Focus is on improving rural reach; see normal monsoon: M&M Fin

Increasing reach in the rural market has helped reduce gross non-performing loans (GNPLs) for the company, said Ramesh Iyer, MD, M&M Financial Services. The company reported a 12 percent rise in consolidated net profit to Rs 411.33 crore and its total income rose to Rs 1,904 crore from Rs 1,680 crore in the fourth quarter on a year-on-year basis.The company’s GNPLs reduced to 8 percent in the March quarter against 10.1 percent in the previous quarter. “The company has reduced NPLs in high provision markets,” Iyer said.The company has identified high-pressure states and created separate customer buckets to improve its GNPL situation, he said. The company witnessed cash flows from states such as Assam, Tamil Nadu and parts of Maharashtra. The expected volatility in GNPLs is already factored in, he said.If the monsoon is below average or normal, the company will be more aggressive and will try adding more branches. The focus will be on commercial vehicles as well as pre-owned vehicles, he added.Below is the verbatim transcript of Ramesh Iyer’s interview with Ekta Batra on CNBC-TV18.Q: What is the reason of improvement in Gross non-performing loans (GNPL) which came around 8 percent? A: We have been increasing our reach into the rural market with a clear understanding that once you are closer to customer and the market condition starts improving, definitely we will get the benefit of the cash flow. Therefore, closeness to the customer has resulted into one. Two, I think internally we also created a group for different collection buckets and kind of have very focused approach to how do we reach out to these customers for different buckets of collection. We clearly identified about five or six states where there were pressures that we had witnessed in the last two or three quarters and then we had branch mentors who created deeper into the pockets with the local branch and then have that focused approach to do these; these are very internal. However, when you look at from the external factor, some of these markets, let us look at Maharashtra for example, we had a good cash drop from both Nasik in terms of grapes or oranges from Vidarbha, so, there the cash flow was good. We did see the paddy harvest was good in Tamil Nadu, it has resulted into good cash flows in the belts of Tiruchi, Coimbatore, Tirunelveli and where we had exposure and that helped us.When you look at states like Assam, a lot of coal movement that we saw which resulted into cash flows in that market. So, if you go on focus state-by-state then we looked at what are the possibilities, what are the cash flows from this market, setup team out there and that improved our collections substantially in every bucket and also helped us in better recovery from the non-performing loans (NPL) accounts. Recall, in the past, we have been saying, reposition is not necessarily the answer for recovery and only repossess in case you think a customer is unable to service the loan or want to surrender the vehicle. In this quarter we have done that also. We looked at customers who built large over dues, not able to service loans, we have taken back their collateral and then we have transacted on them and substantially reduced the NPL from high provision buckets. All of this we have done but we have moved to 120 days already so that is an interesting important factor to note as well. Q: How much do you expect in terms of further improvement in GNPLs because this quarter has been a standout but in the past if you notice, M&M Finance has shown volatility in terms of its GNPLs, one quarter good and then a spike up for the next quarter. So, what are you projecting, maybe in at least the first half of FY17 predicated on what could be a good monsoon as well as maybe a  below average monsoon? A: 20 years we have run this business, we have realised one thing that the semi-urban, rural market, normally the first half is not high on economic activity, climatic conditions are extreme and we will see this volatility in this business model. It is a business model where we have factored this requirement. However, if the monsoon happens to be positive, which we all expect it would be, and if that really turns out good, I think the sentiments will be extremely buoyant. We do believe that outcome of that should result into good growth in terms of adequate vehicles and tractors and all assets moving into that market and then with various announcements that we saw in the Budget which are more focused towards rural in terms of roads, irrigation projects and this will absorb assets and labour in a substantial way. I think both of this coupled together, I think for M&M Financial it should be time going good once monsoon turns out positive. Q: Give us a number or at least a range for your GNPLs for Fy17, do you think that you are going to possibly hit 10 percent again based on volatility or do you think you are going to better the figure that you recorded this quarter, what would be the range? A: We have moved to 120 days and that would continue to remain little elevated as far as NPLs are concerned for the simple reason that 120 days, customer even misses one or two installments, he starts moving into the NPL range. It is extremely important to understand in a model like this, it is not the NPL which is really fearing, what is the ultimate credit loss because these are earn and pay customers and you will see this kind of volatility where sometimes they miss out on this installment.One data point is extremely important, about 65 percent of the accounts which are in NPL, have registered collection in this year which means the customers are not intentional defaulters, it is circumstantial delay and therefore they will not lead to credit loss while they may lead to some delay and we don’t reschedule even a single contract. Therefore we are willing to live this elevated level. Our confidence is they are not credit losses and therefore we are not overly worried about some volatility like this. That is where the reach 0f this model is important that how much do you know your customer, do you see your asset and customer daily. Q: It would be fair to assume that we are going to sustain at these GNPLs as oppose to better them?A: As an organisation that will be our attempt always but the regulatory needs are that we need to move to 90 days. So, once you start moving towards 90 days, you would see them get little more elevated because then more accounts do come into this. Q: We assume that we have a normal monsoon; will there be a structural change that M&M Finance will see? A: I am not too sure it is called structural change but I think we will be aggressive in going more deeper, opening more branches for sure. I think organisationally we are restructuring ourselves to have product focus because they require different skill sets, we do believe commercial vehicle will show an upswing and therefore there will be a specific team looking at commercial vehicle, construction equipment as one focus area. We always have been market leaders for the utility vehicle, tractors and in the car segment for Maruti cars, etc so they will receive one set of focus. We will focus on pre-owned vehicles which we believe will be a very buoyant segment for us. So I think we will focus on a product basis and the focus will be more state rather than all India oriented. So, you will have different sets visible in different states.