A customer holds up a Indian two hundred rupee banknote. (Photographer: Dhiraj Singh/Bloomberg)

M&M Finance Expects To Grow Over 15% In The Next Financial Year

Mumbai-based consumer finance firm expects assets under management growth over the next two financial years to be significantly higher than the current 15 percent, Ramesh Iyer, vice chairman and managing director of Mahindra & Mahindra Financial Services Ltd. told BloombergQuint.

Higher OEM (original equipment manufacturer) growth, commercial vehicles disbursements, zero to nil inventory levels and higher proportion of pre-owned vehicles will fuel further growth, he added.

Watch the entire conversation here:

Here are the edited excerpts of the interaction:

What is happening in the rural area and how is it translating into business for you?

Rural is driven by positive sentiments andit is then followed up by real actions. On both the fronts, we can see a goodsituation in the rural space. The sentiments did turn positive after a goodmonsoon. The yields were good. The support price has also been more than average.Therefore, the overall sentiment is turning positive. Cash flows were good.

Even at the state level there were someinfra activities which drive growth. Therefore, both the farm and infra cashflows are holding up for rural to consume and even repay their debts which weare witnessing.

Add to that the various initiatives that the government wants to take up going forward. I think it is a great positive for rural concerns and therefore, we have come off from what we saw in 18 months or 2 years of struggle initially to the last 2-3 quarters. I think it’s a great turnaround situation for us and going forward we believe it will remain that way.

Is the runway for NBFCs open in calendar year 2018? 

Every financial enabler must have theability to expand the market. If all of us are going to say that the marketsare going to remain the same and all of us are going to take share out of that,then only there is competition among the financial services players.

I have always said that banks have a certain set of customers that they were normally looking after, and they never encroached upon our customers. Therefore, the good news for us could be if the banks are not going to be as active or aggressive in that space then that’s the real additional market for us. Therefore, we must have that additional capacity built in us in terms of product capability, channel reach and people competence. If we are ready with that then a player like us has phenomenal opportunity if somebody is going slow in that segment. It could add to our normal growth story which otherwise an NBFC (non-banking financial company) would have achieved.

Does all of this help mitigate the cost pressures due to higher yields?

Clearly productivity does kick in when you have additional volumes coming in. The back-end processes, capacity-wise, is not to be enhanced too much. While the front-end capacity will need to enhance some more capacities. You have to add and there is no doubt on that. But the productivity factor kicks in and the cost factor does get offset to an extent. But these are very variable businesses. The fixed cost is limited and the variable cost is per contract. But clearly the emerging new opportunity also brings on the element of margin improvement coming and a little of cost correction happening. Therefore, it does add up to the overall improvement in profitability if all these volumes are converted as a business for NBFC.

What’s the AUM growth you envisaged for your company for FY19 and FY20?

We are already growing at about 15 percent and this is at the back of the OEM growth at about 8-10 percent and tractor being a little more. We see the OEM growth in rural market higher than where it is today. We are working with every OEM for cars. We have worked with Hyundai, Renault, Nissan. For us, it would be always the story of little of everything than too much of any one thing. If you put it at 15 percent growth, will that mean more products will be coming in? Then the answer is yes. I don’t want to put a number to it, but additional products are seen.

Currently, the products are available, even today, on a discount of 8-12 percent. But for commercial vehicles we are seeing that the inventory levels are close to zero or rather a waiting list is there,which means that the discounts are slowly coming off. For the same volume,without discount, the disbursement value will be a little more, which will be the additional growth story that we will look at.

I mentioned that in the pre-owned tractor space, we are getting some numbers but we already see the overall pre-owned vehicle growing in the rural market as new segments of consumers come in. Currently,8-10 percent of our balance sheets comes from pre-owned vehicles. We have a strategy to take it to 15-16 percent of the balance sheet. So, that will be our other growth story.

Commercial vehicle construction equipment which is low base product for us currently. The average about 300 crores and in good months it is above 500 crores. Consistently, we do disbursement of 500 crore which is a good growth story for us from where we were in the past. We were half of this in the previous year. We were not a significant player. Even now at this level of disbursement we may not be a significant player, but we do see this product opening for rural market for buyers with less than five vehicles, light commercial vehicle buyers, JCB type of machine buyers. We are also in that segment.

We don’t want to take the view on next three years as how do things look like. We have built capacity and channel, we have people with adequate capability, resourcing is well done, we have already raised capital for growth. I think we are ready with all this to embark on the growth story. I see that each of these segments will be our contributor. We are currently growing at 15 percent. With all of this happening, it will look to be a different number as we go along.

In the third quarter, the company was able to recover from the provided accounts resulting in an increase profit. Is that likely to play out in the fourth quarter too or may be not in the same wing?

Non performing assets in a rural market is never a bad debt. It is never a write off. If you have had a high gross NPA, over a period of time, this money does come back. Our credit loss historically have remained around 2-2.2 percent. We think it will still remain around that, which means all the provisions that we are carrying will come off over a period of time.

Will it all come in one quarter? No. The customers have built overdues. Currently, they are servicing their loans by paying monthly installments. Some of them have built their capability to also pay more than one installment and therefore we see reverse law provision.

I think this trend will continue and you may see in a year’s time or in three to four quarters, where many of these past provisions will completely come off. It is extremely important from our point of view that we move to 90 days already and our gross NPA levels are maintained at a 120-day level. Normally,the third and fourth quarter in rural areas are good quarters. We would see improvements in our collections.

One would see improvements in overall reduction in NPAs but the provided accounts from where we start getting money, I think we will see them coming in every quarter. Because the consumers are earning and are servicing their current loans and are also building capabilities to repay their past dues.