Good monsoon, festive season likely to boost sentiment: M&M Fin

With widespread monsoon this year, sentiments are turning positive, says Ramesh Iyer, Vice-Chairman & MD of M&M Financial Services adding that the worst is behind for the company now. The company reported a subdued quarter with 2.25 percent fall in its net profit to Rs 87 crore and reduced its provisions to 30.5 percent to Rs 224.5 crore in Q1. Asset quality quarter-on-quarter deteriorated to 36.9 percent at Rs 4,414.7 crore.Change in product mix led to contraction in company’s margins and not lending rate, Iyer says. The upcoming festival season in October-November will see a positive uptick for the company. Non-performing assets (NPAs), which increased in Q1, is expected to improve going ahead. NPAs increased in states like Maharashtra, Madhya Pradesh and parts of Uttar Pradesh. While the company has reduced its provisioning, it has Rs 700 crore excess in its books. For FY17, M&M Financial Services is aiming for 8 percent gross NPAs without asset growth.Below is the verbatim transcript of Ramesh Iyer’s interview to Reema Tendulkar & Nigel D'Souza on CNBC-TV18.Nigel: Rural economy isn’t good, now that is very evident from your numbers itself. What is the outlook on the book going ahead?A: Rural economy does continue to be under pressure and given last two years of not so good monsoon has definitely added to the pain for rural market.The good news clearly is that this year the monsoons have been on time widespread and we do see the sentiments have already turned positive and we are able to see it from even the tractor numbers. Typically, it is important to understand that for us the first quarter is always a steep quarter from an non-performing perceptive (NPA) because the climatic conditions remain extreme, the economic activities do come down, the customers segment do wait for monsoons onset.So, we are not surprised by the change and historically if you look at first quarter over the fourth quarter of any year, you would see a similar increase. However, interestingly we have maintained our 120 days provisioning norms so that adds to further pressure.We do expect beyond the festival season that is beyond the monsoon from October-November, one would start seeing good positive trends given the monsoons situation. We do expect that this year the festival season post harvest with good yield expected should do well for rural India.Reema: Let me come to the provisions. Provisions have declined by Rs 193 crore on account of the change in provisioning norm. Could you give us some more details on the same?A: We have moved to 120 days as I said and importantly these are assets where we have already made 100 percent provision. Then when you have a collateral underlying, which has a realisable value we have taken the credit for the realisable value having made 100 percent provision of these assets. As you note from our book we always have been on an aggressive provisioning norms while we are required to provide 50 percent on 48 months we are already providing 100 percent at the end of 24 months. It is just that the reason that we are already on an aggressive provisioning and if you look at the book we already are carrying an excess Rs 700 crore provision in excess of the Reserve Bank of India (RBI) requirement.Given all of this, we felt it is prudent and necessary that if you have an underlying collateral, which are realisable, we have taken a discounted price of the same as a credit for provisioning.Nigel: The spread it has been the lowest, we have seen in the last three to four years at around 7.1 percent. What will be the effect of moving from 120 days recognition to around 90 days?A: When you look at the margins as you expressed have come down is not out of the pressure on the lending rates. However, it is clearly a product mix change. So when you do more of heavy commercial vehicles, small and medium-sized enterprises (SME) segments they are always on a low yield product. It is likely that the net interest margins would look to have come down. It is also important to note that these assets do not have a high cost of operations or a high non-performing loans (NPLs) as one would see in the rural assets, retail assets that we have seen.The return on assets as we move along would not show significant change even though the net interest margins may look to be a little lower. It is cost by product mix and not definitely by a lending rate for sure. As far as our need to move towards 90 days is concerned, we are required to move by 2018, but for sure like every other year we will review our situations quarter-by-quarter and then we will take a call. We do expect that we would always like to move to the next level of provisioning at the earliest possible.So far as the growth in gross NPL with moving of the NPA provisioning to the next bucket of 90 days is concerned, it would show an upward trend. I don’t have a ready number, but we do believe that it will have an upward trend because when you move from 120-90 days.I would just like to make one mention which is, it is not important to look at what the NPL numbers are. Eventually these are all collateral backed lending and it is extremely important to look at what is the credit loss that the company eventually incurs after taking back the asset and transacting on them. Our belief and our experience both is that we would not cross the threshold of 2 percent credit loss.Reema: What is the outlook on the asset under management (AUM) growth, margins as well as the gross NPAs for the full year?A: We have run this business now for last 21 years. It is in the last 18 months or so we have seen this kind of volatility in this business model and what is causing that. Most of our customers are earn and pay customers and their ability to earn and pay every month is clearly under pressure as we can see for various reasons.Most of the assets that we finance are deployed for commercial use whether it is tractor for all age application, whether it is vehicle for people carrying, all of these assets. We have seen a very sharp downturn in terms of the economic activity in rural India is concerned and also the monsoon not being very favourable.I guess after this monsoon you would see some stability clearly in the tractor business is concerned. Once the economic activity do pick up like road projects etc, which are now commencing to happen as we see there, in all of these pick up well we would clearly see more stability to this model. However, historically first and second quarter is always under pressure due to climatic reasons, lower economic activity etc. It is only from the second quarter that the business and the recovery normally picks up and peaks in the fourth quarter. That stability would come once economic activity returns and the monsoon outcome is more positive.Nigel: What about the business segment growth how do you see this going ahead?A: It is not so important to look at segment it is more important for us to look at by geography. The cashflows underlying for all products are almost similar because they earn and pay from these geography. So, we have seen increased non-performing assets (NPA) over a period of time in states like Maharashtra. We have seen it in Madhya Pradesh, we have seen it in parts of Uttar Pradesh and they are all due to economic reasons as I have been repeatedly saying due to poor monsoons in the last two years.I think again it is important to understand the gross NPA increase is on account of us moving to 120 days and these kinds of business volumes will normally have three or four instalments especially when they don't earn and pay on a monthly basis, two quarters are likely to move up the NPA.Second, is even the asset base is not growing significantly and therefore you get some denominator impact. We have not overly worried about it, definitely we are concerned and we have actions in place. We always believed that the credit losses would not go beyond 2 percent since it is all backed up by good collateral.Reema: NBFCs have seen major repayments in the 120 to 150 day bucket. Therefore with the current slippages run rate what kind of recoveries are expected towards the end of Q3 and in Q4and also where could this gross NPAs of closed to about Rs 4,000 crore levels go to?A: If you look at our historic data we have had similar situations, may not all India basis but on different geography. We have been able to recover; again it is important to understand that the assets are in place, the customers are available, it is just their ability. Even today from our NPL account we do see upward of 55-60 percent of the account, there is a movement of payment every quarter. It is just that they are not able to pay for the cumulative outstanding that has been built and that is causing the pressure. Once the market conditions eases, we are very confident that these amounts are recoverable and the customer will pay them off. They are not intentional defaulters, they are just circumstantially delayed.