Non-banking finance company Mahindra & Mahindra Finance is betting big on the expected jump in rural credit demand. It has charted out a strategy to expand its rural loan book, encouraged by the thrust of the Union Budget on the rural economy, managing director Ramesh Iyer told Moneycontrol in an exclusive interview on March 24.
The NBFC is aiming at 40-45% on-year growth in loan disbursements in the next financial year, said Iyer, who also spoke about factors that affected its asset quality, the roadmap for recovery, global expansion plans, new products, and partnerships in the pipeline. Edited excerpts:
Your asset quality took a hit in FY22. What were the key reasons?
The second wave badly hit the rural market, so the first quarter was a disaster. Obviously, collections suffered big time, NPAs (non-performing assets) went up very high, branches could not operate, people and customers could not move. Our NPAs went up to 15% plus.
But one thing we knew was that this was a temporary increase in NPAs – they were not asset quality deterioration, per se. They were a temporary shift from the customer’s ability to pay to currently suffering and therefore not paying.
What is your asset quality outlook for FY23?
We had very clearly set out that more than 80 percent of what we have provided in the first quarter would actually get reversed in the next three quarters. By December, we had already done 60 percent and if you look at our collection efficiency in January and February, they were much higher than 90 percent and therefore, we are on track to achieve the 80 percent reversal target.
What we promised at the end of the first quarter we will be able to achieve for sure. This means gross NPAs from 15-16% would go to 8-9% by the end of this fiscal. By FY23 end, the GNPAs should be somewhere in the vicinity of 6-7%. The other way to put that would be that the company is confident of maintaining a net NPA of 4% in FY23 as well.
Your monthly disbursement figures point to a credit demand recovery. What is your guidance for FY23?
We saw in the second, third quarter and even now continue to see that people want vehicles. Unfortunately, the new problem of inventory unavailability has become an issue.
Otherwise, I think our disbursements would have been even much higher… On the disbursement, collection and NPA management fronts, I think we will end the year much better than what Q1 reflected. In FY23, we expect disbursement growth will be at least 40-45% over FY22.
What will be the key growth drivers?
In the budget there was a lot of talk and allocation towards infrastructure. This means that a lot of labour from rural markets will get absorbed, which means the consumption story will reopen, in the sense that cashflows will improve.
I personally believe rural areas will remain very buoyant throughout FY23, given that the infra story is going to open up. I was recently attending a construction equipment conference and they are all talking of big numbers from the construction equipment side.
Fortunately, the monsoon has been good and so have the water levels and even the harvest and government support price are good. I think the government will continue offering a good support price to farmers.
Are you looking at new channels of growth in urban areas?
There are two or three ways to look at it. One is the same business, like vehicles, are we also going to offer urban customers the same product? Second is Quiklyz, which is nothing but offering vehicle lease options to both institutions and individuals.
Third is growing the SME (small and medium enterprises) businesses. SMEs by nature will be in semi-urban, urban markets. A lot of these small vendors are in the field of auto, agri and engineering sectors and we want to participate in SME financing in these three verticals. There we will see a lot of demand.
The fourth piece will be our Digital Finco, where we give small-ticket loans to customers but operate it digitally. It will be through lots of relationships and partnerships built with various OEMs and we will be in the space of personal loans, consumer durables up to two-wheelers. From April, this will be a full- fledged business.
You recently picked a majority stake in a Sri Lankan NBFC. What are your other expansion plans?
In India-like markets, whether it is Bangladesh or whether it be Sri Lanka or Nepal, they are all now where India would have been 25 years ago.
We have experience of how to run an emerging market business or a new-to-credit business. We will use all that expertise and operate in those markets. That is why we have gone and taken a stake in Sri Lanka while we know Sri Lanka today is not doing so well. But we are not going to lose capital. We will wait there but once things open up then we will get the full benefit.
Likewise, Bangladesh today is a very well-growing economy. Today, we are exploring setting up a shop in Bangladesh. Our approach will always be to work with local partners because you need a lot of local knowledge, relationships etc. We will be very choosy about who our partner should be.
What is the update on your plans to list Mahindra Rural Housing Finance?
We will do the IPO once the company goes up to a book size of about Rs 20,000 crore. Today, they are at about Rs 9,000-10,000 crore. In the next two-three years, this company should be IPO-ready.
What is attracting large players to go aggressive on housing loans?
The country’s requirement is housing for all, which means there is a huge opportunity where people will want houses. If someone wants to either buy or construct, they will need a loan, so the future opportunity as a potential is very high and it is a very unfulfilled demand.
Are you planning to venture into the gold loan business?
Gold loan is a product that we are very keen to look at. We have not got into this so far because it requires a very different skill set, requires a different branch network and we have to grow it as an independent business.
Since our current businesses were going through some difficult times in rural areas, we wanted to first make sure this settles down well and we wanted to ensure we do not miss out on the growth opportunity in the current business. Now that we believe rural areas will settle down and growth will come back, I think we will look at gold loans in the current year.
Any appealing inorganic growth opportunities that you are evaluating?
We will have a very open mind to inorganic growth, but we will first look for what business that company is in and whether we are interested in it. Secondly, we will look at the size of the company and what their challenges are because we do not want to inherit another problem. Thirdly, we look for a cultural fit. However, today there is not even a single transaction under discussion.
What will be your digital focus in FY23?
Our business model will move from physical to phygital. All our efforts are to invest adequately and appropriately in the technology space. There are two types of technology investment. One, to ensure a good backend technology to support all front-end activities. Second is to have a perfect customer-facing technology and employee-facing technology.
What kind of investments will you make in technology?
Investments will be in apps, APIs and platform space. The second investment will be in digital play where the partners—dealers, OEMs – will want to connect with you. The third will be to give facilities to customers for repayments.
Last investment would be in data. We have millions of data points and are trying to invest around data to see what machine learning and AI can be used for, to have very strong forecasting abilities and tools.
Have you shortlisted fintech partners for these services?
Each of these investments will ensure that the ability to work with partners is kept on top of the mind. We have made a list of some 40-50 fintechs from which we will shortlist ones we want to work with. There is a team which is analysing who is good at what and what solutions they can provide. So maybe by the end of April, we should be ready.