Cost of funds has not bottomed out, still room for lowering

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November 23, 2021 1:15 AM

The loan portfolio declined during the first quarter and we started growing only after the first half of the second quarter. Secondly, we lowered our pricing when targeting large ticket sizes.

We have an adequate CRAR of 32-34% and we think we can leverage it more.

Manappuram Finance reported an 8.8% year-on-year decline in its consolidated net profit for the second quarter despite consolidated assets under management increasing 5.7% YoY to Rs 28,421.63 crore. VP Nandakumar, MD & CEO, talks to Rajesh Ravi on the company’s performance and future outlook. Excerpts:

Net profit has declined YoY despite AUM reporting an increase?

The loan portfolio declined during the first quarter and we started growing only after the first half of the second quarter. Secondly, we lowered our pricing when targeting large ticket sizes. Earlier, it was uniform pricing for all loans. To ensure sustained growth, we changed our strategy. Cost also increased as employees are back and travelling. We also increased our publicity expenses and incentives.

Do you mean that there will be margin compression going forward due to competition?

Competition is seen only in larger ticket sizes of Rs 5 lakh and above. We were losing in that segment due to competition. With the new pricing strategy, we are gaining ground, but our yield may come down by 2%. This will be compensated with higher branch efficiency. We have an adequate CRAR of 32-34% and we think we can leverage it more.

What is the outlook for the quarter and the fiscal?

We are giving guidance of 20% in AUM and 20% in Return on equity (ROE). The decline in profitability is a temporary phenomenon and our ROE may go slightly below 20% for a while before bouncing back. We aim not only for profitability but also growth and this ensures the sustainability of the company. Profitability will improve in one or two quarters.

NPA has increased during Q2.

NPA has moved up and we have provided for it in anticipation. There was no surprise. NPA will come down going forward.

How is new customer acquisition? There is a tight competition in the gold loan sector.

Demand is good and we are able to achieve growth every day due to the new strategy. The collection is also improving even in the non-gold sector. Acquisition of new customers is back to the pre-pandemic level.

What about the cost of funds? Do you feel that it has bottomed out?

No, it has not bottomed out. Still, there is room for lowering the cost of fund. Our legacy NCD cost is around 10%, while our average borrowing cost is below 8%. For incremental borrowing, our cost will come down further.

Average LTV of your gold loan portfolio?

The average LTV of our portfolio is 64% according to current gold price.

How are your non-gold businesses doing? Will the share of non-gold businesses increase in coming quarters?

In microfinance, collections are seen improving and it has reached 93% in Q2. It may touch 96% in Q3. The resilience of the microfinance industry is evident despite the pandemic. In one or two years, we may have to raise capital for growth. Some of the segments which we wish to grow are affordable home lending and commercial vehicle financing.

What about the expansion of branches?

We have given application for opening 100 new branches. We are strong in south, and there are ample opportunities in north, east and western parts of the country.

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