MV Nair recommendations positive: M&M Fin Services

Excerpts from Midcap Radar on CNBC-TV18 Watch the full show »

The MV Nair committee has proposed slew of recommendations on lending to priority sector. It has reviewed the existing guidelines in the sector categories including agriculture, MSME and export.

RBI has been a little cautious of a bank lending to NBFCs, but the committee has recommended that 5% of bank's credit to NBFCs be classified as priority sector . Ramesh Iyer, managing director of Mahindra & Mahindra Financial Services sees this move as positive.

Below is the edited transcript of Iyer's interview with CNBC-TV18. Also watch the accompanying video.

Q: The 5% cap on adjusted net banking credit, that was perhaps not a surprise, but analysts and many people are wondering about the 6% cap on spreads and seeing that as a negative for NBFCs, what's your take on it?

A: Definitely, in the sense that some cap on lending rate would always mean that the cost of running this business is not taking into consideration. When you go out and lend in rural market, the risk and the cost to run business is very different.

So, it is not just the bowering cost which is relevant for arriving at the net cap of the lending rate. Therefore, one is reacting to say okay, if you out a cap how is whole cost going to be taken into consideration while arriving at those lending rates? To that extent, there seems to be a concern on that.

Q: What is the current spread that you enjoy?

A: The borrowing cost today is about 9%. So, therefore the current spread may still be around the same. You are borrowing at a lower rate and trying to expand the market, that the time the new cost and the new risk comes in. So, is 12% right? Should it be 13%-14%? One is not too sure of what it is, but one should not kind of correlate directly the borrowing cost to the lending rate.

One cant correlate that I take x rupees under this route and lend can be at one rate, but you are in a common market where you are now addressing a larger sector of the customer. So, how do you explain to somebody else that he is going to pay little more than somebody else?

The average cost of money do come into play because the cost distribution will also be passed on to the overall volume. When the benefit of cost side is getting passed on to the overall customer, the benefit of the borrowing cost should also get distributed to everybody.

I don't think it can be a one to one comparison, but definitely when there is a percentage of overall borrowing which comes down and lets say 6% one should definitely bargain for - will the overall lending rate come down? I think okay to that. One to one relationship between this borrowing versus this lending, should be at this rate will become difficult to monitor more than anything else.

Q: When the RBI implements it, you expect RBI to take cognizance of this?

A: I should think so because each one of us will go and speak to them to say this is our total borrowing programme for let's say tractors alone, at least it can be product wise it's still workable. If we go and say we are going to borrow Rs 100 crore tractor of which Rs 25 crore or Rs 30 crore we get under this scheme. Therefore, the overall borrowing cost for tractor comes down to so much  and our lending rate gets corrected like this is a workable proposition.

Q: What is your overall view on what MV Nair has recommended? Would you consider it a positive that he has asked that 5% of priority of loans be treated as priority sector and given to NBFCs or do you think that that positive is coming with too much of a baggage and therefore this is neutral to a company like you?

A: I think it's a positive. I am not wanting to kind of neutralize this additional input on the lending rate ceiling to be a dampener for the overall scheme of things. If the priority sector was not eligible, was a bigger negative as compared to the way it's looked at now, then 5% of the total is a large volume. Now they are clubbing the primary and secondary together as a limit of 18% instead of having a breakup of 14 and 4%.

It does open up a larger opportunity as against one additional factor of the lending rate to be what it is, but it's a question of sitting across, discussing and seeing how does it work out eventually. When the priority sector non-availability was announced we would have put it at let's say 3 on 10 versus after all this has been gone through discussed, debated and announced, seems to have moved upward towards 7.