Aditya Birla Capital's lender nears its 2.5% return goal, without help from margins

Aditya Birla Capital's non-bank lending arm, which lends mainly to small businesses, with the rest split between larger companies and individuals, earned a 2.45% return on its assets in the quarter to September 2026, up from 2.2% a year earlier. In May management set 2.5% as its goal for the end of the financial year. With two quarters still to run, the lender is within touching distance of it. For a holder, the more useful question is how it got there, because the route is not the one management described.

A lender's return on assets is what remains of its interest and fee income after paying for its borrowings, its running costs and the loans that go bad. In May management said a wider margin was the way it would reach 2.5%, and that if two loan segments grew by 2 percentage points over the next two to three quarters, the margin could widen by almost 0.25 to 0.30 points.

The margin has not widened. Net interest margin including fees was about 6% last quarter, roughly where it stood a year earlier. The improvement came from the other two lines. Credit cost, the charge for expected loan losses as a share of loans, fell to 0.92% from 1.16%, below the range management guided in May. Running costs as a share of assets under management fell by 0.19 points on the year.

Calculated from the reported ratios, the two cost lines fell by 0.43 points between them, against a 0.25-point rise in return on assets. The ratios are not measured on the same base and one is before tax, so the comparison is rough, but it leaves no gain to credit to margin. Asked why a growing share of higher-yielding unsecured loans had not lifted it, Rakesh Singh, who runs the lending business, said "whatever benefit which we saw was mitigated by the increase in cost of funds and all of that." He expects margins to improve over the next few quarters.

That matters because the two levers that worked have less room left. Management expects running costs to stay around last quarter's level, not fall further, while it opens new gold loan branches. Credit cost is already below the guided range, and Singh said it includes an extra provision, a management overlay created after the Iran-US war began for segments coming under stress.

What is left is the margin: pricing, and a shift towards higher-yielding loans. The lender raised its benchmark lending rate by 25 basis points from 26 October on its floating-rate loans, about 70% of the book. Singh put the floating share of borrowings at 57%, so on management's own figures loans should reprice faster than funding. Against that, its borrowing costs are still rising, and the increase took effect after the period ended, so none of it is in last quarter's numbers.

The strongest argument that the lower credit cost will hold is the loan book itself: loans in the two weaker stages of the accounting classification, overdue or impaired, fell to 2.31% of the book, lower than a year earlier. If that holds, the 2.5% goal is close to met on costs alone, and any move beyond it rests on the rate increase and the loan mix lifting the margin faster than funding costs rise.