Having stepped into the heavy commercial vehicle market (HCV) just 18 months ago, M&M Financial Services has exited the segment due to sales slowdown. “Liquidity wasn’t a problem for us even if you were to take the last 12-month situation, but the borrowing costs were volatile and therefore one has to be cautious,” said the company MD Ramesh Iyer on CNBC-TV18.
Currently, their base lending rate is up to 10 percent. Tractor sales have picked up since the last quarter and the company expects tractor yields to be better than new car financing.
Below is the edited interview transcript of Ramesh Iyer interview on CNBC-TV18.
Q: You stepped out of heavy commercial vehicle market. Why is that, you do not see this cycle recovering anytime soon and would at any point you reconsider getting into this market?
A: We started it about 18 months and we were not a significant player and then we saw the market not moving in the right direction. Therefore, we felt it would not be strategically right for us to be in middle of activity when the industry isn’t doing too well. However, we do see commercial vehicle as one of our growth vertical and we do continue to do the light commercial vehicle (LCVs) pickups and all those range of vehicles. It is not that we are completely out of commercial vehicle but we were not a very active player at this stage but we would definitely look at it as a growth story for us going forward.
Q: Could you explain to us how exactly the liquidity situation is panning out for the company in this quarter as oppose to the previous quarter and what is your cost of funds
A: Liquidity wasn’t a problem for us even if you were to take the last 12-month situation, but the borrowing costs were volatile and therefore one has to be cautious in the sense at what rate you want to borrow and be in the business. Fortunately, there has not been too much of upward movement of interest (rate hikes as was expected).
Currently our base rates are up to 10 percent. The overall average cost of funds in the book could be somewhere around 9.5-9.75 percent but the marginal cost, if you were to borrow any money today, the base rate would anywhere between 10 percent and 10.5 percent.
Q: Any case of changing rates after the Reserve Bank of India (RBI) status quo?
A: Not yet because if you recall our earlier discussions, it is not that every time when the borrowing cost goes up we push up our lending rates. So, we are running about 50 bps behind in terms of the overall covering of the increased rates that has happened in the last 12 months or so and therefore we do not see an urgent need for bringing down the lending rates at this stage.
Q: What are your net interest margins this quarter versus the previous quarter? Could you give us a sense on how it’s changed or moved and also what your spreads would be?
A: This quarter is difficult to express because we are still in the quarter but if you look at the earlier ones, we were close to double digit numbers. However, for us the net interest margins are not necessarily the impact of borrowing cost, it is also an outcome of the product mix change so when we move into little more of secondhand commercial vehicle, the lending yields are much higher so one would see an increase in the net interest margins, which could move up or down in a business like ours.
From the previous quarter onwards the tractor sales have been good and the tractor yields are also expected to be better for us in the books as compared to new car financing. So the net interest margins, I have expressed even in the past, it is not something very difficult for us to maintain given the multiple products that we are in. I think we are retaining it for the last 12 months or so. We have not had a pressure on the net interest margins arising out of the borrowing cost. If you see a dip, it would be because of product mix change.
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