Sentiments in rural India have turned positive with the ebb of the second wave of Covid and a good harvest, said Ramesh Iyer, vice president and general manager of Mahindra & Mahindra Financial Services.
The company is back on the path to growth with consolidated net income of 1,102.94 crore in the second quarter of the year and cash disbursement growth of 61% year-on-year. In the future, vehicle availability will be a key factor, he said in an interview with Activity area. Edited excerpts:
Has business normalized after the second wave of Covid?
After the first trimester, I said things were getting back to normal in the rural economy. Of course, at that time we were still using the term third wave submissive, but it looks like there was no serious impact from the third wave and the feelings definitely turned positive. Most businesses slowly and steadily return to normal, which automatically means better use of vehicles.
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This trend is expected to continue and with good monsoons, a good harvest and support prices, we expect farm cash flow to be good. Third, now even the infrastructure will open up to the rural market. So with these three factors, I think the rural economy is well positioned for the next two to three years. The only two problems at this stage are the availability of vehicles for which the supply needs to improve.
Once that improves, you know, business volumes will pick up. And the second is that diesel prices have increased, which has had some impact on the viability of operators. But if the price is to be at that level, then even freight rates and passenger rates will increase.
To what extent are supply issues in the automotive sector and diesel prices affecting consumer confidence?
We would have made 15 to 20% more in disbursements, if the inventory had not been a problem. If the supply continues to stay that way, the loss in volume will obviously be greater.
High diesel prices are a very recent phenomenon and this should not have a major impact on sales because vehicles are scarce anyway, people are willing to wait. The real impact will be on the commercial use of the vehicle – taxi and freight transport. Unless they are able to set the customer’s price or freight rates, that can be a bit of a pressure.
What is your expectation on disbursements?
We are resuming the growth in disbursements. Disbursements increased 61% year-on-year to 6,475 crore in the second quarter of the fiscal year. Going forward, asset growth will begin to occur. Growth in the second half of the year will depend on vehicle availability. Otherwise, the growth rate will be in the same range that we are already seeing. Being one of the best borrowers, we also have a good cost of funds advantage and our margins are healthy.
Are restructured accounts a problem? Do you plan to resume certain provisions?
We have restructured 1,04,130 contracts. But people don’t want to pay just under the restructured contract. They will pay more than the restructured EMI if they start earning more. Then we have the option to reclassify these accounts.
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We classified 96,391 contracts as phase when they could have remained generally classified as phase zero or phase 1. Once we see that they start paying steadily, this is an opportunity to reaffirm the restructuring. On the rewriting of provisions, it is too early to tell. We will wait for two or three quarters of the performances. Once gross NPA continues to decline as we’ve seen in this quarter, we certainly won’t need to postpone a substantial overlay.
What is your take on the scale-based framework for NBFCs announced by the RBI?
There was already a draft document on this and I do not see too much regulatory change in the framework. The FIDC had asked the RBI to give the smaller NBFCs time to go through 90-day stages, which the RBI did. Most NBFCs like us will fall into either Category Two or NBFC Top Layer and we are already subject to numerous on-site inspections, regulations and capital requirements.
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It’s good that NBFCs of different sizes are categorized differently and the bigger ones won’t have to suffer if something goes wrong with a smaller NBFC or vice versa. Moreover, today all NBFCs are considered as one in terms of borrowing. Maybe tomorrow there will be an exception for each category of NBFC with a separate limit. We have to wait and see how this classification will be used in the future.