ramesh iyer: demand for used vehicles is very dynamic, demand for heavy vehicles has picked up: Ramesh Iyer
Look at the numbers we saw in a good performance compared to a year ago. Does it indicate good momentum through higher disbursements and improved collections?
Overall, demand has been quite good and feelings are very positive in rural areas. I was asked this question. We say the feelings were positive. Some remarks were received from some other circles where the feeling was that the demand is not as high. But we saw very good positive demand from all sectors and geographies.
If better inventory levels were available, sales were higher or even cash outflows could be much higher, but we all saw very strong demand for tractors in April-May and so it was a very good quarter.
On the vehicle side, we have seen demand increase. Used vehicles are very dynamic, heavy duty vehicles have picked up and I think without exception there is demand for all products and in all geographies.
With a marginal increase in cash, there was a slight increase in gross NPAs. Why is this the case and how will you meet your own recommendation to have gross NPAs below 7%?
First, let me clarify that there is absolutely no stress on the fundraising front. Collection efficiency is over 94% and this is the first time we have seen this type of collection efficiency in the first quarter.
It is important to understand that rural areas always face enormous pressure from the extreme weather conditions of summer in the first quarter. S0, activity levels decrease. But this quarter, we’ve seen great collection efficiencies. It may be because of a lot of pending requests. Tourism was very high, the movement of people was high, the contract segment was active. We found that in each segment, there was good collection in almost all geographies without exception.
There were a few days lost here and there due to heavy northeast monsoons etc. but that’s not something to really acknowledge at this point.
Historically, in the first quarter, NPAs are normally up more than 2% and that’s what we even predicted when we closed March. But surprisingly now, due to the high level of activity and excellent cash flow, we could contain it to a very marginal increase, and that would be corrected.
So how do we see the sequel? We are very confident that we would significantly reduce our raw NPA levels from where we are today and the trajectory is clearly in that direction and the second half is best for rural markets and with good monsoons, we expect cash flow to hold and we would see great collection and correction in the second half.
Mahindra Finance continues to remain the market leader when it comes to tractor utility space. But the focus will gradually be on second-hand vehicles. Help us understand the growth potential of this segment and how can we expect the concentration of loan mix towards used vehicles to continue?
Regarding the outlook on the loan mix, they would remain limited because we are now in all segments, all geographies and therefore regardless of the overall volume of their market, we will maintain or increase our market share and therefore we don’t see a big product line shift happening.
There might be a marginal shift within these segments with respect to tractors and utility vehicles and automotive segments. We are the market leaders in the rural market and the growth rate will come from the overall volume we see from these OEM sides.
The benefit that I would see is that apart from volume growth for this year, we expect there will also be an increase in asset prices and that would add to additional disbursements so the growth in disbursements will come from both the increase in volume, a little gain in market share added to the increase in the prices of vehicles and tractors expected, so it is a very clear growth that is possible.
The growth engines that you talked about as I said would still be limited to the premium product line, but even used vehicles today, availability is the biggest issue, there’s no too many vehicles available because the banks and the NBFC take back little because the collections are quite good.
Trade-in programs are not very aggressive as new vehicle availability is always a small issue, once new vehicle availability increases you will also see the used vehicle supply improve and that would definitely be our priority area.
Q1 to Q1 margin was 8.2% versus 7.6% for the whole of FY22. In the current interest rate environment, where do you think the strength of the NIM will lie in the medium to short term?
Based on the increased cost of borrowing, we have already increased our lending rates to 30-40 basis points. Are we going to do every quarter? The answer is no, but clearly if we see borrowing costs continuing to rise, the market will also adjust to the cost of borrowing and there will be an increase.
We don’t see a big net interest margin squeeze for two reasons: a bit of a pass-through that will happen. Second, we talked about the product mix and if the number of used tractors and vehicles were to increase, they would have a much higher return and they would also help protect the net interest margin.
In the net interest margin (NIM), we could see a decline of 20 basis points over the next two quarters, but that could be the catching up to do at the end of the year.