L&T Finance’s amazing AI driven system made Fund Houses bullish – Upside move 42%?

L&T Finance (LTF) shared important information during its Investor Digital Day 2024 (Link) on November 25, 2024, focusing on Project Cyclops, an AI-enhanced, multi-dimensional underwriting engine. In his opening remarks, the MD & CEO emphasized LTF’s shift from exclusively being a wholesale lender to expanding into retail and digital sectors, positioning the company for a future that prioritizes digital integration. Following this, the Chief Digital Officer and the Chief AI & Data Officer elaborated on LTF’s advanced digital framework and the role of AI in driving growth. The heads of various business sectors then provided a concise overview of all product categories.

Project Cyclops will be gradually rolled out across all LTF offerings, excluding the JLG segment. The beta version was initiated in June 2024, utilizing an AI-based multi-dimensional underwriting model that incorporates alternative data sources such as trust signals, geo signals, and account aggregator data, alongside traditional bureau information from various sources. This next-generation underwriting engine aims to enhance approval rates and deliver improved Return on Assets (RoA) through operational efficiencies and optimized credit costs.

For the two-wheeler financing segment, Cyclops was introduced in June 2024, and thus far, the outcomes have been promising, according to company management. Cyclops has enabled LTF to present better offers to customers while filtering out higher-risk profiles, resulting in an increase in the prime share of disbursements from 54% in June 2024 to 64% in October 2024, with expectations of further growth in the coming months. Following the successful pilot of Cyclops in the two-wheeler sector, LTF intends to extend its application to other product lines as well, excluding JLG. This initiative could enhance underwriting practices and unlock new growth opportunities. The incorporation of Cyclops allows LTF to analyze various additional data points for assessing customer profiles beyond just the traditional bureau score, which will be particularly beneficial for evaluating new-to-credit customers.

Big fund houses have given their targets for the next 12 month.

Investor Digital Day 2024: Key Takeaways – L&T Finance

Guidance

• Targeting to double the loan portfolio within the next 3 to 4 years.
• Anticipating a 20-25% growth in Assets Under Management (AUM) consistently.
• Projecting credit costs of 200-225 basis points under steady-state conditions.
• Expected Return on Assets (RoA) of 280-300 basis points.

Drivers for RoA Projection – L&T Finance

• The launch of micro-LAP, which is a high-yielding segment.
• Personal loans have significant potential for growth.
• Strong emphasis on cost reduction across the board.
• Starting from FY26, India may initiate a downward trend in interest rates, likely enhancing Net Interest Margin (NIM).
• If the external scenario improves, the overall credit costs in the industry are also expected to decrease.

Personal Loans – L&T Finance

• Prime and super-prime customer loans are performing well.
• Stress in personal loans is primarily seen in those under INR 75,000, which represent INR 1.25 trillion out of a total of INR 13 trillion.
• Personal loans with average ticket sizes under INR 75,000 are experiencing loss rates of 6-7%, compared to approximately 2% for larger loans.
• A safe growth forecast for personal loans is around 20%.

Microfinance – L&T Finance

• The MFI sector has been intentionally slowed down, focusing on safe business practices due to the current external environment.
• For attendance at MFI group meetings, advanced AI methods utilizing CNN models for face recognition with KYC images are being employed.
• LTF ranks among the top five financiers in the JLG market.
• The company is enhancing efficiencies in microfinance through data and technological advancements.
• It currently achieves 100% paperless customer onboarding with 25% of collections done digitally.
• A differentiated, unique, and resilient microfinance portfolio has been developed.
• The Planet app has introduced a mobile DIY customer journey.
• By the end of CY23, LTF noticed leverage increasing in specific markets and implemented a customer leverage tracker for risk-based classifications.
• Collection efficiency is at over 99.5%, with collection from overdue debts at over 95%, fostering a culture of minimal overdue payments (~97%).
• Each risk manager oversees three branches, providing field-level insights for informed decision-making.
• Unsecured asset quality issues typically manifest within a 9-12 month timeframe.
• Effective January 2024, the company has shifted to LTF + 2 due to signs of excessive leveraging.
• Growth may return to the MFI sector but is unlikely to reach previous rates of 30-40%, potentially stabilizing around 20%.

Microfinance – Business Update – L&T Finance

• MFI disbursements have reached INR 18 billion, with LTF identifying a crisis within the industry. Consequently, branches must meet certain collection efficiency thresholds to be eligible for new MFI business.
• New sourcing has been restricted to two external associations, exceeding the MFIN standards even for repeat customers.
• Over 1,000 new employees have been onboarded to alleviate collection pressure on individual officers.
• A significant 69% of the portfolio has either 0 or 1 external association, indicating lower customer debt levels.
• The focus is on reducing the number of customers with high leverage (four or more associations) in the portfolio, which has decreased from 7.0% in June 2024 to 5.4% in September 2024 and further to 5.0% in October 2024.
• An additional 500 team members have been hired for fresh sourcing to mitigate potential impacts on new business from asset quality challenges within the current portfolio.
• Collection efficiency in Bihar is projected to improve by December 2024.
• The overall MFI portfolio credit costs are not expected to surpass INR 10 billion in FY25.
• An increase in collection efficiency has been seen in Maharashtra following the implementation of the Ladli Behna scheme.
• LTF acknowledges that the turmoil in the microfinance sector will have repercussions for its operations.
• Positive trends in collection efficiency are being observed across various states, indicating potential peak stress levels in the industry by December-January 2024.

SME/Tractor/Farm Equipment – L&T Finance

• LTF avoids financing any SME applications that fall within the sub-prime classification.
• The company aims to utilize satellite and meteorological data to enhance the prediction of delinquencies for tractor loans.
• There have been no overdue customers in the 18 months of operation within warehouse receipt finance.

Two-Wheeler Financing – L&T Finance

• High-speed computing is being utilized to improve underwriting processes and reduce turnaround time.
• In India, 170-180 million two-wheelers are financed annually.
• LTF boasts robust dealer partnerships and collaborations with select premium OEMs.
• The two-wheeler segment serves not only as a standalone product but also as a channel for cross-selling and data analysis.
• The company aims to boost the login to disbursement ratio from 33-38% to over 45% for two-wheeler loans.
• A complete renewal of the legacy two-wheeler portfolio is planned within the next year.

Technology at L&T Finance

• The pace of technological advancement is currently rapid.
• LTF has recruited some of the leading talents globally to propel the organization forward.
• Success rates for account aggregators stand at an impressive 91%, indicating a high level of functionality with each pull.

Cyclops – Cutting-Edge Credit Underwriting System – L&T Finance

• Cyclops is gradually being enhanced, yielding positive results.
• The future of the BFSI sector lies in AI.
• Presently, LTF is missing out on many customers due to thin credit scores; therefore, analytics may facilitate expansion into new customer segments and increase penetration among new-to-credit clients.

Cyclops Investment – L&T Finance

• Operating expenses of INR 450 million are allocated for FY25.
• Capital expenditure of INR 1.75 billion is planned for FY25.

Planet App – L&T Finance

• Monthly active users on the Planet app have nearly doubled, reaching 1.9 million from 1.0 million last year.
• The app now has 2.4 million rural users.

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