Good evening, ladies and gentlemen. Please note this call is not for media representatives. All such individuals are requested to disconnect now, and the replay of this call will not be available to media. Good day and welcome to the Mahindra & Mahindra Financial Services Limited Q4 FY 2024 earnings conference call. This call will be recorded, and the recordings will be made public by the company pursuant to its regulatory obligations. Certain personal information, such as your name and organization, may be asked during the call. If you do not wish to be disclosed, please immediately disconnect this call. As a reminder, all participants' lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touch-tone phone.
Please note that this conference is being recorded. Before proceeding. Before proceeding, I will read out the Safe Harbor Statement. Please note that certain statements in this meeting. [audio distortion] Th ist meetings. With regard to our future growth prospects, our forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. I now hand the call over to Mr. Jigar Jani. Please go ahead.
Good evening, everyone. This is Jigar Jani from Batlivala & Karani Securities India Private Limited. Thank you very much for joining us for the Mahindra Finance call to discuss the Q4 FY 2024 earnings. To discuss the earnings, I'm pleased to welcome Mr. Raul Rebello, Managing Director and CEO. Mr. Vivek Karve, Chief Financial Officer. And Mr. Sandeep Mandrekar, Chief Business Officer. Thank you very much for the opportunity to host you, sir. I now invite Mr. Rebello for his opening remarks. With that, over to you, sir.
Thank you, Jigar, and good evening, everyone. Jigar, just another announcement again because we can see some folks in the list who are not from the investor and analyst community. I would request, as moderator and control of the console, if you could please keep this call limited to only the investor and analyst community. Anyway, good evening, everyone, and again, welcome to our Q4 call. I'm pleased to have, as mentioned, our CFO, Mr. Vivek Karve, and Chief Business Officer Sandeep Mandrekar alongside me. I'll open this commentary with the recently detected fraud at one Northeast branch, which is the Aizawl branch, which was the reason because of which we deferred our Q4 financial results that were scheduled on the April 23rd but then held 11 days later on the fourth of this month.
This fraud was detected during a management review in the second half of March 2024, and we then put our best internal teams while equipping them with external firms also who engaged with the local law enforcement agencies to dive deep into this matter. What unfolded thereafter in the course of the investigations was a case of extreme collusion, and I repeat, extreme collusion, because this involved 20+ of our employees, five-vehicle dealerships with their staff, and even some bank employees. Till date, 11 arrests have been made, and we do expect this number to grow.
The extent of this collusion, we believe, is extreme and unique because employees belonging to various job families in our banking and finance parlance, we refer to them as Maker-Checkers and some of them in the Checker-Plus roles, all of them connived along with reputed OEM dealerships and their staff to take the disbursement proceeds into dealership bank accounts and thereafter also connive with bank staffs to open fake bank accounts. It was in this manner that this racket kept going. As you'd be aware, vehicle loans disbursements are never made into borrower accounts but into the account of dealers. In this case, too, all the proceeds of disbursements went into dealer accounts. We have thereafter done an exhaustive analysis of the portfolio, and as management, it was our prerogative to ensure that the worst-case scenario is factored before we closed our books of accounts.
Accordingly, 2,887 accounts which required INR 136 crore of provisions have been made, and in our estimate, this is the worst-case scenario. We, of course, do expect recoveries as completion of actions by the law enforcement agencies have now started in our drawing closer, and we must also compliment the Mizoram Police who are continuing to do a great job on this. We do believe what happened in Aizawl branch is an isolated event. However, management was keen to double-check in light of this incident and run a series of stress tests across our 1,300 branches pan-India. Post-completion of these checks, we have concluded that there is no such evidence of a similar fraud in any of our other branches. The details of this stress test for the pan-India branches have been duly reviewed by the statutory auditors and the audit committee which was recently held.
In conclusion of this section of the fraud reporting, let me say we maintain that this is an isolated event, and our business model, which has its inherent strengths, which is with existing control designs on systems and processes, with stakeholder responsibilities, have the inherent ability to solve for mitigating these fraud risks. However, definitely, there are lessons from this incident, mainly on how do we foolproof the system for even such extreme frauds. In that direction, we are in the course of implementing a very heightened due diligence around customer onboarding, including centralized processes. These additional safeguards have been scheduled on priority and accelerated in terms of its timelines for delivery. I now move on to the Q4 and full-year financial updates, and may I request you to keep the analyst report which we have circulated earlier in the day.
If you refer to page 13, 14, 15, 24, and 25, I will, in the course of my commentary, be referring to these pages. So in the progress of Q4, we did cross a significant milestone. As a company, we have crossed the INR 100,000 crore mark of assets under management. We closed the quarter at INR 102,597 crore of book, which was a 24% YoY growth. For Q4 YoY, the disbursements grew at 11%, which is at INR 15,292 crore, and for the full year by 13% at INR 56,208 crore. If you refer to page 13, you will see that segment-wise, the growth that we have delivered is quite secular across categories, including passenger vehicles, EV business, the used vehicle business, and the three-wheeler business. All these businesses have seen a healthy growth in the course of the year. We have also gained market share across these categories.
The segments which we witnessed degrowth was in the tractor segment. Of course, the tractor segment this year saw an industry-wide contraction, but needless to say that our market share across the quarters has remained stable. You would see that the SME degrowth, which has happened on a YoY basis, is nothing to do with our core smaller-ticket SME growth. The overall degrowth is in line with the larger-ticket SME growth which was pertaining to hitherto medium enterprises. That segment, we have vacated now because the intense competition with banks as well as pricing was more or less in line with our thinking that this segment will not be in our sweet spot of pricing efficiency.
Moving to revenue growth, which you can check on page 24 and 25, what you will notice both in Q4 and the whole-year basis, we have had a strong revenue growth, 22% on a quarterly YoY basis and 23% on a full-year basis. We are actively working on the revenue levers, which are mainly on the product mix, driven by the used vehicle increase, fee income increase, and overall pricing efficiency. On cost of funds, we have seen an overall increase both for the quarter and the full year. The reasons largely for cost of funds increase, you are aware that the rate environment has remained elevated. Besides that, our leverage ratios also have been increasing. We have a two-pronged strategy now on cost of funds.
One is to, of course, optimize for overall cost of funds attractiveness in terms of instruments, but we are also diversifying our liability mix to get much more granular in terms of our liability mix. The cost of funds for the quarter YoY grew by 30% and on a full-year basis by 40%. On NIMs, since the last quarter saw cost of funds decline, we were able to take some of the NII growth from that relief into QoQ NII growth of 16% and a full-year growth of 10%. Moving to OpEx, you would have noticed that an overall OpEx decrease has happened in terms of the OpEx-to-average assets. On a standalone OpEx growth, it's been a very reasonable 2% increase for the quarter and 8% for the full year. This is largely driven by a very rational headcount increase, which has for the full year been under 2%.
At a PPOP level, the growth in quarter YoY growth has been quite decent at 24% and 11% on a full-year basis. Moving from PPOP to now the credit cost and asset quality lines, first, I'll cover the GS3 numbers, which have come in at a very healthy decrease from Q3, which was at 4%, fallen to now 3.4% in Q4. If you noticed, last year, we had closed at 4.5%, so this is a 110% reduction from last year's GS3 levels. Our net GS3 numbers also now stand at 1.3%. Another important asset quality metric is the GS2 number, which has slipped from 6% in Q3 of the fiscal to 5% at the end of Q4.
So the way to look at it is as GS2 plus GS3, which was last year close to 10.4%, has this year closed at 8.4%, which is a 200 basis points reduction in the GS2 and GS3 levels at a combined level. Moving now to credit cost, Q4 was at 1.2 and the full year at 1.7. And by the way, this includes the INR 136 crore of the Mizoram fraud.
You would recollect at the end of Q4, we had guided for a 1.5%-1.7% credit cost, and we closed at 1.7%. If the Mizoram fraud was not included, this would stand at 1.6%. You would acknowledge the credit cost is a function of provision plus write-off. The way we are looking at controllable variables and looking at a trend, the last five years' trend in provision number has been a little jumpy with sometimes rapid increase and then thereafter decrease.
Taking a five-year average period between 2019- 2023, the provision cost average has been at 30 basis points, and the write-off for the same period has been 2.6%. However, as we have very controllable measures taken in terms of the GS3 numbers as well as on-time collection, the write-off component in credit cost has slid from 2.6% to 1.6%, which is a good 100 basis points decrease. And we see this structurally shifting with our continued focus on due date collections, performing books mix, and the performing books, which is Stage 1 plus Stage 2, now being at 96.6%. Moving to PAT, the details of PAT are on page 6, 24, and 25.
While PAT has degrown YoY on a quarter basis at 10% and 11% on a full-year basis, one can explain this decrease with the swing that has happened in provision between last Q4 and this Q4 of INR 341 crore and swing for the whole year of INR 1,322 crore. One should take comfort with the PPOP growth, which is basically a metric which is worthwhile noticing, which has steadily increased. From P&L, I move to balance sheet comments. The capital adequacy of the company continues to be well capitalized. Our Tier 1 capital is at 16.4 and Tier 2 at 2.5. Our coverage ratios are prudent. We carry a 63.2% cover on Stage 3 assets.
If you combine the entire provision which we maintain across Stage 1, Stage 2, Stage 3, and look at it across and look at it as a cover on the Stage 3, we are at a very high level of 97.5%. Our liquidity buffer is also at a comfortable level at 8.3% of our outstanding borrowing. I now move to Mission 25. Since at the end of 2022, we gave a Mission 25 kind of guidance. You can refer that in page 16. The first one is on asset quality. At 3.4%, we are on a good note here. The levers we continue to be sharply focused on are on ensuring that GS3 at a sustainable basis is maintained. It is, one, sourcing business on customer segments which are within the risk guardrails. Number two, strengthening our underwriting capabilities. And number three, ensuring that we have best-in-class collection practices.
The second metric on Mission 25 was on margins. We closed the year at 6.8% against the initial 7.5% goal. We are recasting this goal at. And we believe if we close at 7% for FY 2025 would be a decent spike from the current levels. The metrics that we are working on, the levers we are working on, are on product mix, fee, and cost of funds. The third metric on book growth, you would see that the last three years' CAGR on book growth has been in the 17% range. If the tailwinds in FY 2025 are supportive, we would be able to continue in the same trajectory. And if we do so, then our book goal, which we slated in FY 2022 to reach close to INR 120,000 crore, should be a possibility.
Our fourth metric on OpEx, this is a metric which you would notice has sequentially come down, and we are at 2.8% now. We will continue to keep the spends on for tech, for digital properties, as well as for beefing up our manpower, which are in the business which are in the functions of underwriting, in the functions of fraud control, and the functions of SME. The benefits that we have started seeing in terms of the investments made in tech and digital will also start bearing fruit meaningfully going forward. So we are not immediately giving guidance that our OpEx ratio from 2.8 will climb down very sharply because we will invest in distribution. We will invest in branches. But we will also see benefits, as I mentioned, in the investments we have made in tech and efficiencies for the frontline staff.
Fifth, on new businesses, here, we did guide for a 15% mix from the new businesses. That is quite behind. The SME business and leasing business, though they are growing well, the pace of vehicle business is far outpacing them. And hence, it will take some time for us to get to that 15%. But we are, in the medium term, still committed to get the new businesses to contribute to 15% of the overall mix. Lastly, on the ROA, we had guided for a 2.5 at the end of FY 2025. We closed the year at 1.7. We do think that striving for a 2.2 post-tax ROA can be a reasonable goal. For taking the 1.7 up to 2.2 would mean a 50-bips increase. But that's at a post-tax level, which means that we'll have to at least factor for a 65-bips increase at a pre-tax level.
Roughly, we are anticipating a 25 basis points lift in NII, a 10 basis points lift in OpEx, and a 25 basis points lift again in credit cost. These are, of course. Don't take this as guidance. Take this as more internal goals that we have for ourselves to move from the 1.7%-2.2% ROA. We have added a new page, if you look at page 18, on subsidiaries.
The subsidiaries are three ones which we have showcased here. MIBL has had a good year crossing the INR 100 crore PAT. MIBL also is playing a much more horizontal role, not just with covering vehicles. They're also into now multiple lines of businesses, including commercial lines and also including opening up stores and increasing the life and health insurance. Manulife in my mind that Manulife has crossed the INR 20,000 crore AUM and climbed the rank in terms of AMCs in the country.
Our HFC, which was focused last year on asset quality correction, has covered a decent level in Q4. Now, they're close to 9% in the GS3 reduction. A long way to go here again. So now, before I go into Q&A, I just want to make three quick points. The first is that we want to give you confidence that this is a business model which has its inherent strengths. The second is that we do acknowledge that the model requires augmentation. The model requires new capabilities for it to flourish to full potential. And three, that we are on this path of strengthening the business model. We are all committed here as senior management and as every one of the 40,000 employees to make this turnaround and transform the business in an impactful and sustainable manner.
I want to give some data points of the journey we have covered in the last year. This business has historically, by design, been a model which was fully decentralized. We will continue to retain the decentralized model to give us the ability to be agile. But we have also stitched in a central nervous system for extra oversight. In the last six months, 50% of our branches have gone from a fully decentralized check to now also having a second-level centralized check on docs and pre-disbursement formalities. The CPC has gone live for 50% of our branches. The next 50% have been prioritized and will go live in the next few months. The second data point is on capabilities on data and tech. We have got new capabilities, and we have actually onboarded quite a few new members.
Close to 18 new members have been onboarded in the last few months: data scientists, business analysts, data engineers, and AI experts who are now beginning to spin out very powerful and sharpened risk insights as well as upgraded our underwriting models. We have, in the last year, recruited 144 underwriting staff. We are all set to add another 161 underwriting staff, which are budgeted for this year. These staff will be completely having no conflict of interest in businesses and make sure that our underwriting practices are further streamlined. In the last year, we have also onboarded a fraud control unit head. He has augmented the team recently. 61 employees have joined in the fraud control unit. We have onboarded 23 agencies, FCU agencies, who have been onboarded to further strengthen our underwriting and our onboarding of customers.
The risk and compliance teams have also been strengthened. We have recently added another 40 employees in the risk and compliance teams. We are soon going to go live with our new org structure to give you a little bit of color on our new org structure. We are bringing back a branch-head-led org structure with heavy emphasis on the branch head on delivery of ops and risk controls and accountability for every branch being a microcosm of having the highest amount of safeguards in place. On the talent front, we have seen leaders in the BFSI segment join us recently in functions of underwriting, collections, data analytics. We will continue to augment the organization with these talents that are required.
In summary, before I hand it over to Q&A, I want to mention that with all the investments that we have put in place and will continue to put in place, I've cited some of our commitments on this path for strengthened operations. We do see our franchise increasing its meaningfulness to the sector and adding value as well as creating value as you go ahead. I pause here now and invite you for question and answers. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use the handset while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Mahrukh Adajania from Nuvama Wealth Management. Please go ahead.
Yeah. Hello. Hi. I have three questions. My first question is just on the core credit cost, not the fraud-related provision. But the core credit cost seems to be slightly higher than the usual seasonality, right? So last quarter also, we had the COVID-related rollover. But the provisions in the fourth quarter were much lower. So what drove that? Is it possibly because of the activist movement that's going on in some states? So that's the first question, right? Because the writebacks to Stage 3 , even excluding the fraud provision, are on the lower side compared to last year's fourth quarter. So that's the first question. And then the second question is on other income. There's been a very good growth in other income. So what drove it, and how do you see it sustaining in the next few quarters, right? Because other income would include fees as well.
My third question relates to the fraud incident that you said that it was caught in a management there was wide collusion across companies and that it was detected in a management review. So how frequently are the management reviews done, say, once a quarter or when? Or was it detected because the management review is very intense in March given year-end results? So these are my three questions. Thank you.
Yeah. Thanks, Mahrukh. Thank you for the three questions. I'll take them one by one. On your first observation of overall Q4, not the whole year, as we have mentioned, that the overall write-off and settlements, which we call as end losses, has been INR 500 crore lesser than last year on a whole-year basis. Your observations are right. On a Q4 versus Q4, it is slightly muted compared to last year. And the reason there is, if you break it up and we usually don't give this level of granularity, but just for the overall clarification, the bad debt write-off continues at the same pace. As in, because the Stage 3 numbers are reducing, we'll constantly see bad debts coming off lower.
In Q4 this year versus last year of Q4, we did resort to slightly higher amount of settlements because when we repossess vehicles and we find a good time to sell them instead of keeping them in our yards, we would prefer to do that at a good price discovery. But of course, there are overall losses that emanate from doing that, right? So in Q4, usually, we like to we like to clean up our yards and make sure that the settlement the whole disposal of vehicles increase. And that's why, compared to last year, you would see a slight bump in settlement. But overall, we are quite confident that our end losses will structurally start seeing a decline from quarter to quarter going forward too.
Coming to your second question on other income, you have heard from us over the last two, three quarters that we are putting in place a lot of investments in skinning the opportunity to get other income. We have traditionally been a company which was heavy on only interest income. There were capabilities for us to skin the organization on various state-based incomes. Some of them are starting to bear fruit. Yes, Q4 was also some of the income that we have seen, whether it's in the subvention mode or in the mode of some of the insurance incomes, are slightly higher. But this is also going to be I would say you would structurally see the management focus on skinning the organization for other income.
Coming to your third question on management reviews, yes, we maintain that this was not any external agency which highlighted the fraud that occurred. We have institutionalized what we call as our other support functions and our control functions. We have a portfolio quality group which is housed under the risk and underwriting functions, which every month, and the CFO, the CRO, me we all of us huddle toward we huddle every month on these alert mechanisms. Aizawl was a little bit of an outlier as a branch because this was artificially kept low. From a risk standpoint, nothing came up. There was huge collusion in terms of operating metrics, which all came down. But nevertheless, we have now, besides the alerts which come to us beyond the delinquency or beyond the operating metrics, we also look at market insights.
Just to give you a heads up, the growth in Aizawl branch versus any other branch in the country was not an outlier in FY 2022 or FY 2023. It was only in FY 2024 that the growth in this branch was slightly an outlier. And it's a triangulation of risk-based alerts, triangulation of operation-based alerts, and market insights which led us to find out that this was an outlier. And that's how we got the outlierish nature of this product.
Got it. So it's not necessarily a strict year-end review, right? It is like a usual review that happens.
Yeah. Reviews happen throughout the year.
Okay. Thank you. Thanks a lot.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants in the conference, please limit your questions to two per participant. The next question is from the line of Avinash Singh from Emkay Global. Please go ahead.
Yeah. Hi. Thanks for the opportunity. Two questions. First one, on your FY 2025 targets. Now, looking back, as of course you have explained, I mean, only pieces. But looking back now, if you see that 2.5% ROA as an outcome, where did sort of what I mean, the inputs where you missed that, I mean, this target now has to be sort of revised to a 2.21%? And I'm asking particularly because even when in the past, you were reiterating this sort of a target, I mean, the analysts and investors were sort of pointing out that, I mean, things are not adding up. I mean, the way the NIM was playing out or the OpEx, eventually, it was not looking.
So at this, just if you can help us, where sort of when you sort of had chosen the 2.5% ROA target and where you are today, what has sort of not come in as for expectations? What changed over these last two, three years? That's one. Second, again, you have provided a lot of details and clarification around this fraud. So one thing, of course, with the hindsight sort of, I would say, information or intelligence in place, considering that it's the Northeast, I mean, a place like Aizawl at the extent of INR 136 crores, I mean, a couple of things. I mean, if this was the sort of extent, particularly 136 crore amount as such, it would be a reasonably big amount for even your larger branches. And that's particularly the small place. This big amount, that's, I mean, entirety of fraud.
Even, I mean, over this course of this sort of fraud loan being booked, you're probably the market share in the vehicle loan in that particular city would have been going up. And why did it take so long, I mean, for you to sort of detect almost like a 3,000-odd accounts to INR 135-odd crore kind of amount, that too in a small place? I mean, where all, I mean, sort of things went wrong that it took so long to detect? Because, I mean, sort of I am aware of certain sort of this kind of a nature of some fraud happen even with some public sector banks in certain branches
But generally, even for the banks and that to be the bigger branch-level balance sheet, typically, it gets detected at the earliest INR 18 crore, INR 15 crore, INR 20 crore. But here, INR 135 crore for MMFS, and that too in Aizawl. So what sort of a lapses did you sort of find that, okay, this went to such a scale? Thanks for your follow-up question.
Yeah. Thanks, Avinash. So I'll take both your questions. First is, you're right. At the end of financial year 2022, we did set out a goal of 2.5% ROA. And we've been giving everyone feedback across the journey on how are we trending against this. If you ask us in reflection, why is this 2.5 being probably reset at 2.2? I think the major variable over there, which is something probably I don't think in financial year 2022, anyone would have looked at the cost of funds moving in the direction in which it moved, right? I think that is one singular variable. Even if you looked at it six months back, I think everyone was giving guidance that end of Q3 of last fiscal, you would see some softening in the rates. And I don't need to labor on that point.
We all know that there is really no relief on that number. And that number is a meaningful number in terms of the NII deviation that we have as of now. So if you draw the ROA tree and you look at various attributes of the ROA tree which was supposed to deliver the 2.5%, the biggest deviation there is the NII. Can we not solve for it and look at other alternatives? I think you've seen part of that in the last quarter, Q4 or Q3, whether we are skinning the other income, whether we are looking at still growing the NII line with passing on pricing, all of that is happening. And our NII has been sequentially moving up. But clearly, the gap in terms of the original cost of funds factored in for this 2.5% ROA and where we are today, that's probably the biggest miss.
The other kind of variables, levers that we have are in credit cost and in OpEx. I would think in credit cost, you can't fault us for the way in which we have come down. I think we have been quite reasonable in terms of the guidance we've given and the way we have progressed on that. Even on OpEx, compared to the rest of the pack, I think our OpEx today is in category, sequentially come down better than most of the other lenders. I'm not kind of indicating this 2.2 is exact guidance. I think this is 2.2 is something which is reasonable for us to aspire. It is, in my mind, our base case. If things progress well, we might be able to give some upsides from there.
But reasonable to say the cost of fund in that whole pack of 2.5 was the most bumpy variable. Now, coming to your observations on fraud, I do not differ with your view that INR 136 crore is a big amount for a one branch, a branch which is close to INR 400 crore in AUM. And I just want to lay down a few clarification points. This INR 136 crore is worst-case scenario. We have looked at all the accounts here and factored even for the worst-case scenario. So that's the number, INR 136 crore at the worst-case scenario. Why wouldn't this fraud be detected earlier? If you heard my earlier commentary, Avinash, what we have mentioned is there are systems and controls, and we are a company in the last 30 years never seen something like this before.
You usually put systems and controls with stakeholders, Maker-Checker architecture to protect for these kind of anomalies. I don't think what happened is such large-scale collusion wherein you have stakeholders within your organization from three families, Maker-Checker, Checker-Plus. And I repeated, there are external entities here, dealerships where money has gone to dealership accounts, and they have also connived. And here, we're talking about connivance with even bank employees. Bank employees have been fired over the last week. So this is not a normal scenario. This is, and mind you, this INR 136 crore in our scheme of things was. These are all not even Stage 3. These are all Stage 1 accounts. So this was a well-thought-of. I'm not saying that we should have not even been able to bust this earlier.
We are, as I said, increasingly making more and more investments to make sure that the liability of even such large-scale collusions are brought under or detected earlier. But I'm trying to labor on the point that this was a quite outlierish fraud with many, many stakeholders coming together to hoodwink the system.
Thank you. The next question is from the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.
Yeah. Thank you. And good evening, everyone. Raul sir, first things first, I mean, because we were kind of just discussing the fraud, I just wanted a clarification. This INR 136 crore, has it been classified under GS3 now, given that you just said that they were Stage 1 loans? Have they been classified under GS3 and 100% provided for?
Yes, Abhijit. Your understanding is exactly right. They have been moved to GS3, and the full provision has been made.
So again, I mean, just a clarification. I mean, while you explained that there was, like you said, extreme collusion that happened between multiple stakeholders, do you think in hindsight, this collusion could even have been avoided had there been a centralized kind of a check in terms of someone verifying the KYC documents of customers, vehicles, right? I mean, registration documents of vehicles. Someone in a more centralized setup, could this have been avoided?
See, in hindsight, Abhijit, many things can be thought of. I just want to leave some data points here for everyone. Northeast, especially Mizoram, the penetration of Aadhaar see, we do. We do centralized checks on PAN, N SDL. But the penetration of Aadhaar, the penetration this state is, by the way, exempt of IT. So a lot of it requires decentralized approvals. And some of it are geography-related constraints, which, as I did mention in my opening commentary, we are solving for by making sure we have a centralized outfit now even to check some of these localized practices. So two comments there. One is there are inherent challenges with this location, which we are now putting in place a special team over there to overcome these geography-level kind of hindrances. But you're right.
Even speed tracking, I did mention 50% of our branches today mandatory are now on the local plus centralized check. In a couple of months, all branches will go through the centralized check to even catch these outliers.
Got it. This is useful. My last question, again, referring to slide 15 of your presentation where you have given your ROA tree. Also just kind of just trying to understand, in terms of your internal targets, you spoke about 25 basis points declining credit costs to get to that 2.2% ROA target in the base case. Just kind of trying to understand last two years, right? I mean, with FY 2023, there was a provision release of almost 1.4%. Then, in FY 2024, I think the provisions were just 10 basis points.
Given where we are now today in terms of Stage 2 and Stage 3, when you, I mean, think of this 25 basis points decline in credit costs, are we still factoring in releasing ECL either from that ECL model refresh that you did in the third quarter or decline in the provision cover on Stage 3 and Stage 1 loans? And maybe a related question on the ROA tree itself, how are we kind of thinking about cost of borrowings from here? How are we expecting it to trend so that we can kind of derive some comfort on the margin trajectory? So I think the 15 basis points or the 25 basis points NIM plus the income improvement that you spoke of.
Yeah. So on the credit cost, what you would have seen, Abhijit, is we have a sharp 100 basis points reduction in the write-offs, right? So 2.6 has become 1.6. We don't expect a lot of I mean, any change in provision now. I think going forward, the provision numbers are going to stay same. What we do believe will give us some relief is further improvement in our write-offs, which will further come down to that 25 basis points. And you are right. The ECL model, which Vivek had mentioned last time, which not the change in the ECL model, but the fact that the coverage, the 63% coverage that we are sitting on because it's a 46-month moving average, which had periods of the COVID, as we now move forward, it's a moving block. As we move forward, we do see that 63% coverage ease off.
That will also provide some amount of relief to the 25 bps that I talked about in credit cost. Coming to your second question on OpEx—sorry, on cost of funds—I think I mentioned that there are two objectives here. One is diversifying the liability mix at the same time getting some cost of fund benefit. But I'll invite Vivek here to give you commentary on that.
So hi, Abhijit.
Hi, sir.
Yeah. As we speak today, there are no immediate signs of easing off that are evident. So you would know that in the fourth quarter, our average cost of incremental borrowing was in and around 8%. So at least in the short run of the next couple of quarters, we believe it will range in that bucket only. However, at some stage, the rates may start falling when both the Fed and RBI in India start getting some comfort on the inflation parameter. If that were to happen in H2, maybe we can expect some relief. But from where we are today, where the cost of borrowing was closer to eight, I'm afraid to say that there are no immediate signs of easing off. And we would not like to make a promise what we can't see, then we can't promise.
But as Raul said, we are trying to exploit all avenues, including PSL borrowing, including doing short-term borrowings well within the ALM framework and the Prudential Limits framework, which would help us to keep a tight leash on the overall cost of funds.
Yeah. And Abhijit, just to conclude on your how the 25 basis points again, this is internal goals, the 25 basis points NII increase while cost of funds might be flattish as Vivek expected. And we'll optimize for what we can do on cost of funds. But the other levers on the NII plus fee, we are making a shift towards used vehicles. So that shift in used vehicles, you would have seen in our Q4 also, the share of incremental used vehicle is going up. And that's a concerted effort we are making. The fee-based income, which is also starting to play out, will give us some delta on the NII, right?
Got it, sir. I think this is useful. I will come back in the question too. Wish you and your team the very best.
Thanks, Abhijit.
Thanks.
Thank you. The next question is from the line of Shubhranshu Mishra from PhillipCapital. Please go ahead.
Hi, Raul. Hi, Vivek. So two questions. The first one is, what have changed in the collections? Have we increased the incentives? Are the collections bucket-wise as well as business-wise? So how do we look at collections? And what would this be as a proportion of total manpower or total OpEx? What is the cost of collections? Either of the numbers can be spelled out. The second is, is there a guidance as to whether we can reduce our M&M dependence to, say, 10% or 15% of our AUM? It's ballpark 45%. So we are more or less looked at like a captive financier. Are we willing to take that leap of faith and let go of this tag of captive financier and give a guidance towards lowering this number with some kind of timeframe?
Yeah. Hi, Shubhranshu. Thanks for this question. On the first one, on collections, see, the kind of levers we have on credit costs, as I mentioned, is largely on portfolio selection, as in the customer segment selection, underwriting, and collections. You'd recall post-COVID, we had put in place a very different way in which we were approaching collections, which included a lot of analytics to make sure that we are engaging with customers with the right kind of toolkits, as well as we have the movement of contracts between different teams. We have soft bucket, hard bucket, etc. We were reducing the noise of the movement of ownership of those contracts. So in a nutshell, we have improved on our effectiveness of collections. And when I say effectiveness, we have not added a single collection manpower over the last two years.
In fact, moving collection headcount from last year, it's been a reduction of 5% because of the toolkits that we are employing for collections. And a lot of our customers today don't need us to go and stand in front of the door because in the last two years, we have also swapped in what we call as the prime segment customers. And that's resulting in lower requirement of frontline staff in collections. And the whole effectiveness of using, as I said, data and using of communication engagement toolkits with customers is improving to give us that delta. On your second question, frankly, we thought we have shed the tag of being a captive financier, right? As in, M&M for us is not a captive. It's more of a synergistic player. If you look at slide number 14 from FY 2022, 46%, we have come down to 44% now.
I don't see the reason why we should come down further. M&M is having a great time in terms of the kind of vehicles that they are. M&M is buying market share in the passenger vehicle segment, in the commercial vehicle segment. Every product they're launching is a superhit, including the one which is now launched. And we have such synergistic they don't need us, right? I mean, we compete in a manner which is to earn our right in their showrooms to finance their customers. They don't give us any privileged seat on the desk, on the table. We feel that it's a very synergistic business to get more action on the M&M counter. And as long as it's synergistic and not captive in nature, we don't see the need to give off any gains that we have over there.
Thanks.
Thank you. The next question is from the line of Abhishek Murarka from HSBC Mutual Fund. Please go ahead.
Yeah. Hi, Raul. This is Abhishek from HSBC Securities. So my question goes back to NII. And first question is, on the cost of funds, you would be expecting further increases in your overall cost of funds, right? So to get a 25 bps net expansion in NII, the effect of product mix plus yield increase plus fee would have to be much higher. It would probably have to be around 35 bps or so. So do you see that kind of an expansion happening? And just a second part to that is, what would be the difference in the disbursement yields today versus your book yields if you could tell us that?
Yeah. Hi, Abhishek. I just want to clarify. I don't think Vivek said that he's anticipating an increased cost of funds. He's saying that keeping it stable is more like the guidance. And with use of some of the short-term instruments, commercial papers, etc., I think the treasury team is really working hard to make sure that our incremental cost of funds is not going to come in at, as you mentioned, 10, 15 basis points higher. That's clearly not the explanation Vivek gave. Vivek, you want to comment on that?
Yeah. So Abhishek, what I said is, we are not expecting in the short run the costs to go down. That is what I mentioned.
Right. No, sure. Sure. Sorry.
So what I meant is that if you look at your book two years back or something, the cost was roughly 6.5. Today, it's eight. So the book matures, right? And as it matures and new book gets formed, automatically, the book cost will keep going up. So you don't see that happening. At a portfolio level, you think 4Q cost of funds is where it should sustain.
Yeah. We believe so. We believe so. Yeah.
Plus, Abhishek, if you know our book is largely we borrow decently floating, but we lend all fixed, right? So in a declining interest environment, we will stand to gain therefrom spreads too. Yeah. About 45% of the book is floating, Abhishek. So as in.
Sure. And.
Decline commences, we'll start getting that benefit, obviously, with a lag.
Sure. And could you give some sense of the disbursement yield versus book yield? What would be the gap?
No. We do not offer so much explanation, Abhishek. Feel free to excuse us on that.
Sure. Okay. And just a second question on the OpEx part. Now, can you just share what would be your employee addition, branch addition targets for the year? And all this staffing for fraud controls, training, all of this is relatively high-cost manpower, or? So does that also impact your OpEx going forward?
See, at the overall OpEx level, as I said, we are looking at a maximum 10-15 basis points gain from where we are right now. For a large balance sheet, that clearly can be absorbed. We are not going to shy away from making investments, as I mentioned, on the critical themes, whether it is the underwriting team or the fraud control team, etc. These are the heads and, you could say, the first level and the second level have already been recruited.
Now, it's more the third-level recruitments which are taking place and will come up to shore up that specific unit. So yeah, on the OpEx front, we are going to add more branches. We have initially given you guidance that we are looking at close to 150-180 branches in this year. We are looking at first making sure that the whole branch head structure that we talked about falls in place. And you can see more of these branches being opened in the second half of the fiscal. Having said that, distribution is not in its old sense, only our branches. We are tying up with like-minded ecosystem players. We are doing partnerships with various banks, with various other entities. Our co-lending partnership with the SBI is now starting to show some volumes.
Our other partnerships even on the SME side are starting to show some decent volumes on a month-to-month basis. So we will spend on distribution. We will spend on augmenting the staff for all these investment-led and other departments which are important for a sustainable outfit.
Got it. Got it. Thank you so much, and all the best.
Thanks.
Thank you. The next question is from the line of Piran Engineer from CLSA. Please go ahead.
And congrats on the new role, Raul. Just firstly, a clarification. When you talk about NIM improvement, are you referring to it on a YoY basis or from the exit fourth-quarter NIM? Because our exit NIM anyway is 25-30 basis points better than the FY 2024 average.
All the expectations were from the 1.7 from the year-end of 2024.
1.7 is actually year average.
Yeah, yeah. For the year, for the full year.
Okay. So then mathematically, NIM should sustain at 4Q levels, not really improve. I just want to be clear on this. Because our average NIM for the year is 6.8, and our exit NIM is 7.1.
Correct. Correct. Correct. You're right.
Broadly, at 4Q levels, it should sustain, right? My understanding is correct.
No. So Piran, you would have heard Raul also mention that for the full year, we were at 6.8.
6.8.
He said that our attempt will be to at least reach 7% for the full year in FY 2025. So the other way to say that is, what we have achieved in Q4, we are likely to we will strive hard to maintain that for the full year. We can reach the reach we want.
Okay. Fair enough. Fair enough. And just on this NIM topic, how is pricing across various products? Because when we just calculate your yield on loans, it hasn't really moved anywhere in the last five, six quarters. And initially, I know you all were looking at better quality loans, the higher ticket, better quality loans. So the mix changed towards that. But even after slowing that down, there's been no improvement in yields.
So I think, Piran, the way to look at it is if you kind of move to the page on the mix, right? As in, probably if you look at page number 13, what you would see over there is the real growth is happening in the PV segment. That's growing at 28%, CV at 11%, and used vehicle at 18%. Now, when the mix is increasing towards passenger vehicle, we have, in fact, after Q3, added another 20 basis points pricing in Q4. But the way to look at it is because the passenger vehicle segment, which also has a sizable amount of prime customers, that doesn't give you at an overall level because that segment comes in at a blended yield which is lower than or at an overall yield which is lower.
And that's why there's no meaningful bump in the overall income-to-average assets.
Okay. Okay. Fair enough. And just lastly, how should we think about loan growth for FY 2025 given that disbursement growth has been slowing down for the past six, seven months now? And this month, also, the number was just 4% YoY.
Yeah. So the way to look at it is we know that, as I said, 17% is the usual for the last three years. This year, we expect Q1 to be a bit muted. You all are aware. There's an election in progress. We also see some of the segments that we serve, which is the agriculture segment, because Rabi was a bit muted, there is some sentiment drag which we are seeing. So I don't want to paint a whole full-year picture of how will growth look like. But Q1 seems to be going a bit muted. Maybe there's a whole lot of enthusiasm which will come in post-elections. We don't want to call anything.
If that picks in, and typically, there's a sentiment improvement over there, even a 14%-15% disbursement growth coupled with what we hear in terms of monsoons being predicted to be decent, probably a 14%-15% disbursement growth will still lead to an 18%-20% book growth, which, in our standpoint, will be a good outcome for the whole year.
Got it. Got it. Okay. That answers my question. Thank you and all the good.
Thanks. Thank you.
Thank you.
Thank you. We'll take our last three questions for today. Next question is from the line of Kunal Shah from Citigroup. Please go ahead.
Yeah. Hi. So a couple of questions. Firstly, with respect to cybersecurity, which is there in the note, okay, in terms of experience some incident out there which took almost like nine odd days to restore. So what is the intensity? What could be the implications of this going forward? And how are we taking care about this? So that's the first question. And second is collection efficiency in April, again, being quite low at 89% even on year-on-year basis. So if we look at maybe last three, four months, in fact, on year-on-year basis, the trends in collection efficiency is not that great. No doubt, overall, state numbers have been coming off with the help of write-offs as well. But anything to read into this lower collection efficiency?
Yeah. Hi, Kunal. Thanks for those two questions. On the cybersecurity one, I think the factual thing is that we were out for or we were, in some way, incapacitated for four days, not nine days. You know that we have given most of the disclosures in the stock exchange update. It was a very temporary impact for us. And because we have three levels of backup, we were able to bring back the systems in full control in the next four days. And there was no disruption, material disruption to customers or to any servicing capability even though this happened in the month of March. Coming to your second observation on collection efficiency, yes, it is below last April, 89 versus 92. I just want to make a few points here. There were a couple of disruptions. There were, of course, elections in some states.
Second, in the last week of March, last week of April compared to the last week of April last fiscal, we did see a bunch of holidays kind of coming up, which, from a collection universe, every day is really going to give you a meaningful upside here and there. So for us, collection efficiency is a very key metric. But I wouldn't look at it as a major outlier what happened in April and hopefully with the way in which we are progressing in May. Without too much of, of course, there is still disruption with elections, etc., we'll hopefully showcase the whole of Q1 being very similar to Q1 of last year.
Okay. So election disruption will not have the impact on the entire Q1?
No, no. I'm saying that we did see some in April a little bit. I'm not kind of giving an overall sweeping statement. We are saying that we are trying to overmanage it. We saw some of it in April, minor, and we also saw a combination of holidays in April towards the end of the month which disrupted versus April of last year.
Okay. Sure. Sure. Thank you.
Thank you. The next question is from the line of Viral Shah from IIFL Securities. Please go ahead.
Yeah. Hi, Raul. Thank you for taking my question. So basically, with regards to this fraud, right, so over here, have you actually heard anything from RBI on this perspective? Because given right now the way RBI has a hands-on approach, is that something that you are anticipating?
Viral, you have any more questions? I'll take it all at a time. Is this the only one?
No. Okay. Fair enough. So this is one. The second is basically, we have seen that a couple of other NBFCs or HFCs who have been transitioning to a centralized kind of model, there we have seen some instances of frauds that keep coming up. Essentially, some of those practices which used to exist in a decentralized model, they're not being possible in this model. So how do we get that confidence that any of this kind of things, not necessarily the similar kind of fraud, but anything different, would not be there in other branches? And thirdly, basically, from the perspective of growth, since last three years, we have seen that Mahindra Finance hasn't added any material branches. Now, in this quarter, we saw that you added 33 branches.
How should we read in terms of the sustainable, I would say, more from the perspective of growth, disbursement growth for FY 2025 and more importantly, even 2026?
Yeah. Thanks, Viral. I'll take all the three questions. First, on RBI, we have very active engagement going with our SSM. Everything that is reported to the external world, whether it's the stock exchanges, before that, we have a practice of engaging very in a deep manner with the RBI office. And of course, being a regulator, we would have concerns over the fraud. And we've been giving them constant updates on the way in which this has been progressing. And all the developments in this matter is kind of made known to RBI on a regular basis. I don't want to second-guess anything since you were alluding to actions, etc. I do not want to get into speculations on that front. All I can say is that we have a very strong and good engagement going on with our SSM and the CGM's office.
To the second one, on the HFC, on Mahindra Rural Housing Finance, see, Mahindra Rural Housing Finance moved into a new loan management system, etc., etc., last year and a half back. Of course, now that certain frauds have happened with the decentralized model, clearly, across the organization, we have got to get our antennas up and our antennas up on all fronts to make sure that these kind of risks are solved for risks of very heavy collusion, risks of decentralized. So clearly, as an organization, we are prioritizing safeguarding our designs on systems, controls, etc., etc. And any call is a wake-up call. And we will use this as a mechanism to make sure that our systems are foolproof. Third, on growth, you're right that we have not prioritized many branches in the last two years. We were prioritizing a whole lot of other actionables.
Clearly, for an organization like ours, though we have 1,300 branches, but in a vehicle lending industry where it is still 94% of our book, the point of action is not just the branch. The point of action is also the dealership. And we work with close to 5,000-odd dealership points. And every year, we keep increasing the coverage of the dealerships. And we keep increasing our frontline staff who are manning these dealerships. So it's not necessary. And you know we have been talking about improving our tech stack wherein right from the dealerships or from the point of origination, all of this moves into the loan origination and the LMS stack so that the whole loan journey gets orchestrated well, which actually, in the going forward world, unless we are doing very, very multiple products, we don't need so many branches.
At least, we see, yes, branches solve for reputation, branches solve for comfort of the local geography to see a presence, etc. We will keep opening branches. It's not something that we have to grow so prolifically as we grew in the past. Our partnerships, our presence in dealerships, and our working with partnerships with other entities are also equally important initiatives for us to look at the distribution front.
Right. Thank you, Raul. And actually, I had two data-keeping questions from Vivek. Vivek, what would be the GNPA as per the RBI in this quarter?
Just a minute. It will be about 1% more, if I'm not wrong. But let me just give you the data. INR 1,000 crore higher. About INR 1,300 crore. Sorry? About 13 or 14? About 1% higher.
Okay. Yeah. Yeah. And Vivek, what would be the incremental cost of funds that we have?
No. So as I mentioned earlier during the call, we are experiencing the cost of incremental borrowing to be range-bound at the same level that we experienced in the fourth quarter, which was about 8%.
Okay. Fair enough. Thank you, Vivek. And thank you, Raul. All the best.
Thank you.
Thank you. The last question for today is from the line of Raghav Garg from Ambit Capital. Please go ahead.
Okay. Hi. Thanks for the opportunity. I have a few questions. One is on the new branch expansion. I think you mentioned about 150 next year. I just wanted to understand, is that going to be the regular annual run rate for FY 2025, FY 2026, FY 2027, or are you going to upfront your branch expansion and then probably slow it down in the subsequent years after FY 2025? That's my first question.
Yeah. Raghav, if you can go through all your questions, it'll be easier for me to take them all.
Sure. Right. And then 150 branches, what does it mean in terms of OpEx? Because I think that you just highlighted it might there is a lever for you to the extent of, I think, 10, 20 basis points in terms of OpEx to assets. But my thought process here is that if you open 150 branches, your OpEx might remain elevated given that you're now targeting about 17%-18% AUM growth. That's my second question. And my last question is, even for the 17%-18% growth next year, your leverage would go beyond 7x. Would you be looking to come to market for capital given that historically, your leverage has been somewhere between 5x-6x? Those are my three questions. Thanks. Thanks.
Yeah. Thanks, Raghav. So on the branches, as we mentioned, we will be not front-ending these 150 branches. As I said, the, I mean, and don't hold us. This number is not cast in stone. As I mentioned, the maneuverability of getting business, irrespective of opening a branch versus having more manpower at dealerships, etc., etc., there is capability for us to still meet the growth targets without necessarily having the same run rate of branches. So our aspiration is to, in the potential locations which we call as attractive geographies which we have identified and we have already opened 33 branches, right?
Yeah.
33 was last quarter or this quarter?
Yeah. Last quarter.
So this quarter, we may not have a very similar 33 number. The aspiration is 150 for the full year. As I said, the first ambition is to get the whole new branch structure in place. The new branches will be pretty much a Q3 or late Q4 objective for us. Having said that, what it does for OpEx, our branches are not the typical bank-type branches which are very heavy square foot branches. We have also light-mode branches which are not very draining on our OpEx. With the new branch model in place also, these branches will have a very limited number of people sitting in the branch. Our staff is much more what you call as runner boys who are at the site of action.
So we do not see these branches actually causing a very steep increase in our overall OpEx to average assets and getting that 10-15 bps release from where we are this year. Moving to your third question on leverage, you're right. Today, as Vivek pointed out, we are, let's say, 16.5 on Tier 1 , 2.5 on Tier 2, so about 19, I think, overall Tier 1 plus Tier 2. With the kind of growth that we have, for this fiscal, we don't see the need to go to the market to we won't be definitely in the 7x or 7% debt to equity. We'll be still in the 6-point-something range, which is well below the 15% requirement of Tier 1 plus Tier 2. If at all, we'll need further capital, probably it'll be in the next fiscal.
At that point of time, we'll see what are the options open to us to kind of the routes to raise capital.
Sir, just one follow-up question. You were alluding to this new branch structure that you're trying to implement. Will that lead to higher employees per branch? I believe right now, the figure is somewhere around 19 employees per branch if I just do a simple employees per branch. So just some thoughts on that, please. Thanks. That's all from my side.
No. We have only a couple of job families which you can say are earmarked for the branch. A lot of employees are actually floating, as in they service multiple branches, multiple dealerships. So the new branch structure will have just probably about a few, as I said, a couple of job families which are earmarked for that branch. The rest are covering multiple branches, multiple dealerships. Not a heavy structure.
Raghav, coming back to your question on debt to equity, as of March 24th, 2024, our debt to equity is 5:1. So I believe you talked about 7:1. So we are today at 5:1.
Okay. Sir, I was referring to assets by equity. But I get your point.
Okay. And one more quick number because that was asked earlier. This is about GNPA versus Ind AS. So that's about INR 1,700 crore higher as compared to.
Yeah. No, no. 1,300.
Yeah. Yeah. 1,300. [crosstalk] No, 1,300 is for collusion. Let it 1,363.
[crosstalk] Yeah. 1,363 is the number.
Okay. Okay. It's about INR 1,300 crore higher. I'd mentioned INR 1,000 crore. So it's about INR 1,300 crore. Okay. Any other questions? Thank you.
Thank you. That will be the last question for the day. I now hand the conference over to the management for closing comments.
Yeah. So thank you, everybody, for joining us on this call. I hope you've taken back most of the queries that you've placed to us. We have tried to cover. I want to give everyone again confidence here that whatever happened in this one branch was an outlier. And we did mention that we are making significant investments as management for this turnaround journey that we started about a year back. And we are committed to make sure that the organization has the adequate amount of investments in place to, over a period of time, really, really change. We've had a certain amount of setbacks two years back. And we do believe that with the kind of investments that we have made, we are in the right path of recovery. And we will demonstrate a consistency in that path. So thank you, everyone. And thank you for hosting us, Jigar.
On behalf of Batlivala & Karani Securities, that concludes this conference. Thank you for joining us. You may now disconnect your lines.