Ladies and gentlemen, good day, and welcome to Mahindra & Mahindra Financial Services Limited Q3 FY 2022 earnings conference call hosted by IIFL Securities Limited. 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 the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Alpesh Mehta from IIFL Securities. Thank you, and over to you, Mr. Mehta.
Thanks, Nirav. On behalf of IIFL Securities, I welcome you all to this Q3 and 9M FY 2022 earnings conference call of Mahindra & Mahindra Financial Services. The company is represented by Mr. Ramesh Iyer, Vice Chairman and Managing Director, Mr. Vivek Karve, CFO, Mr. Amit Rajge, Chief Operating Officer, Mr. Rahul Rebello, Chief Operating Officer, Core Businesses, Mr. Dinesh Prajapati, Head Accounts, and Mr. Rajesh Vasudevan, Senior VP, Accounts. Now without much ado, I hand it over to Mr. Iyer for the opening comments and post which we will have a Q&A session. Thanks, and over to you, sir.
Thank you. Good evening, everyone. Thank you for joining this call. We had our results announced about an hour back. We had our board meeting, and the results were announced an hour back. Just to give you a very summary of how the quarter has been for us, I would very strongly think that the quarter has been in line with what we had envisaged for the quarter. Which is, we were focusing on getting back to a growth in our core business as well as to focus on the collections and the recovery from the NPA accounts. After our first quarter pressure, we had put out on how do we see the following quarters pan out.
We had kind of put out saying that by end of March, we should reverse at least 80% of the provisions that were made in the first quarter. As we close the books in this quarter, we do see that we have been able to reverse upward of around 60% of the provisions that has been so far made. What is causing this to happen, and how do we see it from here? Clearly, the segment that we are operating in and the geography that we are operating in has had a decent last 2Q . The economic activities have returned back to a kind of, I would say semi-normalcy, though not full normalcy, given certain segments didn't open up fully. Nevertheless, it was substantially better than what we saw in the first quarter. The monsoon turned out to be good.
The harvest went by, was very good. The yields are very supportive. The support price given is also equally good. We do see that the cash flows from different state governments are being paid to the farmers on certain installment basis. Still there is a commitment, the crop has been bought, and therefore, we don't see a pressure arising from that segment. Rural sentiments are holding up positive. We are seeing demand for vehicles at the dealerships. We are continuing to see the footfall at the dealerships are increasing, but the problem truly is the non-availability of vehicles, and that is building some pressure on the aggressive disbursement which otherwise could have been achieved.
The tractor business has seen some slowdown, and my understanding and belief is that it's at the back of the contracting segment, yet not buying tractors or replacing their current tractors. That, therefore, is causing a little pressure on the overall volume. As otherwise, the farm side of tractor buying was very good. I think it's important also to note that the previous year volumes on tractor had a very aggressive growth and therefore one has to look at that base and from where that we have to see how the growth is. On the commercial vehicle front, again, there has been a decent movement by the fleet operators.
I think the less than five vehicle owners, et cetera, are still resisting the buying of new vehicles because possibly the vehicle price is too high and their economic viability is not something that is comfortable for them. Therefore, we are yet not seeing buying happening in that segment. Overall, I would think that the volumes are picking up, and if the vehicles were to be made available, which is what we hear from the OEMs, that the vehicle availability will start improving. I think that should result into a good number even for us. All of this has led to our disbursement growth on the pre-owned vehicle side. We have seen good traction. Again, demand is very, very high on the pre-owned vehicle side. Again, there the supply is a little weak.
With the new vehicle availability being a challenge, people are not offering to exchange their existing vehicle until there is an assurance of getting the new vehicle. Once that side starts improving, we can even see better action on that front. Clearly, our customer segment where we have seen good collection efficiencies and we have been putting this out on a monthly basis. In December, we actually had 100% collection efficiency. In the quarter, we had upward of 95%+ collection efficiency. I think overall the collection efficiencies have been good. Even if you look at our delinquent accounts which moved into NPA in the first quarter, we have seen movement in very large percentage of the accounts. We have seen movement in collection.
While, yes, people have not yet been able to clear their entire past due, but for sure they are able to service their monthly installment and many of them are in fact also paying an additional installment. The reason why we are able to see the reversal of NPA happening, clearly. I think therefore, on the ground, the fact is that the customer cash flows have improved, demand continues to be robust, and that is helping us, to kind of look at both business growth as well as collection and overall delinquent correction as the direction that we had set for ourselves after the first quarter, and we have seen that happen in both the quarters.
During this period, we have regained our leadership position in the tractor business, given that volumes of tractor at various counters where we had a little pressure on the market share has been regained by us by putting in a specific team looking at that specific analysis of various dealership as to where we had lost certain market share, and therefore what was needed to be done has been done with, and therefore that has also helped us regain the volumes in tractors and leading to an increase in market share.
As a matter of fact, in every product we seem to have gained some market share, though not substantial in certain products, but every product has shown a trend of gaining market share, whether it is the Maruti range of vehicles or whether it is in the Mahindra auto segment, including the new product launches that Mahindra did of the XUV700, et cetera, which are a short supply product at this stage, and there's a heavy competition to finance those products from every end. Given our relationship with the dealerships and our local presence out there has helped us gain some volumes even in that segment, and that adds to the overall volume.
We are confident at this stage to definitely make a statement that even going forward you will see a growth trajectory from our overall disbursement is concerned, as well as our collection efficiencies will be maintained at the levels that we are. We would see a reversal of NPAs happening for sure the way we have projected. Of course, all this is at the back of the practices that we had so far with the new regulatory guidelines or guidelines that have come from RBI to look at NPA a little differently. I think it's important to recognize that on the ground for the customer, honestly, nothing changes with this kind of a regulatory change. Our practices will undergo definite change.
The future products that we would launch will factor in this requirement and therefore, certain product designs will have to be done in a manner that can accommodate this. As far as the current book is concerned, I think this will require a reapproach to aligning with the requirement and to meet the customer cash flow as to how do they behave, which way do they behave. We have taken some very definitive actions in terms of setting up collection war rooms. We have kind of created separate teams for different contract segments, different product applications requiring a different approach to all of that. We have resorted to, you know, talking to customer on negotiating and offering them some kind of settlements where they are able to bring in large installments.
All this is definitely going to be an effort on our side to ensure that the requirements are fully communicated to the consumer. It's also about this. You know, as I said, as far as customer earnings, customer cash flows, customer overall business practices are not going to have a dynamic change because of this changed approach. It will have to be initiated from our side. On the overall cost front, I think various actions that we have put in place have worked in our favor. Even at this enhanced level of business and at the enhanced level of collections, etc., we have still been able to retain our cost of operations to be around 2.7%-2.8% type levels. Once the volumes do pick up, I think we are a little invested into the future in this.
Once the overall volumes do pick up and the AUM starts to grow from here, we can definitely see the correction to this number further from where it is. I think net, the point that we are making is that the business is kind of come back and we are seeing growth and we will continue to see a growth trajectory which will then lead to AUM growth. Clearly, collection efficiencies are holding up and that will lead to asset quality maintenance and improvement in asset quality. As was promised, we would see that 80% of the provisions of past getting reversed. The investment in the people front, both in terms of their capability building and competence building, is helping us productivity improvement, but also some specific actions on cost savings is yielding benefits of overall operating costs coming down.
There's a lot of efforts that have gone into the data and the digital front. We have a very large team which is working on it, and there is a core team looking at how the core business and what percentage and what processes of the core business could be digitized and that would further bring in a better improvement to the overall cost going forward, more than that ability to handle larger volumes into deeper pockets. Our penetration continues and we have identified to open another 150 odd branches during the year. I think we will embark on that journey because we have identified several locations which require a more closer availability to the consumer, which could help us gain further volumes and improve the overall collection. On the liquidity front, we have not had any kind of pressure points.
Sufficient funds have been available at a very competitive price for us, and that has helped improve the margin when it comes to our ability to borrow at a very, very fine rate. We are also sufficiently carrying liquidity buffer to be able to meet any challenges if it was to come. The pandemic wave three was little scary to start with. I think there was this pressure on it spreading fast, and it could have a serious impact, et cetera. I think the good news so far is that there has been no major impact out of the third wave. The branches are all up and working. People are all on the streets, able to meet customers. Customers are able to come to our branches.
All that is happening in a very normal manner, and the third wave has not had a serious impact, except in January. Of course, in different pockets, different markets, there were some temporary kind of a pressure that was going through, but nothing in a continuity basis like what we saw in the second wave. Even on that front, there seems to be a better comfort. Overall rural sentiments, I would kind of say that it is not still at its best. If we were to look at any past history, and if we were to say, "Has the rural come back to complete normalcy?" I think we would say it with a little hesitation that it has come back to full normalcy. But directionally we are able to see quarter-over-quarter things look better.
So far, there are no serious signals of things slowing down in a big way. Overall, people have become cautious when they want to acquire an asset or if they want to spend money on any kind of a consumption or whatever. People are a little cautious. People are holding back some money for their future for sure, but, it is far, far better than what we saw at the end of the second wave. If I had put rural 3 on 10, I think we were able to move the scale to say that rural is very clearly now at 6 on 10 or close to 7 on 10. There is sufficient scope still to improve from where it is now that the schools are opening up. We are sure that the school bus operations will become good.
Tourism centers are opening up, so the tourism will pick up. I think overall economic activities are beginning to happen. I think we are seeing a lot of directional talk about mining opening up, coal excavations beginning to happen. I think all of this will contribute to the overall growth. I still believe that there is sufficient action and activity on the ground to believe things will go positive, and we remain very positive to see that even this quarter that is in our hand, we'll see it that way. The month gone by has been a favorable month in all the fronts, and therefore that would remain to be the trend is what we believe, and therefore we could have a good quarter. We are very clearly reviewing the entire RBI guidelines as required.
As all of us know that the fourth quarter for us is always the best quarter, and we would see a good collection efficiency, a good NPA reversal, and therefore even under the IRAC zone, the gross NPA would stand corrected to a different level. If there is a gap that we require to bridge by making any additional provision, we would be more than willing to do. As of December 31, as you've seen, the provision required under IRAC and Ind AS has come back. We are carrying a much higher provision in the Ind AS since we have a high coverage of 50%-50%. In the end of the fourth quarter, there is a gap if we need to, in order to take the IRAC number as of today.
If we were to believe that will remain as it is, no movement whatsoever, then the worst-case scenario is that we may need to do about INR 1,500 crore kind of a number, which we don't think will be the reality. We will see substantial reversal to this number happening as well. I just still want to make a mention that all this rule change, et cetera, will require a revisit to how we do certain things in future. The fact of the matter is that the customer's business, customer's way of earning, customer's way of engaging his vehicle, developing his cash flows may not undergo any major change because of this. I would stop here and then invite questions for us to be able to answer.
I think the whole team is here, and therefore any questions that you may have will be jointly answered by all of us. Thank you and over to 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 handsets while asking a question. Ladies and gentlemen, we will 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 Sanket Chheda from B&K Securities. Please go ahead.
Hi, sir. My question was on your last update that maybe in Q4, we are likely to take INR 500 crore-INR 1,500 crore of provision. Just wanted to understand how this number has been arrived. Is it like 500 is the best case and 1,500 is the worst case? And if that 500 is best case, then why not take it in this quarter itself? What has been the thought process and how this number has been arrived in particular? Yeah. I will give you my comment, and then Vivek can add to that. You know, what we have done is we have analyzed the NPA as of today, and that is as of the December end.
We have seen how many customers are paying what kind of amount already. If these customers were to continue to pay in the fourth quarter, how would they be in terms of their overall repayment, and therefore how many of them would actually come out of NPA one under the new guidelines. There's level of gross NPA that we would reach by that method. Therefore, you know, why consider a provision when we are able to see very clearly that they are able to come out of it, already carrying an excess provision under the IRAC. We want, we would want to give it a complete try this quarter to reverse them, get them collected. Even there could be settlements with customers. All of that actions will be put into place.
Once that is done, and then if there is a gap and if that requires any provisions to be done, is what we would do. That estimate has led us to believe that at the worst what it could be and at the best what it could be. Vivek, anything that you may want to add over what I said, you may please go ahead.
Yeah. So, you're absolutely right, Ramesh Iyer. It would have been premature on our part to take any provision in the third quarter, because our attempt will be to reduce the NPA, which we have now informed the market at about INR 10,900 crore as of December end, to a reasonably lower level. We are all doing the. When we said this about INR 500 crore-INR 1,500 crore provision, this is in order to bring our net NPA as per IRAC below 2% so as to complete the norms.
Therefore, we will definitely watch the ground during the fourth quarter and, based on what we are able to achieve by the quarter end, we will take the necessary provision. That's the reason that we did not take any premature action on this matter.
Okay, sir. I'll put it the other way. Unless you see a case wherein you can reach this 6% under IRAC norms without any incremental provisioning, that is, the INR 500 crore lower end that you have mentioned, is there a case wherein it is possible that you wouldn't have to even take that INR 500 crore also? Then it makes sense not to take in this quarter. Otherwise, if that is the best case, I think that should have been taken. I wanted to ask whether there is such a scenario wherein you would be able to reach this 6% under IRAC now without taking any incremental provisioning.
That's a judgment call we are making because as I said, when we looked at how many accounts have shown movement in their repayment, even though they are not able to come out of the NPA in this quarter, and the fourth quarter is the best quarter for us from the overall customer collection possibility. Also that we have aggressive programs of settling it with the customer where, you know, we are negotiating and closing. Therefore, the call is that if maybe, you know, if you reach the best case, there may be hardly anything required to be done. Therefore, like Vivek said, why take a jerk reaction rather than go through the process that we have put in place.
Okay. The range that you are giving is on a very conservative basis that this could happen.
That's right. That, like, 1,500 is that, you know, if nothing happens to the NPA that is today, then what will be-
Uh.
Required to be done.
Oh, okay. Cool. Understood. Thanks a lot, sir.
Thank you. The next question is from the line of Gaurav Kochar from Mirae Asset. Please go ahead.
Yeah. Hi, good evening. I had just couple of questions. Just continuing from where Sanket left in the previous call. The total, if I look at, you know, the provisioning, and the difference that you've given, between the Ind AS and IRAC norms, and you mentioned INR 500 crore-INR 1,500 crore as a number. Is that considering the write-backs that you are taking, you know, in the Q4, about INR 500 crore write-back that you'll be taking? Is that net of that number? On a gross basis, is it INR 1,000 crore-INR 2,000 crore? Just wanted to understand, you know, that INR 500 crore-INR 1,500 crore number.
If I compare that to the slide number 25, wherein you've given the breakup of IRAC as well as Ind AS, that number looks slightly on the higher side. The difference in absolute difference of stage three is INR 3,700-odd crore. Even if I do a 40% sort of PCR, that number comes to the higher end of the guidance. Just wanted to understand that INR 1,500 crore or INR 500 crore, how has that been arrived at?
Vivek will explain.
Yeah.
You are right, like at INR 3,000 crore, then I said that let's say that today's NPA under IRAC, nothing moves in the next quarter.
Right.
Right? The high end is that 1,500 number. Right?
Okay.
We have made an estimate on how all, what all can move, and therefore what can be the loan and can we even avoid any provision requirement. Vivek can explain the logic of what he has specifically, but that's the way you need to look at it.
Yes, sir.
Okay.
I think that is correct. The estimates that we have put out are based on a certain assumption of how we see the gross NPA by end of the year. That's exactly the reason that we have given a range, because sitting today it will be difficult for us to predict what that number will be.
Right.
We wanted to be transparent with our investors and analysts. That's the reason that we have put out a range around it.
Sure. Just, I mean, any color on what is the kind of, you know, estimate on stage three, as at the year-end, which is resulting in only INR 500 crore. Is it 200 basis points, 300 basis points improvement in stage three? I mean, just wanted to understand the base case, in case of INR 500-odd crore.
I think our attempt will be to bring our growth stage three to the same absolute level that we started the year with at the beginning of this year.
Okay. Sure. I mean, stage three at the beginning of the year, if I'm not wrong, was 7%, sir, if I'm not wrong?
No, it was around 9%.
Okay, 9%. All right. Sure. That was one. Just one more question. Just wanted to understand the collection efficiency that you've quoted for the quarter at 95%. Once an account becomes an NPA, do you still keep billing that customer? How does that process work?
Oh, yes, certainly. I think, the account becoming an NPA and billing or not billing are very, very different matter.
Okay.
the billing will definitely continue. Insofar as any account, whether it is in whichever stage it is, it pays.
Right.
It pays into my numerator for calculating the collection efficiency.
Okay.
Collection efficiency is completely a subject matter of the current demand, which is the monthly demand that we raise.
Right.
The collections that we are able to make, from the customer, both from the overdue as well as from the current demand for the month.
Okay. That current demand also includes NPL accounts. The denominator of 100 will include the NPA demand also. Is that correct?
Certainly. Certainly.
All right. Sir, in just that, in that context, I mean, can you throw some light on what would be the non-NPA collection efficiency? The blended collection efficiency is 95%. Just wanted to understand ex of NPL or ex of stage three, what was the collection efficiency number?
I'm sorry, but at current granularity we do not normally publish any number, so I will not be able to share that.
Okay. Sure, sir. Thanks and all the best.
Thank you. The next question is from the line of Rikin Shah from Credit Suisse. Please go ahead.
Thanks. My question is for Vivek. Vivek, if I look at the GNPA under the IRAC norms, it is currently around 17%, and the net NPA is around 12%. Assuming that we make another INR 1,500 crore of provision and gross NPAs, so the IRAC doesn't change, the net NPAs for IRAC still comes down only to 9.7% by the next quarter. So just wanted to understand whether we are expecting. I mean, I'm just trying to reconcile it earlier to you know Mr. Iyer's comment that even if the GNPA doesn't move at all, the maximum provisioning that we would need be only INR 1,500 crore.
The way we look at it is like this. Our gross GNPA is INR 10,897. The IRAC required provisions for GNPA is INR 3,189. But you will also see there is INR 1,877 of overflow, that is the excess of IndAS provision over IRAC provision. If you are appropriating this number to the GNPA, that number comes down to about 9.9%. What is this whole idea of IRAC doing? The whole idea is that we need to be below 6% at net NPA level, and we also need to be adequately provided for on all the standard assets.
Insofar as the provision required to meet both these requirements is fully covered by the provisions that we are making under Ind AS, we should be good. That's how we are looking at it as of now. We have put out a number of INR 500 crore-INR 1,500 crore, depending on the range of GNPA number that we should be able to reach by end of the year.
Okay. This is helpful. In this case, what we are saying is that if we appropriate this excess INR 1,877 crore as of March, we would not have any excess provision over the IRAC, right? Then our Ind AS provision would broadly be similar to IRAC.
You are right. We would be adequately covered. While doing so, we would be achieving two targets. One, in Ind AS we would be below 4%, which was the regulatory expectation from RBI to bring that number below 4%. As per the IRAC, we would be below 6% so as to meet the PCA norm.
Okay. Thank you.
Yeah. Thank you.
Thank you. The next question is from the line of Kunal Shah from ICICI Securities. Please go ahead.
Yeah. On this moment of stage three, when we look at it, there has been INR 1,800 odd crores which have got resolved. At the same time, there is huge net addition as well of almost INR 1,360 odd crores. I'm not sure maybe how should one look at it, because I think the last time it was quite contained, and this is not even the forward flow. Anything to read into this?
Dinesh, Vivek, somebody's taking this? Actually I lost. If possible, if the question can be repeated.
Yeah, yeah. Yeah, Vivek. I was just checking that, in terms of this Stage 3 movement, okay. Obviously there is a resolution of INR 1,860 crores, and there are forward flows of 340 odd crores. But still there is, there are net additions of almost 1,360 odd crores, and that seems quite high compared to that of what we saw in Q2. Is it because of some unseasonal rainfalls or floods or any particular geography giving the pain because this net additions seem to be on the higher side?
No, I would not call any specific reason for this. It typically happens and insofar as the overall trend is decelerating, we should be okay with that because the business is like this. The business is all about earn and pay. There will be customers who will enter, customers who will exit. However, insofar as the overall trend, which is what we have demonstrated, that you know, from 12.7% we have brought it down to 11.3%. Another thing is, while there would have been additions in Q3, it doesn't mean that these guys who entered stage three did not pay. They have all made a part payment.
I think more than 50% of the exposure belongs to people who have done part payments during the quarter. We don't want to read too much into it. This is business as usual, and this is how the earn and pay customers behave.
Okay. Maybe in terms of GNPA, so 810,897 is the current number. For 6% we need to get the net towards INR 3,800 odd crores. I think adjusting for the outstanding provisions which are there even under Ind AS, we are somewhere around INR 5,300 odd crores. That's where maybe at the upper end we are saying it's INR 1,500 odd crores which can slip even if there is no recovery, which happens in Q4. That's the-
Thing is absolutely right.
Perfect. What could be this number of GNPA as of September and as of maybe net NPA, we have done some allocation from 3,200 to 3,700 that's so net NPA would have come out. But if I have to look at GNPA as of September, how much would that have been?
See, the thing is, this daily stamping started only effective.
Yeah. Okay.
The IT system capability was ensured only from that day onwards.
Okay.
Other than that, the systems are not equipped to look at that data to be very fresh.
Sure. No, the only thing was almost 30% of Stage 2 is something which is getting classified as GNPA. Which is maybe much higher, okay, compared to what we are looking at for peers. I don't know, maybe is the collection efficiency out there quite comfortable? Because when we look at it, the difference between GNPA and Stage 3, and that is almost 30% of our Stage 2 assets, so that seems to be quite high. Yeah.
I would say that that is typically the nature of our customers. Our customers are many of them first time borrowers. They are earn and pay vehicle, their cash flows are completely dependent on vehicle. It is not unusual. That is the reason why Mr. Iyer in his opening remarks said that if we need to control the GNPA flow going forward, we may need to reexamine the kind of cohorts that we would like to give loans to. Or we may have to make certain amendments to the way we collect from these customers. These are the initiatives that we will take.
Um, am I-
Yeah. Yeah, I think,
Please take an interline for the, uh, speaker to help. Ladies and gentlemen, please stay connected. Also you're reconnected, you may go ahead.
Sorry. Am I audible now?
Yes.
Yeah. Yeah. You are audible. Yeah.
We got cut off for a minute. Did you hear me completely?
Yeah, yeah. We heard you completely.
Yeah. That's perfect. Okay. Maybe even if like 20% of this comes back, INR 500 odd crores in terms of the reversal of the provisioning, then what will be required will get offset. Would that be the way to look at it, the way there has been the write back and maybe whatever is the write off, that could be the hit to PNL in Q4, broadly?
That's right.
Okay. Got it. Okay. Thank you.
Thank you. The next question is from the line of Viren Engineer from CLSA. Please go ahead.
Yeah. Hi, congrats on the quarter. A couple of questions. Firstly, for Mr. Karve, the net NPL ratio we are targeting at 6% rather than 4%. Did I hear that right? If so, why? Because, then we can't pay out dividends, right?
It is like this. These are two different ratios first of all that we are talking about. One ratio is under NPA as per Ind AS, which is in the NPA terminology called stage three. We are targeting a net stage three below 4% because that was the regulatory expectation from RBI. That is point number one. Point number two is the net NPA below 6% as per IRAC, and this is to comply with the PCA norm. This is the Prompt Corrective Action norms. It is not just for the dividend, but it is basically to avoid any regulatory action or any regulatory interference from the...
I would not call it interference, but I would say, greater degree of oversight from RBI.
No. Sir, I get that. Isn't the RBI norm? Doesn't it state that if you had more than 6% net NPL in the past three years, then you have to get it down to 4% in order to pay a dividend?
No. In fact, if you look at the extant regulations of RBI on dividend payment, they actually talk about 6% only. They don't talk about 4%.
Okay. Just to clarify from an accounting perspective, this INR 500 crore-INR 1,500 crore hit is going to go through the P&L. It won't be like an adjustment to impairment reserve or any such sort of accounting adjustment, right?
No. It will be by way of a management overlay provision.
Got it. Since firstly, we did restructuring in 1Q, which had a six-month sort of window where we pay lower EMI. I know it's too early to say, but can you talk about how collection trends from that restructured book has been now that it has come out of that six-month sort of moratorium?
I think this is one area that we continuously monitor. As of now, we don't believe there is any reason for us to be very concerned about it, but this is an area that we will keep watching, and any curing that we do out of this pool will be completely a function of how these accounts behave. Because quite separately, RBI has already come out with a formula wherein how the curing should happen. We will also watch the payment behavior of these customers, and accordingly we'll take a curing. In any case by end of Q3, that is December thirty-first, no curing has been done.
The only change in the restructured accounts has happened either because the accounts have got settled, closed, or the accounts by natural progression have moved into CC.
Got it. Just lastly, if you could elaborate more about your collection war room, as in, you know, how is it structured, how many people, just some more details would really help. If you've really changed some underwriting practices in the past 18 months, you know, maybe in terms of LTVs, maybe in terms of avoiding certain types of products or people. Because the idea is that once all of this is over, you know, COVID is over and this year is done, then on a steady-state basis, you know, do we get back to say a sub 2% credit cost or how do we think about, say, beyond the next two, three quarters?
I'll ask Rahul to explain the collection war room and the credit parameter changes and how we're using data for better decision-making. Rahul, you are there on the call?
Yes, sir, I am there.
Yeah. Can you go ahead? Can you explain the war room concept and how we have set it up and what we are doing?
Sure, sure. The collection war room, as you're all aware, was set up after Q1, and the objectives largely were to look at how collections can play a very active role in proactively seeing how the forward flows can be mitigated as well as recover as much as possible from the existing stage three. How we've gone about it, we do have a large collection team, and this collection team has been enabled with a lot of data insights on how to you know create cohorts of customers, more visibility on how these customers' contracts behave not just on Mahindra Finance, but also how they behave on other lenders. Accordingly, each of these cohorts are dealt with differently.
Our whole collection mechanism, the way in which we approach customers for even settlements and where we have to use legal tools, maybe for repossession, all that is streamlined basis this central nervous system that we created at corporate office. Having said that, the collection war room, you know, continues to operate with full throttle even now. Considering we had committed, as Mr. Raya has said, to get back to our GNPA levels of last year. That means we'll have to reverse significant amount of provision. The collection war room, besides doing, you know, the whole collection activity, also is looking at incremental business, whether we are, for example, a large number of our customers are new to credit. The way in which we underwrite these customers definitely have got revisited.
We are looking at enablers at the time of onboarding itself. Whether it is LT, whether it is IT, et cetera, all of that also is baked in, into our new onboarding.
Okay. On the underwriting parameters or if anything has really changed?
Sorry. Can you repeat it?
I'm sorry to interrupt you. I'll request you to come back in the question queue for a follow-up question. A request to all the participants. Please restrict to one question per participant. If time permit, please come back in the question queue for a follow-up question. The next question is from the line of Karthik Chellappa from Buena Vista Fund Management. Please go ahead.
Yeah, thank you for the opportunity, sir. As far as the increase in the stage three is concerned in IRAC compared to prior is INR 3,674 crore, which is the product that is contributing maximum to this increase?
This will be across segments, Kartik.
It's not like a segment like tractor or something is contributing maximum to this increase. There is no specific product category or segment, is it, which is contributing to this increase?
I don't think so. See, as you know, even in the past we have explained, our NPAs or our collections are more geographical impact rather than really truly product impact. Except of course, when certain times, as we explained the last three or four segments which are not done well. Even within the increased NPA, you will see a similar pattern that you see for our basic NP. It will not be skewed towards any particular product or anything.
Got it. Given that the increase has come maximum from stage two to stage three, why have we taken down our coverage ratio on stage two?
Sorry, are you saying we have taken our coverage down on stage two?
Yes. From 13.6 to 12.7. If you look at the reduction in stage two loans and the reduction in provisions, it's actually slightly disproportional. Given that we still have about INR 500 crore-INR 1,500 crore of buffer, which we are expecting in Q4, why did we choose to reduce the coverage on stage two?
No. There are two things here. What we do is there is a quarterly refresh that keeps happening on the LGD and PD ratios, and this is a feature which is there on a quarterly basis. Based on that, there could be some movement in the underlying ECL model itself. That is point number one. Point number two, if any of the restructured assets have by natural progression moved into stage three, while the coverage on stage two will come down, actually as they enter stage three, the coverage under stage three will go up.
Okay. Okay, this is very clear. Okay, thank you very much, sir, and wish you and the team all the very best.
Thank you. The next question is from the line of Nischint Chawathe from Kotak Securities Limited. Please go ahead.
Hi. Am I audible?
Yeah, Nischint. Yeah, yeah.
Oh, thank you. This is actually on the cost of funding. It looks like there was a sharp decline in the cost of funding this quarter. Just kind of curious what really happened and what proportion of your total borrowings are linked to external benchmarks.
Nischint, can I request you to repeat what you just mentioned?
No.
15 seconds.
He's saying your cost of funds have come down during this quarter, and what percentage of your borrowing is linked to the external environment, linkages, and has anything specific happened because of which your cost of borrowing has come down? Nischint, that was your question, right?
That's right. That's right.
Yeah. Vivek, should I go ahead and answer it?
Yeah, please. Go ahead.
Yeah. Nischint, as you would have been noticing that we have an advantage of underlying asset which qualifies for a PSL. We continue to get a very decent pricing from the marketplace for our not only on the on-lending PSLs from the banking system, but also a decent securitization deal, which we have been doing every quarter. That is definitely helping us reduce our borrowing costs. At the same time, overall market had been quite liquid, and which also enabled us to continue to borrow at a very, very decent price. To your point on the last point, what you specified, Nischint?
Linkage to the benchmark.
What proportion of your
Yeah. Around 17% of our borrowing is linked to the external benchmarks, which is either repo or the T-bills.
In anticipation of rise in you know some of these benchmarks, have you kind of effected a rate hike on the asset side?
Not yet, but we are in the process of putting out our prices from the end of this quarter. We won't want to do it immediately because there is still an advantage of the overall cost of money. As we start seeing that fresh borrowing starts to happen at a new rate, then we would also start pushing up our rate accordingly. Dinesh, maybe there's one more reason it could have come down is some of your past borrowings, which were high rate borrowings could have matured and you would have replaced with a new borrowing at a low rate.
That's true. In fact, there is still a scope for us to continue to see that our cost of fund may continue to remain lower because our mix of borrowing, if you see, our short-term borrowing continues to be at a very, very low. So incrementally, we have a scope to borrow through a short-term source.
Sure. Thank you very much and all the best.
Thank you.
Thank you. The next question is from the line of Mihir Ajmera from ENAM Holdings. Please go ahead.
Hello? Hello?
Hello.
Mihir, you're not audible.
Hello?
Mihir, may I request you to speak through the handset?
Hello?
Go ahead.
Hello?
No, there's a lot of disturbance. Maybe we want to take the next question, then Mihir can come back maybe.
Thank you. Mihir, I request you to come back in the question queue. The next question is from the line of Mayank Gupta from Citadel. Please go ahead.
Hi, sir. Thanks for taking my question. This INR 3,700 crore extra that we are sort of showing, how much of this is coming from the impact of, you know, reversing the NPL upgrades versus the impact of daily stamping that we might have seen in the last, one or two months?
Dinesh, anybody has got that kind of breakdown?
Difference between the gross stage three and gross NPA, right?
No, no. He's saying that, yeah, 7,000 versus 10,000. The difference is coming from daily stamping normal.
Accounts off for daily stamping only because these are the accounts which, as per our ECL model, are not Stage 3. In terms of their aging, they are below 90 days today. Because they had touched 90 DPD and they have not come back to 0 DPD, they are being classified as NPAs under the IRAC norms.
Got it.
Hope I've been able to clarify.
Got it. What I wanted to ask is two things. The question essentially that I want to ask is that, you know, typically in Q4 we see a lot of recoveries, a lot of NPL upgradations because people pay up. This time around because of the NPL upgradation norms, will we be able to see the same sort of recovery that we have seen in the past Q4s?
So far as the stage three is concerned, you will see the same. As far as the IRAC NPL is concerned, which is why we have taken the additional range of provision that we may have to do in case they don't completely reverse.
Got it. Just to confirm, you said that the target is to keep net NPL at 6% and net stage three at 4%, right?
That's right.
Wouldn't that mean that our IRAC, that the total provisions that we hold under IRAC would be lower than the provisions that we hold under Ind AS, if you're keeping net NPL at 6% and stage three at 4%?
No. No, no. If you look at our Ind AS, I think we have a 50%-53% cover, right? Under the IRAC, the provision norms are very different from the way the stage three provision norms are under ECL. Vivek, is that right? You may want to clarify. That's the reason that IRAC will always be lower than the Ind AS requirement, right?
Yes, you are right. You look at it this way, that as on date, we have an excess provision of INR 1,900 crore, and the estimate of INR 500-1,500 that we have put out is after utilizing this excess. We are primarily looking at a scenario that in order to comply with both the ratios below 4% under Ind AS and below 6% under NNPA, we may not have any excess of Ind AS over IRAC, but we will be adequately covered at the same time.
Got it. Just if I can slip in one last question, and this is more sort of, you know, the business construct or the change in business that you're talking about to manage these RBI NPL norms. Now, what I understand is that, a lot of our cash flow is, or the customer's cash flow is agri-based. I understand that, you know, banks, when they lend to agri segments, they get to collect or they get to recognize NPLs in terms of cash crop cycles or crop cycles, logically because that is how the customers make money. Given this constraint, how are we going to be able to collect money on a monthly basis from the customers? Because this essentially creates a disparity between how regularly we will collect money from the same customer versus how regularly the bank needs to collect money.
Are we representing this to the RBI? Because this clearly seems to be a disparity here.
If I may attempt that. You are right that banks can and specifically they do for their agriculture loans, which is crop loans, so that they have a you know 365-day norm of income recognition of NPA. When it comes to structuring loans to underlying customers whose cash flows are dependent on agriculture, especially our tractor portfolio, there too we are able to match the requirement cycle to mimic the cash flows of the customer. The difference only will be in the recognition of NPA, which banks probably especially for their crop loans have a slightly longer duration to recognize NPA.
Understood. All right. That's it from us. Thank you so much.
Thank you. The next question is from the line of Rahul Garg from Aditya Birla Asset Management. Please go ahead.
Thank you for the opportunity. Just one important question. If you could, talk about the growth momentum and.
Sir, sorry. Your voice is breaking slightly.
Sorry. Am I audible now?
Yes.
Sorry. Just one question. If you could talk about growth momentum coming back with the improvement of pickup in disbursement. Last four or five quarters, there is a lot of noise or stoppages in work because of COVID waves. If you could talk about what type of trend do we expect in the next twelve months when it comes to growth and pickup in disbursements and therefore AUM growth?
Clearly, if you see, I alluded to this, even in my beginning comments, which is, you know, we have started seeing gaining market share in almost all the OEM product lines. We are seeing definitely demand up there. Once the vehicle availability improves, we should start seeing growth continuing in the all segments that we are looking at. We are very bullish about the pre-owned vehicle that is refinancing. That is, we are very bullish because the demand there is very, very high. We also see very clearly that the commercial vehicle pickup is beginning to happen, though slowly, but that will begin to happen. Last whole year, we had not done much of commercial vehicle lending at all.
With the revised product offerings to certain high-end customer at the rural segment, we are able to also get traction from high-end customers in rural through our smart branches and through our digital initiatives, et cetera, and our additional branch network that we are looking at to go more deeper. Put all this together, I think maintaining the growth of around 20%-25% is very clearly visible, but of course, subject to availability of vehicle, et cetera. The only area where we see there is a little slowdown at this stage is the tractor volumes. But as I said, we are even confident there that once the construction segments do start participating in the tractor purchase, that would also start adding up. Apart from the fact that, you know, one year, one and a half year back, definitely our focus was more on collection, one.
Two, the rural was resisting and not adding too much of buying there. That was adding to some volume drop that we had. Certain segments were not buying at all. I'm very reasonably sure that once things open up, like you said, once the COVID is behind us and the tourism starts to happen, schools begin to happen, all those segments will come back to start buying vehicles, which are very strongly our segments of customers. I think our confidence is high in terms of disbursement growth beginning to happen, leading to AUM growth is something that we are very confident of. It's. We are seeing it on the ground, things beginning to change, and we will watch it by the month, not even by the quarter, and we are already seeing benefits of that flowing towards us.
Rahul, anything else that you may want to add in terms of any particular geography, product?
No, sir, I concur with you. I think you have covered it.
The high, strong disbursement growth should translate into growth. Are you seeing a change of repayment cycle also moving in tandem to improve the AUM growth?
Sorry, what will change, you said? I missed the word. I don't know if somebody else heard it, but.
What I'm trying to understand is that, the strong disbursement there, growth should translate into AUM growth as well in the coming year.
Yes. Yes, it should. Because, you know, so far the AUM has been a little stagnant because the recoveries have been much higher than the overall growth that has been happening.
Right.
Once the disbursement growth starts to happen more strongly, even though collections would be maintained at a high efficiency level, but the net will start adding to AUM.
You believe that 20%-25% type of disbursement growth in FY 2023 is very much possible?
I would strongly think so, because the market would support. I think, you know, what we have seen the previous year is a large part of non-availability of vehicle has played its role. The run up to the next election, next three years, we would see buoyancy in rural and, you know, with infrastructure opening up and focus on various, infrastructure projects. I think all of that will add to the rural consumption, at least when it comes to vehicles like pickup, LCVs, the JCB kind of or backhoe loaders. You know, these kind of products will all start doing well in the next three years. I mean, run up from now to the next three years.
Just if I can push one more question. Your outlook on net interest margins and how are we placed, say from point of view that there could be some slight increase in rates either by the regulator or the short-term rates moving up already, to some extent. What would be your stance and do we expect margins to remain stable?
Two or three ways of looking at it. One is we will continuously look at our product mix on the borrowing side to see how do we remain the most efficient. Like Dinesh explained, you know, our assets do qualify priority sector, so the securitization routes do continue to give us the advantage of borrowing cost. Second is some of our past borrowing, which are actually high cost borrowing, even when replaced now, the current rates at which we would borrow would definitely be possibly lower than the rates at which it has been averaged out in the past. Therefore, even though the current rates may slightly go up, it may not actually increase our borrowing cost overall. The third is once the borrowing cost starts to move, the market does allow you to price yourself for future lending also accordingly.
We have always maintained this stand. If just about 15, 20 basis points go up, we won't change our lending rates. If we do see that kind of a stance and we see 20, 30 basis points and go beyond that, then we will also offer new rates to the customer. The last is our focus is going to be a little higher also on the pre-owned vehicle financing, which comes as a different yield. We have become once more we have become number one financier for tractors. The tractors also come at a little higher yield. That product mix change also will increase our overall yield at the lending level. Put all this together, I think to protect the margins at which we are operating, even when the rates were to slightly go up, is not our major worry at this stage.
Sure. Thanks. Thanks a lot for your time.
Thank you very much. Ladies and gentlemen, that would be the last question for today. I now hand the conference over to Mr. Alpesh Mehta for closing comments.
Thanks, Dheeren, and thanks everyone for joining. Thanks, everyone and the management for joining on this conference call. Thank you and have a great day.
Thank you. Thank you, everybody.
Thank you.
Thanks a lot.
Thank you. Thank you all for patiently listening to us. Thank you so much.
Thank you very much. On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.