Lending rate hike likely; NPLs to dip in H2FY14: M&M Fin

M&M Financial Services is hopeful of the business not remaining under stress going forward. Good monsoon may have a positive impact on the asset quality going forward, says Ramesh Iyer, managing director of M&M Financial Services. He also told CNBC-TV18 that short-term borrowings have increased by 200 basis points (bps) which will have no significant impact on net interest margins (NIMs). 

Speaking on Reserve Bank’s liquidity tightening measures, Iyer says it may take a decision on hiking lending rates soon. He too foresees all banks increasing base rates by 25 bps.

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Below is the edited transcript of his interview to CNBC-TV18.

Q: The environment has definitely gotten worse. Even in Q1, the increase in gross NPLs is high. Are you sensing an incremental worsening of macroeconomic pressure and some pressure on the company too?

A: I would not put it that way, but yes, one has to look at it. There is a product mix change and we do have a little of commercial vehicle in our portfolio. It has not performed as was expected to. The southern market did not show the improvement that one was expecting either.

So while it is seasonal, definitely on every Q1 one does see a little increase in the NPL.

Q: How big is your CV portfolio? Can you quantify the amount of stress or the incremental stress that the portfolio is seeing?

A: They are all high ticket items. Provision numbers do go up when CV segment becomes NPL. As far as our overall portfolio is concerned, we just have about 3 percent of our total portfolio to be in heavy commercial vehicle. So, it is not an area of concern for us.

Q: What might they rise to if they do rise after all the slowdown? Can you give a NPA guidance for FY14?

A: We have seen always in the past with good monsoon, the rural sentiments are substantially positive and we don’t see deteriorating any further. The NPL gross always in the first half will move up and it will start correcting itself in the second half and that has been historical in our business model. We would see the benefit of monsoon coming into our portfolios.

Q: Given the increase in wholesale rates, can you give us an idea of how much your cost of borrowing has increased?

A: The long-term is clearly linked to the base rate and that has still not moved up for all the banks. We have not seen any impact on the long-term as yet. The short-term borrowings are moved up by 200 bps. We always have relied on long-term funds for our long-term lending.

So we don’t have a direct impact of the cost of funds yet in the balance sheet, but a clear look at a short-term money shows a rise by 200-300 bps.

Q: Many banks have started increasing base rates by around 20-25 bps. Once your long-term borrowing also goes up, on a consolidated basis, what would your cost of borrowing be increased by?

A: We are forecasting that almost all banks will increase their base rate by at least 25 bps if not more. About 50 percent of our borrowing comes from the banking system but eventually, everybody else will link it up to the bank base rate.

Therefore, we do expect a 25 bps increase to happen in next couple of months for sure. We are also planning to therefore simultaneously increase our lending rates with the customer.

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Q: You are saying there won’t be any impact on your net interest margins?

A: Yes, NIMs we don’t see an impact because ultimately as enabler, we will not be able to absorb the cost of borrowing forever. If you look at the last couple of years, we have absorbed about 0.3-0.4 percent already in our books.

We don’t want to keep doing that. All of us are now forecasting the interest rate to come down. That is not to happen for sure and if the interest rates are to go up, it would get passed down to consumers