Vivek Karve, CFO, Mahindra Finance, says “growth for the sake of growth is not something that we are targeting. We would like to have growth which also brings with it a very good asset quality. While we had given the guidance at the beginning of FY22-FY23 that we would be doubling our book by the end of FY25, and we believe that we are on track to do that, we are not in a hurry to do so. If growth happens, combined with a supremely good asset quality, we will be happy.”
A narrative has emerged in the market in the last 48 hours. Ever since the chances of a rate cut in the US have shot up and several global agencies are now calling for a 250 to 275 basis point cut in the US, there is a view that India may not be very far behind. If May-June is where US rate cuts may start, we may also see cuts beginning with a lag of, say, a quarter. If it starts in the middle of next year in India as well, it may start becoming very beneficial for NBFCs. Can you explain how it will impact the rate cut regime?
So, what the market has understood is right. Typically, all the NBFCs lend on a fixed rate basis, which would then mean that if the rates were to go down, then the NBFCs whose book has been built on a fixed rate basis, there is an opportunity to expand their net interest margins. So, this is what typically happens in an NBFC world.
I was speaking to Dabur group and they were telling me that there are very clear signs of improvement on the rural side. You have a large exposure via a completely different product but the target market is the same. Would you concur that after being soft for a very long time, there are early shoots of recovery in rural India?
In fact, I have a slightly different point of view here. If you look at the last four quarters or so, where the FMCG companies have been complaining about a very subdued demand environment in rural India, that is not something that vehicle financiers like us have been witnessing. I will explain why I say that.
If you look at somebody who wants to buy a vehicle, you typically put it to productive use. And if he sees that opportunity to earn income by deploying that vehicle, then only he will invest. So, generally, if you look at the way the economy has been growing, look at the infrastructure spends by the government, look at the spend that government is doing on rural development or for that matter, the GST revenue that the government has been earning, it in a way points out to an overall buoyancy on the rural infrastructure as well as the general infrastructure spends, both by the private sector as well as the public sector.
That is the reason that while the FMCG companies have been experiencing a subdued demand environment, we in the NBFC world have actually been growing quite consistently. And MMFSL is not an exception. Generally speaking, all NBFCs have reported very robust disbursement growth and therefore, the asset under management growth as well. So, if the tide is turning and the rural incomes are showing a definite upturn, it continues to augur well for even the NBFC sector.
You are talking about that rural not being much of an impact for you all. But a trend that came up was that tractor sales were impacted in Q2 specifically, and the high-yielding-use segment also was a bit muted in Q2. Has the situation actually started showing a positive side and a green shoot for Q3?
In some of the states which experienced some erratic rainfall, the southwest rainfall, the demand was a little muted. And in those states, probably the collection performance was also not as good as in the other states. But as the Kharif crop comes in, MSP has anyway been raised by the government. We believe both the demand as well as the collection efficiency in these states will improve. Also, the northeast monsoon is yet to show its full colour. IMD has projected that it will be in a 88-112% range and they are pointing more towards a normal northeast rainfall, which would be positive for the rabi crops as well.
Also 27% growth has continued in October as well. Would you want to relook at that 20% growth guidance? Should we expect a higher guidance now?
Growth for the sake of growth is not something that we are targeting. We would like to have growth which also brings with it a very good asset quality. While we had given the guidance at the beginning of FY22-FY23 that we would be doubling our book by the end of FY25, and we believe that we are on track to do that, we are not in a hurry to do so. If growth happens, combined with a supremely good asset quality, we will be happy.
Do you see asset quality holding up now? Do you think the NIMS have bottomed out?
Let me take the second question first, whether the NIMS have bottomed out. My answer would be yes. And if I were to also take a cue from the first question that was asked to me, if the rate cycle were to show signs of reversal, NIMs could improve.
On your first question on the asset quality, if you take a slightly longer term horizon, say the last four to six quarters, we have been improving our asset quality both on stage two, as well as stage three quite consistently. The collection efficiencies have also been improving quite consistently. So we are at a stage today where stage two is very firmly at 4.3% and stage three is around 6%. And we believe there could be some weight room available for us to further improve on the stage three number, as a result of which we have actually given a guidance that our credit cost for the full year will be in the range of 1.5% to 1.7%.
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