Having turned around from the adverse effects of the pandemic, Mahindra & Mahindra Financial Services Ltd. (Mahindra Finance) has now diversified its customer base to focus on growing the used-vehicle financing business and to improve asset quality to boost profitability, vice chairman & CEO Ramesh Iyer said in an interview. Edited excerpts:

What helped make the turnaround?

Over the past three decades, our commitment to empowering semi-urban and rural communities has been unwavering. Our journey commenced in 1994, driven by a resolute focus on these geographies. We placed particular emphasis on the vehicle and tractor lending space, carving a niche in the dynamic automobile industry. This strategic vision led us to establish 1,400-1,500 branches, all in alignment with our steadfast dedication to retail.

Our portfolio distinctly reflects our affinity for customers in the emerging ‘earn and pay’ segment – individuals new to credit and endeavouring to acquire their first or second vehicles. This strategic alignment, while rewarding, did expose us to the ebb and flow of the on-ground reality. However, none tested our resolve more than the COVID-19 pandemic, a challenge felt globally. This unprecedented event impacted our customers severely, as their ability to utilise their vehicles diminished, thus affecting their earnings. Naturally, this strained their repayment capacity.

Yet, it was our conviction that these customers, who invest 25% of their own funds in their vehicle purchases, held genuine intent. They were not seeking to default, but were navigating circumstances beyond their control. Thus, our approach remained steadfast – patience combined with a collaborative partnership with customers, guiding them through these challenging times. This approach proved pivotal in weathering the storm.

Amid the first and second waves of COVID-19, we encountered a non-performing assets (NPA) surge, reaching 14%. Concerns arose regarding the resilience of our model and the prospects of customer recovery. At that moment, we reaffirmed our belief that given the essential nature of our products, a rebound would occur in the subsequent quarters. This conviction propelled us to extend support to our customers through government and regulatory initiatives, such as moratoriums and loan restructurings. Gradually, market conditions improved, and so did our collections.

Within a year, we transitioned from a 15% NPA closure rate to a commendable 7%, reflective of our patient yet purposeful approach. Recognising that these customers required time to settle overdue amounts due to their income cycles, we provided them the breathing space they needed. Our dedication and their resilience led us to our current standing – an NPA rate under 4%.

This journey of transformation also prompted us to ponder risk mitigation. Rejecting the notion of turning away from long-standing patrons, we conceived the ‘prime segment’. This strategic pivot targeted customers one tier above, endowed with steadier cash flows. These ‘Primex’ customers now contribute 10-12% to our portfolio, fortifying our risk profile while acknowledging the capabilities and character of our clientele.

Who form the prime segment?

 Individuals with salary, government salary, or high-end farmers with large landholding. People who have better cash flows, or some people who have got multiple businesses at the local level. They may have a trading business. They may have a contracting business. So, they are not first-time borrowers.

They buy pickup, tractors, and heavy commercial vehicles. Our approach is aimed at aligning with their evolving needs, whether they sought personal vehicles or are engaged in the commercial sector. This strategic pivot became an additional layer of risk mitigation, reshaping the composition of our portfolio. These decisive measures spurred a transformative shift in our portfolio’s dynamics, manifested not only in its improved quality, but also in the overall growth trajectory.

What are you doing to maintain asset quality?

One should never remodel the product design to chase growth. So, we have not changed our LTV (Loan to Value), or increased our loan to asset, and not taken it to 90% or 95% because no sooner you do that, the growth may come, but the quality may suffer in the future. So, in this retail business, you must always ensure that the customer brings at least 20-25% of the vehicle price as margin money. Also, one should not overextend the loan period to 7 years and 8 years, you should always keep it around 4 years so that the customer, you know, continuously repays more and enough. So, that is the second thing that we should do. 

The third thing is, while all of us will use lot of digitisation, we will use lot of data, we should not lose the interaction and physical touch with the customer… at least once in 3 or 6 months to know genuinely what is happening. So, some of the strength of the business model is retake, while some new things are added. And this is why you will find that collateral back lending always is qualitatively far superior to a non-collateralised business. In our book, upward of 95 or 98% will be secured. 

How confident are you to improve the asset quality going forward? 

How did a 15% NPA fall below 4%? This is where it is very important to differentiate between circumstantial defaulter and intentional defaulter. If you have lent by mistake to someone you realise is not genuine, do not wait for it to become an NPA. Immediately take back the asset and close the loan. 

Whereas circumstantial defaulter, even if he has not paid you for 5 months, will start paying once things change. 

Three, do not sacrifice the margin money the customer has to bring in. Fourth, do not jump to repossessions and legal action unless somebody defaults. 

Partner with the customer, and once you identify that the cause of this is intentional and not circumstantial, then you take action. I think that is the approach to this.

How comfortable are you with your capital position. And is there any fundraising programme? 

If you look at our capital adequacy, we are currently at 20-23%, with tier 1 being 17-18%. And this is sufficient. Plus, our profit acquisition is that the two together are sufficient for the growth we are discussing going into 2025.

You had announced to double your balance sheet in two years and profitability in three years. Are you on track?

If you look at our FY22 March results we said that in three years, we will double our balance sheet by 2025. And I think we have maintained an outstanding growth rate. And today, we have reached about ₹86- 87 thousand crore balance sheet. And we have two years to grow. I think we are confident that we are trading well on that path. 

In the case of profit in FY23, we made close to about ₹2,000 crore of PAT. But I think our ROA by then was about 2.3-2.4%. Margins are holding up at 7%. So I don’t think we have any serious doubts about where we are on the profitability front. 

So, I think we are pretty confident that what we said in FY22 is that by FY25, we will reach ₹1,20,000 crore kind of balance sheet, I think that is evident.

What is your strategy to grow the used vehicle financing business?

At present, approximately 12% of our portfolio comprises  used vehicles, and our target is to elevate this share to a robust 15%. To attain this objective, we’re engaging in a multi-pronged approach that reflects our commitment to both our existing customers and the evolving market dynamics. The demand for pre-owned vehicles is robust, largely driven by the accessibility factor in contrast to higher-priced new vehicles. This trend is underpinned by the resilience of the second-hand vehicle market, as reflected in the upward trajectory of prices. This year’s lending outlook, compared with the previous year, holds promise due to the increased resale prices. Moreover, pre-owned vehicles yield better returns, with interest rates generally around 2% higher than new vehicle lending rates. This contributes to an overall improved lending landscape.

In summary, our proactive approach to boosting pre-owned vehicle lending aligns with market trends and customer preferences. The multi-pronged strategy ensures a diversified portfolio, while our ALM strategy mitigates immediate impacts of borrowing rate fluctuations. Our goal remains steady: to serve our customers’ evolving needs while preserving healthy margins.

How is the leasing business doing? 

Exceptionally well. At the same time, we think a little ahead of time. But we started off with just one or two corporate accounts. And today, we are managing close to about 200 corporate accounts. Currently, we are only there in corporate leasing. We are not there in retail leasing, not to individual customers. But most companies today are taking cars on lease for their CTC vehicle for their employees. And therefore, once you have done well in that segment with a few big corporates, you can showcase what you are doing and get many accounts.

What is the outlook for FY25? 

While discussing specific figures might not be appropriate, the projection of reaching a balance sheet milestone by 2025 is public knowledge. Presently, our book stands at approximately 90,000 crore, and our ambition is to achieve a figure of ₹1.25 lakh crore. This strategic aim embodies a considerable growth trajectory, one that aligns seamlessly with our historical track record.

Semiconductor issue is still not resolved entirely. Is it impacting demand anyway? 

Productions have gone up, and the inventory level has improved. There are some delays in supply; ofcourse, the vehicles are waitlisted. So, if somebody signs up for a loan today, gets a vehicle maybe two months later or whatever. But I think there are still overall volumes that are very high. So far, that is not impacting our growth as we see. 

Between semi-urban and rural, which is doing better?

We are born and grown in rural areas; therefore, our size is much larger. And I think the ground reality is that the rural is doing very well. A lot of economic activity and contracting activities are happening. Sentiments are very positive. Tourism is at its best. People’s movement is at its best. And the monsoon has been supportive. So overall, I think the rural is doing very, very well. We see the sentiments are very best.

What is your network expansion plan?

We had said that we will add at least 50-70 branches this year. But our emphasis is on substantial investment on the digital front and the data front, because these two are also very strong pillars of growth. And therefore, physical will be required to expand further. But clearly, investing in digital and data space is equally important. 

I always believe that we have so much knowledge of the market and the customer, the product. And we have so much data of our own. And with investment in digital, I think we will make a unique digital store.

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