Ladies and gentlemen, good day, and welcome to the Mahindra & Mahindra Financial Services Limited Q3 and nine months FY 2024 earnings conference call, hosted by Motilal Oswal Financial Services Limited. This call will be recorded, and the recording 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 discontinue this call. As a reminder, all participant 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 this conference call, please signal an operator by pressing star then zero on your touchtone phone. I now hand the conference over to Mr. Abhijit Tibrewal from Motilal Oswal Financial Services. Thank you, and over to you, sir.
Yeah, thank you, Neeraj. Good evening, everyone. Thank you very much for joining us for the Mahindra Finance call to discuss quarter three FY 2024 earnings. To discuss the earnings, I'm pleased to welcome Dr. Anish Shah, MD and CEO, Mahindra & Mahindra, and Chairman, Mahindra Finance; Mr. Ramesh Iyer, Vice Chairman and Managing Director; Mr. Raul Rebello, Executive Director and MD and CEO Designate; and Mr. Vivek Karve, the Chief Financial Officer, along with other members from the senior management. I now invite Dr. Anish Shah and the senior management for their opening remarks, post which we will open the floor for a Q&A. Thank you, and over to you, Dr. Shah.
Thank you, and good evening, everyone. It's a pleasure to have you join us for the earnings call today. I'm here in my capacity as Chairman of Mahindra Finance. Just to provide a brief update on the transition of leadership before we get into the earnings numbers. As we announced almost a year ago, we had Raul Rebello appointed as CEO and MD designate, and we had planned a very structured transition, and very happy to report that that continues to go extremely well. We are now in the final phase of that, and Ramesh, who is sitting right beside me, has now handed over the mantle of day-to-day operations to Raul and continues to provide the guidance and mentorship that Raul and the team require.
In that construct, Raul will conduct his first earnings call independently today, with us being there again to provide the support and mentorship that may be needed. So that's the significant aspect of the transition. It's proceeding well. We will have Ramesh with us for one more earnings call before his retirement date, which is in April, and I'll join back again for a brief update at that point. But before I turn this to Raul, just want to say that the business is very much on track with regard to everything that has been promised and very strong performance from an asset quality standpoint and an overall standpoint, just progressing extremely well.
So with that, I'll leave it to Raul to take you through the details. Over to you.
Thank you, Anish, for those opening comments. Thank you, Motilal Oswal and Abhijit and team for hosting us today. Good evening, everyone, and yeah, welcome to the Q3 earnings call. We bring you along with the senior management of Mahindra Finance here. As housekeeping, I would request you to keep the Q3 deck, investor deck handy, because we will be referring to the deck, and I'll be noting page numbers as I refer to certain numbers. So moving straight into the first page three, actually, in your reference, which is titled as Highlights for Q3. We continue to see a very strong demand momentum, you know, in the segments that we operate in and the markets that we operate in, primarily the rural business, as you know.
Q3 always has the added festive volumes which come in. So across banks and NBFCs, where we are amongst the top three financers, we are happy to note that we continue to maintain the leadership position. In tractors, re-owned vehicles, passenger vehicles, three-wheelers, and the three-wheeler segment, we continue to have a market leadership position. Noting the loan book growth, we are at INR 97,048 crore, which is a YOY increase of 25.5%. On NIMs QoQ, there's an improvement of thirty basis points. You know, we are now at 6.8%. You would have noted we were at 6.5% at the end of Q2.
On the asset quality side, GS3 numbers have reduced QoQ from 4.3% to now 4%, which has meant that the credit cost also has had a sharp decline to 1.2% from Q2 end at 2.4%. And if you recollect, we had guided last quarter that for the full year, we anticipate to have credit costs in the range of 1.5%-1.7%. With Q3 numbers delivered, we believe that we are on a firm track to meet that commitment. Referring to the graph at the bottom of this slide, you would see that compared to last year, where in Q2 and Q3, we had a very sharp reduction between Q2 and Q3, a sharp reduction of GS3 and GNPA by almost 210 basis points, 16.4%- 14.3%.
That resulted in a very high provision release of INR 343 crore. Vis-a-vis this year, where GST has reduced from 4.3%- 4%, but overall, it's not been as sharp as last year between Q2 and Q3. So the equivalent 343 provision write-back last financial year, it's only a 121 write-back this year, which passes to the PNL. So the overall PAT for a comparable quarter last year, we've seen a slight decline of 12%. PAT for this quarter stands at INR 553 crore. Moving to slide number four, on the deck. Now we're providing, before we go into further details of Q3, we're giving a year-to-date summary. On disbursements, we continue to have strong momentum.
Cumulative disbursements are INR 40,916 crore, which is a 14.4% YOY growth. Loan book, I mentioned, is up by 25.5%. NIMs versus last year is 90 basis points more, largely by a rising cost of fund environment that we are in, and NIMs are YTD at 6.7%. Coming to an asset quality, Stage II has significantly lower, at 240 basis points lower than last year, which is at 6%. Stage III, as I mentioned, is 190 basis points lower compared to last year, at 4%. Net Stage III, important to note, is right now at 1.5%, which is 100 basis points lower than last year. So at a PPOP level, we are at INR 3,005 crore, which is up 7% from last year YTD statement.
Provision impact, as we did mention, and I mentioned in the Q3 impact, overall last year, because sequentially we were climbing down on provisions every quarter, on a YTD basis, we had a INR 613 crore release, last fiscal, on provisions, which, this year there was a INR 363 crore-INR 368 crores charge on PNL. So it's approximately a INR 980 crores swing on provisions, but we have significantly lowered the settlement and disposal losses. So that number, actually, we have a very smaller number flowing into profit. But definitely we can't cover for the overall swing in provisions. So on a YTD basis, the PAT stands at INR 1,141 crores versus INR 1,300 crores for last year.
Moving to page six, since I mentioned numbers, you know, we'll directly move to page six on your deck. Overall, disbursement growth has been sequentially growing up. As you see, quarters of the year were very strong because of a low base. Last year, just to remind everyone, supply side constraints were all back to normal—you know, there were no supply side constraints, so we saw a very strong Q3 last year. And this year also a strong Q3, it's a 7% growth, which means a total 14% YOY growth on disbursements. Collection efficiencies are panning out as per plan in the 95% range.
Moving to slide number seven, page seven on your deck, which we have now attempted to give you a very product-wise update on how our products have been performing. In the wheels business, you would have seen a big trend of change to SUVs. Preference of SUVs have been moving up. So we have also seen an equivalent surge in our UV and SUV business, which is 21% QoQ, and 26% on a YTD basis. Overall, cars also has moved positively 15% QoQ, 25% on a YTD basis. The CV business has also been strong at 10% QoQ and 18% on a YTD basis. Pre-owned vehicles, 8% on a QoQ and 19% on a YTD basis. Tractors, as you would have heard commentary from most OEMs, has de-grown YTD basis and even on the quarter.
We've seen a QoQ degrowth also of 18% and a 2% growth, but on a YTD basis. I would like to underline the point that we're not losing market share in the tractor business. This degrowth is very much in line with what the industry is witnessing. Our SME business, you would have seen is a has seen a, a, a kind of a you know QoQ degrowth and a YTD degrowth. I want to underline the point here that we are moving much more to very granular retail business in SME with LAP being the mainstay product. On the retail business, we don't see a growth. It's mostly the degrowth which happened on the YOY on the wholesale business. So, nutshell, 7% QoQ growth on disbursements and YOY 14%.
YTD, on a YTD basis, 14% growth in disbursements. Moving to the next page, page nine, where we give you a trend of how M&M versus non-M&M. We continue to have M&M contribution of 45% in our share of disbursements for YTD December. Moving on to margins and spread analysis, page number nine for your reference. As I mentioned that, you know... Page number nine, yes. So you would see that, income to average assets have gone up, you know, sequentially. We have started passing on prices, passing on pricing. So there's a 50 basis points difference between the two quarters. Income to average assets is at 13.1%.
Cost of funds continue to be a rising environment, 20 basis points increase in cost of fund to 6.3, so which leaves an overall NIM increment of 30 basis points to 6.8. Overheads have been range bound at 2.8% for some time now. Our write-off and provision, as I mentioned, has fallen sharply by 120 basis points to 1.2%, which means ROA for the quarter is at 2.1 versus 0.9 for Q2. Moving to the next page quickly, we've talked about GS3 numbers, you know, reducing. We want to underline here that we've had an ECL model refresh. The objective was to have a much more product-wise granularity to the ECL model, and as an outcome, we are not seeing a huge impact on provision coverage.
You would see the Stage 3 has in fact increased by 50 basis points to 62.7 from last quarter. Stage 2 has stayed constant at 11.3. There's been, of course, a very small relief of 10 basis points on Stage 1 from 0.8 to 0.7. Overall provisioning, you know, our requirements are very well covered at the INR 3,655 crore. It is. We are even sitting at. This is back to the previous panel. On the provision versus IRAC also, we have a cover of INR 1,534 crores. Moving now to the next page, page number 11, where we'll give a little more granular updates on credit cost. You would see that GS3, as I mentioned, has been coming down.
The breakup of credit cost here, we've been... We've shown it two components of credit cost, provision separately and, you know, write-offs. While provisions have been a huge swing on a year-to-date basis, INR 613 crore last year, it was INR 368 crore. What is important to note here, the middle panel, we had a write-off of INR 1,612 crore versus this year, INR 1,113 crore. This basically signifies a INR 500 crore reduction in write-off, which is a very positive trend. It shows the quality of the assets and the amount of assets flowing into bad banks, which is, you know, a positive outcome for us right now.
With this confidence, we are still committing to our total credit cost for the year being at 1.5-1.7. Moving to the next page, page 12. Balance sheet. From a balance sheet standpoint, the headline says it all. We are adequately capitalized, 18.3% is our overall capital adequacy. Within that, our Stage 1, I believe, it's at 16.5. And coverage is at healthy levels at 62.7%. Now moving to page 14, wherein I'll. This is the second last page of the slide before we move to our, you know, to question and answers.
Overall, I would like to give everyone confidence that we're moving well, you know, from our overall Mission 25, you know, delivery items. We have one clear strategic objective was on the previous slide was on asset quality, not just Stage 3 and credit cost. When I look at the underlying sourcing mix of what's coming in through the door on NTC, near-prime, et cetera, very healthy levels of new book sourcing. X bucket opening is also at its all-time low. On digital transformation, we are on track. We've gone live with various end-to-end digital journeys on personal loans for existing customers, fixed deposits, and part digital and part physical journeys for our vehicle loans are all progressing well.
On growth through diversification, we have increased our composition of used vehicle business. Every month, every quarter, we see an increasing trend. You'll notice that used vehicle is now 17% of our origination. Our new growth engines, whether SME or leasing, are all also progressing well. On the partnership side, I would say, early days, but the partnerships with SBI, Bank of Baroda, with India Post CFA, and now we've added a new partner on Lendingkart for the SME business. So these partnerships are gonna be key. Right now, they might be adding low volumes to our overall disbursement, but, but they'll be key as we go forward. Moving to page 15 on the deck.
Finally, on Mission 25 progress, I would say we are green on the first two, on asset quality and AUM growth. We've been seeing, you know, asset quality, as we mentioned, is well below our stated goals. On book growth, we have been sequentially and seeing even on an annualized basis, a 25% growth. We will, of course, calibrate our growth to keep in mind the margin requirements that we have. On new business contribution, I've mentioned, while it's a slow start, looks like we'll, we'll be slightly below the number, aspirational number of 15% by FY 2025, but we have confidence in the way in which the new businesses are moving.
On the NIM side, I would like to mention that last time we have recalibrated 7.5 to more 7% kind of NIM aspirations for the medium term, with the way in which cost of funds have been moving. Against the 7%, we have been moving decently well. On OpEx, 2.5 is, is the aspiration. We have been, when we set this goal, we were above three. We have been moving directionally well on that front. And if all these are delivered well, ROA is an, is an outcome metric. We are still keeping our, our goal on the 2.5% ROA. Directionally, I think we are, we're moving decently well. So this is broadly a summary of, of where we are.
A slightly longer story, but that's the summary for our Q3 numbers, and I'll open it up for Q&A.
Thank you very much. We'll 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 handsets while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. Participants, you may press star and one to ask a question. The first question is from the line of Madur Jain from Nomura. Please, go ahead.
Yeah. Hi, good evening. Congratulations, Raul. So, my first question is on asset quality. Do we really need a cover of 63%? Where do you see settling in the next one to two years? And you talked about recalibration of provisions product-wise.... or at least that's what I heard in the commentary. Could you elaborate, please?
I'll just correct, recalibration was on MIMS, which I mentioned. I think we have a stated goal of there. I mean, we, in our Mission 25, which we did at the end of FY 2022, we talked about 7.5% in aspiration. I said we are recalibrating that to 7%. On your first point on coverage ratio, you know, Vivek can expand. The current coverage ratio is largely model-driven. We have an ECL model which determines the coverage ratio. Yes, compared to peers, we would be higher, but this is a function of LGD and PD. And, you know, just looking at how things would go, we do expect this to come down by Q3 of next year.
Right now, it's mostly an ECL model, which dictates the kind of provision levels that we hold in Stage 1, Stage 2, and Stage 3. Vivek?
No, I think, very, very rightly described by Raul. So Madhur, there are, there are no overlays in the provision that we maintain. So the provision number is based on the model, which has now been further, refined, I would say, at a, a product classification level. So that's the only change that we have done in the current quarter.
No, but has there... So, the write-backs that you see on provisions, that's because of refining or obviously because of recoveries?
It's because of refining, refinement of the model.
Oh, okay. So what would have been the credit? I mean, is there a figure for comparable credit cost in September, or it really doesn't matter?
No. So I think we have also talked about it in our investor presentation. But anyway, the number is INR 86 crore. So because of the model refresh, if we had not done the model refresh, the provision number would have been higher by about INR 86 crore.
Just for reference, page number 10, we have qualified that number, which Vivek just underlined, underscored, INR 86 crore is the repeat value number.
Okay, thanks. And, my other question again, is that you said that we correct, you know, the ECL model, the rollover will correct in Q3 next year. So in Q1, Q2, you would therefore see again high credit costs like we saw this Q1, Q2. Is that a fair assessment?
No, I think that is not what Raul mentioned. And your first question, Madhur, was on the coverage percentage, right? And you said the coverage percentage seems higher.
Yes.
So what, what we are trying to say is that, the coverage percentage, we expect it to normalize at a lower level going forward. That's what we meant. We did not provide any commentary on what the credit charge will be in the first or the second quarter.
No, no, as in that, the coverage will come up by Q3, wasn't that said?
Yeah, yeah. Coverage, that's, you are right.
Okay, that's not credit cost. Okay. Okay.
That's what I just wanted to correct. It is about the coverage percentage.
Madhur, this is Ramesh here. So the way you should look at it is if your Stage 3 has already come down to 4%, right? And if you even maintain it at this level, there is not likely to be a very higher charge that you talked of when the first quarter will continue to have a higher charge, right? Only when the Stage 3 goes up, then you will see a new charge coming in. If they remain stated there, to the extent of the book grow happen, only to that extent the charge will come, right? It won't otherwise happen.
So far as the reversal is concerned, as you know, in this model, it's a four years history or 42 months history that we look at, and therefore, in the past, if you have had higher write-offs, that is always going to keep impacting until each year starts moving out, right? So when the book starts performing well, which has been the case in the last two years, you'll start seeing the benefit of it come down, and that's the time the coverage will fall.
Okay, makes sense. Thanks a lot.
Thanks, Madhur. Thank you so much.
Thank you. Next question is from the line of Anuj Singla from Bank of America. Please go ahead.
Yes, thanks for the opportunity. Good evening, and congrats again, Raul. So first question is on the funding cost. We have seen a significant tightening of the liquidity and also the risk weight increase for bank lending to NBFCs. So, Vivek, probably you can give us some outlook on how the funding outlook is there for the 4Q and the next year, and also what it implies for NIM?
Sure. So hi, Anuj. As you rightly said, the overall liquidity environment has remained tight. However, for a company like Mahindra Finance, availability of funding hasn't been an issue given our credit rating, but the costs have remained elevated. If I were to pick up the cues, both from the Fed and therefore from RBI, the regulators don't seem to be in any hurry to reduce the benchmark rates. So we would, as a result, expect the incremental cost of borrowing in Q4 to remain at the same ballpark as that of Q3. I would not like to hazard any guess on what could be the rate trajectory in the coming year, because while everybody believes that the rates will come down, the timing of the rate reduction is something is anybody's guess.
So, just to summarize for you, the rates are definitely higher as compared to Q2. So as a result, our cost of borrowing is higher as compared to our cost of borrowing in Q2, and we expect the Q4 levels to remain at around the same levels as Q3.
... So unless something changes on the, you know, repo side, there are the, or liquidity items further, this is the kind of the peak cost of funding which we should assume?
Yeah, we hope to believe so.
Okay. Okay, got it. And secondly, I think earlier in the call we had mentioned that OpEx to asset would rise in the second half, which hasn't happened, and I think that's a great outcome. But just to understand, are the peak investments behind on the tech side or how do we see the trajectory on the OpEx to asset side from here?
Yeah, well, attempt, Anuj, is to keep it at the same level. You know, investments of course, are happening, but we are. We have a, you know, an era of being as frugal as possible, and as efficient as possible. So we are maximizing on all fronts. As you know, OpEx is a large bucket. We will continue to make investments. We will not shy away from the digital transformation that, you know, the entire spectrum of investments that we have to make. And at the same time, clearly run a very efficient shop, a very productive shop, making sure that part of the investments we've already made are starting to, you know, show results.
So, we are looking at keeping this 2.8 right now, and, finally, the model requires us to come down to a 2.5. So that's how we are tracking the business model and the number on OpEx to, to be achieved there.
Got it. And lastly, a more strategic question, Raul. On the ROA target seems still at 2.5, but NIM target calibrated to 7%. On the growth side, new business is lagging a bit, our expectations. So what are the levers can be there for us to achieve on this 2.5% ROA target, for the next year? Thank you.
So one is, of course, at the income side also, we'd like to push it slightly higher, and, you know, we've, we're looking at, other sources of income, non-interest income sources. But largely the other big lever is gonna be credit cost. If, if the NIMs are going to be recalibrated at 7%, unless your OpEx at 2.5. So we will, definitely start, you know, making sure or not... We, we definitely have to, keep a much lower appetite on credit costs in the 1%-1.5% range to get to that. But this is, of course, going to be in a sequential manner. It's not overnight. And the good thing is that we are trending well.
As you know, we have already given guidance of credit costs to be in the 1.5%-1.7% range. But that's for end of this fiscal. Next year, we'll have to even go down below that number.
Got it. Okay, thank you very much, and all the best.
Thank you.
Thank you. Next question is from the line of Piran Engineer from CLSA India. Please go ahead.
Yeah, hi. Thanks for taking my question and congrats on the quarter, and congrats to Raul for the, for your next role. Couple of questions here. Firstly, can you comment a bit on vehicle finance, disbursement growth outlook? We saw a slightly tepid festive season, and it kind of reflected in numbers in December. And I'm not just referring to Mahindra Finance, but in general for the industry. So what is your outlook? Where are the risks? Are you seeing discounts go up? We've heard that for commercial vehicles, is that also the case for passenger vehicles? Some commentary on outlook on growth would be useful, yeah.
Yeah. So I'll open it up and request my colleagues also to join in. So what we are seeing definitely is, you know, break it up because there are different nuances for passenger vehicles. After a couple of years of good growth, we are seeing inventory levels at dealerships now come back to maybe two months. So we are going to see a sub-10% growth for sure, going forward. Clearly, what will provide momentum is, one, for a lender, there is a premiumization theme happening. So though the volume growth might be slightly lower, the ticket sizes are going up and SUVs are becoming now the bulk of passenger vehicles. So as a lender, even keeping the same LTVs, it gives us a benefit on overall growth.
The other thing to note is, most passenger vehicles, as you see now, a slew of new models coming in. Those models, of course, are creating some demand-side upsides, right? Moving to used vehicles, where we are also a participant, as the more formalization happens there, there's been a, you know, good increase in the amount of lending to used vehicles, which was highly under-penetrated. And we being one of the main players in used vehicle finance, we see headroom for growth there. CV business, we are not a very large, you know, heavyweight player, largely in M&M in the LCV and CV segment, and now we are increasing in the... The bus segment, by the way, overall industry, you would see, you know, good growth.
CV segment, also decent growth. As overall infra, mining, et cetera, goes up, I think CV has been a growth story now for two years plus, and we hope to ride that momentum. Tractor, I would say, is in a tough spot. After two years of very high growth, we all anticipated a negative growth this year. The industry is playing out. It's been a degrowth, and we don't see that the agri, you know, the overall sowing data coming in are probably really low. We do see a prolonged kind of stretch purely in the agri segment, and that will rub off on tractor demand.
But not to say the other side, the rural also, agri might be a little down, but rural overall with remittance and overall agri infra and, and, you know, those tourism, et cetera, there is otherwise slight buoyancy in the rural markets. But we would watch out for tractors, and we don't anticipate a huge uptick in growth there. Three-wheelers, I didn't talk about three-wheelers, but of course, we are the number two leader there. Three-wheelers, we've seen a 30%+ growth. There's a huge EV change happening there. We're seeing much more movement towards EV, and we will see how we play that game, too. So that's in a nutshell, as we might, Mr. Iyer, if anyone else has, you know, views on the industry.
Piran, if you look at the overall growth at 7%, but if you adjust it for estimate, the core vehicle finance growth is 10% for the quarter and 20% for the nine months.
Okay. So, the sense I get putting the grammar into words is that disbursement growth might taper off a bit, next year.
Yeah, it's something.
Yeah? That's fair.
It won't be as exuberant as what we saw in FY 2024, for sure. I mean, one could expect FY 2025 to be tempered compared to FY 2024.
Got it. Got it. Secondly, you know, we've done a good job on improving NPLs asset quality. How should we think about, let's call it, usually call it the revised targets for GNPL? Clearly, now, Stage 3, less than 6% will not be our target. Can we see it going down to, say, 2.5%-3%, like some of your peers?
We don't give forward guidance, Piran, but, yes, if we have to, you can do the calculation. If we have to be in the 1.1%-1.5% credit cost, clearly we'll have to come down slightly, slightly more on the GFC numbers. But more importantly, the other constituent of credit cost, which is a disposal, settlement, and write-off, also has to come in lower. I think, you know, at the end of Q4, we generally have a meeting in person where we give you a slightly more forward look of how we are looking at this business model. And in our next meet, you'll see a little more granularity on our forward plans.
I think one important data that you may want to continuously look at is what is our Stage 2. If that isn't growing, that's a clear indication of the Stage 3 not expected to grow any further. As we settle those accounts, as we negotiate, settle, as we repossess, settle, as we collect, settle, one would see a downward trend.
Got it. Got it. Just my last question for Mr. Karve. Firstly, what percentage of our bank borrowings are repo linked? And is there scope to further reduce liquidity on the balance sheet to support margins?
Yeah, so not exactly repo, I would say, but-
External.
External benchmark.
Floating.
So, yeah, about floating, floating rate borrowing. About-
Okay.
About 40, 40% of our total borrowing today will be floating rate borrowing, which includes NCLF also. Anything which is floating and is subject to any reset is about 40. Coming to your question on the liquidity, that recalibration continues to happen as we look at the overall liquidity, and we draw comfort from the fact that flow of the pipeline needs to be decently available to us, as a result of which we can take those calls to reduce our liquidity buffer. We are conscious of the fact that excessive liquidity buffer can lead to a negative carry, and we keep doing that recalibration exercise every now and then.
Got it. But, sir, out of this 40%, can you just break it up, repo versus non, versus NCLR?
Yeah, but we might not be able to get that granular.
Okay.
Yeah.
Okay, fair enough. Yeah. That, that's it from my end. Thank you so much, and wish you all the best.
Thank you.
Thank you very much. Next question is from the line of Subhranshu Mishra from Phillip Capital. Please go ahead.
Hi, Raul. Congratulations on the new designation. Two or three questions. The first one is if you can split our employees into various functions, frontline guys, collection guys, guys distributed into various businesses, and maybe some of them would be in HR function as well. The second is on the housing finance business. In the fourth quarter last year, Mr. Iyer had referred to a IPO of the housing finance business three years from then. So where are we on that? If you look at the last 40, 50 odd quarters, the total profit pool is roughly around INR 1,000 crore, which is around maybe 9%-10% of the standalone profit that we made from MMFS. So it looks like a capital misallocation.
So, one, do we really intend to run this business in the medium term, or maybe have a strategic investor coming in to running the housing finance business with us? And the third part would be, when we look at the PCR, which is roughly around 60-odd%, now we are running a fairly secured book, so 60% in ECL would mean the pretty much mean the LGD. So, having an LGD of roughly around 60% running a majorly secured business seems out of back. Thanks.
Thanks, Subhranshu I'll take the first. See, just to be fair to what we disclosed so far, on exactly number of employees in frontline, back office, et cetera, we've not yet done that. We'll, we'll probably do that and provide more granularity going forward. But to give you a sense of, our large, large part of our organization, most of them are in, business roles. We have, for the last two years, not added any, headcount in collections. We have been saying that our collections have been, heavily moving towards digital mode, so we are not required to add any headcount in the last two years on collections. In fact, we released some of the collection folks into, business roles and other roles.
... When we look at our in normal nomenclature, tooth-to- tail ratio that you look at in organizations, I think they're at a healthy level, of folks who hunt and do business as well as collect to back office folks. We can, at some point of time, maybe, end of Q4, where we think deem fit when we give that granularity, we can, you know, give it to everybody on exactly how many headcount are in what functions. On rural housing finance, the objective right now is to, you know, we have to bring down the GNPA numbers. As you just, we have come down in that effort, but there is significant more work to be done there.
I don't think we're in any mood right now to unlock value there before we get the brilliant basics in place in that business. So we continue to be committed to getting that ship in order. Mortgages is a big theme for us at the sector level. You know, we started doing LAP last year, but of course, we started doing it in MFSL. But we have called out that mortgages is an important theme and it's on the outside. It's such a big heavyweight scheme of lending, and we will play the potential in mortgages. Rural housing finance, for now, the objective is to further get asset quality under control. The third question on 63%.
That's not the same but
So if you are okay, because you asked many questions. If you can repeat your question on ECL?
You have a 60% coverage-
Yeah.
Does it mean your LGD is that right?
Yeah. So, so in ECL, essentially, the states seek, provision coverage, ballpark, the LGD, right?
So if we are running a fairly, a largely secured book, which is the asset finance, we are largely asset financier. A 60% LGD seems out of that. That's my question.
No, no, you're right. So, I think maybe we should quickly recap as to calculate that. So, your, your understanding is right, that the coverage would correspond to the LGD ratio, and LGD is calculated based on the past losses that we have experienced in that particular portfolio. And therefore, and Raul also made a point at the beginning of this conversation, right? That we have seen reduction in our credit losses over a period of time, so which should reflect going forward in lower LGD numbers, and which in turn will also reflect in lower coverages required. Also, what you should also bear in mind is the number on which this coverage is applied, which is the gross NPA, has also been sharply coming down for the last one and a half years.
When can we expect? Earlier, we used to have close to 35%-40% LGD, which is roughly the PCR. When can we expect those previous levels of LGD or PCR? I know we will have a reset in the fourth quarter. We have already done that. But irrespective of the reset, when do we see that level of PCR?
No. So we may not be able to give you an exact, exact guidance. However, responding to the first question that was asked today, we are expecting some stabilization of LGD in the next fiscal.
But it won't come down to 35%-40%?
I cannot say yes, I cannot say no, because then I am almost giving you a guidance. But, what I can only say is that we are expecting some, a normalization to happen.
Thanks. Thank you, Vivek. Thanks, Raul. I'll come back in the queue. Thanks.
Thanks.
Thank you. Next question is from Viral Shah, from IIFL Securities. Please go ahead.
Yeah, hi. Congrats on good set of numbers. I had a few questions. So one is, first of all, Vivek, you mentioned about the cost of funds. So you are referring to the incremental cost of funds. Can you quantify what is your incremental cost of funds, given your back book cost of funds seems to be around 7.8%?
Yeah. You are right. The overall cost of funds is about 7.8%, and therefore, the incremental cost of funds is in the ballpark of about 8%.
Okay. So basically, as this kind of recharges, there is some bit of further increase in cost of funds that can happen.
What I mentioned is that, in immediate future, we are expecting this incremental cost of funds to remain in the ballpark of what we have experienced in the third quarter.
Okay. Got it.
Very difficult to exactly estimate that number, because the situation is very dynamic.
Right. Fair enough. Understand. The second thing is on the yields. So over there, of course, there was an unwinding of the trade advances, which was there. Apart from that, what was the major driver for the yield expansion of 45 basis points quarter-on-quarter?
So, see, you know, it takes time to transfer at a book level, but we've been seeing a steady increase in our fee-based incomes, which we have been for a while driving now. So we... In the festive season, very rarely do you become very sharp in transmitting rates or increasing rates. I would say most of this benefit has come from the fee-based incomes, which we started to unlock, right? Unlock, you know, incremental revenue from.
It is possibly increase the rate percentage you are taking.
Yeah.
... So that's besides the rate increase, we took a marginal rate hike, but now we'll pass it on mostly.
Can you quantify, like, what proportion of your book is now at repriced to the higher rate in terms of reflecting on the P&L?
No, we may not be able to disclose that number. And when you say reprice, what do you mean by that?
So basically, the share of the higher rate book. So that would be the pre FY 2022 book, which would be there, and its share would be coming down. But, do you have any numbers which are there, if you can let us know?
Yeah. Frankly, we don't go that granular.
Okay. Fair enough. And the last question I had was, in terms of the branch expansion. So, in last three years, there is no major branch addition that has happened. Going ahead, I see in your PPT that you have guided for around 100-150 whole branches to be added in next one, one and a half years. So does the credit, sorry, the OpEx guidance take that into account?
Yeah, whatever we have, I mean, the OpEx guidance of 2.5% by end of FY 2025, I know that's an aggressive number. But overall, when you look at the... and this will be a phased plan of rollout of branches. And you're right, we haven't opened branches in the last two years because we were, of course, you know, remodeling the branch structure, et cetera. And now, you will see us opening more branches as part of our overall distribution and growth plans. But the number of branch and the amount and, you know, the cost associated is overall baked into our OpEx expansion.
Fair enough. I think that's it from my end, and congratulations, Raul, on the job ahead. Thank you. Thank you.
Thank you. Next question is from Shweta Daptardar from Elara Capital PLC. Please go ahead.
Thank you, sir, for the opportunity, and congratulations. So a couple of questions. So, you mentioned on cost of funds from bank borrowings. So am I getting it right? So 50% are not EBLR linked and sort of. So, you mentioned 40% are EBLR linked and the entire portfolio is floating.
No, I think, that's not the correct understanding. In fact, because we deal in vehicle finance, the vehicle finance loans are typically fixed rate loans. So there's-
Sorry, I'm sorry, I'm interrupting you. I'm talking about bank borrowings.
Yeah, yeah. So, you know, so what I... Yeah, yeah. So when you say 40, in fact, the correct number is 46%. So 46% of the total borrowing is floating, which means 54% is fixed.
What's the incremental cost of that?
Let me also correct. It is not just bank. When I give the number of 46%, it is of the total outstanding borrowings that we have.
Okay. So what is the incremental?
Okay.
What is the incremental cost of funds on bank borrowings portion?
I'm sorry, but I will not be able to give you such a granular answer.
Sure. So secondly, on the disbursement front, so year-on-year basis, there has been drop of as high as 30% in personal loans and consumer loans. Now, apparently, of course, the entire industry is wary about this particular segment. So what is your read through here and general feedback?
So see, we were doing personal and consumer durable loans largely on a pilot basis. Very frankly, we have actually in December taken a call to pause consumer durable loans. We realized there is a crowding in the market, and as a late entrant, the entry barriers are too high. So we've actually sunset our consumer durable aspirations, and we're not going forward. On the personal loan side, as you know, it's we're doing it only on existing to our customer base. And considering we are still in the early phase of development, refining our scorecards, we are in that learning curve, and once we have full conviction, we will amplify the monthly throughput numbers.
Sure. So second bit of, you know, taking it further. So you had mentioned on the previous call as well, that you'll be focusing more on prime customer base across certain key products. So would you like to give a fair color on the same now?
Yeah, without getting into specifics, when we talk about prime customers, as you know, we have a fair share of new-to-credit customers, prime and close to prime customers. A proportion of new to credit overall is coming down. But you know, today, even in new to credit, there are various layers of new to credit. There are scores, even our internal scores also are able to grade new to credit customers, and we are focusing on those customers where we have more insights on and who have historically, as per our scorecard, had a lower sloping of risk. So in the overall, new to credit cohort has come down. We are in our origination volumes, we are seeing more prime and, you know, close to prime customers. And subprime customers as a cohort also has significantly come down.
Now, one, what's driving this? As you know, in the passenger vehicle segment, there's a premiumization happening. So by default, the demand is coming in also, you know, from customers, the prime segment customers. And, we are conscious what should be that ideal product mix, because we have to also protect for margins.... and we are playing to that, to that overall, you know, volume to, price, ratio that we, we expect to, you know, to build into the business model.
Understood. Just one last question. Collection efficiencies have been dwindling and the cumulative number is way below than, you know, the previous year. So how do we read into this?
If you refer to the slide on collection efficiency, we have been range-bound. As you know, you know, quarter three has a lot of festive period numbers, but that's why it's probably slightly lower than quarter two. But if you look at it on a comparable basis, Q3 of this year versus Q3 of last year,
Participants, please stay connected. The line for the management dropped. Ladies and gentlemen, please stay connected while we reach on the management back to the call.
Ladies and gentlemen, thank you for your patience. We have the line for the management reconnected. Sir, you may go ahead.
Yeah, sorry, we dropped out while we were expanding on the explanation of collection efficiency. The question was whether our collection efficiency is falling, and we were just underlying the point that refer to slide number six. We've been in the same range. It might have sequentially fallen down by, you know, by about 100 basis points from 96% to 95% for Q2 versus Q3. But there are seasonalities, you know, minor months of slight movement of collection efficiency. But overall, we are in a positive and a decent range of 95% for the whole year versus, again, 95% for last year. And if you look at Q3 of last year, we were again at 95% versus Q3 of this year at 95%. Sorry, just checking. Are we audible?
Yes, sir, you're audible.
Yeah, sure. Thank you, sir. That's all from my side.
Thank you. Request to all the participants, please restrict to two questions per participant. The next question is from the line of Kunal Shah from Citigroup. Please go ahead.
Yeah. Congratulations for a good set of numbers. Firstly, with respect to the trade advances, unwinding and the benefit on the yield, because we see that cost of funds have gone up by 20 basis points, but still new expansion is 30. So what has led to this yield improvement, actually?
Yeah. So, Kunal, we did clarify, yes, Q2 usually sees a bump up in terms of trade advance, which is, which is not income accretive, and that part that is released into retail conversion. So there would be some benefit in the yield in Q3 over Q2 on that front. But we have also seen a sequential increase in our other sources of income, which we have for some time now been making investments on, those other sources of income, which has started to now add to the overall income level.
This would be largely sustainable?
I'm sorry?
This would be sustainable?
Yeah, they would be, I mean, I don't think they'd be lumpy in nature. These are other income items which we plan to sustain over time, and in fact, grow further.
Sure. And secondly, on the borrowing side, so you mentioned not seeing much increase in the rates. So is it like larger part of our bank borrowing gets classified as PSL, and that's the reason post the risk-weighted increase also, we'll not see any kind of a pass on from the bank side in terms of the higher rates?
No, Kunal, that's, that's not true. Not the entire bank borrowing for us will be PSL linked. So to that extent, there will be some pressure from the banks, wherein the banks will push for a rate hike, and we are not an exception, as you would have heard in other conference calls also. But we will always try to mitigate that impact, either through the negotiations with the bank or by maximizing our PSL.
Okay. Okay. And if I can squeeze in one last question, particularly on the overall consistency in the asset quality, I think post Q4, Dr. Anish, and all of you highlighted that, that's gonna be the key objective. We still saw the volatility this year, wherein first half it was high, maybe this quarter we again saw an improvement, and Q4 is generally better. But otherwise, when should we ideally see now with this levels of Stage 2, Stage 3, and all the efforts which are being put in, plus maybe slightly moving towards the prime customer base, when should we actually start seeing the, more, stable asset quality and the credit cost outlook? Or maybe that's more annual and quarterly volatility will still continue.
So Kunal, I'll take that. You know, I think if you look at post FY 2022, there's been clearly a decline in at least the two key metrics of GS3 and credit cost. We did qualify that last quarter, the bump we saw was typical to one product, which was mostly the tractor business, because of you know, there were unseasonal rains, and there was an impact on cash flows. We are in the business, we are in rural, we are working with a large cohort of self-employed customers, but with the controllable influences of how we can reduce the volatility in that segment, with good underwriting, good collections, I think we've covered reasonable distance.
And just from the fact that the last seven, eight quarters have seen a secular decline in those numbers, we think there should be inherent confidence that you take away from the normalization of volatility in the numbers. You know, full volatility will completely go away. There'll be, you know, for this underlying segment, there are variables in our control, which we are optimizing on, and we'll continue to.
Thank you. Kunal Shah, sorry, but I'll request you to come back in the question queue for a follow-up question. Next question is from the line of Umang Shah from Kotak Mutual Fund. Please go ahead.
Yeah, yeah, hi, thanks for taking my question, and congratulations on the quarter. I just have one question, which is related to the point that Kunal was making. Clearly, in last two to three years, there are a lot of actions which have been taken by the management. Some of them we would like to believe are more structural in nature, and some benefits we would have got because of the tailwinds in the economy. I just want to understand that, so you might end the year sub 4% gross Stage 3 number, right? I mean, clearly that is something which, and we have seen lower NPA numbers for Mahindra Finance only in the previous NPA recognition regime, right? Which was relatively more liberal.
So clearly there will be some mean reversion. The only thing... I'm not looking for a number, but how confident is the management that when the mean reversion happens, it is not as sharp as that we have seen in the past, thanks to some of the structural changes that you would have taken to control these asset quality volatility?
Yeah, so, you know, a very relevant question. We should acknowledge we are in a slightly benign environment. We have mentioned in previous calls that, and you've said it yourself, structural changes and structural initiatives and investments have been done. From an origination standpoint, because we do believe asset quality is a function of both, underwriting, onboarding, as well as collection efficiency. We have mentioned in the long tail of, you know, on NPA customers, we have steadily decreased the most volatile cohort in that segment. We have, in fact, given up 5%-7% of what we have qualified from the learnings of two crises. One is Demon and the second being COVID.
We have actively, in various cohorts of customers in different vehicle categories, reduced participation in that, in that, what we have localized and seen as extremely high volatile customer segments. And, you know, within the self-employed customer, new to credit customer segment, our overall engagement with that customer segment, as well as our high touch with both physical, digital and digital, making them conscious about credit culture of, of, you know, keeping credit bureau scores healthy.
We've been partnering with our customer segment, you know, in a very structured manner to make sure that, in times of stress, we will not face the kind of swings we have faced in the past.
I think, you know, just one way to look at it is, any fall over a period from Stage 3 actually has moved to Stage 1. If you look at our Stage 1 now, between Stage 2 and Stage 3 together, it's only 10%. So therefore, 90% is in Stage 1. So that reflects the actions that have been put in place, and that's reflected in the asset quality by looking at the Stage 1.
Understood. Understood. This is quite helpful. Thank you so much, and wish you all the best.
Thank you. Next question is from the line of Harshad Awalegaonkar from Bandhan Asset Management. Please, go ahead.
Hi, sir, thanks for the opportunity. I just wanted to understand on this, refinement of the ECL model that you have, that you have done. Is this a one-time exercise or it's a periodic exercise that you undertake, and what's the frequency of it? So the idea to understand is this INR 86 crore benefit that you have got, can, can it reoccur, and what, what will be the frequency of that?
Yeah, so the exercise, the benefit that we have got is incidental to the refresh. So let me just clarify that first off. The refresh that we have carried out, we believe, is to recognize the fact that over the last four to five years, ever since we had created that model for the first time when we first came in, the portfolio has grown and each of the product individual product portfolios by themselves have grown, and therefore they carry their own risk and reward metric, which was important for us to recognize in the whole design of CE. That's the reason that we have done this, we have done this refresh.
On an annual basis, we will keep looking at this model and keep refreshing the, reviewing the model and refresh if required. But your question on benefit or no benefit, I think that's an incidental outcome of the refresh that we have done.
Sure. Just to understand, this annual refresh is done in every Q2, or it's like, say, next year, we'll do the refresh in Q2 once again. Is that a correct understanding?
You can say that, yes.
Okay, sure. Thanks. Thanks a lot, sir.
Thank you. Next question is from the line of Nischint Chawathe from Kotak Securities. Please go ahead.
Nischint, you are very,
Sorry, you're sounding very distant and very feeble.
Yeah, is this better?
Yes, thank you.
Yeah, sorry. Thanks. Just, you know, two questions. One is, what is the GNPA, as per RBI announced?
It's about 5.5%.
5.5%. Okay, 4% versus 5.5%. Okay. The other is, you know, on the SME loans, you know, Raul kind of mentioned that you're moving from, you know, larger tickets to smaller tickets. Maybe if you could just elaborate that, you know, what exactly is the change in strategy and what's driving it?
Yeah, so the way we've, you see our, our SME plays largely into, you know, in the retail segment, we call it as LAP and business loans. And in the slightly higher tickets, basically we do business enterprise loans. So the differentiation is, enterprises with INR 25 crore and below turnover and above INR 25 crore. So the focus right now is enterprises with a turnover less than INR 25 crore. And largely, the incremental business that's happening there is through LAP, right? Machinery loans we continue to do because we've been doing it for a period of time, and we've had pretty good credit costs as well as growth outcomes.
What we continue to do in the whole, in the slightly larger ticket is because we have, you know, quite a few of the vendors to the M&M Group, supplying, you know, both to the farm as well as the auto sector. We do a bill discounting. We've been doing it for some time now, and we're getting more traction there. Of course, that's a business which is not, as, competitive as the retail business in terms of NIMs and ROE, but we do it because it's a very secured business and, there's hardly any OpEx in that business. But what we've really seen going forward and what we've taken a call is, you know, you really can't amplify LAP business. It's a very structured business.
You've got to have deep distribution, both, within the organization as well as with, DSAs and the DSA community. We've had a new LAP head who joined us three months back, who was running LAP at scale in a different organization. And then as he's building out his team, we've also built out the whole underwriting team for LAP. It's carved out as a very separate SBU. There's a separate FCU unit for LAP, and there's a separate underwriting, as I mentioned, and a separate collection vertical. So a new collection head for LAP, a new business head for LAP, and an FCU unit is the additions we've all done in Q2 of this fiscal, and we do see that business growing stronger as we go forward.
The specific reason why you would have probably, you know, kind of gone slow on the larger ticket LAP is because of yields or trade costs?
Mostly yields, and these are also business enterprise loans to... As you say, in the MSME segment, our focus now is on the micro small. Medium, we believe, is becoming very, the barriers to play there with banks becoming very aggressive pricing-wise. So largely to write, we are giving up on the medium enterprises, which are above INR 25 crore, where we will give, you know, short-term loans or term loans. That's why we are, we are, we are kind of scaling down on.
Sorry, just stretching this further, can we sort of then read that this is kind of moving a little bit away from prime? I mean, is that a right way of looking at it or?
No, no, no. Not really. I think in the 25 to 1 CR LAP business, we will get a decent composition of close to prime and prime customers.
Okay. Got it. Thanks. Those were my questions, and all the best.
Thank you.
Thank you very much. Ladies and gentlemen, we will take that as our last question. I'll now hand the conference over to the management for closing comments.
Hi, everyone. So I think, true to our belief, you know, the customers, we always felt as things improve on the ground, we would see them perform in a way very different from when the things are difficult. And, they have shown their resilience, and they have been able to repay very, very regularly. And we always said that these are not intentional defaulters, they are the circumstantial one, which normally delayed, and we are seeing that. I think also important to note that while we have learned through that, we've also added new segments to the business, and, those customer profile are allowing us to be more stable in terms of our asset quality is concerned.
You will see, therefore, over a period of time, how the Stage 3 numbers stay at the lower end, and even in a most disruptive situations, they don't jump back to higher numbers. And those are purely by selection of customers, the underwriting standards that have been put in, and giving up of certain segments that were very volatile in nature. I think those are the steps that has been clearly taken. I think, what has also been proved by this model over a period of time, that amidst all competition out there, I think there is a significant advantage to a model and a player who've been there for very long, have built large relationships with the dealers community, which continue to be the source of, business provider.
As well as a company with large customer base, their ability to retain customer and self-generate a lot of business. Even if you look at our numbers today, at least about 15 odd percent or maybe upward of 15%, close to 20%, is self-generated business, and that is going to remain a big strategic differentiator when it comes to playing with the competition out there. I think it's important to also note that while the loans are fixed rate, as the borrowing cost starts to come down, over a period, we would get the benefit of NIMs.
While we're not able to put a number to it today or a time to it today, but we have historically seen that clearly, you know, when the borrowing cost goes up and when our liability corrects, that cost has to be borne by us, which we have seen in the recent past. A similar reverse benefit will be seen when the borrowing cost starts to come down and we change our borrowing profile, we'll start getting the benefit and you will see the reflection of that in the NIMs, but we are not able to put a number and a date to it at this stage.
We continue to believe that the rural market continues to be positive in sentiments, and as we have discussed several times in the past, the cash flows which drive this are the tourism cash flow, the people movement overall, the infrastructure cash flow, and the farm cash flow. Well, there has been some talk about the lowering of the farm output, but I personally think that the support prices would be adequate to cover up for the yield drop, if any. And therefore, the three cash flows or the four cash flows on which rural depends continue to remain positive, and that's reflected in the overall disbursement growth that we are witnessing, and we will continue to see that. I think our investments will continue in the area of branch expansion.
It will continue in the area of technology, investments in technology and data, as well as in people and people capability development. Because while they do bring some temporary pressures on the P&L and the OpEx stay little high temporarily, but they have disproportionate benefit, when you look at a three-year kind of a period horizon, and therefore, we would not shy away from that. And putting all of this together, we very strongly believe that the commitment that we have made for 2025 are definitely an achievable commitment from our side, and I think every effort is in that direction, and you've seen it quarter-over-quarter, that numbers reflecting, in that particular direction. Particularly, what gives us, you know, absolute comfort, confidence, and happiness, is the growing of Stage 1 and coming down of the Stage 2 and Stage 3.
I think I have emphasized this even in some of the answers before, and it's super important to therefore understand that if Stage 1 remains that high, under any volatile condition, they don't inch towards becoming an NPA. And second is, the bad debts coming down and termination going up is again a positive trend, which means we are able to reach out to this customer, negotiate and settle with them. So if you kind of look at both of this, and overall, therefore, termination and bad debts come down in a manner and Stage 1 goes up in a manner, I think the promise of returns that we are talking of would be very visible as we see quarter-over-quarter.
And we are conscious of the fact that, even if we have to give up some business at the cost of not able to be you know, completely confident of certain quality, we are more than willing to do that. At this stage, we have tightened all norms around it, and therefore, the overall confidence of growth with asset quality focus and return in mind. I think that's what we have seen, and rural and the semi-urban and little of what we've started doing as a prime customer, the three together allows us to do that. So I would stop there with that, to confirm to you that the trend that we see are here to stay, and we would see improvement on a continuous basis. Thank you for joining this call, and thank you to the organizers.
Thank you for hosting us today, Abhijit. Thank you, Abhijit. Thanks a lot.
Thank you very much. On behalf of Motilal Oswal Financial Services Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Bye.