Asset quality pressure to continue, not worsen: M&M Fin

M&M Financial Service's second quarter saw worsening in asset quality with gross non-performing asset (NPA) rising to 9.4 percent as against 6.3 percent year-on-year. Ramesh Iyer, MD of the company says though the pressure will continue, but the asset situation will not worsen further. Iyer says that sales have been better during the festive season than in first two quarters of FY16. However, asset under managements (AUMs) saw a muted growth. Growth will pick-up with discounts and raise in sales volume, he adds.Below is the verbatim transcript of Ramesh Iyer’s interview with Reema Tendulkar & Nigel D'Souza on CNBC-TV18.Nigel: I wanted to ask you about your non-performing asset (NPA) situation? Is there any recovery on the ground, have you factored in the worst? What is the current situation on the ground?A: Normally, in the market that we working in the rural market, you do see this going up in the first two quarters and then as the festival seasons sets in and then the harvest, the two quarters do start showing some signs of improvement. However, you will have to understand in the background of not so much good monsoon across in many of the states, the pressure will continue but we don’t see them getting worst. Our expectation normally is that the third and fourth quarter historically has been good quarters.Reema: How has this festive season particularly been for the company talking about the two successive drought situations that we have had what could be the potential assets under management (AUM) growth because that has been moderating and secondly even on the NPA picture gross NPA 9.4 percent do you see it improving in Q3 and Q4?A: It is important to understand that we are moving our provisioning from 150 days to 120 days that is one year in advance over what the regulatory requirements are. Therefore the pressure of numbers are on account of us moving more accelerated. Second is these percentages are also an account of how your AUM growth has been. Given the AUM growth has been a little muted you will also see the percentages look very different. From an absolute gross NPA by number of customer that is not the pressure that we are currently in and most of our customers are earn and pay customers and therefore we know their pain points at this stage and it is good to partner them in difficult times. So far as the overall growth is concerned I think the two festivals of Dusshera and Diwali did see some kind of an excitement increased footfall at the dealerships and things like that. Therefore, the volumes of sales as we understand from dealership were much better than what one would have witnessed in the last two quarters or so. Therefore the numbers look more buoyant at this stage from at least a festival perspective.Nigel: How do you plan to deal with this kind of NPA recognition if you have to bring it down to around a 120 days then what would your gross NPAs look like? You just told us that in fact it at around 9.4 percent so at around 120 days what would it look like at and in next couple of years it as to move around 90 days. What would it look like in that particular scenario?A: We have taken a view that we will kind of move towards 120 and 90 in an accelerated manner and we are already at 125 days. We do believe that we will continue our journey in this direction. In a collateral based business it is extremely important to understand it is not about the gross NPA, it is about the credit loss that you eventually incur. So, irrespective of the fact whether it is 180, 150 or 120 days doesn’t matter. However, if the collateral protects the loan amount that you have given out your credit losses are not expected to be beyond 2 to 3 percent which has been our historic understanding. We don’t think we will breach that number as we go along because our loan to asset values are 75 percent kind of situations. Most of the customers are able to services their current loans while they are not able to come out of a past over dues. We don’t reschedule any of our contracts. So, gross number by itself doesn’t tell any big story the credit loss is something that we watch very closely and I kind of believe that our credit losses won’t be anything beyond the 3 percent level that we have factored in our pricing.Reema: What could be the AUM growth in FY16?A: That is a difficult question I don’t want to put a number out forward. You have seen in the past two quarters we have had a disbursement growth of about 6-7 percent and AUM growth of about 9 percent or so. Unless the market conditions improve at the end of the days we are only enablers we don’t create markets so, unless the overall volumes pick up for an enabler it is difficult to say how much will we grow. However, we are not losing market share for any of the product in any of the occasion. The last six months has shown a disbursement growth of 6-7 percent. Another important factor is for the same volume the disbursements are low because of the discounts on vehicles etc which continues. So, the growth story for all of us would return once the discounts discontinue as and the volumes pick up and we are waiting for this to happen.Nigel: We are getting some small banks, payment banks that are going to be coming in, are they going to eat any kind of your business? How do you plan on tackling that and the second question that I had is Tech Mahindra they have got a banking licence and do you see any kind of opportunity coming in from there? A: As far as payment bank is concerned Tech Mahindra has got the licence to go head. We will be kind of partnering in them in that endeavor given our reach and our large customer rural base. So far as payment bank is concerned it is format of moving money and they don’t really compete per se at the business front while lot of customer who get generated through payment bank could eventually be used to buy financial entity to lend money so that is going to be an opportunity space. So far as the small banks are concerned it is lot of microfinance companies which are moving into these formats. They are very regional player and therefore they will be some kind of new format that is emerging there to land in those markets. Our belief has always been the whole financial inclusion requirement is from the fact that you need more players to expand the market and not really service the same available market. So as an intermediary whether it is in the form of a payment bank or in the form of small bank or for that matter even many more banks reaching out to these markets etc our belief is that all of us together will expand the market and make credit available and therefore there is room for many more players and rather than looking at them as competition for the same volume out there.