In Sept, Mahindra Finance expects further fall in NPAs as rural demand holds up: Ramesh Iyer

“As far as NIMs are concerned, we will also push up our lending rates. We have already moved it up by 25 basis points or so and we will keep reviewing and if the borrowing cost does keep going up, there will be a correction to the lending rate that will happen and that is one level of correcting the NIM,” says Ramesh Iyer, MD & VC, Mahindra Finance

There was 75% uptick in disbursements for August. Where did the growth largely come from?
I have been repeatedly saying that rural areas are doing well. The sentiments are very positive and it is not any one particular segment which is doing well for us. We have seen it across products, across geographies and in case the vehicles were to be available much more than what it is today, then our disbursements would have been even better. The demand for all the vehicles, whether it is for utility vehicles, whether it is for personal segment vehicles, whether it is the LMV, commercial vehicles, tractors, pre-owned vehicles, we are seeing all through the demand is holding up, sentiments are positive.


Even though volumes have picked up, the near-term challenges for auto financiers are still very much there. Commodity prices are going down but still elevated from where they used to be and there is margin compressions. What is your outlook for the sector in coming quarters?
One has to look at it as follows. Even in the past we have seen that when the interest rates go up or the fuel price go up, subsequently the passenger fare or the freights do get corrected and the operators normalise their costs.

There will be some lag effect for sure but I have not seen operating costs suppressing demand. Therefore, I would continue to believe that demand will remain buoyant. People will negotiate, people will ask for some finer rates, etc, etc, but I don’t think it would have an impact on demand and judgment. That definitely means the freight rates will go up, the passenger fares will go up and operators will start adjusting for the cost increase.

Do you expect the interest rate hike to dampen sentiment? Where do you see the net interest margins in the short term to medium term?
As far as NIMs are concerned, we will also push up our lending rates. We have already moved it up by 25 basis points or so and we will keep reviewing and if the borrowing cost does keep going up, there will be a correction to the lending rate that will happen and that is one level of correcting the NIM.

Second is the product mix change. As I said, the demand for pre-owned vehicles is high and that comes at a different yield and therefore if you look at the product mix change, that will protect the NIMs further.

Third, for us, not every borrowing needs to be corrected. We have good ALM match and therefore only a percentage of our borrowings comes at a new rate and therefore our blended rate does not increase in line with the borrowing rate.

If the borrowing cost went up by 100-150 basis points, our overall cost of funds would have gone up by only about 40-50 basis points because we have the past borrowing continuing. Therefore, for an NBFC, one will look at all three phases and over a period of time, they would come together and the NIMs would be protected.

The company has also laid their vision to contain GNPAs below 7% and they have managed to remain stable. I believe you are expecting an improvement in stage two and three assets as well in the September quarter. What is really giving you this confidence and can you highlight what the NPA trends have been so far and where do you see the credit cost in Q2?
If you look at our collection efficiencies, month after month, it has been maintained at 95-96% level which is much higher than ever before in the first or the second quarter. Basically, in the case of rural, the first and second quarter collections are much lower due to climatic conditions, monsoons and all of that. Then it picks up in the third and the fourth quarter after the harvest. Tourism picks up, the wedding season comes in and all of those activities and we see overall collection improving or the vehicles getting better utilised.

What we have seen this year is that collection efficiencies have been pretty good. Month after month, the NPAs are coming down and more importantly, the stage II is also showing continuous decline which means there is no forward flow happening and which is where the comfort and confidence comes from to make a statement that in September, we do see further correction to our NPAs as well as to stage II.

All this is on the back of substantially improved economic activity, I am sure all of us are aware that tourism is at its best. People movement has fully picked up, the monsoon is average plus and therefore the cash flows going forward will also be positive. Putting all this together, I continue to believe that the collections will remain very attractive with very high level percentages and therefore the decline in NPAs would be reasonable.

As you grow, will you be becoming a bank and is that going to be the natural progression then?
This again has been a topic that we have touched many times in the past. At Mahindra, will we look at turning into a bank as an opportunity? I think the answer is yes. We are the right candidate from the size of the balance sheet, the kind of product that we do and the geography that we serve. We play the financial inclusion game extremely well out there and we have been doing it for the last 30 years.

Therefore everything fits in well. Mahindra as a group will look at this opportunity. We would definitely see it very closely. We will wait for what the regulatory directions are and if there is an opportunity which is available, we will not want to miss that and we will look at it very closely before we decide otherwise.