In a business like ours, which is highly rural focused, the cash flow and the NPA cycle is such that Q1 of every fiscal witnesses higher NPA and lower disbursements.
Mahindra & Mahindra Finance might consider an overseas issuance of bonds as and when the process of acquiring credit ratings from international rating agencies is completed, Ramesh Iyer, VC and MD, Mahindra & Mahindra Finance, told Shashank Nayar and Vinayak Aggarwal. Excerpts:
Even as the gross NPA ratio increased sequentially in Q1FY20 by 150 bps to 7.4%, provisions have increased by over 100% y-o-y, are you expecting slippages in the coming quarters?
In a business like ours, which is highly rural focused, the cash flow and the NPA cycle is such that Q1 of every fiscal witnesses higher NPA and lower disbursements. According to the new IND-AS accounting standards, provisions for the expected losses during the life of the assets have to be made as and when new loan accounts first default, based on the possible credit loss, hence the high provisions in Q1.
In the subsequent quarters, the provisions will go up only to the extent of fresh additions to NPA accounts. When the loans are paid back, we account for a write-back in provisions which in general is during the last two quarters of a fiscal.
NPA levels of 7.4% is still high compared to industry standards, do you see these levels dropping further or will remain at current levels? Which sectors contribute most to the rising asset stress levels?
In the first six months in the rural financing business, NPAs will rise as there is not much economic activity going on. We see increased cash flows predominantly from September when the harvest and festival season kick in. In rural lending, NPAs depend on geographical activities rather than asset class. Historically, in the H1 of a fiscal, rural cash flows are low, resulting in higher NPAs and provisions.
With the cost of raising funds for AAA rated NBFCs inching downward, do you plan on raising funds in the domestic market or raise funds overseas?
If you consider the hedged cost for raising money overseas, it will add up to somewhat similar to raising money in domestic markets. We try to borrow from every source like bank term loans, securitisation, ECB, NCDs, retail NCDs and fixed deposits. Term loans from banks account for nearly 28% of our total borrowing while deposits account for nearly 12%. We have not yet borrowed much from the international market, but are in the process of acquiring our ratings from international agencies.
Your loan book has increased by 22% y-o-y. Where do you see demand coming from going ahead?
We have witnessed increased demand in our second-hand vehicle financing and growth in our commercial vehicle loans due to a low-base effect. We have partnered with auto makers like Hyundai, Nissan and Renault to provide loans to buy their passenger vehicles. While there is no particular agreement with these automakers, when it comes to the rural markets we are their preferred financiers. Initially we had this arrangement only with Maruti. We feel second-hand vehicles will amount to nearly 15% of our loan book. I anticipate higher festive demand as dealerships might come ahead with schemes as vehicle stocks need to be liquidated before the new BS VI emission norms kick in.