We don’t see a substantial reduction in rates, says Mahindra Finance VC

Published: February 22, 2019 12:12:59 AM

As an NBFC we need to be conscious of cost but more than cost we need to be conscious of absolute liquidity availability, because that’s the raw material for us. Therefore, you would see us borrowing from every source.

Ramesh Iyer, VC & MD, Mahindra FinanceRamesh Iyer, VC & MD, Mahindra Finance

By Shashank Nayar

A strong presence of original equipment manufacturers (OEMs) and a growing demand for second-hand CVs and tractors is set to be the main growth factors for Mahindra Finance in India’s rural market, Ramesh Iyer, VC and MD, Mahindra Finance, told Shashank Nayar. Excerpts:

How do you see the rural demand shaping up over Q3 and in the near future?
The rural market has gone through a change. What earlier used to be a market of Mahindra, Tata and Maruti products is now seeing a presence of almost all original equipment manufacturers (OEMs). In addition, we have also become an active pre-owned vehicles financier in that market. The book composition, from an asset perspective therefore, is different from what it used to be in the past.

Now, about 28-29% of our portfolio would be Mahindra automotive products, about 15-20% would be tractors, about 25% would be lending to OEMs, 25% would be commercial vehicles (CVs) and construction equipment and 8-10% would be used vehicle financing.

We have shifted our focus to pre-owned vehicle financing including pre-owned tractors which we feel will be a huge growth engine for us. We see growth coming from CV financing, construction equipment financing and the small and medium enterprise (SME) segments, which is 5-7% of our loan book in the rural market.

How would you explain and tackle the current liquidity situation?
There was definitely pressure in the system, where every player had to rediscuss and look at how much one could get and whether one would have to relook at business. The cost of borrowing has gone up, but we have never had a situation where we had to say no to a business opportunity due to a liquidity situation. But the system is a little more cautious than it was before.

As an NBFC we need to be conscious of cost but more than cost we need to be conscious of absolute liquidity availability, because that’s the raw material for us. Therefore, you would see us borrowing from every source.

Hence, our approach is not to over-borrow from one source. We borrow from banks, mutual funds and pension funds. In addition, we also have retail deposits. Our borrowing thus comes from all these sources; the percentage however keeps moving up or down with other sources of funding coming in.

What is the strategy behind tackling competition, especially given the increasing competition from small finance banks and micro finance institutions (MFIs) which are increasing their outreach in rural?
The rural market is an interesting market where maintaining relationships with the customers and dealers selling our products is very important. For this reason, our employees are recruited locally, so they understand the local markets, speak the local language, are connected to the land, its people, and understand the local challenges. All of this put together gives us our advantage. I am not sure how many players have this similar approach.

Secondly, we have been operating in rural markets for 25 years now. Most of our customers are repeat customers or have the ability to bring more customers to us. We self-generate about 15-20% of our business. Therefore, we think we are uniquely placed to remain ahead of the curve in rural, which helps us to maintain growth irrespective of the fact that there are others in the market.

Affordable Housing is one of the sectors that is an upcoming one. What are your plans for your housing finance subsidiary?
On the affordable housing front, we have partnered and worked with the state governments of Rajasthan and Madhya Pradesh on the Pradhan Mantri Awaas Yojana programme and we have some volumes from there. We also work with Mahindra Lifespaces who are in the affordable housing construction business for financing. We are looking at various reputed builders in semi-urban markets, who are into low cost affordable house construction and partnering with them for financing.

Our housing finance subsidiary was focused on pure rural financing for home improvement and expansion. But we have started to change our approach that at least 15-20% of our book comes from low cost and affordable housing segments. We aim to achieve this number in the next two years as our book grows.

Where do you see interest rates going ahead?
We don’t see a substantial reduction in rates from where they are. It will have a play of 25 to 50 basis points at best. At the same time, we don’t think it will show a big increase. So in the next couple of quarters one may have to live with these interest levels until after one is clear of the overall scenario post elections and after monsoons. Our view is that it will stay here. It will neither drop big time nor increase big time.

What is your outlook for Q4?
Our take on Q4 is that we still see that stocks at the dealer levels are high. Therefore, we see the dealers, jointly with the OEMs trying to aggressively drive various initiatives and programmes to bring more customers into the dealerships. We see that as an opportunity. We are conscious of the fact that we need to resource ourselves adequately to get the benefit of that growth.

Rural sentiments continue to remain positive, with various state government actions, as well as good support prices and the fact that crop yields have been good. Rural cash flows, both from farm as well as from infra, seem to be doing well, which is a big positive for rural. We are therefore signing off on a positive note on rural and we think that we are one of the beneficiaries of what is happening out there.

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