Mahindra & Mahindra Financial Services is currently increasing its assets under management (AUM) by more than 15%. With a loan portfolio of Rs 73,817 crore as of September 30, the company sees no challenge in making Rs 10,000 crore in quarterly disbursement, Ramesh Iyer, Vice Chairman and Managing Director, told Shashank Didmishe. Edited excerpts:
The company saw historic disbursements in the second quarter. What is the reason behind this?
Whenever Dusshera and Diwali occur in the same month, we have high demand and high volume. But, without a doubt, whether the festivals take place in the same month or not, the demand must be good. This is exactly what we have seen, at least in the rural market. Each product has been in phenomenal demand. If only there were more vehicles available, including used ones, our payouts could have been even better.
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Was there a supply issue on the production side, as we saw with tractors two years ago?
No, the availability of tractors is not a problem. But, commercial vehicles and even used cars and vehicles have problems. Many people want to buy used vehicles, but availability is low. If I don’t buy a new vehicle immediately, I’m not giving up my old vehicle. Second, if finance companies are not repossessing vehicles because their collections are doing well, then even the availability of repossessed vehicles is low. Thus, the demand for used vehicles is high and availability is low. On the car and UV side, there is a waiting list and vehicles are not available.
Given this trajectory, what kind of credit growth do you see for the rest of the year? Which segments are ready to grow?
From a segment perspective, we are able to see traction across the country and across products. We have reintroduced SMEs as a portfolio. A few years ago, we had a pound of around Rs 5,000 to 7,000 crore, and due to various market conditions, we were going slowly. We have relaunched this product and you will see some growth coming from SMEs. Overall, after a long period, AUM registers a growth of more than 15%. We believe this trajectory would continue given very robust disbursements. The quarter ended with disbursement growth of 83% year-on-year, and this month we achieved Rs 5,000 crore. So, the quarterly payout of around Rs 10,000 crore should not be much of a challenge.
Banks are currently becoming aggressive on deposits and system liquidity has contracted. So, given that bank loans are one of the main sources, how will this impact your borrowing costs and, therefore, your margins?
We are carrying four months’ worth of funds in the form of a chest. So we don’t see that as a problem. We have many lines of credit that have also been taken out. So we don’t think liquidity will be a challenge. From a capital perspective, we are already at a very high capital adequacy of 23-24%. This is sufficient capital for growth needs for at least the next two years without any hurdles.
What will be your ideal funding mix beyond the four-month situation, and are you looking to change the funding mix?
Our first philosophy is a good ALM (Asset Liability Management) fit. The second philosophy is not to borrow too much from a single instrument. Third, our internal Asset Liability Committee has prescribed certain standards for each of the instruments. The fourth philosophy will be that our average cost of funds should be maintained through a product mix approach. So if we borrow more from a bank today, for us, our ability to raise money from a bank at a reasonable price compared to any other instrument is high. So, given the current rate situation and the liquidity situation, perhaps the bank loan would have increased from 35-37% to 40-42%.
Are you able to pass on the price increase to the customer without affecting demand?
Without affecting demand, that’s something I can’t predict, but anytime the cost of borrowing increases beyond 50 basis points (bps), that’s a time when we start to pass it on on customers. Thus, the pass-through of the rate will always occur with a lag. This time around, rates rose very aggressively in less than three to six months. We started transmitting in October when we raised rates by around 50 to 100 basis points on certain products. By March, we should fairly cover the entire increase. Because we hold three to four months of additional cash, there will always be a holding cost that we incur that cannot be passed on to clients.
Is there an update on credit cards?
We think it’s a bit premature for us to opt for the product. The core product has grown so much now, and there’s so much growth that we don’t want to divert our attention to anything new. We want to stabilize this big ship first.
What about the transformation into a bank?
I think we’re doing everything right, and that’s why we keep saying we’ll be watching this space very closely. When the opportunity opened up for companies like ours, we would look at that opportunity very closely and not pass it up.
With regard to asset quality, what type of guidance is provided?
The second half is much better than the first half historically, as harvest money starts coming in, festival expenses start coming in, and the customer gets better cash flow. Tourism begins to occur after October-November. We would see a more positive trajectory over the next two quarters, both in terms of collection and overall quality.
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There was an unfortunate incident involving recovery agents. What kind of long-term measures have you taken to avoid this kind of incident?
We have tightened our approach by appointing take-back agents. We take a closer look at them and make sure they follow all guidelines and guidelines.