SBFC Finance Ltd

NSE:SBFC

Q2-2026 Earnings Call

[Operator]

Ladies and gentlemen, good day, and welcome to SBFC Finance Limited Q2 and H1 FY '26 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Renish from ICICI Securities Limited. Thank you, and over to you, sir.

[Renish Bhuva, analyst]

Yes. Thank you, Itra. Good afternoon, everyone. Welcome to SBFC Finance Q2 FY '26 Earnings Call. On behalf of ICICI Securities, I would like to thank SBFC management team for giving us the opportunity to hold this call. Today, we have with us the entire top management team of SBFC represented by Mr. Aseem Dhru, Managing Director and CEO; Mr. Mahesh Dayani, Executive Director; Mr. Narayan, CFO; Mr. Sanket Agarwal, Strategy Officer; and Mr. Rajiv Thakker, Chief Risk Officer.

I will now hand over the call to Mr. Aseem for his opening remarks, and then we'll open the floor for the Q&A. Over to you, sir.

[Aseem Dhru, executive]

Thank you. Thank you, Renish, and good afternoon, everyone. The challenge of any business build is that while one is building for the decades, one is accounting for in quarters. If I ask you what is your plan for the evening today, you are likely to be very specific. I'm going to watch a movie, a play, go to a party. If I asked you about next week, you may have some a little more general. The next quarter, details start to blur. The next year, you will probably say a more directional thing and the next decade, and we get into the territory of hope.

Similar challenge the company faces when it looks ahead, a quarter, a decade and a century. The challenge for any management is to get both the next decade and the next quarter, right? At SBFC, when we look at how the most abused word in start-up decks called the total addressable market, the TAM stands, we feel very bullish about the future.

The total MSME book of loans between INR 500,000 to INR 3 million, which is our target segment. The total book complete, which includes banks, NBFCs, all kind of lenders, between INR 500,000 to INR 3 million is about INR 4 trillion as we speak. And as -- this has been growing at a CAGR of 24%, meaning it's doubling every 3 years.

The best thing is as far back as I look, these numbers have helped, which means through peaks and troughs, through interest rates and delinquency cycles, the market growth has neither accelerated nor decelerated. And when one looked at the decade ahead, one can safely presume that the market will grow at CAGR of 20%, which means it is doubled in about 4 years. So from INR 4 trillion that it is right now, it will go to probably INR 8 trillion by 4 years from today.

Now as we know, growth cycles are produced by interest rate cycles. India right now is one of the lowest inflation volatility in the world. This produces a low interest rate volatility, which feeds into lower growth volatility. Even if you don't want to get too technical, let's just know this, it is not the quantum of the move, but the volatility that kills you. So low-growth volatility is a really good place to be.

On top of this, India, in my view, is a long-term trend of low real interest rates. We have decidedly entered a cycle of low-real interest rates. A low inflation interest rate growth traject -- volatility and a lower real intra-rate trend is music to a bankers here. The long-term trend is for India is very clear. It is up. In business, as in life, it is very critical to get the long-term trend right.

While you may get the decade right, it would be posthumously meaning for the management unless they get the quarters right. So when we look at the more immediate, we shift from the telescope to the microscope, and there is never any beauty one can find under a microscope.

The near-term view is a chaotic bazaar with so much noise and cacophony that it gets very difficult to preserve your enthusiasm. To those of you who have followed our earnings call over the years at the risk of becoming -- I told you so expert, we had seen and called out a shorter-term trough in April '24. Post-COVID, Indian lenders had kept the bar open for too long and alcohol and money, both have unlimited demand if they are easy to get on credit.

RBI was watching this too. And in the second half of fiscal '25, it read out the [indiscernible] right act on the unsecured lenders first and then the microfinance sector next. We're in the business of lending loans that will need to get repaid every month over a long period of time. The business segment will lend too has uneven cash flows and operates in an undisciplined way.

A few days back, the screen in our office displayed our live loan book rising in real time as we crossed -- let's say loans getting disbursed across 220 branches. I usually see this excitement when an important cricket final is underway to a nail-biting finish, a loud cheer and applause broke out as we crossed INR 10,000 crores of AUM.

Now on a lighter note, I know the night that came out to cut the cake that's been wheeled in is on my throat too or we can truly celebrate only when the monies come back. We are the only business that expects sales returns to happen. These high-yielding loans price in the incipient risk in them. Our job and raise no debt is to price and manage this risk.

Last quarter, in line with peers, we too had a large flow in our 1-plus portfolio. The previous quarter, the June quarter. This quarter, while the tide hasn't fully stepped, the intensity of the flow has calmed and we are still very watchful for we need to first stem the floor and then try to reverse it.

There are a lot of numbers when a finance company puts out its results, but the first amongst equal or the moral of the story is return on equity. What is the return made by the shareholders who trusted us managing their money? We have constructed an ROA tree on the DuPont curve. The power plants step up the voltage for long-distance transmission and step it down to substations and finally, delivering it to your home. And when you flick a switch, the bulb comes on. Reporting this ROE of 14% this quarter for all of us at SBFC is how Edison would have felt when his bulb came on in 1879. This dam thing is working moment.

In finance, it is never so easy. We could arrive at this ROE by using a high leverage, and that isn't the ideal solution. So one has to ideally reach it on a very low leverage, which means that you need to deliver a high ROA. At north of 4.5%, we are achieving 14% ROE at a debt equity of under 2%.

I was looking at our first earnings call in September '23, where we had delivered an ROA of 3.8% and an ROE of 10.4%. So happy to see that we have doubled our quarterly profits since then. That was just after our listing. We have ample capital and as we build to reasonable leverage, it should be -- have a salutary effect on our ROEs going forward.

We have 2 tailwinds powering our client. Incremental borrowing cost is down 80 basis points over the book cost at the beginning of this fiscal. Over time, this will keep feeding into the P&L. Cost of operations has come down 112 basis points since our IPO and incremental benefits will keep feeding into the P&L, but as we make investments for growth at a reduced pace of reduction.

I would also like to draw your attention to the headwind we face, tough credit environment, credit cost has gone up to 1.29%. Our PCR is at 46%, well above our stated intent to keep it north of 40%, and we do not take into account the interest on NPAs, and we do not upfront any income through DA or any co-origination to reduce our future earnings volatility.

I would want investors to know that while we are doing the best we can, we are solving a difficult problem and the risks are evenly balanced. The yields on our business fairly compensate us for the elevated risk and we won't sleep easy until the flow into one plus is fully stepped.

What has changed over the years are the 2 risks that did not exist to this level earlier, political risk and climate risk. Karnataka is a classic case in point where a superb portfolio until January '25, got rudely shaken up in 2 months, and this now is going to take several quarters to fix once it starts to flow. We remain cautiously optimistic about delivering a 5% to 7% quarter-on-quarter growth. Credit cost could from this point inch up 10 to 15 basis points before they peak out.

We have further tightened our credit screens, stopped lending below INR 700,000 and raise the gate of entry to a CIBIL of 700 at a minimum level. And we now watch out for banking behavior and overlevered customers in a more tighter way than we did before.

We thank you for your trust. And with this, I hand you over to Narayan, who understands numbers far better than I ever will.

[Narayan Barasia, executive]

Thank you, Aseem. Good afternoon. Our AUM as of September is INR 9,938 crores and as Aseem said, we achieved INR 10,000 crores now, and this is with a growth of 29% on a Y-o-Y basis and 6% on a Q-o-Q basis, with 100% of our book secured by properties and gold. We have a very minor unsecured book left, which is hardly in terms of percentage.

Our MSME AUM, which is 82% of our AUM, grew by 29% on a Y-o-Y basis and 6% on a Q-o-Q basis. We have added 5 branches during the quarter, with a total branch count at 220 as of September 2025.

In terms of yield spreads and OpEx, the yields for the quarter is 18.01%, with an improvement of 2 basis point on Q-o-Q basis and 32 basis point on a Y-o-Y basis. Our cost of borrowing is at 8.96% for the quarter with a reduction of 36 basis points on a Y-o-Y basis and also on a Q-o-Q basis. Consequently, the spread for the quarter is 9.05%, with an improvement of 38 basis point on a Q-o-Q basis and 68 basis points on a Y-o-Y basis.

Our OpEx continued to improve due to enhanced operating leverage and has improved again by 19 basis point on a Q-o-Q basis and 20 basis point on a Y-o-Y basis. This is part of a consistent increase in our branch network.

In terms of asset quality, our GNPA is rebound in Q2 at 2.77%, with PCR at 46.17%, with credit cost at 1.29% for the quarter. In terms of capital and return ratio, our capital adequacy ratio is 34.05%, with tangible net worth of INR 3,174 crores as of September '25.

Our return on average AUM for the quarter is 4.56%, with return on average tangible equity further improving from 13.53% in Q1 to 14.09% in Q2. We made a PAT of INR 109 crore for the quarter, thereby reporting a growth of 30% on a Y-o-Y basis and 8% on a Q-o-Q basis.

With this, I open the floor for question and answer.

[Operator]

[Operator Instructions] The first question is from the line of Abhishek Gulati from Gulati Wealth.

[Unknown Analyst]

Actually, the numbers are great. So I want to ask what's the future outlook actually amidst the opening remarks, if you have said so?

[Narayan Barasia, executive]

I mean I gave a fairly long monologue on what the outlook is. See, for us, the outlook continues to be what we had guided, no change in guidance. We hope to continue to grow at 5% to 7% AUM quarter-on-quarter. And we hope that the credit cost here will start getting range bound, but may increase another 10, 15 basis points from here. Apart from that, it is business as usual, where we have crossed 14% ROE. And as more things go our way in terms of what has been set as operating leverage and hopefully, it will have the effect on ROE.

[Unknown Analyst]

Understood. And in terms of are we focusing on higher ticket size loan because most of the NBFCs currently are focusing on higher ticket size loan because of the NPA risk. So we are also witnessing the same thing?

[Narayan Barasia, executive]

So our higher ticket sizes are typically range bound, and they are from INR 5 lakh to INR 30 lakhs is our sweet spot. What we had mentioned in our last call -- for last quarter was that we will move away from the lower ticket size where we feel that the stress is building up, which is the sub INR 7 lakhs. So if you look at our average ticket size for this particular quarter, that's moved up marginally from closer to [ INR 9 lakhs to INR 10.20 lakhs ] for this. And that's largely also because of a higher co-origination with ICICI. So to answer your question, our large tickets, the way we define is more between INR 10 lakhs and INR 30-odd lakhs.

[Unknown Analyst]

Understood. And one more thing in terms of the NPAs that's still the credit cost, we are also guiding could inch up. So we are seeing a stress in a particular type of loan, particular customer behavior that we have found in which we are seeing the more risk?

[Narayan Barasia, executive]

So let me break this into 2 parts. So one is a segment and one is a geography. If I were to look at a segment, the segment that we had called out, not last quarter, but probably a year back is that we are seeing stress building up on the lower ticket size. So that call out holds, and that's something that we've shied away from doing it. So as a result, you see our volumes also dropping in quarter 2 compared to the previous quarter.

To call out specific geographies, as Aseem mentioned out a specific state in South where we mentioned that due to an ordinance issue, clearly, the portfolio color hasn't been what it was till about January and March. So it's a combination of both. And that's the reason we said that we're not out of the woods as yet. We will see some bit of pain continuing before we see the trend reversing.

[Unknown Analyst]

Understood. Understood. And just last thing, how long we are seeing the trend to be continued in the -- like the rising NPAs? Any thing that -- this is your experience that you can see?

[Narayan Barasia, executive]

It's very difficult to -- I mean, if we could see the sunset and if we could time it, it would have been perfect. I would have given you that answer. But all that we can tell you is that quarter 2 was slightly better than quarter 1. Is it going to end in quarter 3 or in quarter 4? That's going to be a wild guess. So we wouldn't want to commit to that. But all that we can do is if you are in that kind of an environment, you will be a little watchful. You'll tighten your credit filters. You can't really avoid the credit cost completely, but you can obviously soften the blow.

[Operator]

The next question is from the line of Nidhesh from Investec.

[Nidhesh Jain, analyst]

Congratulations for a good set of numbers. Sir, first question is on the stress -- asset quality stress that we are seeing. Is it only Karnataka specific or are we witnessing the stress in other geographies as well?

[Narayan Barasia, executive]

So in terms of our portfolio, we have Karnataka, where we hold close to an 11-, 12-odd percent. Although we have gone a little slow, but obviously, there's a legacy book or a large portion of the book there. The trends in the remaining 2 states, which is Andhra and Telangana are pretty much holding on. But I think Karnataka is one state where we'll be a little watchful. We are present in Tamil Nadu, but the portfolio is not very large.

[Nidhesh Jain, analyst]

Sure. And how are you seeing trends on the customer leverage as we have again started seeing very sharp growth in the unsecured segment which has been a bit weak for 1 year. But again, in this quarter, we have seen a lot of lenders growing and secular book pretty sharply. So how are we seeing customer leverage trend specifically in your customer base?

[Narayan Barasia, executive]

Yes. So I think what we are now trying to do, probably if you look at our investor slides, you will see CIBIL scores, which were more than 700, that's inching up by almost 200 basis points. We were close to around 86% on the portfolio that's moved to almost 88%. If I were to talk about the new disbursals, almost, I think, 95%, 96% of the customers onboarded are more than 700 and some of them more than 725.

Now typically, what we look out or what we call out, are those set of prime customer within the affordable category, where the number of loans, at least at the time of boarding is relatively less. So what we're trying to do is trying to filter out overleveraged customers. It has an impact on our volumes. So you see our volumes down by almost 6-odd percent, but I guess that's the right thing for us to do. And even after we put out those filters, our overall growth projections do not change. We are disbursing close to around INR 800 crores in a quarter. That if we were to just stay where we are, that INR 3,200 crores in a year, that will still be 20% than the previous year. So I think we're pretty much comfortable where we are despite tightening our underwriting filters for prime customers in the affordable space.

[Nidhesh Jain, analyst]

Sure, sir. So we have tightened the underwriting filters last year. We have further tightened them in this quarter or...

[Narayan Barasia, executive]

Yes. We further tightened them in this quarter.

[Aseem Dhru, executive]

So there is a continuous process because the way we did some figures, last quarter also we tightened some of the norms and even this quarter, we are tightened some norms. So this is a continuous process and of course, whatever the earnings we get from the portfolio, we just try to plug it.

[Nidhesh Jain, analyst]

Sure. And last question is on, from a medium-term perspective, do you have plans to add more products apart from SME and gold loans?

[Narayan Barasia, executive]

No. I think within the ticket sizes, you have -- that's a pretty long range, right? So when we say that we have anything between INR 5 lakhs and INR 30 lakhs, so a INR 30 lakh customer or somewhere about gives you a yield which is slightly lower. And as you keep nearing between INR 8 lakh and INR 10 lakh, the yields are a lot different. So these are different segments, different products within which what we play, and it's a combination of geographies. I think there are enough and more for us to do in the distribution that we have laid and the 5 that we've laid across these 15, 16 states. So I don't think from a medium term, we will add any more products. But yes, our investment in the distribution will continue to be there because we still feel that a lot of states are underserved and our distribution in some of the geographies are yet to sweat in.

[Operator]

The next question is from the line of Prithviraj Patil from Investec.

[Prithviraj Patil, analyst]

Just one question on the microlab portfolio that you mentioned that you stopped doing under INR 7 lakhs. I just wanted to know how do we look at the write-backs or recoveries from on the small-ticket portfolio? What is the tenure when you can expect a write-back? Or is it just a write-off that we see?

[Narayan Barasia, executive]

No. So I think it's going to be a little unfair to say that your LTV on that is almost 100%. That doesn't work that way. It goes through its process. But yes, the time that it takes for the small ticket portfolio, which is sub 7 lakhs is fairly longer. I would probably just give you some sense that if I am doing something under SARFAESI at a scale of 1, then probably if it's a smaller ticket, which is sub 7 lakh, sub 6 lakh, then the time line is almost twice of what probably you would have on a SARFAESI side. But yes, there is time value of money that you would probably consider. And that's the enhanced credit cost that comes along with it, but that also gets compensated with a higher yield.

Having said that, our percentage portfolio on the overall book that we have is fairly small. So we really aren't too concerned as to what is the amount of credit cost that's going to come from that portfolio.

[Aseem Dhru, executive]

Just to add the covers in these segment particularly, so our LTVs would be sub 50%, so that also helps us down the line.

[Prithviraj Patil, analyst]

Okay. And just one more question. What are the number of branches through which we're doing gold loans? And how do we plan to scale it in future?

[Narayan Barasia, executive]

So we are currently closer to 185-odd branches out of 220 branches where we offer gold. Incrementally, you would see branches -- more number of branches coming in for gold. My sense is that in the next 2 quarters, we should add close to around 15 branches for gold.

[Operator]

[Operator Instructions] The next question is from the line of [ Prakhal Goyal ] on from [ Anyway Securities ].

[Unknown Analyst]

I have 3 questions. First is to Aseem. Aseem, we saw in the PID disclosures that your personal holding came down meaningfully over the last quarter. Could you please share some context what is mainly a personal diversification or a liquidity decision? And should we expect any further such transactions?

[Aseem Dhru, executive]

No, it is -- since the -- since 8 years, all the money that I've ever made is in this stock. And the purpose for sale is to create liquidity for myself.

[Unknown Analyst]

Got it. Got it. Fair. Fair. Second, on asset quality. While GNPA has stabilized on a Q-on-Q basis, the 1+ DPD bucket has been inching up for about 10, 11 quarters. What level of 1+ do you consider healthy for this kind of portfolio mix?

[Narayan Barasia, executive]

There is no absolute level. I mean as I said in my opening commentary that this is a level that we are concerned with and watching it. The velocity of the fall has come down, but it is still not stemmed out completely. So we are hopeful that we should see improvement in that. But clearly, it's not a level that is something that we are comfortable with or we have to manage it, handle it and bring it down. So there are certain specific things that have added to it. Some we couldn't control. The Karnataka portfolio that I mentioned. And then some which we think we can control to better credit buying, which we will do -- which is something that we've been doing every quarter. We will keep tightening the credit screens until we get to a more comfortable position.

[Unknown Analyst]

Understood. Just one last question on excellent improvement on cost-to-income ratio. We are growing revenues and profits of about 30%, but employee count seems to be up only about 10% Y-o-Y. Is there any timing or lag effect here? Or should we read this as a structural operating leverage coming through?

[Narayan Barasia, executive]

So I think what we've been doing is there has been a distribution that's been made. There's been an investment in employees that we have been doing. And what we've always called out that we will not be in a hurry to add branches unless and until my existing set of distribution starts to spread.

Just to probably take my point further is if you look at probably Slide 15 or Slide 16, where we give a split of our distribution, you will see that now over a period of time, almost 60% of our branches are more than 3 years with an average AUM of more than INR 60 crores, INR 65-odd crores. And just to give you a sense that the moment the branches are more than INR 40-odd crores, they cross an ROE of close to around 15% and beyond.

You have a set of branches close to almost 25-odd percent of the branches, which are between 1 to 3 years, where we feel that there's still a lot of work to be done, and that's more like INR 25 crores per branch. But that's also a significant ROE of close to 10%, 11-odd percent. And then you have the balance 15%, which are less than 12 months. So I think the whole idea is that there is a period where we feel that we'd like to consolidate and see that how are the branches performing, how are we sweating this distribution, is the cost really making it up because one thing what we started, which was contrary to our segment is that we started with an extremely high OpEx. And while we had promised that over a period of time is going to keep coming off, but we were conscious that the unit economics at a branch level clearly needs to deliver, and that's how it needs to sum up.

Now I think with every passing quarter, as the distribution is beginning to sweat, as the numbers keep on growing, there's more confidence for us that this model is working. The unit economics at a branch level is beginning to show up the required income that was projected and gives us a confidence to invest further in our franchise. And that's how in the opening commentary, we mentioned that our OpEx, what we have guided that we will try and bring it down every year is something that we're living up to.

[Operator]

The next question is from the line of Harshit Toshniwal from Premji Investments.

[Harshit Toshniwal, analyst]

Congratulations for a great set again. I hope I'm audible.

[Aseem Dhru, executive]

Yes, yes.

[Harshit Toshniwal, analyst]

Sir, 2 questions. One is that if I look at our employee base, if you can also help us that, how much would that be for gold loan business amongst them? That is one question.

And the second was on the operating leverage piece that -- so the operating leverage improvement which we have seen, how much also would you want to ascribe towards gold loan being there in now more branches and the efficiency, which is coming up with the -- in general, the price increase and the AUM increase? So that was one.

And probably just to it and continuation of the last question that the branch addition target, which we should look at from here on to achieve that 5% to 7% Q-o-Q growth. I had one more question, if time permits, but yes.

[Narayan Barasia, executive]

Yes. I think one of the probably the dumbest thing that probably we'd like to follow is that keep increasing the number of people and the number of branches to chase growth. I think the idea is that there has to be some bit of efficiency that needs to come in for us to deliver a superior -- at least at a PPOP level, it has to be a lot better. So if my AUM is growing or my income is growing at an X level, my PPOP should probably be better of that, and that's where the operating efficiencies come in.

Having said that, I think what we've guided is that we would probably add 20 or 25 branches in a year. That's something that we are comfortable with in select states where we seem to be getting our businesses right at the right deals and at the right cost.

Coming to answer your question on gold. We have close to around 185-odd branches. There are close to around 8 to 10 people in a branch that comes in so roughly around 1,500 to 1,600-odd employees, including the front end and the back end would be on the gold side.

[Harshit Toshniwal, analyst]

Understood, sir. And one more thing, if I can ask, probably, this might have been answered in previous calls, but just at the [indiscernible], but when we look at the disbursement growth, we saw 4 quarters of probably a mathematical slowdown, but I think there was some change in the way the recognition happened. And last 2 quarters, since the base is again normalized, so we are seeing a better growth. So when we look at the 20% Y-o-Y growth, is there anything in the accounting that is -- that does not make it like-to-like, if you can just help clear this basic question.

[Narayan Barasia, executive]

No, no. I think what you're referring is to the disbursals for last year in the range of [ INR 675 crores to INR 700 crores ]. There was a dip in the last quarter -- last year first quarter, which is June '24, where there was a circular which mentioned that you would disburse based on the actual receipt in the customer's account. So there was one reset which happened. And then subsequent number started to inch up over a period. That was also unfortunately a period where we said that we are beginning to see early signs of stress coming in for a smaller segment. And that's the reason you didn't really see a big bump up coming up in the subsequent quarter. So you would probably at best see a bit of a straight line that came in. And there was some bit of an uptick which probably happened between quarter 3 and quarter 4. And then you saw a tick in quarter 1, and that's what we intend to do.

What we mentioned earlier, I don't think we're in a hurry for really capturing a high market share in a segment where probably we'll spend a lot of time trying to get our money back. I think the whole idea was that at a current run rate of disbursal, we need to be very comfortable that we don't really break any operating risk or a credit risk or a human capital risk. As long as we're adhering to all 3 at a comfortable pace, we should be okay.

But just to answer your question, there's nothing that has changed in the way we were accounting. Everything is like-to-like compared to last year versus this year. Also to give you further comfort, I think our distribution what we have is good enough to generate anything closer to INR 300 crores a month. That's almost INR 900-odd crores. I think it's by design that we have decided to walk away from some parts of geography where we aren't originating or some category of customers that we are not comfortable onboarding.

[Harshit Toshniwal, analyst]

One thing, and this is not related to the numbers. But in general, as an industry, do you think that this SARFAESI advantage, which is there for HFCs, do you do envisage the situation that can come for NBFCs or should we look at that being a very big advantage in terms of the way we operate. Currently, it's INR 20 lakh loan value, above which we'll be able to get. But do you think that this is one aspect where government or the regulatory is also looking?

[Aseem Dhru, executive]

I can't comment on what the regulator is doing. But I can certainly say that it is a level-playing field that NBFC is deserved to be on. And there is a regulatory arbitrage against the NBFC and I hope that it gets recognized in remote.

[Harshit Toshniwal, analyst]

Understood. It will be a meaningful difference that regulatory arbitrage is actually a reasonably arbitrage.

[Aseem Dhru, executive]

Yes, it's a very meaningful one. The time frame of resolution can be more than 3 to 3.5x of SARFAESI.

[Operator]

The next question is from the line of Mayank Mistry from JM Financials.

[Mayank Mistry, analyst]

Sir, my question is mainly on the MSME disbursements. So largely, it has remained stable during this quarter given that we have tightened our underwriting a little, so which has led to a little lower growth in disbursal. But when I bake in -- only if I bake in 3% to 4% growth in -- sequential growth in this disbursal, I have been able to gain 5.5% sequential growth for next 2 quarters. So I'm just trying to decode, I mean, will the run rate move up from here or with the tightened disbursal in the run rate, we remain stable over next -- over the near term?

[Narayan Barasia, executive]

I think the disbursal outlook is going to be a function about how the 0 plus is behaving and how are the credit parameters behaving. I think, as I mentioned earlier, we have a capacity, whether it's in terms of number of people or number of branches to really ramp it up. But I don't think we are yet in a position to go ahead and do that.

As I mentioned earlier that we've already gone ahead and tightened the filters. All I can tell you is that, that's almost a 10% drop from a run rate. So if we're actually disbursing INR 800 crores, all I can tell you that we're leaving almost 10% on the table if we were to filter out all the underwriting norms that we've left behind.

So I don't think we are chasing growth at the cost of credit or at the cost of an operating risk that may come along with it. So if that means that probably we will slight marginally probably come off in terms of our ME growth. But our guidance on the 5% to 7% or a 25% to 30% will still continue to hold up.

[Mayank Mistry, analyst]

Sorry, how much has it impacted our rejection rates then in last quarter?

[Narayan Barasia, executive]

So earlier, our rejections -- in fact, let me swing it the other way. I think our approval rates earlier used to be in the range of 45 to 50-odd percent. That's in stuff -- that probably gone down to below 40-odd percent.

[Aseem Dhru, executive]

And this is in spite of the fact that the log-in filter itself is tightened, so it is plus plus because we don't allow log-ins beyond cutoff.

[Operator]

The next question is from the line of [ Abhishek Gulati from Abhishek Wealth ].

[Unknown Analyst]

So actually, my question is how much leverage we are planning to go? Like currently, as you can see, we have 3x leverage. So what is our leverage target for last 2 or 3 years down the line that we are targeting?

[Aseem Dhru, executive]

So our debt to equity is sub 2%, while asset to equity is 3%, but debt-to-equity is sub 2%. We -- from a banking covenant point of view, we are committed to go to debt equity of 5%. But what we believe is anywhere between 3% and 4% is somewhere we will go to the market and start raising equity capital. So as of now, we are sub 2, at least we'd like to reach to 3% and then revisit this.

[Unknown Analyst]

Understood. And eventually, the ROE target that we are targeting?

[Aseem Dhru, executive]

We are -- we'll let it come as an outcome. We're not targeting any ROE. We had guided a 15% ROE. Let us first build to that, then we will talk of plans ahead. At the moment, our guidance continues to be 15%.

[Unknown Analyst]

All right. One more thing in terms of -- during the tough time also, we are able to manage to grow like around 6% quarter-on-quarter and 30% year-on-year. So during these times, the companies that used to guide that the same growth are like also not able to do the same. So what we are doing differently -- I just want to try to understand what we are doing differently that we are able to deliver in the tough environment as well?

[Aseem Dhru, executive]

Nothing different. We are trying to do the same boring thing and improve it. We are making our mistakes, correcting, learning -- and we are at it and it is -- I mean, nothing is for sure. But we are trying our best. God has been kind. We have the best team in the business. And they are sometimes surprising us also with what we are able to do that as we keep cutting and keep increasing our credit screens, they are still managing to get in more and do the numbers. So I will give the full credit to the team of both business and credit, which is making it happen.

[Operator]

The next question is from the line of Prithviraj Patil from Investec.

[Prithviraj Patil, analyst]

Yes. Sorry for coming back in the queue. Just -- I just wanted to know how do we think of the borrowing. So what percentage of the borrowing is fixed rate borrowings and what percentage of our advances are fixed rate? And then how much of the REPO benefit have we seen on the borrowing side?

[Narayan Barasia, executive]

Okay. So we have matched the asset and liability pretty well. On the asset side first, the entire secured MSME portfolio is on a floating rate. Gold interest, gold business is a very short tenure business, ranging from 6 to 12 months and is a fixed interest rate. But since the tenure is small, it hardly doesn't matter.

From a liability side, we tend to keep everything floating just to match the asset side well. So virtually almost about 90% of the loan will be on the floating side.

To your other question on to how much has been passed on into the -- so 100 basis point REPO reduction has led to almost about 80 basis point reduction on MCLR by private sector bank and public sector banks are to follow. There has been a very minor reduction there. So to that extent, the flow is still happening, the transmission is still happening. We have baked in and captured a certain reduction in the REPO already in the financial, and we believe that we will capture certain more part of the reduction as we go along to the future.

[Operator]

[Operator Instructions] The next question is from the line of Manav Shah, an individual investor.

[Unknown Attendee]

Sir, continuing on the previous participant question. Sir, we told regarding the spreads and the margins. So what will be your outlook so it can improve from here on as well?

[Aseem Dhru, executive]

No. We are already above our guided range and do not anticipate any further increases from here.

[Unknown Attendee]

So it will be stable around this level around 9% of spreads for FY '26?

[Aseem Dhru, executive]

Yes.

[Operator]

The next question is from the line of Akash Shah from [indiscernible] Shah.

[Unknown Analyst]

Congratulations for great set of numbers. So I wanted to understand the Karnataka issue. I mean several unsecured lenders have mentioned that conditions are improving for them on the ground. So what are our expectations going forward?

[Narayan Barasia, executive]

No, I can't comment on the unsecured lenders as such. All I can tell you is that what are we seeing on the ground with respect to the secured and the smaller tickets. If I were to actually flesh it out further, I would say that the smaller tickets aren't showing sign of improvement as yet. Yes, there is some bit of improvement and stabilization on the slightly larger tickets, but that's what it is. And what we had mentioned, the positive is that it's not worsening, but we are yet to see that a lot of customers who had flown actually get back to current. So we're able to -- we are able to stabilize them, but we're not able to get them back to current. And that's the reason we said that we will be cautious in those markets.

[Unknown Analyst]

Okay. And what is the total exposure, sir, in Karnataka?

[Narayan Barasia, executive]

Around 12-odd percent.

[Unknown Analyst]

Okay. And one last question, sir. I mean is there a further scope for the gold loan mix from current levels in our total AUM?

[Narayan Barasia, executive]

It could move up a percentage here or there.

[Operator]

As there are no further questions from the participants, I now hand the conference over to the management for closing comments.

[Aseem Dhru, executive]

Thank you for joining the call. If there are any further questions, please do reach out to me. Thank you.

[Operator]

Thank you very much, sir. On behalf of SBFC Finance Limited that concludes this conference. Thank you for joining us, and you may now disconnect your lines.