L&T Finance Eyes 3% RoA by FY27 on AI and Gold Loan Bet

Introduction

L&T Finance is charting a decisive course towards becoming a leading retail-focused financial institution, underpinned by a robust technology-first strategy and an aggressive expansion into new high-growth segments. Sudipta Roy, the Managing Director and CEO, has outlined a clear vision for the company, targeting a significant improvement in profitability and asset growth by the financial year 2026-27. The strategy hinges on leveraging artificial intelligence to de-risk its loan book, scaling its microfinance operations, and making a substantial push into the gold loan market.

A Tech-First Approach to Lending

At the core of L&T Finance's transformation is its "risk first, tech first" philosophy. The company has made substantial investments in digital infrastructure, including INR 80 crore for underwriting systems and INR 25 crore for portfolio automation. A key innovation is 'Cyclops,' a deep-learning AI model used for the past 20 months in the two-wheeler loan segment. This platform has delivered tangible results, reducing portfolio bounce rates to below 15%, a significant improvement compared to the industry average of 23-24%. The AI-underwritten loan book shows a portfolio risk of just 3.2-3.3% after one year, representing a 150-basis-point enhancement over traditional assessment methods. Technology is also driving efficiency in collections, with automated calls costing INR 38 each compared to INR 600-900 for manual calls, achieving a high conversion rate.

Stabilizing the Microfinance Engine

The microfinance (MFI) business, which constitutes about 25-26% of the company's loan book, is showing strong signs of recovery and normalization. Disbursements in this segment have consistently exceeded INR 2,000 crore in recent months. More importantly, collection efficiency has reached an impressive 99.57% across India. Even in Karnataka, a state that previously faced challenges, efficiency has surpassed 99.4%. Management is confident that the MFI sector will fully normalize in the coming quarters, supported by favorable factors like rural wage growth and good monsoons, providing a stable foundation for the company's overall growth.

Aggressive Expansion into Gold Loans

A cornerstone of L&T Finance's future growth is its ambitious foray into the gold loan market. The company is executing a rapid expansion plan, with the stated goal of opening one new gold loan branch every day. The plan involves increasing its branch network from 130 to 330 this year and adding another 350 branches in the next financial year. This expansion is aimed at growing the gold loan portfolio from its current INR 1,500 crore to between INR 4,500 crore and INR 5,000 crore by FY27. This strategic push was significantly accelerated by the acquisition of Paul Merchants Finance's gold loan business, which provided an established network and customer base.

Clear Financial Targets for FY27

L&T Finance has set clear and ambitious financial goals that reflect its confidence in the new strategy. The management is guiding the market towards achieving a sustainable and high-return business model.

The Path to Full Retailisation

The company's overarching strategy is to complete its transition into a 100% retail-focused NBFC. As of the first quarter of FY26, retail loans already constituted 98% of the total portfolio. This shift is designed to create a more stable, predictable, and less risky loan book. The growth in retail disbursements is robust, estimated at approximately INR 17,510 crore for Q1FY26, an 18% year-on-year increase. The total retail loan book is approaching the INR 1 lakh crore milestone, standing at an estimated INR 99,800 crore. This disciplined focus on retail segments like home loans, personal loans, and now gold loans is expected to drive consistent earnings.

Market Performance and Outlook

Investors have responded positively to L&T Finance's strategic clarity and execution. The company's stock has gained over 114% in the past year, significantly outperforming the broader market. With a market capitalization of INR 77,343 crore, the company is well-positioned within the NBFC sector. Backed by its parent, Larsen & Toubro, the company is well-capitalized to fund its growth ambitions. Management's message is clear: the focus is now entirely on "execution, execution, and execution" to translate the strategic vision into shareholder value.

Conclusion

L&T Finance is in the midst of a well-defined transformation aimed at building a resilient and high-growth retail finance company. By integrating advanced AI into its core operations, aggressively expanding its gold loan vertical, and completing its retailisation journey, the company has laid out a credible roadmap to achieve its FY27 targets of enhanced profitability and sustained asset growth. The coming years will be critical in demonstrating the success of this tech-driven, retail-focused strategy.