'Not possible to do away with repossession agents': Mahindra Finance MD

'Specialised people' needed to ensure loan defaulters don't cheat company, says Ramesh Iyer in interview

The Reserve Bank of India on September 22 barred Mahindra & Mahindra Financial Services from carrying out any recovery or repossession activity through outsourced agents, acting after reports that a woman was crushed to death in Jharkhand's Hazaribagh district, while she was trying to stop a loan recovery agent working on the company’s behalf from seizing her father's tractor over loan dues.

Ramesh Iyer, vice chairman and managing director of Mahindra & Mahindra Financial Services, spoke about the lessons from the episode and business growth in an interview to Manojit Saha.

Soon after the Hazaribagh incident, Anish Shah, Mahindra Group CEO said in a statement that the company will investigate the incident. What are the findings of that investigation?

Internally, we looked at what should be further tightened and what actions should be in place so that we do not have such incidents ever in future. We follow all processes, all due diligence extremely well and correct. I have run this business for 30 years. It's the first of the incidents that I also had to go through. While it's premature…the police investigation is still on…let us wait for the incident report to come. Our belief is it is an accident and there is nothing anybody would have done intentionally.

It’s a pure accident is what our belief is…but I would not like to make a concluding remark since the police investigation reports are to come. As Dr Anish had said we will keep tightening our process, in spite of the fact that all processes are in place, there is always scope for how much more you can do. We have to continuously keep improving.

Do you have any indication, following your discussions with the regulator, when the ban will be lifted?

I think the onus is on us to go back and tell them what the steps we have taken and in future how we will be acting on it. We are reasonably sure that once we are able to provide how we are tightening our policies, the regulator will look at it positively and give us the opportunity to recommence.

The company expects that repossession activity may fall to 3000-4000 vehicles per month due to the ban, as compared to 4000 to 5000 per month. What were the October repossession figures?

We have not consciously gone for repossession in October because it was a festival month and normally if you look at it, these are not the months when repossession is aggressive. Repossession is invariably aggressive in the first half [of a financial year] when the economic activities are low, customers do not repay. In the second half they want to retain the vehicle because activity levels go up. They do not surrender, they come and repay. That is why we felt the impact is not likely to be very high. Even tough repossession is an extremely important activity to ensure that a defaulter does not cheat the company.

So, is it possible to completely do away with such agents…

No, it is not possible and it should not also be. These are specialised people. We believe repossession is a specialised act. For a very high defaulting customer, if an employee goes for repossession and some untoward incident should not happen to an employee also. Which is why agents get used who are specialised in these activities. And they are not only agents for us, they are agents for the whole system.

Coming to Q2 earnings, the loan book increased by 9 per cent as compared to the previous quarter. In an increasing rate cycle, do you think such growth rates are sustainable?

I feel extremely excited that the inventory levels are not high, availability is still an issue with vehicles, whereas the demand is not just coming off. People are booking and waiting. Cost of acquisition is not worrying them. Not only the interest rate, even the fuel prices have gone up. Yet there is demand which means people’s earnings have also gone up. Activity levels are at peak. When that happens the cost of acquisition does not matter.

What kind of growth in disbursals are you looking at for the current financial year?

In October, we had the highest [monthly] disbursement in the history of Mahindra Finance which was over Rs 5000 crore. Well, we have to recognize the fact that both Dussehra and Diwali were in the same month so to some extent demand for the future has come in this month. Nonetheless, Rs 5000 crore for a month is a very high number. We think doing Rs 10000 crore per quarter is not a challenge.

Are you not worried that interest burden on customers can increase delinquency?

It can, but so far we have not increased the rate …we have absorbed some increase in cost. We have just about started increasing the rate by 50 bps or so.

But banks have increased the lending rates. This may dent the margins…

Our net interest margins have come down, for 2-3 reasons. One is that our product mix has changed. We did more cars in the quarter which are at lower lending rates. The main reason for the NIMs to come down is that the cost of borrowing has gone up very fast. We were expecting 75 bps for the full year while in the first two quarters it has gone up by 150 bps. Because of the so much liquidity pressure, we are holding four months of fund requirement as our back up support, we are incurring a holding cost of that. At least half a per cent NIM compression going forward will be seen.