Ladies and gentlemen, good evening, and welcome to Mahindra & Mahindra Financial Services Limited Q2 FY22 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 0 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.
Thank you, Nirav. Hi, and on behalf of IIFL Securities, I welcome you to MMFS Q2 FY 2022 earnings conference call. The company is represented by Mr. Ramesh Iyer, Vice Chairman and Managing Director. Mr. Vivek Karve, CFO and the Group Financial Services, and CFO for the company in the Group Financial Services sector. Mr. Amit Raje, Whole-Time Director and COO. Mr. Raul Rebello, its 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, and welcome to the conference call, and thank you for joining us in. True to our belief, I think the rural market has turned positive, as we were expecting. I just want to draw reference back to the call that we had post our first quarter results. We had said that whatever that we were seeing in that market around that time was caused by the second wave of pandemic, which was pretty severe in rural market, and I want to get into that now. That had caused all the dent and the pressure out there. We had all the belief, even at that time, that the customers who had moved into delinquent account during that period would come back to normal as market begins to open up.
As was our expectation that rural always dips faster when something disrupts, but at the same time, we have always seen, even in the past many a times, that they also pick up with the same speed and climb back to normalcy and then stay up there. We've seen a similar pattern even in this round. They did dip to a very low after the second wave, but then as things began to open up, they did push back themselves up there. The reason why this happens almost all time in rural is most of these customers are people who have their daily earnings from that market, and therefore they have to come back to the market to start earning their livelihood.
Most of the customer segment that we work with are all earn and pay segment, and we have said this many a times before. Therefore when do things go difficult there, they are the ones to get hurt, but at the same time, they do come back and start their earnings through the product that they have acquired. You take any segment, whether it's in the vehicle segment, the tractor segment, three-wheeler segment, all of these segments are earn and pay segment. With the return of activities back in the rural market, we did see the bounce back of our customer segment. I think things look pretty good across the country. We talk of any state.
Even if we take states like Kerala or northeastern states where the severity of pandemic continued for longer, and even at this stage, we do see some numbers up there. I think the routine activities seem to have come back to normal in most of this market, which is a good sign from a market perspective and from the segments that we work with. I think the demand for vehicle trend as we saw in the festival just gone by and before that, the Vishwakarma in, Bihar, et cetera, we did see the demand for vehicle was high and the customer footfall at the dealerships continued to remain buoyant. As we all know, unfortunately, the supply side remains a constraint, but the demand is not.
Therefore, we do think that as the vehicles start becoming available, we would see more traction also on the disbursement side because the demand is building up. The monsoon has been pretty good. Even the earlier round was good. The crop price was good. The farm cash flows were good. In this round as well, the monsoon is definitely much above average, though there were discussions initially that is the monsoon well spread. Is it scattered? Is there a problem, et cetera, et cetera. I think all those doubts were slightly gone by as the monsoon picked up sometime mid-July to mid-August. I think there was sufficient monsoon for sowing. Therefore, we do believe that even this crop will be pretty good. The yield will be good. I'm reasonably sure that the farm cash flows will be positive.
I think on the infra front, again, with the extended monsoon period, therefore, it didn't start in October as was expected, but there are already enough of discussions about how things are opening up on the infra front. You would see tremendous action on the infra front in the rural market, both driven by central spend as well as by the state spend. I think big states like Bihar, UP, Karnataka, Maharashtra, MP, I think will all show good signs of infra opening up. To put it together, we continue to believe, and I've said this before, that when the farm cash flow and the infra cash flow starts to go well, I think the rural starts to turn it around itself. I think very clearly you will see both of this cash flow will drive the rural growth.
We are very, very bullish to believe that run-up to the next election, maybe the next 2 to 3 years plus, you can see the rural buoyancy coming back with vigor. You will see that rural has been under pressure now for quite some time. After a very long time that we've seen in this quarter, everything has chugged along well the way we wanted it to be and we expected it to be. Again, good news from this market is, of course, there are there will be delays, there will be defaults, all of that happened. We have seen a very marginal percentage of customers who are intentional defaulters, and invariably we'll only see customers who are circumstantially hit, and therefore they delay the installment.
Again, our understanding is delay is not necessarily a permanent default, and it's not, definitely not a permanent NPA and for sure not a bad debt. I think that's the way this business is sequenced out there. We will have to live with these customers. We'll have to partner with this customer in their difficult times. We will have to understand what they are going through, and if possible, provide a solution, or if not, at least partner them during this difficult period, and as they come out of it, they will definitely repay. That has been demonstrated through the collections even in this quarter. I think the work is not yet over. We do realize that this is the first quarter after the results that you saw in the first quarter between April, June. We have now started seeing efficiencies on collections substantially improving.
It's across the country and across the product. That's a good news to really look at, rather than, it's not from certain pockets which is contributing this. We are seeing collection efficiency improve across the country and most of the products across the country. Therefore, our belief is that while we believe the job is still not fully done, I think we have confidence that the way we have predicted it to happen, we would see quarter-over-quarter improvements in the same direction. We had made a promise in the first quarter that we would work towards reversing at least 80% of these provisions, and we now have the confidence to see it even more clearer that the path to achieving that is getting more and more clear and very, very focused and directional.
We have also said that we will need to reach the 4% net NPA mark like we did in the previous year. I think with this efficiency and with this market conditions, we do believe that the approach towards that 4% to reach by 31st March will also be well laid out, and we would not have a hesitation to believe that by 31st March, that 4% that we are looking for will be maintained as we move to the market. I think the disbursement growth, while we have seen a good traction, we have seen a good demand, we have seen a good disbursement in this quarter.
Again, if more vehicles were available, if the inventory levels were far superior to where it is, I think we would have gained even higher volume disbursements. Good news from our side is that we have started gaining market share in all the products that we represent. Again, we think that with our deeper penetration, with adequate people being added at every dealership level, with various programs that we have announced which facilitates customer ease and customer convenience, and with the competitive offerings that we see around the market, we have been able to also match those competitive offers, et cetera, et cetera. I think we do believe that the disbursement growth will pick up. We feel very confident that the two quarters in hand normally are a very good quarter from a rural perspective.
Even in fact, if you see in the past, the second quarter is never a great quarter from a rural perspective with monsoon and that, the activity levels coming down, travel becomes difficult, all of that put together. I think what has been proved wrong in this round is because there was a pent-up demand, because people were wanting to come out and start beginning the operation. I think even during this period, we have seen tremendous activity at that level and which has led to good improvement in cash flow, which has led to good collection. On the back of what we have seen in this quarter, we think the next two quarters would be very, very important, and we know for a fact that as every year, we would start seeing good positive outcome from this market in these two quarters.
Festival sentiments are again very high. I think people are waiting for Diwali, Dhanteras, and the demand is very high. Talk to dealers across the country, I don't think any one of them is expressing a demand problem. I think everyone is saying, "Oh, if we get more vehicle, it'll be a great time for us." On the liquidity front, again, we have had no hiccups at all. Sufficient liquidity available at best of best rates for us, and therefore, holding up to the margins has also not been challenging at all. I think there is no pressure to drop lending rates. The borrowing cost is at its best. I think put the two together, we do see good margins that can be really taken in by us. On the cost front, we had put in lot of efforts and the cost is definitely under control.
You would have seen an increase in cost to asset in this round, and it's not in any line item absolute increase in value, but I think it's purely related to the activity level that has gone up and that has led to the percentage that you see out there. One must recognize the fact that today we are a little over-capacitated in terms of where the overall spend is concerned because this particular organization that we have built and the people that we have and the investments that we have made are good enough to actually manage at least another 10, 15% growth for sure. If the asset growth begins to happen, you would start seeing this cost also getting very decently absorbed. Therefore, there is this little pressure that we are going through on the AUM growth.
Again, the good news there is at least the decline is now arrested. The disbursements are beginning to happen. I think you will see going forward, growth of assets also begin to happen. I think during these most difficult times, we have taken two or three strategic initiatives and which is definitely an investment we have made for future. I think we have broad-based our management team. You must have seen Raul Rebello join us as the COO, comes with very rich experience from Axis Bank in handling the rural side and using technology for rural. Raul has joined us. We have added a few very strong resources at our technology front.
We've added someone who's coming with a very rich experience of digitizing core businesses and therefore you will see us move in that direction, and we would be hugely benefited out of that as well. Vivek, of course, is now a year old in the company as a sector CFO. We have a new HR head who would come in from our auto sector business. By and large, at the larger team size, we have got a lot of people handling core activities. Mohit Kapoor, who is our CTO, comes with very rich experience from Bank of Singapore, et cetera, and therefore his contribution to even helping us put in appropriate technology is going to be of immense help going forward. Various strategic steps of this nature have been taken.
We have built a very large team on the data analytics side. We have millions of data that we have worked with in multiple customers over a period of time across the country for multiple products. I think they are all being put together and seen how best can all of this be put to use and how we could really forecast demand, how we could guide recovery teams. All of that is beginning to happen and you'll see benefits of all of this flow into us as we go along. I think through various projects internally, we have set up two or three very key initiative projects.
One, we call it as the collection war room project, where there is going to be a tremendous focus on every bucket of collection, how to avoid a forward flow in this situation where there's so much cash flow in the market, rather work on a backward flow from different buckets. I think you will see great achievement coming out of those projects. We have put in a project to review certain branches which are below the threshold levels that we are looking at, and you will see corrections in those branches beginning to happen, productivity improvement in those branches, and they being pushed to become profitable over a period of time as demand starts to pick up. Those will add a substantial contribution.
All of this together is on an overall transformation journey for Mahindra Finance from going through those difficult times in the last couple of years and helped us understand specific areas that we need to focus on. With added management team and with sufficient investment in technology and data, I think we are all poised to get those benefits. On the digital FinCo business that we were talking of, it's taken off the ground. I think the disbursements are beginning to happen already. I think they are well set to take the journey of growth and next 2 or 3 years that would become a very, very important business of lending small ticket loans to a very large customer base across the country. To start with, they'll be working on a cross-sell opportunity before we can embark on a new customer journey.
It's a phenomenally important business going forward as we see the need for those support. When we use various proxy data that's available, it even more convinces us as to why and how quickly should we be doing that business, and you will see traction around those business. I think the leasing is another bet that we have on. We do believe that many, many organizations want to go asset-light. We have already started pitching ourselves for, the CTC cars of various institutions. We started off, of course, with Mahindra as the first company for us to offer the CTC cars on lease, and we are taking that program to many more companies, and we have some good corporates who are already signing up with us for similar programs.
We do see on the electric vehicle side, leasing will be of very high importance. Jointly with the OEM, we would launch programs out there and leasing would become a very important business to look at in the next two to 3 years as we talk about it. SME is one business where we have always felt that while we want to be cautious about it, but it's a business which can have a clear INR 5,000-10,000 crores of disbursement happening. As I've said in the past, auto, agri, engineering are the three verticals based on which we want to work on the SME front.
Again, with the large Mahindra ecosystem of suppliers, dealers, et cetera, and with various OEMs that we work with, whether it's with Tata, with Bajaj, with Maruti, with all of these OEMs, we are seeing lot of demand for the SME a product, both not just on the CapEx side, but also on the working capital side of the bill discounting, et cetera, where the OEMs are the acceptance of the bill and therefore the payment comes from the OEM. That will again add up to our bottom line. It does not suck too much of capital. They are very short-term in nature, but do add up to the profit line. I think overall, if I have to summarize, I think we do see demand coming back. There's a huge demand out there, inventory levels improving. I think we should get the benefit.
In every product line, we have gained market share, whether it's in Mahindra Auto, Maruti, tractors and all of that. We have started gaining market share and not just half a percent, one percent a number. We are talking of 2 to 3% market share gain. I think that's going to help us come back to the asset growth. Recoveries have been very good between July, August, September. Every month I've seen improvement over each other month, and the trend continues to be the same. We believe run up to March, we will see a similar trend of collection leading to decreasing NPA trends and therefore the asset quality correction would begin to happen well and asset growth will begin to happen. Putting all of this together, I think, we are very bullish about how things look for us from here.
We've built a very large team. As I said, the existing core team is being trained to handle better things at the ground level. We have created a state level CEO concept where senior executives have been given one state to manage, and the outcome that you see is an outcome of a very focused approach that we have taken at every state level. I just talked of how we are reviewing branches for correction. Therefore, I am very, very bullish putting all this together, both growth, asset quality and improvement to profit, returning of margins will be very, very clearly visible for us going from here. I think I would stop here and then invite questions through which we can cover many, many more things. This is a broad summary of where we are. I have not touched on any number.
You must have seen our results. If you have any questions on that, you could raise it in your question session, and then we will try and address all of that. I think overall, I feel that the way the quarter has gone for us and the way we think the future quarters are in store for us, it's going exactly in line with our thinking that we set out in the first quarter after the results. Thank you, gentlemen, once again for joining this call and we'll await your questions and take them as they reach 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 touchtone 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 the question. The first question is from the line of Mahrukh Adajania from Elara Capital. Please go ahead.
Yes. Congratulations. My question is really on the provisioning write-back. In the first quarter itself, you've seen a INR 10 billion write-back on Stage 3. How does it pan out from here on? Do the write-backs get lower? Is this the peak? Because there are concerted recovery efforts in the second quarter. In terms of write-backs, how does it look over the next 2 to 3 quarters? Does it build up on INR 10 billion or is this the max?
No. Clearly.
Per quarter.
No. Every quarter you would see efforts on and recovery from the existing NPAs will happen. Will it be at the same level that we saw in the first quarter? I think my understanding is it will not be because there will not be so much requirement available to be reversed as much as we reversed in this quarter. Clear trend will be that you will see reversal of provisions made from the previous quarters will continue to happen. As this business, there will always be some new accounts which will also come into NPA. Therefore, one has to always look at the net as to what is the levels are. Trend wise, if you are asking a question, the trend will definitely be a declining trend by recovery from existing NPA accounts.
The size of recovery may not necessarily be as high as what we saw in this first quarter. Trend will definitely be declining trend.
If at all you could put a quantum to how much reversals you expect for the year, if at all that is possible?
No. If you recall, after our first quarter, we said that about 70%-80% of the provisions that we additionally made in the first quarter would get reversed. That provision had two elements, which is Stage 2 and Stage 3 element. Once the restructured account starts to repay and starts behaving normal, we will take over a period of time and understanding of how the curing needs to be done, et cetera, et cetera. Then they would start reversing themselves. As otherwise the eligible provision that can get reversed, our belief is about 70%-80% of the extra provision that we had to make in the first quarter would definitely get reversed. I think we have done in this quarter a reversal of close to maybe about 30%-35% of that.
Got it. Perfect. Thanks. My other question was on AUM growth. Of course, you explained well about your market share expansion. When do you see the chip shortage correcting? Is it fair to expect that if that does not happen, you will see a flattish AUM growth by even the end of the year?
When will the shortage get corrected? I'm the wrong person to answer that question. In fact, we are also hoping against hope that it should get corrected very, very soon. What we have seen at this stage for us is at least the contract maturing values are
slightly lower than the disbursement that we are doing. Therefore, the trend seems to indicate that even at this level of operation, there could be a very marginal to, like you said, a flattish level of AUM as we end the year if the inventory levels don't get corrected. If the inventory levels were to get corrected something in this quarter and something in the next quarter, I think the demand is very bullish for us to start believing that there could be some AUM growth registering.
The pre-owned vehicle demand again is very, very high. Unless the new vehicle inventory starts to becoming available, the exchange programs won't commence so fast. There are two things that we can add to all of this. One, as I said, market share gain. Second is my belief that the vehicle prices will start going up sooner than later. If that was to happen, even with volumes not picking up, we could get some disbursement benefit and that can add to some growth. The growth, the way you should look at is when will the volume return to growth area? That will be one growth possibility. Second is the price increase will be the second growth possibility. The third will be contributed by the market share gain that we are doing.
The fourth will be pre-owned vehicle demand continuing to be robust. Once the new vehicles start to be available, the pre-owned exchange program will start. We are looking at growth in these four fashions. Of which the market share has begun, the others are yet to start.
Thanks so much. Thanks a lot.
Thank you. The next question is from the line of Subrat Dwibedy from SBI Life Insurance. Please go ahead.
Thanks for taking my question and congrats for good recovery. Just wanted to know, in case of Mahindra Rural, there seems to be some increase in NPA, although that also, the rural recovery story that you mentioned that one would expect to play out there as well. Any comments there?
clearly, and this I've said before, rural housing is linked to rural, more deeper rural, and this not being a earning product priority wise, they always first fulfill their needs before they fulfill the needs of the EMI repayment for housing. Therefore, it's in the queue, and we have started seeing traction there. There we have the larger chunk of the NPAs in Maharashtra, and we do think that Maharashtra is a story to look at with monsoon being pretty good and therefore there will be good crop coming out from Maharashtra, and clearly the visibility there is corrections will happen. again, it will not all happen in one quarter or two quarters.
The trend will be very clearly declining NPA trend, and it will take a couple of quarters more before we can say, "Oh, the problems are completely behind us." Even they need to start getting back to disbursement and the demand is picking up, it's opening up. I think two things will happen. There is some disbursements will begin to happen, collections already are at good level. Not yet customers are able to come out of NPA even though they are servicing the loan. Once they start paying little over their normal installment, a declining NPA will be seen, but the trends are definitely in the same direction.
Sure. Thanks a lot.
Thank you. The next question is from the line of Rikesh Shah from Credit Suisse. Please go ahead.
Thank you, sir, for the opportunity. I have 3 questions. Firstly, on the asset quality, almost two-thirds of the accounts that are NPA accounts in the last quarter that you had identified which could be resolved have been resolved in this quarter, and around 30% of the Stage 2 accounts as well. The incremental 50% of provision reversal that we are expecting in the remainder of the fiscal year, is it fair to assume that most of that would largely be from the Stage 2 accounts going forward, and not the Stage 3 accounts? That's the first one.
Second one, while the provisioning in this year would be a bit more volatile, but if you could give some guidance on what the normalized provisions would start looking from the next year onwards. The third question is on the growth and the disbursement side. You did highlight earlier in your opening remarks that we have gained market share in most of the products by 2-3 percentage point. If you could just give us some flavor in terms of what changed in this quarter, whether it was withdrawal by some of the peers or were you picking up the disbursements in this quarter, that will be helpful. Thank you.
Let me take the third question first. Actually, if any, we are only seeing all players trying to fight for the reduced volume that's available there. There is no withdrawal of any player or anything. I think, if you go back to our comments in the past, because we were going through this difficult time in the rural, our view was to go a little slow on disbursement and ensure that we have a better control over collections and quality. That probably must have given room to some of the other players to enter and gain some market share. We have had 25 years of history in this market with relationship with dealers and OEMs, and therefore, when we have come back to provide the service to them, we are able to get our space back.
Therefore, we have started gaining from what we had lost a little in tractor or anywhere else, and that's a gain that you're beginning to see, and this will go in the same direction. So far as the provision reversal question is concerned, you're right to some extent, of course, Stage 2 reversal benefits will come. our expectation is that, if you recall, at June end, we had a total Stage 3 NPA accounts by contract number about 2.293 lakh accounts. That has come down to 2.16, and we do believe that if we go in the same path, we want to end March somewhere around maybe 140, 150 type of number. To that extent, number of accounts which are in current NPA levels will also start reversing.
It'll be a mix of both Stage 3, Stage 2 reversal that's happening. Stage 2 will happen also from the restructured account as they start to perform better and as we start dialoguing on when is the right time to look at curing them and et cetera, et cetera. Clearly these two will drive. Was there any other question you had? One you had on the business growth, the other you had on the collection. What was the third question?
Yes, sir. The third one was on the provisioning or credit cost guidance for the next year. Given that, our credit costs historically have been quite volatile in the last few years, would it be helpful to understand how do you see or at what level do you see the normalized provisioning levels?
I think the mix of business that we are in and the mix of geography we are in and the segment that we operate in, and this again, I have said, the best of best in gross NPA level for a business like this one should always look at is a gross of 6% a thing. Whereas we had breached that and we have gone almost up to 9% in March and of course the first quarter was something that we may not want to repeat. Clearly therefore, the gross could come to anything between 6-6.5 a number at best of times. If we maintain our high coverage ratio, our net NPA level should be somewhere between 3% or so, or 3%-4% a range.
It's what we would think for a business like this is. Some products, some geography could be much better, some products, some geography could not be as good. If you were to collectively see it, that's a number we would be ourselves comfortable because that's what we use for our pricing to customer.
Okay, sir. Any guidance on the credit cost, or too soon to guide for the next year?
The credit cost worst could be about 3% and the best could be about 1.5%.
Okay, sir. Thank you very much.
going forward, we expect the resale price of the vehicles and tractors should hold up. That should bring down the credit cost. The worst of times it'll be 3.25% we have seen, and the best of times, I think in the past we have seen 1.25%. So I'm just putting a range, maybe 1.5%-3% is the range, but if good times do come back it'll be 1.5%-2%. The worst time we have seen it reach at 3%.
Got it. Thank you, sir.
Thank you. The next question is from the line of Chirag from DSP Mutual Fund. Please go ahead.
Sir, good evening, sir. This is Vivek Ramakrishnan. I have two questions in relation to what you had asked. One was on this asset prices holding up. I know Mahindra Finance generally tries to work with the customers. Is there any temptation to, repossess the asset and sell them off because the demand is strong? That's question one. The question two is, you also had a urban portfolio. Given the strong growth that we are seeing and opening up and so on, is that also performing better in terms of taxi operators and so on? Thanks, sir.
The urban has started behaving well, at least they are servicing their loans, though they have still not started paying for the past because the offices are opening up, malls are opening up, theaters are opening up. Not full-fledged, but they are. Therefore definitely the utilization of the taxi operations aggregators will go up. We are seeing them servicing their installment, but those still not earning enough to pay for the past. We should also not forget that, at least the urban discussion is still on about the third wave. Is there a new mutant? All kinds of stuff. People earning are also keeping back some money for any exigencies or emergency because they don't want to get back to the same situation they got in the first lockdown.
The answer is yes, we have started seeing clear improvement in those fronts. What was your other question? This one on the urban.
On the repossession and, asset pricing.
repossession, my answer has been always very clear. We have to be very, very sure that the customer has a bad intention to not pay, or we believe that he just cannot earn from the vehicle that he has acquired because he just doesn't understand what he's doing. Only in these two circumstances that we should believe we should take back the vehicle. If somebody is circumstantially impacted, we have knowingly worked with certain customer segment that they are going to earn out of the product and pay. If they are not earning out of the product, just imagine someone is not earning in a geography and we repossess the vehicle, we'll have to sell the vehicle in the same market. How will we even fetch a decent price?
The ultimate program that we drive on repossession is first we see how much money can we really pull out of the customer so that our losses on repossession and sale can be curtailed. That's the first thing that we look for and therefore an appropriate time when it should be repossessed. Second is the timing of repossession is important because certain vehicles pick up demand only in certain times of the year and not all time. Therefore, one has to be playing that game of saying, "Okay, let's pick up a tractor in the second half of the year where there could be demand for the tractor," et cetera, et cetera.
The third is if we know that the customer is delaying the installment because of certain exigencies or because of certain cash flow pressure that he's in, and he's able to reach out and explain to us what it is, we understand, we partner those customers. Because ultimately we don't want to be seen as someone who's lending money and repossessing at the back of it continuously because the product brand also gets killed. We can't run that risk of brand being eroded for the OEM because then they may not want to partner with us. We are a cautious repossession company. We do repossess 3-4 thousand vehicle many a times. That is some, the volume is that we can very easily transact at the local market.
From our current NPAs or our delinquent accounts, when we analyze, we will see what percentage of assets have to be repossessed, where we don't see a possibility of clean and smooth recovery, and therefore we would repossess. Please don't understand as did we take a cautious approach not to repossess during this time. Of course, the last one year, administratively also it was not very easy, to go out and repossess vehicle. The local administration doesn't allow you to do such things in a difficult scenario as this. The regulator doesn't appreciate all of that, so we also are cautious about all of that. Otherwise, this is a business where we need to follow up, collect, and in extreme situation, repossess and sell. Repossession is not the first step of recovery.
Got it, sir. Thank you very much. Good luck and season's greetings.
Thank you.
Thank you. The next question is from the line of Kunal Shah from ICICI Securities. Please go ahead.
Hi, sir. Firstly, in terms of this restructuring, in fact there's been INR 2,000-odd crore of restructuring in Stage 2 and almost INR 180-odd crore. That's quite high. Maybe last time also it was 3.5%. Now we have moved to almost 6.9%. What is the nature of this restructuring, if you have to look at it? And is it like maybe this would have actually slipped into NPL and that has not happened? But when I look at Stage 2 plus Stage 3 put together, that is still 32.5%, including this restructure pool.
No. What is the question?
No. What is the texture of restructuring and is it like restructuring has really helped in terms of the forward flows from Stage 2 to Stage 3, that has not happened, and the rollbacks have been visible in the decline in Stage 3.
No. Let me first explain to you that the total account that we have restructured is only 104,000 account. When we look at this account, it is important to understand that only those accounts were allowed to be restructured who were normal or standard as of March 31, right? We have looked at these accounts who have serviced their loan. Some of them have repaid 50% of their amount. Some of them have repaid 18 months of loans. Some of them have paid more than 12 months of loans. We have actually picked up all those accounts which are absolutely good in quality in terms of their past performance and the vehicle price, underlying collaterals price is substantially higher, and they are not the ones which are delinquent in nature and therefore a restructuring has been considered.
We have also looked at the segments which were suffering, like we keep on saying about the school bus segment, the tourist operating segment, and therefore they were temporary in nature to have come into a Stage 1, Stage 2 a situation who were picked up for restructuring. We have not picked up, the ones who have always in the past historically shown. If you really look at out of the 104,000 accounts or whatever we have restructured, there were about 5,000 or 6,000 accounts which historically once had become NPA, and therefore we have put them in the NPA category. We have not kept them in Stage 2 category.
We have applied standards of seeing that even if we are giving restructuring to this account, how their past performances have been and never ever before they have gone into NPA are the accounts which were picked up and then they were given this restructuring and they have been classified in Stage 2 and we have made substantially a higher provision of 50% over the normal model requirement for those accounts. I think in all fronts we have covered ourselves extremely well for any eventuality whatsoever. As we see the collection starts to improve, our belief is that we are over-provided for these accounts and as they start reversing, we would get the benefit.
Sure. When we look at this resolved in Stage 2, so this resolved are more of this restructure because that number is again 100 and you mentioned 104 contracts and-
No, no. Restructured accounts have not been classified still in resolved. They are still paying in Stage 2. Vivek, help me correct if my statement is wrong, but even if Stage 2 customers have paid restructured account, we have left them still in Stage 2. We have not moved their stage.
Yes, you are right. Probably, I think your question was more on the resolution that we have shown under Stage 3. It is possible that some of the contracts which are resolved in Stage 3 are the restructured ones and as a result of which they are now classified as Stage 2.
20,000.
There are about 20,000. In fact, there are about 20,000 contracts, which is actually given as a footnote in our investor presentation.
it's there. 20K contracts, Secondly, when we look at it in terms of the behavior of these customers, so is it like, maybe now they are able to pay more than one installments? Are we seeing them graduating towards that they would be able to, maybe clear the entire overdue? When do we see that happening? The reason why I'm asking is last time you highlighted that you expect Stage 2 plus Stage 3 to settle somewhere around 20%-22%. Currently it is 32%. Are we confident enough that over the next two quarters we'll be able to bring it down by almost 10 percentage points? Is the behavior that strong among the customers?
Kunal, sorry. Before Mr. Iyer answers your question, what we have mentioned earlier is that Stage 2 plus Stage 3, we will try and bring it down collectively to 25% and not 22% that you mentioned.
Okay.
Mr. Iyer.
The trend definitely, Kunal, is that the customers are paying, and if you recall, we had said this in the first also, that once they built an overdue of this nature, they do take two or three quarters to start paying more than normal. In this round we have seen many of them have paid more than normal. We would see them pay in the second round, some of them will pay more than normal. Which is why we said at least 70%-80% of the provision that we carry for these accounts that we had to make in the first quarter would see a reversal before March. That trend is very clearly visible as we speak today. Unless something very untoward happen between now to March, we don't see that to be a problem.
Okay. Sure, sure. That helps. Okay. Thanks and all the best.
Thank you.
Thank you. The next question is from the line of Piran Engineer from CLSA India. Please go ahead.
Hi. Thanks for taking my question. I have a couple of questions for Mr. Iyer and one for Mr. Karve. Firstly, when you mention about market share gains, but when I look at data from competitors, for example, L&T Finance's disbursements are still 20%, 25% higher than yours. IndusInd Bank yesterday spoke about disbursements being higher than pre-COVID levels, but for us it's still relatively muted. Can you give us some more details on, the market share gains that you're talking about? My second question-
No. Can I answer this? Then you go to the second, otherwise we miss out.
Sure.
First, I don't know which products are you comparing with the other finance company, because I'm not sure the other finance company that you named is in auto and car business, et cetera, et cetera, and therefore they may not be a comparison. and also, I don't know which product they are in, and we may not be in that product to register that a disbursement growth. If people are in two-wheeler and personal loan segment, we are not in those segments. I think it's important to not just look at the absolute value and compare the disbursement growth. It's important to compare underlying product and see whether there is a growth or otherwise. Therefore, they are not actually comparable. When you said that, their disbursements are still higher than ours, of course, yes, maybe.
In the same product lines in which we are and if you were to compare us with others who are in the same product line, you would see more or less the numbers would match with everyone else. Other than that, I don't have an answer on a comparative basis of why is somebody higher than, lower than us. For us, the product lines that we are in, which is the Mahindra Auto products, tractors, the Maruti car, these three represents a very larger volume of ours. If you see, we have had a 65% growth over first quarter of last year and even quarter-on-quarter there has been a growth. I am therefore referring to the market share gain that we have had in these three products.
Maybe it will be useful at some stage if you get their disbursement constitutes which product and what is the disbursement for those product versus our product and disbursement, then the comparison could become little more easier. Go ahead with your second question.
Sure.
You said one more for Vivek, if I'm not wrong.
The other thing, just a clarification. The restructured pool of INR 4,000-odd crores, barring the INR 63 crores, all of these were some 30 days overdue as of 31st March. Is my understanding correct?
No, they were standard contracts, which means they were not NPAs as of 31 March 2021. They were not Stage 3 as on 31 March 2021.
They were not in Stage 2 either as per, slide 25. I just wanted to clarify that. Were they in Stage 1?
No. Let me clarify. As per the restructuring package rolled out, the eligibility criteria is all those contracts that were standard as of 31st of March, 2021. By standard, we mean they were either in Stage 1 or they were in Stage 2. They could not have been in Stage 3 if they were to become eligible for restructuring.
Okay. If I may just put it another way, what percentage of these accounts were already in Stage 2 but not restructured as of thirty-first March? Just want to get a sense of the quality of the book before you restructured them out of this INR 4,000-odd crore.
A bulk of them would be. In fact, many of them would be in stage one also, because what may have happened is some of them that were in stage one because of the circumstantial issues could not pay during the first quarter, they became eligible for restructuring. At the time of invocation, therefore, they could either have been in stage one or stage two, either during first quarter or the second quarter of the current fiscal.
Got it. My last question for you is, over the next, say, 4-6 quarters, what a cost of fund decline can we expect? I'm not referring to absolute interest cost, but, interest cost divided by average borrowing. The cost of fund, can we foresee another 50, 60 basis points decline considering our incremental cost of borrowing is still pretty low?
I would love if the incremental cost of borrowing can be lower, it continues to be lower. The chances that the incremental cost of borrowing will be lower from what it is today, the chances seem lower because you would have seen, the inflation is slowly hardening. The 10-year G-Sec rates have also been inching up. However, given the fact that there would be a rundown of the old liability and with the new liability that we have assumed in last fiscal as well as the current half, there could be a 15-20 basis reduction in, at the weighted average level. On the incremental borrowing, we are not expecting any reduction going forward. If at all, there will be an increase.
Got it. That answers. Thank you and all the best.
Thank you. The next question is from the line of Nidhesh Jain from Investec. Please go ahead.
Thank you, sir. There are two questions. Firstly, how do you think about the return on equity from the business from a medium-term perspective? From next 2-3 year perspective with a credit cost, average credit cost of around 2%, how do we think the return on equity maybe will pan out for the business?
How do you consider what equity?
ROE for the business from a medium-term perspective, because if you look at ROE for us for last 4 , 5 years has been quite low. Prior to that, we used to be very high ROE business of almost 20%.
There has been a lot of disruptions in the last 3 , 4 years because of demonetization and now COVID. On a normalized basis over 2 years, how should we think about ROE from the business now?
See, we think that this business will be a 2.5% ROA, 3% ROA type business. If you look at our capital adequacy currently, we are very highly capitalized and the growth needs to come back and the capital needs to start getting consumed, right? I think the path will be more from where we are to go to a 12% to a 15% to go to an 18%.
Sure. Secondly, on the restructuring, can you explain what is the structure of the restructured loan in the way. Have you provided any moratorium to the customer or does the tenure is got extended and EMIs are reduced or we are providing principal moratorium? So if you can explain the structure of the restructuring that we have offered to the customer, that will be useful.
One was in the first, the June restructuring that was done. It's like a moratorium equivalent where they pay virtually a very, very small negligible installment just remaining in touch an installment and start paying their regular installment post that. I think 4-5 period was given, they will start paying. June to December, maybe they'll pay a very marginal installment. From January, they start paying regular. The second restructuring that was done is they pay minimum 50% of their installment, immediately they start paying. At 3-6 months time, they start paying their normal installment. By and large, these were the two structure that we used.
Sure. Sir, lastly, vehicle finance as a segment, if we think about, we have already become very large in that segment, and growth beyond 15%-16% will be difficult to achieve from a medium-term perspective. Which all other lending products we are experimenting or we are thinking of introducing over the next 3 years?
One is, I talked about the SME segment, and first use the Mahindra ecosystem and then of course, the other OEM relationship ecosystem and letting it grow the SME part of it. That's going to be one of our growth engine and that will contribute to some growth. The second is the digital FinCo that we've started, which is nothing but a small ticket loan. First to start with to a large customer base of ours, and then through that also to look at the market offering as we gain experience by cross experience first. I think that's the second growth engine which will add to.
If we get to a 12-15% growth over a period on the core business of vehicle, etc., and if these two can add another 5% of growth or at least 3% of growth, I think to get to a 20%+ growth, these two product would be a supportive growth. These -- I think these three are the main pillar of growth we will look at. I'm not adding leasing to this because leasing will again play in the same vehicle space to start with before we can go into other product line. Leasing could probably give us a 1% or 2% growth because we may go to a new segment of customer in the vehicle that we have not worked with so far. To that space of CTC cars, etc.
The three new growth engine that we talked of will add to a growth with the core business coming back to normal. All of this together should get us to the 20%+ growth rate.
Sure. That's it from my side.
Thank you. The next question is from the line of Sanket Chheda from B&K Securities. Please go ahead.
Hi, sir. Congrats on a good set of numbers. My question was again on provisioning. We reversed about INR 1,000 crore in this quarter, but through P&L, we have taken about INR 350-400 crore. Consequently, though the base of Stage 1 and Stage 2 has increased, because of the upgrades from Stage 3, the overall provision on that is also increased from 3% to 3.3%. Is my understanding correct, though, for next two quarters, we are expecting about INR 1,500 crores of write back, but the flow through to P&L will be higher than this quarter because we have used some of the write backs to again pack it to Stage 1 and Stage 2. Through P&L, maybe impact will be more in next two quarters?
more write backs will be there in P&L.
Maybe Rajesh or Vivek, somebody can take this question in technical terms. The way we look at it is, we have maintained a very high coverage ratio already at 50%-52%. I think our LGD has slightly moved up and that could have caused some pressure, and all of that may not be required to be reset going forward. There is a large bunch of accounts which is in Stage 2, which has been done through restructuring. If we get the curing benefit as things become normal, some reversal out of that will also happen.
Purely to your question of will the overall reversal be higher and the P&L benefit will be higher than what we saw in this quarter, maybe Vivek or somebody wants to explain a little more technically what exactly that means.
Sure. When you look at the reversal, the entire reversal may not actually flow to P&L because some of them could be in the nature of resolution through either write-offs or through the repossession and subsequent sale. While there could be a reversal at the provision level, there may not be a reversal at the credit cost level. It is very difficult to estimate that today because it all depends on the intensity of repossession and subsequent sales.
However, if you specifically talk about a Stage 3 reversal, which as you rightly pointed out, is to the tune of about INR 1,000 crore in the current quarter, whether that number will repeat itself in Q3 and Q4, we don't think so. The last point is on the Stage 2 contracts. As the Stage 2 contracts behave properly during Q3 and Q4, it gives us an opportunity to cure them. When I say cure them, it could either be in terms of reducing the extra provision that we are carrying or in fact, putting them back to the stage to which they belong at the time of the reporting at the quarter end, that is Q3 end and Q4 end.
That call we cannot take today because it is purely a function of how they behave for the next 6 months. We see a potential for reduction in the overall provision that we carry on the restructured contract. As in the first half, we have created a total provision of INR 310 crore additional provision on account of these restructured contracts. If they behave properly, we have an opportunity to write these provisions back to the P&L. I hope I have answered your question.
Right. I was coming to the calculation that you are mentioning, that out of INR 2,500 crore of provisions which you made in Q1, 30% you have reversed and you are sure that 80% would be reversed by the end of the year. That means another INR 1,500 crore could get there. Fifteen hundred crore worth of reversals would happen over the next two quarters. Maybe what amount will flow to P&L that we can't quantify, but that is the or ballpark number that will be there, right? INR 1,500 crore
You are right. It is more arithmetical because if 30% of INR 2,500 is, it comes to INR 763, the balance 50% is what it is. INR 1,200 crores, so not INR 1,500 crores.
Okay. Last question to answer, sir. The guidance that we were talking about, Stage 3 + Stage 2, I remember last quarter we had said, I checked it again, that we were guiding our 22%, which has been our usual run rate. Are we just mentioning 25% to be on a conservative side, and the result could be better than that? Just wanted to have a view on that.
The endeavor will always be to keep it lower. We shouldn't forget that we are just about coming out of these difficult times. To be overambitious is also not too good at this stage because, let's not forget that everything has not become straight already, right? There are still ambiguity out in the marketplace. when we say we will reach those numbers, is the visibility that we have it could be better as market conditions further improve. We hope and pray that nothing disruptive happens from here on. these are all range-bound numbers that we will speak of.
Nobody will know exact and precise to say, "Okay, this is where we will stop as a destination on thirty-first March." The visibility largely is that the trend is better recovery, reversal from the past and growth coming back to some a normalcy. It is a very clear visibility at this stage.
Sure, sir. That helps. Thanks a lot.
Thank you. Next question is from line of Aditya Jain from Citigroup. Please go ahead.
Thank you. One on the collection efficiency. It's been great to see the monthly updates. Just for the coming months, so October, November and December, what is the normal collection efficiency that you would expect outside of any different behavior in this year? What would be the normal levels? Just to confirm on the definition of collection efficiency, it is including Stage 3 and Stage 2, but not the restructured loans.
That's right. Pure collection. They are pure collection. So that I can clarify that they are pure collection and not restructured account added to that. As far as what will be October, November, December, can we wait for 1 November, 1 December and 1 January?
No, no. that in general, in the month of October, November and December.
Normally October is a little lower than November, December for very simple reason that festival month people want to spend money, so they hold back something, wait for the harvest money to come, and then they pump it out. I think things being not as normal as always, in this October we are seeing things look to be better than the previous Octobers. With good monsoon, I'm reasonably sure November, December will also look good. You must spare us from putting a number at this stage because that's not something that is generally practiced to give immediate this month what will happen or next month what would happen. Pick up a trend generally as we see, as I told you, that we are seeing good collections, we are seeing positivity out there. That should give you some understanding
I just said one more qualitative comment, which is this October seems to be doing better than the previous Octobers because of some pent-up collections that we need to do.
Correct. Lastly, on the restructured contracts, which are in Stage 2, so their upgrade decision can be taken when? As a policy, you would look for 1 year of normal performance before upgrading, or is there a different approach?
See, since we did it in June, by January, we would have done 6 months of those contracts. Likewise, July would have done six in February, and August would have done six in March. If we see a consistent performance and if we see market conditions holding up, we will start to think about what is the right way to do. Again, those are not firmed up policies yet. Maybe give us another couple of weeks. We need to discuss internally. We need to discuss with various, our board, et cetera, et cetera. these are businesses where if you see somebody is able to pay their regular installment and consistently for 6 months, and you see general market conditions are turning out to be in the same direction, one can take a view of a type.
If you see some blips up and down, then one can take a very different view. Maybe in another two weeks or so, we should have a little more clarity on how do we want to approach this. At this stage, we have just left them as it is. Good news is that many of these people sometimes even pay more than what they are supposed to pay under the restructured account. That will be another trend that we will see how many of them are able to pay more than normal. All of that we will see before we can really say anything. Definitely as we end this quarter, before that, we would have firmed up our policy on how we want to treat it, and then that would be the method we would apply in the last quarter.
Correct. Thank you.
Thank you very much. Ladies and gentlemen, due to time, that's the last question for today. I will now hand the conference over to Mr. Ramesh Iyer for closing comments.
No. I think both in the opening comment and, all through the questions, I think we have almost answered everything that we would have said or we wanted to say or we might have missed saying. First, I wanted to thank all of you for able to join this call so late in the evening. Thank you very, very much. I just want to leave you with this thought that, rural is a good story to watch, the way we have always believed for the last 25 years, and we do see return of a lot of positivity in the rural market. I continue to believe surely for the next 3 years there'll be a lot of focus on rural from everyone, whether from the governments and the growth of rural is something good to, we believe in.
Sentiments have turned positive. I think, we have taken all the right steps through the difficult time and are really embarking on the growth journey as we look at this call, and we remain very positive for the next couple of years. Thank you, sir.
I also take this opportunity to wish all of you a very happy Diwali.
Thank you. We are wishing well ahead. Thank you. Thanks a lot.
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.