Expect growth to pick up in H2FY17 on monsoon: M&M Fin

Below is the verbatim transcript of V Ravi’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Sonia: It has been a very good quarter for you, but I wanted to talk a little bit about how the disbursements in the core segments are still quite weak for Mahindra Finance. Most of the disbursements in the quarter gone by was led by the commercial vehicle sector, but stripped of that, passenger vehicle loan growth has slowed down to 14 percent, tractor growth has slowed down to about 3 odd percent. What is the sense that you are getting about the first half of the new fiscal?

A: Primarily, we are expecting the growth to pick up from the second half for us based on the monsoon performance and of course, the second half also, along with the monsoon performance we would also start off the busy season as well as the festival season. So, it has been traditionally that we have been growing, if you look at that our performance is better in the second half than the first half. So, this year, also we predict that -- of course last two years there was a continued drought, so that to some extent had impacted our disbursement growth. But, we are hopeful that this second half will do much better than what it was earlier.

Latha: Can you give us a split of your business? How much is really agri-agri, how much is non-agri, as well various products, passenger vehicles, commercial vehicles, other non-vehicular lending?

A: Roughly about 30 percent of our assets are in passenger cars and another about 30-31 percent in utility vehicles and about 20 percent is in tractors, roughly about 7-8 percent commercial vehicles. The balance of about 4-5 percent is in small and medium enterprises (SME) and all others miscellaneous make up for the balance.

Latha: You have about 60 percent in utility vehicles (UV) and cars, so are you more an urban focused company?

A: No, it continues to be that even though the product category is like this, it is catering to the same semi-urban rural market that we have been catering to. So, the businesses consumed in those geographies are not necessarily urban India.

Latha: There have been a lot of moves lately of even public sector banks wanting to go retail. Is that not getting a bit crowded? There is no corporate lending left to do. Are your margins getting pressure?

A: Basically, our experience so far is that it is not an interest rate which is making much of a difference. Of course it is important, but what is more important is the custom made schemes. Custom made product is that we have to look at the farmer’s cash flow and this is basically a cash flow lending is what we do. We see what kind of yield that asset is going to produce for him and then based on that and his other considerations, other commitments that we estimate his cash flow and according give him a scheme. Therefore, what is important for him is the equated monthly instalment or quarterly instalment that he would like to pay and what is the maximum affordability for him considering his cash flow monthly or quarterly. So, that is more important. Of course, interest is important, but interest is much more important than the optical interest rate.

Sonia: That is fine, but what Latha was trying to ask you is that the competitive environment for auto loans has really perhaps turned a bit hostile for non-banking finance companies (NBFC) because of how aggressive the banks have become, not just in pricing, but in other issues like giving a higher tenure, higher loan-to-value ratio (LTV), some of them are even waiving off the processing charges. So, do you see that competition heating up and do you think that your growth in the auto loans segment will slowdown from the current 14 percent that you have seen?

A: Of course banks are doing a very good job and they have their market, they have been improving their reach in rural India, and they also have very good technology. However, important is that India is a big country and there are several categories of customers. In fact even among NBFCs, you know that even though we are all categorised as one common industry NBFC, but each of us are unique in our own asset size and in our own asset category. So that being the case, we are looking at is a huge market and it can accommodate many players and we strongly believe that each of us have a big pie for us to operate and we have been growing steadily.

And coming to the competitions, very specifically in terms of rates, we are not feeling that much pressure in terms of the reduced rate. If you look at our weighted average lending rate, something like about one year, yield drop is about 1-1.2 percent. This 1-1.2 percent is on the back of a product mix change. What is happening is that due to lower tractor demand-- tractor segment that we have substituted, to some extent, with improved car sales and improved utility vehicle sales. So, to that extent, that asset product mix has undergone a change which in turn, is to some extent, showing as though we have reduced the lending rate but not in reality. We continue to maintain our lending rate and then this is only a product mix change which we believe that will get corrected as we proceed further into this financial year.

Latha: I wanted to ask about asset quality. We saw, for the full year, the gross non-performing loans (NPL) rising by about 40 percent. Is it peaking off? Should we expect lower accretions to slippages?

A: There are two things in asset quality that one can look at. One of course, we have something like 62 percent coverage, one of the highest coverage among the industry. Second, what is important is that it is much above and we are very conservative and very prudent in terms of our approach to this NPL and we have been making much accelerated provision as compared to the regulators requirement.

Coming to the NPL quality in particular - we are able to see, especially in the last quarter which ended in March, 2016, we are able to see almost 60-65 percent of our NPL showed movement. What we mean by movement is that the customer is there, assets are there and there are some payments he is able to make. So, what is happening is that he is not in a position to make those four-five-six instalments that has become overdue. He certainly is able to, showing the intention that he wants to keep the asset, he wants to engage the asset, he wants to continue to use the asset. So, that is the heartening news for us. So, these almost 2/3rd of the segment of the NPL will be a very high potential when the monsoon is good and the rural economy turns for the good.

Latha: So, if the rains are good by the first half, your NPLs are likely to fall, aggregate NPLs?

A: The aggregate NPLs, what happens is that traditionally, if you look at our performance, and if you look at the market place also, during the first quarter the NPL builds up and second half, there is always festival, harvestable thing is there, so the cash flow improves and also year-end collections drives is at its peak and everybody is sort of single focused towards collections. Then of course comes April, May and June, then the customers wait for the monsoon performance or monsoon signals as well as there is very peak summer and extreme weather coupled with some kind of holidays, vacations within the companies. So, it is all these things put together. There will be slight build up in the first quarter. It has been our performance in the past traditionally that there would be a build up in the first quarter which will start correcting itself from the second quarter and correct it to its peak in third and fourth quarter.

Latha: The monetary policy in April itself had put more money into the system. How much did your cost of raising money fall? We saw a significant amount of yield drop in commercial papers (CP). Is your cost of money lower and will it get even lower in this quarter and the next?

A: I just want to point out to you that 7-10 days back, we had a hugely successful long-term bond issue. It was sort of first of its kind in the sense that it was unsecured, subordinated with two agencies giving AAA, top rating. And the yield was something like 8.6-9 for a period of something like 6-10 years. And what was very good about that was that it was oversubscribed by 4-5 times totalling about Rs 1,000 crore and almost 80-90 percent of the subscription was from the retail category.

Traditionally, the retail category, the response for these kind of very long-term bonds used to be, at this kind of a reasonable interest rate used to be a bit lukewarm. But of course, Mahindra brand and the trust they have in us and you do not also have this kind of papers. There is a vacuum in the long-term quality investment papers. So, all this put together ensured that the issue was a mega success. So, that being the case that in fact, had we done this issue, just to give you one, if say about 6-8 months before, at least we would have paid 30 basis points more if not higher.

So, that is something I would say that something about 75 basis points to something like 120 basis point in this range, we have been raising money, cheaper than what we did in the past. So, going forward, we should be doing it similar, we should be getting the benefit.