Just if you could give some perspective on when do we see normalization in both these segments. So that's the first question.

The second one relates to cost to income. And just to the point that Rajeev highlighted earlier on further operating efficiency. So if you -- I mean, somewhere in COVID, I think our aspiration was 30%, 31% kind of OpEx to NII. Is that what one should expect in the medium term based on the business mix that you're targeting? So some perspective around how much more benefit can one see in the medium term? So that's the second one.

And the final one is on RBI commentary that we are hearing around various segments relating to growth and asset quality pressure plus the regulatory perspective, around NBFC, I mean if you could just highlight how the company is looking at navigating these -- the current environment. Yes, those are 3 questions.

[Rajeev Jain, executive]

Yes. So look, rural B2C, as you can see, after a long time, after virtually 7, 8 quarters, it showed a double-digit growth. Clearly, we are -- that portfolio has not grown for the last -- has grown single digits for the last 6 quarters. As we get through the worst of it, we started to slowly grow that. We foresee that, that portfolio, it will remain yellow until such time -- there comes a time in any credit business where you cut all the bad cholesterol and you have to build the good business.

We are 18 months into it. We are moving to a phase where we are starting to build a good business. I think that's point number one on rural B2C that I would like to make. We foresee that business still, however, may grow only by 12% to 14% on a full year basis. That's on rural B2C at this point in time. Business and professional loans mind you that the hurdle rate is -- bar is very, very low. As you can see, we color code based on -- it used to be 99% in pre-COVID. That's our "threshold number." So that's 1 part. It's now at 98.63%, that's one part.

Two, if you go to SME, we've seen some level of elevated flow rates, just go to -- if go to panel number, I'm referring to Panel number 52. If you see SME lending, you see elevated numbers on a -- no, not this comparison. Not -- just give you one second. Yes, yes. You see the GNPA come in at 134 basis points -- sorry, 164 basis points. It was a year ago 134 basis points. And that's how we have -- and I repeat Dhaval what I was saying earlier, while 98.63% looks like it is fine. But as I said, across portfolios, whether it's SME or retail, the default rates are lower and flow rates are higher.

So that's a little unique situation that we are actually seeing. It's unique is what I would just say. So given 164 basis points GNPA, we have stand is as yellow. Having said that, in that, the professional launch part is fine. The MSME businesses are that way only. They are -- the risk goes up, we pull back business. Risk goes down, we accelerate. I think that's the nature of the MSME business. So that's the second point.

Operating efficiencies, look we are amongst -- we are the most efficient. You would know that as you benchmark us across various peers. As we build on this year's long-range plan or long-range strategy, which we will publish in January, the intent would be to dramatically transform our operating -- focus on operating efficiencies using GenAI across call centers to service to what I would call a Phase III of digital transformation that we are ready to embark on for us as a firm. Where that takes the number 2 is an outcome. I think you will see expressions of that in when we share in January the long-range strategy.

Do we see operating costs as a lever? Answer is yes. Will we continue to make progress? Answer is yes. I can't say where a number will get to 31 ever, because at our base, 31 to 33 is a significant drop, but you will continue to -- you should continue to see this number trend down.

On regulatory matters, I would not like to comment, Dhaval. Do we continue to make deep investments in compliance, operational risk? Answer is yes. We have now from 2.5 years ago from very little to now 250 people in first, second and third line of defense, we have? Answer is, yes. Are we on a proactive basis on an ongoing manner, looking at areas that we can improve on, the answer is yes, is all I would like to say. We're investing in all 3 lines of defense, business and operations compliance, central compliance, internal audit and -- we also -- when the embargo happened, we embarked on a proactive integrated compliance framework and did a periodical review and created a self-corrective regulatory compliance framework for us. So we're doing all that, that we can to be from a compliance readiness standpoint as a firm.

[Sandeep Jain, executive]

Yes. Just to add maybe a couple of points on OpEx to NII because that's a point that you make. I think it's also important to note that over the last 18 months, we have launched lots of businesses. We have made investments in all those business launches and so on and so forth. As we go along over the next 2-year period, I think, one, the investments will be very marginal in terms of only propelling the presence of the businesses and growth. That's one thing. So this should give us some operating leverage in the subsequent year.

Second, of course, the investments that Rajeev talked about on GenAI capabilities and so on and so forth, but the important point is we would like to pace it out, have 20, 30, 40 basis points in a year. Idea Is to continue to improve, but the same time, continue to remain invested in the growth of business. That's a point that I thought I should make.

As regards growth, I think Rajeev did call out at the beginning of the call that while the balance sheet grew by 28%, 29% in the current quarter, 2% growth came from new lines of businesses. As we forecast full year, we see the growth at 27%, 28% with the new businesses and mostly being secured in nature, contributing about 2% to 3% of the AUM growth for the current year, which means that the non-new business, which is old existing businesses that we have in the company will see a growth of anywhere between 24% and 25% for the current year.

We remain guided by our medium-term guardrails, which is 25%, 27% AUM growth and leading to a 23%, 25% profit compounding. And that's what we remain guided by.

[Rajeev Jain, executive]

I think the point that Sandeep made on investments have peaked out in launch of new businesses and geographies is an important point. And they should swing from loss to start to breakeven/generating profit as we get into the next fiscal.

[Dhaval Gada, analyst]

Yes. Just one small follow-up on the rural B2C. Do you think by the end of the year, we can see the business turn into green, which means for next year, the growth will normalize or you think it is still a few more quarter away?

[Rajeev Jain, executive]

We are cautiously optimistic on that. And I would say -- yes. But Sandeep take it in quarter at a time, we can forecast the current year. But if we -- just to reinforce the point, it's possible that if we exited a 12%, 14% growth, on a year-on-year basis, then next year could start to grow between 23% and 25%.

[Operator]

Next question is from the line of Piran Engineer from CLSA.

[Piran Engineer, analyst]

Congrats on the good set of numbers. Just a few questions. Firstly, on the overall asset quality environment. What really -- so I know you mentioned that we've made underwriting tweaking and improving our collection infrastructure. But what would make the cycle prolonged as in the elevated credit cost cycle. For example, you mentioned 8% to 9% of your clients have 3-plus loans versus 13% earlier, but you could have other irresponsible lenders lend to these people, right? So just trying to get a sense of what's changing right now versus, say, 3 months back?

[Rajeev Jain, executive]

I think, one, the fact is that various actions by Reserve Bank has started to slow down the unsecured market. I think if you take the first half, if I'm not mistaken, based on the bureau data, the personal loan year-on-year growth is degrowth, if I'm not mistaken. I think it's minus 3%, 4%. So I think in terms of disbursals, not AUM. So clearly, the supply side has slowed down. So that was probably mostly needed to availability had become very easy. So I think that's one at a metadata level point I would like to make.

Two, as we further prune segments as we reduce exposure, we're doing both pruning segments and reducing exposures. I think mix of both these factors and when excesses happen at times, there is a phase of excesses. Post that, good also don't last too long and bad also doesn't last too long. I don't believe it will last too long either way, right? So as the portfolios get washed, you should see improvement. But as I said, we remain cautiously optimistic of the same.

[Piran Engineer, analyst]

Got it. Got it. And just secondly, on our fee income. Now I noticed that it's a little bit weak, considering the fact that the ban on those digital lending products was lifted and that itself for some INR 60 crores a quarter. So if I kind of adjust for that, it does not look like we've seen any fee income growth. In fact, we've seen degrowth Q-o-Q. So anything you have to read into it.

[Rajeev Jain, executive]

Yes. Seasonally...

[Piran Engineer, analyst]

Degrowth here because of, I mean, summer season versus non-summer season. But last time, we didn't have those digital lending products, right, which are banned?

[Rajeev Jain, executive]

Yes, yes, yes.

[Piran Engineer, analyst]

And now we would have added. So I would have expected to be at least flat. So -- is this because of the RBI thing where collections we are not doing for them and therefore, fee and OpEx both are proportionately lower?

[Sandeep Jain, executive]

Yes. So Piran, point number one, I think if you're referring to last year, whether we had the fee income or the digital lending fee income not being there. I think last year, the action by RBI was in November. So quarter 2 last year, we did have that income from a Y-o-Y comparable point of view. However, to the other point that you're making on the co-brand credit card, where the collection activities was earlier managed by us, incrementally starting quarter 2. That activity has moved to RBL, rightfully so. And that has an impact in terms of overall fee income for the quarter from a comparative point of view.

[Rajeev Jain, executive]

He was making a point on sequential basis, if I'm not mistaken.

[Piran Engineer, analyst]

Yes, I was making a point on sequential...

[Sameer Bhise, analyst]

It was sequential...

[Piran Engineer, analyst]

No, I was Q-o-Q. Because the quarter, 2 months, you all didn't do that product, right?

[Sandeep Jain, executive]

Yes. The answer is then very clearly, the transfer of the collections activity to RBL Bank, which otherwise would have come to us as payment towards the collections activity, would have set in the fee income.

[Piran Engineer, analyst]

Okay. Fair enough. And just on the NIM outlook, did I hear it correctly that NIM will be stable, assuming no rate cuts further. Or is it that cost of funds will be stable but yield could still decline because of portfolio mix?

[Rajeev Jain, executive]

Both a peak and AUM compensation should stabilize, both.

[Operator]

Next question is from the line of Kunal Shah from Citigroup.

[Kunal Shah, analyst]

So firstly, maybe in terms of the overall growth, given the environment wherein we are, we have kept on increasing the credit cost guidance as well. But still, we sound a bit upbeat on the growth despite Bajaj Auto business, maybe I think that's coming off, plus you said like you are tightening a few of the standards. But I think that commentary on the growth still seems to be like 27%, 28%. No doubt there is something which is contributing from the new business, but existing is also continuing.

So wouldn't it -- maybe in terms of the approach, maybe in terms of the growth versus credit cost, is there any change in the approach that we are looking or there is no need to change at this point in time.

[Rajeev Jain, executive]

No, no, there's no need to -- there's no -- as I mentioned earlier, Kunal, that between 2 to 3 or maybe, in fact, as we exit the year, close to 4% of the growth will probably be coming from new lines of business between new 2-wheeler to tractor, to new car financing to CV, we just went live in July to gold loan, while it's an old business, but growing in -- growing healthily. These are 5, 6 lines of businesses that are yet to, if I may say so, breakout in any given manner.

Some of them will start to break out by the fourth quarter. So if you knock this off, the organic -- so even this is organic, the organic number would have looked like 24%, 25%. So it's just the -- we use the good times over the last 24 months to launch or complete our product suite as a firm. which is helping us continue to generate AUM momentum without having to compromise in any given manner the credit quality.

[Kunal Shah, analyst]

Sure. And secondly, in terms of urban B2C. So if you look at Stage 2, that still continues to be quite elevated, almost similar to where it was in the last quarter as well. And that -- and then we had seen this kind of increase out there as well of, say, almost like 38-odd basis points in the GNPA and maybe as you indicated for SME lending, maybe moving from 1.4% to 1.6% made it like getting to the amber -- do you see the risk of urban B2C also getting into amber given the collection efficiency and this kind of trend in Stage 2?

[Rajeev Jain, executive]

No, we remain watchful, Kunal, is what I would say. And as I said earlier in the call that we saw inching up on Panel 51 across. So technically, so clearly, there is pressure across -- mind you, you can see the numbers -- an absolute numbers in urban sales finance and rural sales finance are smaller, but one has seen movement across lines on a year-on-year basis. So we remain watchful. And the only point I would like to make is that between managing risk and managing growth, we'll choose credit. So it is the only point I would make. So...

[Sandeep Jain, executive]

And Kunal, I think there's a technical thing also because of number of days logic for DPD classification and given that most of our customers get banked on second. There is that 1 month plus and minus that happens between quarter 1 and quarter 2. So that's one thing that I think is an important point. But leaving that aside, I think it's also important to the point that Rajeev mentioned at the beginning of the call as part of the portfolio quality that in the current quarter, the Stage 2 and Stage 3 has actually gone up by INR 542 crores. And we did make a point saying that this number was much lower than the last quarter.

Just to give you context, last quarter, the Stage 2 and Stage 3 on account of various disruptions that we had referred to in Q1, and I'm not repeating it, has seen actually INR 1,100 crores of movement. Yes. So Q1 had seen INR 1,100 crores of addition to Stage 2 and Stage 3 versus that in the current quarter the movement in Stage 2 and Stage 3 is INR 542 crores. So there is that level of improvement that is clearly visible.

[Kunal Shah, analyst]

Got it. And last question, was that the option to create the management overlay buffer against this onetime gain? And would you have done that? Or maybe that was not there from the auditors, and that's the reason we inch up the guidance and still maybe not have created any buffer out there against this one-off?

[Sandeep Jain, executive]

Yes. Kunal, just to clarify, when we say an option, I think we don't have options. We look at the data point and based on the decide what is the right thing to do. The onetime gain does not necessarily give you an opportunity or option to create provision. We looked at the information. And based on that, we did not felt a need at this point in time to create an overlay. However, to the other point that you made, even from accounting perspective, the gain sits in standalone financials on a consol basis goes and sits in the reserve. So if there was a question that you -- that was a point that you're highlighting, yes, it's in the consol numbers, it go and sits in the reserve.

[Rajeev Jain, executive]

And Kunal, I'll reiterate the point that I made that which I said earlier that if the PPOP is 25%, then we have sufficient margin in the P&L for us to sustain any kind of -- I wouldn't even -- just on this point, I would just make a point that, let's say, if our long-term or medium-term guidance/experience, experience/guidance is 185 to 190 basis points.

And if you're looking at full year 205 basis points, doesn't create pressure. It's a 10% increase or an 8% increase in credit cost doesn't create that kind of -- year-on-year comparables are looking bad because you were at 156 basis points at that point in time. And we were consuming overlays. If you do apple-to-apple what our run rate is, which is 185, 190, 195, let's say, for the moment, given our diversity of businesses, and the number on a full year basis comes in at 205 even, let's say, worst case, 210 basis points, that's a 10% -- 7%, 8%, 10% increase in credit cost on a year-on-year basis or from our medium-term experience/guidance. So I won't lose too much sleep over it.

[Operator]

Next question is from the line of Viral Shah from IIFL Securities.

[Viral Shah, analyst]

Sandeep, I wanted to ask you, you were talking about the new businesses and then contributing to growth. But if I look at the distribution slide for tractor, I see that nearly on a sequential basis, the distribution has halved. So is there anything to read into it? Or what has happened over there?

[Sandeep Jain, executive]

So what we disclosed out there for the first 2 quarters is exact number of dealers that we have signed up. But depending on the activation rate that we see as to how many dealers have started booking cases, on a 2-quarter basis, we do have that adjustment. So if you see that drop, that drop is on account of having seen probably less or no business from those counters.

[Rajeev Jain, executive]

It's a very early stage of business. Don't read anything into it. Business is now boarding between INR 65 crores, INR 70 crores of volumes per month. since January. We started the business in January. We are cautiously growing this. It's a business to be grown cautiously only given that it has a different repayment behavior and patterns. So nothing to read in that line, but we are now disbursing between INR 65 crores, INR 70 crores of volumes a month in geographies.

[Viral Shah, analyst]

And secondly, if I look at the 2-wheeler and 3-wheeler business, right, you mentioned about the Bajaj Auto credit and that business. I wanted to understand like, is there any say the ROA or the profitability differential between, say, doing the non-captive business versus the captive business? Just trying to understand if at all there can be any profitability pressure.

[Rajeev Jain, executive]

It's a fair question. So principally, look the group 2-wheeler, this company was formed to do Bajaj Auto products. So it's a little bit of mixed feeling that as that business goes out. It's a profitable business. But it also used to be, as you have observed over year, it's also a volatile business. All captive businesses are more volatile than non-captive. It's a global truth in terms of credit performance. I mean during COVID, we really struggled. It was 5% of the balance sheet and 20% of the GNPA.

But over cycles, it was a profitable business. The -- we foresee that the group 2-wheeler financing AUM will mostly wind down fully over the next 2 years. In fact, that will -- since you raised the point, I must make a point, it will actually lead to -- as this winds down, it will lead to lowering of our loan loss to average AUM. It's an important point I must make. If you look at it today, as of September, it's 4.3% of the balance sheet, and it is 18% of consolidated GNPA. This is a factual number as of Q2. So eventually, as this book winds down, we will see the benefit come through in the overall loan loss to average AUM.

Correspondingly, the non-Bajaj book for us because it's an open architecture business comes in at half the risk cost. That's been our experience over the last 2 years. So in the short term, it will have some impact on profitability. Over long term, it will be beneficial in building a lower-risk business and aggregate for us as a firm. So I think that's really how this migration or transition will principally play out. So it's a mixed feeling. But...

[Viral Shah, analyst]

No, I understand, and thank you for the detailed listing Rajeev, perspective. And while you -- because you mentioned also the asset quality piece over there. If I look at your panels that you gave in terms of the portfolio quality, so in that, we have seen that in this quarter, sequentially, it has moved up, right? The Stage 2 and Stage 1 has come down and even versus, say, if I compare it, I understand, even from a Y-o-Y basis, it's come down. Whereas over this period, I would expect that the non-captive business would have built up just in terms of the size and the contribution of it.

[Rajeev Jain, executive]

It will take us 2 years. As I said earlier, it will take -- we are at 35,000. We used to do 65,000. We're doing very little 3-wheeler, we used to do 20,000 and every 3 wheeler is virtually equivalent to 2.5, 3, 2-wheelers. So it will take us, as I said earlier, 2 years to fully make up for the AUM. So that's why, as I said, there'll be short-term impact on profitability because AR will go down. It's by March '26, we'll start to make up as much AR addition as Bajaj Auto used to do with us in terms of quarterly addition. But we are very clear, it's half the risk cost. That is super clear to us.

[Viral Shah, analyst]

Got it. But my question was actually more on the asset quality front. Like what was -- what drove the sequential...

[Rajeev Jain, executive]

It is going to be a high credit phase. So last year was abnormally low credit phase. I must make a point to you. Its long-term average loan loss to average assets has been in the region of 4%. Last year, if you see this number is looking like 1.5% and recoveries are very high. So this business went through an ultra low credit cost phase last year -- rather last 2 years. It went through '20/'21, '21/'22, very high credit cost phase. Then it went through in extremely low, lowest that we have seen in the last, I would say, 17, 18 years phase.

It is normalizing, but inching up more higher than it longer-term trend. I must make that point as well. So that's really how volatile we've seen it to be actually, peaking, bottoming and right now, rising, but rising above the long-term threshold.

[Viral Shah, analyst]

Got it. And Rajeev, if I may, one more question. If I look at the rural B2C panel, right? Over there, if I look at sequentially, there seems to be some bit of improvement. And of course, you mentioned and you discussed that at length. My question was that given the way the cash flows are in the rural India and especially the asset quality pain that the MFI players are witnessing, like I was actually a bit surprised to look at this. If you can just throw some more light on this.

[Rajeev Jain, executive]

We would get only 5% of the clients in this entire portfolio who would get -- not even that much actually. 2%, 3% of the clients would probably qualify for MFI -- Anup...

[Anup Saha, executive]

Yes. The only other point, I think -- Anup here, when we reclassify this as rural and what MFI classified, those are the villages of India. So I would -- MFI would be even 1 tier lower. So that's the first -- 2 tier lower because those are the 6.5 lakh villages we largely talk about. Our rural is still the smaller towns and cities. That's one.

And second point is the MFI equivalent segment will be very small. That would be 3%, 4%. So who can be like household income below INR 3 lakhs or so on and so forth. So there will be not much of overlap there.

[Viral Shah, analyst]

Got it. Makes sense.

[Rajeev Jain, executive]

Separately on this rural stress, I mean, we also -- as I mentioned, always for the last 5, 6 quarters because of the rural B2C that we don't see such the so-called rural distress pressure in the B2B business, where we deal with millions of customers. So it's a little bit of -- it's anecdotal, but the rural B2B performance is not anecdotal. Even when you're looking at the seasons growth at this point in time, we are 15, 17 days into the season, we are seeing the momentum to be reasonably strong in rural. So it's -- we are driven more by our experience rather than by anecdotes. So rural B2B continues to be strong, both in terms of momentum and in terms of credit performance. B2C, of course, you've seen pressure and we've acted on.

[Viral Shah, analyst]

Noted. Makes a lot of sense.

[Sandeep Jain, executive]

I think it's important that I call it out. Rural B2C also includes MFI JLG business, that is an independent. There is about INR 600 crores of balance sheet that we have. That's all sitting there. The portfolio continues to remain reasonably healthy.

[Rajeev Jain, executive]

It's very young.

[Viral Shah, analyst]

Yes, understood. That I agree.

[Rajeev Jain, executive]

We'll break that at some point in time, it's too -- it's not relevant. That's why.

[Operator]

Next question is from the line of Roshan from ICICI Prudential.

[Roshan Chutkey, analyst]

Firstly, you mentioned the 13% number to be the live unsecured loans overlap that -- it's 3-plus live unsecured loans overlap number. That was the case a few years ago. What was it? It was not clear, 13% dipping to 9%?

[Rajeev Jain, executive]

Let me tell you, give you full numbers since you're asking. It was 8%. It went to the peak of 13% is now down to 9%, 10%. So it's not like this is a new thing. But the supply of those clients' propensity to take has increased. And because the supply entities or availability increase, their borrowing pattern increase. So it's not like it was pre-COVID, it was 0. It was 8% in our customer banking.

It went up all the way to 13%, it's down to 9%, 10%.

[Roshan Chutkey, analyst]

Right. And when I look at this amber color panel and your GNPA movement, if I -- the GNPA has increased across the board, like you said, but you chose to call out SME lending and rural B2C alone as amber. Anything more to the -- to what you're seeing which is not clear in data?

[Rajeev Jain, executive]

It's a management assessment, Roshan, nothing else. Where we are tightening in a transparent manner, we are assessing. As you rightly -- as I pointed out, as you are reinforcing, you've seen movement even in gold loan, right? On a year-on-year basis, 35 basis points, GNPA has gone to 53. I'm giving an example to make a point. right, or 60 basis points and urban sales finance has gone to 81. But wherever we tighten and we act on is really what we -- or things go lower than pre-COVID or higher than pre-COVID in terms of delinquencies. That's how we would -- we, in general, provide management assurance to be. So it is -- there is -- I hope that makes it clear.

[Roshan Chutkey, analyst]

Yes, yes. The other question I have here is last quarter, you said bounce rates are stable, but whatever has bounced is turning out to be very chronic.

[Rajeev Jain, executive]

Yes. That is -- as I said, the flow rates I use the word flow rate, it's the same point. The defaults remain lower, but flow rates are higher. That has not changed, Roshan, as yet.

[Roshan Chutkey, analyst]

Right. And just one last question. There was this suicide case that has happened, right? So any comments on that?

[Rajeev Jain, executive]

Very saddened by the incident and our prayers are with the family. We've referred the incident that happened. It's very, very unfortunate that incident had happened. We've referred it to our internally -- internal disability action committee for investigation and recommendation. And we'll go by -- and we've shared our action abilities or learnings that we've taken away with the Board as well, is all I have to say.

[Operator]

Next question is from the line of Umang Shah from Kotak Mutual Fund.

[Umang Shah, analyst]

I have 2 questions. One is, Rajeev, if you could -- I mean, at the beginning of the call, you already mentioned that probably by the end of '25, you'll share long-range plan. But just some color as to how should we look at the stand-alone Bajaj Finance entity maybe broadly in terms of growth and profitability and ROE given that Atul has already spelt it out about Bajaj Housing Finance on the Bajaj Housing earnings call, I mean that will give us some clarity on how should we look at the stand-alone entity maybe from a 2- to 3-year perspective?

[Rajeev Jain, executive]

Just because we happen to have listed the firm and offloaded 11%, we continue to be 90%, just a short of 90% owner of Bajaj Housing Finance. And that's why we still look at it as sum of parts. While they have the independent journey and independent -- but they are 31% of the balance sheet today on a consolidated basis. I don't foresee the composition, their contribution to profitability, et cetera, so on and so forth to change in any given manner.

So we still look at it as sum of parts of BHFL, BFSL and BFL and we continue to be excited about both the subsidiaries and of course, the core operating business of Bajaj Finance. So we -- at least in my head, until I run it, I continue to look at it on a consolidated basis is what I would say.

[Umang Shah, analyst]

Understood. Fair point. And just the second question is on clearly, we are getting a little mix sort of views or commentaries when it comes to consumption trends...

[Operator]

We are losing your audio. Can you come to a better reception area.

[Umang Shah, analyst]

Yes. I just wanted to take you to...

[Operator]

Umang, sorry, we as not able to hear you.

[Rajeev Jain, executive]

I assume that -- I assume he's asking a question on season.

[Umang Shah, analyst]

Yes, that's correct. On the festive demand? Yes.

[Rajeev Jain, executive]

Yes. So look, in the discretionary consumption businesses that we are in, what we are principally seeing is that if you look at the first quarter growth for us was 8% in terms of units sold. Second quarter was actually 9%. And I'm talking -- when I say discretionary consumption, I'm talking our point-of-sale businesses, which is CD, digital, rural, CD, lifestyle, e-com. So far, if I look at the first -- the season -- festival season started on 3rd of October, we are virtually 18, 19 days into it. So far at this point time, it looks like the count growth is like between 20% and 21% -- between 20%, 21%, 22%, depending on a day.

Every day during these 30 days is important. The season will end on 3rd of November. So far, 20 days into -- 19 days into the season, number looking like 21% in terms of count. In terms of value, in terms of discretionary, it's -- clearly, prices have cooled a little across phones and televisions and so on and so forth, given a reduction in raw material prices. We are seeing a 19%, 20% growth between -- so I would call that on our base a good number.

I mean it's -- so if I take our -- and mind you, we're talking 2 million kind of number being delivered. So it's a very large representative sample of what we are seeing, at least in our categories so far in the first 19 days of the season.

[Operator]

Thank you very much. Ladies and gentlemen, we'll take that as the last question. I'll now hand the conference over to Mr. Sameer Bhise for closing comments.

[Sameer Bhise, analyst]

Thank everyone for joining this call today evening, and thank you to the team from Bajaj Finance for giving us the opportunity to host the call. Thank you, Rajeev, Sandeep, Anup and Atul. Thank you.

[Rajeev Jain, executive]

Thank you all. Thank you all. Thank you.

[Sandeep Jain, executive]

Thank you. Bye-bye.

[Operator]

Thank you very much. On behalf of JM Financial Institutional Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.