L&T Finance: Can It Reduce Its Unsecured Loans and Grow Secured Lending?

Synopsis: L&T Finance is balancing growth and risk by managing its high unsecured loan exposure while gradually increasing secured lending. With improving credit costs, strong disbursement growth, and AI-driven underwriting, the company aims to achieve a 60:40 secured mix, ensuring sustainable growth without compromising asset quality or profitability in the coming years.

L&T Finance has transformed into a retail-focused lender with strong growth momentum, but its high unsecured exposure remains a key concern. As the company works toward increasing secured lending while maintaining expansion, the key challenge lies in balancing risk, profitability, and asset quality in a changing lending environment.

Strong Growth Momentum Sets the Base

The Q3FY26 performance by L&T Finance was impressive because of its successful implementation of its transformation strategy. It witnessed an all-time high disbursement in the quarter of Rs 22,701 crore, which represented a growth rate of 49% in YoY terms, helping push the retail loan portfolio to Rs 1,11,990 crore, indicating a YoY increase of 21%. 

The increased retail disbursements helped the company generate higher profits, as seen from PAT of Rs 739 crore, representing an increase of 18% in YoY terms and a RoA ranging between 2.31% and 2.37%. Such impressive performance suggests that not only has the company been growing rapidly, but the growth has also been efficient.

Current Portfolio Mix Reflects Elevated Unsecured Exposure

However, even in light of such good results, there is an important aspect to pay attention to, which is the portfolio of loans. The company’s management emphasised that loans without collateral account for about 44% of the AUM. 

These include such areas as microfinance, consumer credits, and unsecured SME financing. Although such operations bring high yields and positively affect margins, they have greater risks due to their sensitivity to economic fluctuations. The recently faced microfinance stress cycle is an example of this situation.

Strategic Shift Toward a More Balanced Portfolio

Understanding such risks, the L&T Finance Corporation has laid down a very clear future strategy for itself to bring about a change in its investment portfolio mix. This entails a gradual shift in their portfolio mix towards achieving a ratio of 60% secured versus 40% unsecured loans. 

It is worth noting that the company does not seem to be looking for a quick shift towards this ratio, but rather a gradual one over the coming years. One can tell from the comments made by the management that, whereas the company will continue growing through unsecured loans, they aim to reduce this number in proportion.

Secured Lending Segments Emerging as Growth Drivers

In order to accomplish this shift, L&T Finance is currently expanding its range of secured lending segments. Among the secured lending segments, gold loans have become a focal point with an outstanding disbursement rate of Rs 1,408 crore in Q3 FY26, which has shown a remarkable rise of 43% on a QoQ period. 

Also, the firm is keen on building its branch network by planning to set up a network comprising more than 330 gold loan branches. Besides, other secured lending segments like home loans and LAP have been growing steadily at a pace of 22% YoY, with a housing portfolio of Rs 28,682 crore.

Continued Expansion in Unsecured Segments with Controlled Risk

Although the company is ramping up its activities in the secured lending space, this does not mean that it has moved away from all kinds of unsecured business. For instance, their personal loan portfolio is still growing very fast, with the disbursement going up by 118% on a YoY basis. 

But here again, the management has explained that the reason for this growth lies in the successful scale-up of big tech partnerships, which should become more normalised in the coming years. What is even more important is that the company is concentrating on prime lending only and not on subprime lending or BNPL lending.

Technology-Led Underwriting Strengthens Risk Management

One of the major distinctions of L&T Finance’s strategy is the extensive use of technology in managing risks. L&T Finance has used innovative technology such as Project Cyclops, which has helped in boosting the performance of underwriting. In addition, for example, the net non-starter ratio in the two-wheeler portfolio has fallen from 2.36% in Dec ’24 to 0.41% in Dec ’25, and similar results are evident in the farm sector. 

Furthermore, technologies such as Project Nostradamus and Project Helios have aided in effective portfolio management and decision-making. The use of technology has already been helping the company to minimise slippage, which has decreased by about Rs 190-200 crore.

Improving Credit Cost Trajectory Signals Better Asset Quality

The effectiveness of such initiatives is evident from the credit cost graph of the organisation. The credit cost is seen to have fallen sharply from a high level of 3.8% to approximately 2.74% in the quarter of Q3FY26 on a core basis. It is expected that by the quarter of Q4 FY27, this cost will come down to 2% to 2.2%. This will be possible because of excellent levels of efficiency in collections, especially in the microfinance division, where collection efficiency has improved to approximately 99.7%.

Multi-Pronged Approach to Risk Mitigation

In addition to portfolio rebalancing and technological advancements, there are other ways in which L&T Finance manages its risks. It is using schemes such as CGTMSE and CGFMU that help to protect certain parts of its unsecured portfolio. In addition, it intends to re-establish macroprudential provisioning, which could be done not just for certain categories but for the whole unsecured portfolio. Such actions contribute to a better balance sheet structure and also create a safety margin in case any unexpected risks arise. In addition, diversification into rural and urban segments minimises the risks faced.

Conclusion

Although L&T Finance’s 44% unsecured exposure does seem relatively high on the surface, a closer look at the interview transcript demonstrates how L&T Finance has a clearly thought out plan moving forward. L&T Finance is currently targeting a secured/unsecured split of 60/40, respectively, all while taking advantage of the high yields that can be obtained from unsecured loans. 

Additionally, improvement in underwriting through artificial intelligence tools, lower credit costs, and high collection efficiency demonstrate how L&T Finance has been successfully managing the risks related to its unsecured loans.

Ultimately, success for L&T Finance will hinge upon reducing its unsecured exposures while also ensuring asset quality and growth in both its secured and unsecured loan portfolios. On this basis, it seems L&T Finance is well-prepared to undertake this challenge.

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