Q&A: Ramesh Iyer, MD, Mahindra Finance

'Cash flow with customers has offset rate rise'

Mahindra Finance, with Rs 17,000 crore of assets under management, has registered robust loan growth of 35 per cent over the last six months, even amidst the rising interest rates. Managing Director Ramesh Iyer tells Malvika Joshi how the growing business in rural areas has helped the non-banking financial company (NBFC) to offset the negative impact of higher borrowing costs. Edited excerpts:

Where do you see the growth coming from?
The semi-urban and rural markets are growing more aggressively than urban markets, though their volumes are still lower. We are spread across the semi-urban and rural markets and seem to benefit from these. This is clearly shown in our loan disbursement growth of 35 per cent in the first six months.

 

What are your expansion plans?
We currently have 570 branches and we expect this to rise to around 600 by the year-end.

How have the rising interest rates impacted your business?
There has been some impact on the personal car segment. However, buyers of commercial vehicles, utility vehicles and tractors are mostly able to pass on the cost burden to their customers. But another round of interest rate increase would certainly affect purchases.

Has the festive season this year been less enthusiastic?
The demand in rural areas has been very buoyant this festive season. Purchasing power is up, and cash purchases have been high. Cash purchases accounted for 30-40 per cent of sales in the two-wheeler segment. For tractors, the figure was 20 per cent. Earlier, customers asked for 80-85 per cent finance, while today, it is 60-65 per cent. Cash flow in the hands of customers has been able to offset interest rate costs to a certain extent.

You finance vehicles manufactured by Mahindra. How is your working model different from the captive model and how have you diversified?
You need to run the NBFC business independent of the manufacturing business. The demand for product should not be fuelled by the availability of money. Availability of money should be an enabler for sales. Mahindra would look at how efficiently we are using the money provided by them, and whether we are running the business without hurting the interest of its customers. Mahindra vehicles account for only up to 50 per cent of our portfolio.

How much has the borrowing cost risen?
In the last 15-18 months, the cost of borrowing rose by 200-250 basis points. We have been able to pass on 70 per cent of it. No increase in interest rate simply means stability, and even if the repo rate is cut by 25 basis points, it cannot also be counted as a reduction.

How have you managed to improve asset quality, given the high interest rate regime?
If the loan to value is curtailed at 70-80 per cent, the asset quality improves, since the customer has also invested a substantial portion, and does not want to surrender the asset. NBFCs' physical recovery ability is large. They do not reschedule loan repayment, as banks do.

The Thorat committee is in favour of assigning loans that are due for over 90 days as bad debt, compared with the earlier 180 days. How do you perceive this?
It does bring pressure on NBFCs. However, we look at controlling our credit losses as soon as loans are given out. For us, credit losses have been curtailed at 1.4-1.6 per cent. Also, NBFCs do not get benefits of tax deduction on non performing assets. These are added to the income and increase the tax burden till the time the debt is recovered.

Any plans to raise capital?
Right now, we are in no hurry to raise capital, since our capital adequacy stands at around 17 per cent.