Could see 25 bps hike in long-term funds: M&M Financial

Ramesh Iyer, MD, M&M Financial Services believes one may see a 25 bps increase interest rates for long-term funds, which are unlikely to come-off easily.

In an interview to CNBC-TV18, Iyer says, their company prefers repo rate hike to CP and CD rates because they look for long-term funds. "For our business, we would look for a long-term fund to stabilise and rates to come down because almost all are lending us upward of three-years. So, we would not want to borrow short and use it for long-term lending," he says.

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Meanwhile, the company does not see a dip in the margins so far, but going forward, it may not be able to increase its rate to consumer and is likely to seek support from the manufacturers and dealers. Below is the verbatim transcript of Ramesh Iyer’s interview on CNBC-TV18 Q: How is the cost of money and margins looking like for the rest of the year? Will money get cheaper as marginal standing facility (MSF) rate has been cut by the Reserve Bank of India (RBI)?
A: We are still not saying that. Yes, six months back we were saying that interest possibly may come off but what we have seen in the last couple of months does not give us that comfort and confidence to say that interest will come off. Currently, the short-term funds have moved up close to 300 bps over a period of time.
For somebody like us who has 10 percent of its borrowings coming from short-term, there is a 30 bps impact which we have negotiated with the dealers, manufacturers in trying to push up their lending rates because we cannot absorb it all the time.
We also think along with the short over a period of time, one may also see a 25 bps increase even in the long-term funds. So we are holding a view that interest rates are not likely to come off that easily. Q: Immediately after the credit policy was announced, CP (commercial paper) rates and CD (certificate of deposit) rates came down by about 50-60 bps which is not very material as you are saying, will it be the repo rate hike that will be more material?
A: Yes, because ultimately for a business like ours we would look for a long-term fund to stabilise and rates to come down because almost all are lending us upward of three years. So, we would not want to borrow short and use it for long-term lending. Therefore, one would like to see the long-term rates coming down. For somebody like us as an enabler the decision is between able to absorb that kind of rate or pass it on to consumer.
We believe the market place that we operate in and the product lines that we are in, we would ask for support from the manufacturers and the dealers to help us if we are not to pass it on to the consumer. But I don't think we will want to absorb that kind of rate increase. Q: What is your cost of funds in Q2 as compared to Q1? Also, what would be your net interest margin (NIM) impact?
A: About 30 bps increase, one would say from a 10 to 10.4-10.3 percent level as far as overall cost of fund is concerned. But we have also increased our lending rates around end of July. Therefore, we are unable to see a dip in the margins so far but going forward, endlessly you cannot increase the rate to consumer. So, we would look for a support from the manufacturers and dealers, they will possibly look at it as a marketing support rather than subvention just for the sake of it. Q: Will your spread be at 9.6 percent?
A: I would think so, we are not forecasting a dip in the NIMs. Q: What about loan growth then, obviously at higher levels appetite could be under strain?
A: If you look at this quarter alone, for us fortunately product mix helps, like tractors have done well. So, if a product is not doing well something else comes in and does well. We have done fair amount of second hand vehicle financing, utility vehicles (UVs) and cars in the second hand vehicle segment.
We have ensured that our product mix is taking care of the growth requirement rather than focusing on one product. But in this quarter one did see for new vehicle demand coming down a bit. But all expectations are for the festival season in October-November. Therefore, one can see once more a pushup happening may be in Q3 of this year.
If some indications from the festival in Maharashtra or a festival in Kerala, we did see some number movement while not very significant. But clearly Dassera, Diwali are two big festivals with good monsoon, expected good crop, so the overall rural cash flow is expected to hold on well. All hopes are waiting to see what happens in the festival season of October-November.