Tractor financing major non-banking finance company (NBFC) Mahindra & Mahindra Financial Services (M&M Finance) is targeting its gross stage-3 or gross non-performing asset ratio (GNPA) to moderate to 3.5%-3.7% by March 31 from 4.3% as of September end, Vice-Chairman and MD Ramesh Iyer tells Piyush Shukla in an interview. He shares business guidance for H2FY24 and views on M&M Finance’s subsidiaries’ long term strategic vision. Excerpts:
Your PAT declined 48% YoY during Q2. What led the fall?
If you compare H1FY24’s net profit with H1FY23, it is 11% lower. The simple reason is in H1FY23 we had a lot of provision reversal benefit, because NPAs came down from 7%-8% to about 5%. Now the GNPAs have settled down at 4% and therefore there is no provision reversal benefit. Therefore, net profit is not purely comparable YoY. One additional factor that pulled down bottomline in Q2 was that GNPAs rose slightly by about Rs 200 crore, resulting in nearly Rs 100 crore of additional provisions.
However, this is a temporary phase as tractor payment which normally should be done by month end has shifted to October 15. So, one month delay causes the impact in the respective quarter and same benefit will be seen in Q3.
Will GNPAs moderate to below 4% by March end?
Normally, second half of the fiscal for rural business is pretty robust. Our credit cost was at 2.3% this quarter and we expect it to reach 1.5%-1.7% by end of current financial year. If this were to happen, the GNPAs will also come down to 3.5%-3. 7% by March end from 4.3% currently.
Things are going well. Collection efficiency has never been lower than 95%-96% so we do not see any stress. Gross stage-2 ratio at 5.7% is at its lowest. It means that there are no forward flows into delinquencies.
NIM dropped to 6.5% in Q2. Will it recover to 6.8% in FY24?
We have now gotten into PrimeX customers, which give lower yield. But eventually they also come at lower cost, as well as lower credit cost. Secondly, once the higher yielding used vehicles and tractor segment become larger in size, yield will start picking up automatically. Third, our conscious call was to hold raising lending rates till now as we expected the borrowing cost to come down.
But unfortunately, now the situation seems to be that rates are not going to come down before March. Accordingly, we will surely be raising lending rates at least by 25 basis points (bps)-30 bps during H2. Therefore, the growth in higher yielding book and rise in lending rate will take us to 6.8% and eventually 7%. By that time borrowing cost should also come down.
What is your guidance on loan growth in H2FY24?
The way Dusshera festival has panned out for retail business is extremely exciting. Everybody’s volumes show they have done well, and that has excited us as well. We expect Diwali to go same way. So, if that is the trajectory of growth, we do not have any doubts on our asset growth staying above 20%, as last H2FY23 was also a robust growth period.
Are there any new co-lending deals in pipeline?
We have just launched a strategic co-lending partnership with State Bank of India. Under this agreement, M&M Finance will facilitate leads and manage different loan servicing, with a special focus towards MSMEs. We are also in active dialogue with Bank of Baroda. This partnership would entail priority sector loans and truck financing.
Are there any plans of consolidation of subsidiaries before your demit office in April next year?
Each of our subsidiaries are very different in nature and do not find place for natural merger into the parent. Our housing and asset management subsidiaries are very different. For our insurance business, with all regulatory changes in the space, the business has become very viable. In Q2FY23 we (Mahindra Insurance Brokers) made net profit of Rs 6 crore and in Q2FY24 we made Rs 29 crore. So it is a highly profitable business and does not consume any capital.
Therefore we are very clear that till such time businesses independently have a road map for growth and profitability, and subsidiary like Mahindra Rural Housing subsidiary goes for IPO, we do not think we will see mergers. Only if there is duplication of products, there can be a merger.