L&T Finance’s retail disbursals hit record in Q3, but rural, micro slippages weigh on profit

Mumbai: L&T Finance Ltd posted record-high disbursements of retail loans in third quarter ended December, but its asset quality woes—especially in the lender’s microfinance and rural portfolios—weighed on profitability.

The non-banking financial services company (NBFC) disbursed retail loans worth ₹15,210 crore during the quarter, up 5% on-year and 0.8% on-quarter, led by healthy growth in the farmer finance and two-wheeler segments, and aided by a better-than-average monsoon and strong festive season demand, the lender said in a release.

In line with the company’s decision to run down its wholesale book, there were no wholesale disbursements during the quarter. As a result, total disbursements were also at ₹15,210 crore—higher by 2% on-year and 0.3% sequentially.

Retail loans were up 23% on-year at ₹92,224 crore as of December, accounting for 97% of the total loan book. The consolidated book stood at ₹95,120 crore, higher by 16% on year.

Growth in secured loans was led by farmer finance, which grew 23% on-year, and home loans and loans against property that rose 24%. L&T Finance said it has also ramped up its cross-sell and up-sell franchise by leveraging its 2.5 crore customer database. Cross-sell and up-sell loans now account for 32% of the company’s disbursements in value and 43% in count during Q3 FY25. As of December 2024, the company had 45% rural assets and 55% urban assets.

Provisions, loan quality

During the pandemic period (FY21 and FY22), L&T Finance had created macro-prudential provisions of ₹975 crore for rural group loans (RGL) and microfinance (MFI) businesses. The company used ₹100 crore of these provisions during the reporting quarter to off-set the impact of the asset quality hit in these portfolios.

“During the current financial year, there have been certain macro events viz. prolonged heat wave, severe floods in several states and temporary slowdown of government expenditure and grants due to general elections, leading to increased credit cost for RGL and MFI portfolio, thus warranting a case for utilization of these macro prudential provisions,” the company said.

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It added that with most of these sectoral issues seemingly abating and stabilization in the collection efficiency in December, the lender expects recoveries from the rural and microfinance portfolios to improve till the end of the current financial year.

“Before utilization of macro-prudential provisions, the total credit cost in the RGL and MFI business is estimated to be in the range of ₹950–1,000 crore for FY25. Our advance estimate of the macro-prudential utilization in Q4 is in the range of ₹300-350 crore,” it said.

Credit cost for Q3 before the macro utilization was at 2.91% compared with 2.59% in the previous quarter. Including the utilisation of provisions, credit cost for the quarter was 2.49%.

Consolidated gross stage 3 assets ratio worsened to 3.23% as of 31 December from 3.19% a quarter ago and 3.21% a year ago. The net stage 3 assets ratio too deteriorated to 0.97% as of December 2024 from 0.96% in the previous quarter and 0.81% in the previous year.

The higher provisions and deteriorating asset quality weighed on the NBFC’s profitability. It posted a consolidated profit after tax of ₹626 crore, lower by 2% on year and 10.1% on quarter.

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Net interest margin (NIM) and fees for the quarter was 10.33% lower than both 10.86% a quarter ago and 10.93% a year ago, largely on account of the change in the portfolio mix, the company said.

“Despite certain macro challenges within the microfinance sector, we have managed the situation effectively. We are hopeful that the environment will be much better over the next couple of quarters,” said managing director and chief executive Sudipta Roy.

Stricter loan process 

Loan growth was muted sequentially as the company has calibrated disbursements owing to the strengthening of documentation and credit guardrails for sourcing of better-quality credit tested customer and shift towards prime customers, it said.

As such, L&T Finance targets a compound annual growth rate or CAGR of 25%, seeks to bring gross stage 3 assets ratio below 3% by FY26. It is also aiming for consolidated return on assets (RoA) of 2.8-3% by FY26 compared with 2.27% in Q3 FY25.

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For this, the lender has put in place a five-pronged strategy–enhancing customer acquisition; sharpening credit underwriting; implementing futuristic digital architecture; heightened brand visibility; and capability building. 

These measures include expanding the company’s distribution footprint—both in rural and urban geographies, increasing the share of cross-sell and up-sell loans, only onboarding new microfinance customers that are 0 dpd (days-past-due) and part of joint lending groups, capping the number of loans per borrower at three at upto a cumulative limit of ₹2 lakh, and independent estimation of household income and details of total borrower indebtedness.