FY23 will be a year of bounce back in terms of growth for M&M Financial Services, Ramesh Iyer, Vice Chairman and Managing Director of the NBFC said in an interview with BusinessLine.
According to Iyer, the option available to NBFCs to convert to banks will be closely watched as regulations for NBFCs and banks almost converge.
June quarter was very good in terms of loan growth and disbursements. What is your projection for the full year?
The first quarter was never as good as it was this time and the next three quarters should see it going in the same direction. The festival season seems to be very buoyant with the monsoons being very positive so far. Infra sector is opening up. So, I think, rural demand will hold on to the festival season. Tractor segment, unlike everybody’s belief in Q4 FY22 when it was slowing down, has posted great growth in Q1 FY23. If monsoon turns out to be good, tractor will continue to maintain growth momentum.
The commercial vehicles segment is doing well, but there is some resistance among truck buyers due to high vehicle prices, rising fuel costs and stagnant freight rates, making their operations unviable. The fleet operators, however, are adding capacities. Demand for pre-owned vehicles is very high, but availability is a problem as exchange programs are low.
Do you expect interest rate hikes to dampen sentiments?
No. Interest rates and fuel costs are operating costs for the operators. If the freight rate doesn’t go up or passenger fare doesn’t go up, then it will impact the demand. Currently, people can absorb these costs. One per cent increase in interest rate impacts EMI by ₹500-600 per month and that’s not going to influence their decisions. But if the vehicle price goes up by 10-15 per cent, then they would evaluate the viability factor. Even historically, you will not find that interest rates pulling down the demand.
You’ve entered some new businesses recently. How are they shaping up?
SME has been a growing segment. We are looking at auto engineering, agri-loans and industry vertical as well because we understand the industry well. We have also tapped into the auto ecosystem—whether it’s Mahindra or others, we are extending working capital support like bill discounting services to suppliers.
The third area of interest is loans against property where we’ve made a small beginning. To cater to small ticket consumer durable and personal loan needs, we launched Digital Finco and that’s now well settled with systems and people in place and relationships tied up. You will see some numbers come from there soon.
But all these businesses put together will not be larger than the vehicle finance business, which will still be 85 per cent of the total book. We want to double the balance sheet by FY25 and you will see 20 per cent of the doubled book coming from these new products.
Non-bank lenders have also been flagging banks aggressive lending to retail and MSME segments. Will it impact margins and pricing?
The basic question to ask is if an SME could get all money from banks, why will they want to borrow from NBFCs. If an SME wants ₹100, the bank gives him ₹40 and for the balance ₹60 he looks up to NBFCs.
There is another layer of consumers who want to borrow from NBFCs because they either need the money fast or need the money for a purpose for which the bank is not willing to look at immediately. So, if you choose the segment correctly, there is no pressure on rating. But you have to be conscious that just because they don’t get from an alternate source, you can’t let them in at any price you want. Then they will borrow and default.
In terms of asset quality, the restructured books, especially in the Stage-2 is still pretty large. What is your assessment of the book now?
We had about ₹4,390 crore of restructured accounts, which has now come down to approximately ₹3,590 crore of which ₹913 crore has nil overdue. When we restructured, we took a conscious call to say let’s keep them at Stage-2. We have not done any curing so far.
While restructuring we gave customers smaller instalments and not a repayment holiday. Also, we kept them in Stage-2 because you cannot call them NPA when they are paying. But what is surprising and interesting is that at the end of the four-month period, every one of them is servicing the loan fully and regularly. Technically, they have moved back to stage zero, but we have not recategorised them yet because we want to wait and watch for three more months.
As you grow, will becoming a bank be a natural progression?
Large NBFCs like us should never ignore that opportunity and should watch that space very closely because the current regulations are more or less close to that of banks.
In terms of balance sheet, we are larger than some of the smaller banks. But as industry houses, we are not even allowed to apply for a license. If that limitation was to be revisited, I would think large NBFCs will explore that space.
This is a significant departure from the stance that you had two years ago..
If you look at the regulations for NBFCs, it was very different at that time. All of us were very focused on just doing some things. We are now broad-based as regulations have come in very strongly from different angles and we have made ourselves ready for all of that. Technology investments have been so high. So now we have to see how to get the benefit of all that we have created. We can’t remain in a limited space.
Anything that is still bothering you about the impact of the pandemic?
I’m not sure if 100 per cent of the customers have come back to pre-Covid levels. There will be certain segments like cab aggregators and school bus operators who are still struggling to find their feet. They have looked probably at alternate businesses because they don’t know if Covid is over.
For some, their wealth would have got eroded during the pandemic. How are they going to rebuild that wealth? And if they don’t rebuild their wealth, how they’re going to live through. Wealth erosion has happened to certain segments and watching these will be necessary.
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