Working cap constraints in semi-urban, rural mkts: M&M Fin

He said the below par monsoon in some areas had affect the yields the company earned on its loans.

Below is the transcript of Ramesh Iyer's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: This quarter saw no respite in asset quality; GNPLs have risen to a five year high. Can you give us some more details and colour on what is happening here?

A: The entire profile that we work with in terms of customer profile, we are on earn and pay segment customers which means contractors, traders, local contractors, farmers, this is a segment that we work with. Therefore, two things that we have witnessed with this segment of consumers is (1) there is overall shrinkage of cash flow because of lack of economic activity and (2) the cash flows are also stretched in terms of their working capital which means somebody is doing some work but the money that they collect also is taking long than the normal and therefore one will always see in a cycle like this that there is a build-up of non-performing asset (NPA) that happens. This year in addition to this we had below average monsoon in some of the states resulting in low yields and of course even the support prices have been little low. So the overall cash flow, the segment that we work with; we work largely with semi urban rural markets, have got a little stretch and therefore I would not call them as bad assets but it is just that delayed collection, which is building up this NPA and typically the rural market one always sees the third and the fourth quarter’s starts behaving normal, this time the Q3 has stretched, so one would expect some corrections to start happening over a period of time but until the overall economic activity does not pick up in the rural market like more projects and more deployment of assets does not happen, one will have to wait and see the correction coming its way.

Latha: Can we say that the bad loans have peaked. How do you see them in the current quarter and the next?

A: We measure ourselves from the credit loss perspective and not on NPA because these are all business with collateral assets. Typically if there is a default and if intentional default, of course one takes back the vehicle or the tractor and then sells them off to recover our dues. We know that these are circumstantial delays, so it doesn’t matter if the NPA was to go up a little. We do not believe that it will keep raising this way because the activities would commence for sure, but as far as the overall measurement is concerned, our pricing and our comfort levels would be the credit losses do not go beyond 2 percent and that’s been our historic number to be around 1-1.5-1.6 percent. We do not see it cross the 2 percent level even if the NPAs have reached where it has reached.   

Sonia: Tell us more about the tractor portfolio because there were clear concerns on account of lower monsoons, lower kharif etc, what were the gross non-performing loans (NPLs) from the tractor segment and what is the outlook going ahead, when do you expect to see a recovery?

A: For us it is not the product, it is by geography. If you look at it, in a geography every product would have the same pressure because almost all our assets are earn and pay asset irrespective of whether they are tractors, pickup, light commercial vehicles (LCV) even for that matter cars that we lend to, they are all commercially applied vehicles and therefore it is by geography and unfortunately we see every state going through this pressure of crop not being right or projects not being enough, mining not being there, coal excavation not happening, so almost every state has dual problem that we witness and therefore it is not byproduct and since you specifically raised an issue on tractors, it is important to note that 40 percent of the cash flow for tractor come from haulage application and if you see the contracting segment is doing well, tractor also has its own impact like we had in the commercial vehicle, the tipper segment or the excavation segment that we had a similar impact on the tractor as well but for us it is not a product, its more geography whether you take any state, there are dual problem in almost all states and that is leading to build up of over dues.

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Sonia: Which geography has been most susceptible for you and what is your outlook on recoveries within these geographies?

A: Typically last year or two we have seen lot of pressure coming to us from south and heading that is in Tamil Nadu, we have had not too much of a good time in the last couple of years. However, in this round with some good monsoon, we do see things changing from here, after the January harvest we do see some changes that will happen but south continues to be the highest pressured zone for us from our overall portfolio perspective.

Latha: Overall when do you expect a recovery in rural markets?

A: The overall economic activity is at the low end and we do expect that it will wait for the next monsoon to see how does it fair but one can expect by next September-October that the next festival season October ’15, one would start seeing many things to be much better than where it is today but as we speak today the cash flows are stretched, they have still not bee addressed and we believe that it will take at least another four-five months or maybe two quarters before we start seeing things to be on a much improved version.

Latha: From what you have said, more additions to NPLs in the first half of 2015?

A: I am not seeing that. Most of the assets are earn and pay assets and it is very important to note that even our NPA assets – our customers who are repaying except that they are not able to come out of NPA and one thing to our credit that we do not reschedule any of our contract. If the customer is having a stretch cash flow and he is only able to pay in an extended period, we allow him to pay in that extended period but we do not reschedule the contract in our books. Therefore, one would see the number as they are but we do not see that every customer is stretched; we do not see the customers are not able to pay except that they are not earning enough to pay more than one installment at a time to be able to come out on their current scenario.