Mahindra & Mahindra Financial Services Limited (MMFIN) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Mahindra & Mahindra Finance Services Conference Call hosted by Motilal Oswal Financial Services Limited to discuss business impact of COVID-19 and related RBI measures. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Alpesh Mehta from Motilal Oswal Financial Services. Thank you, and over to you.

Thanks, Steven. Welcome to this Mahindra & Mahindra Financial Services Conference Call to discuss the impact of COVID-19 on the business as well as related RBI measures. Today, the management is represented by Mr. Ramesh Iyer, Vice Chairman and Managing Director; Mr. V. Ravi, Executive Director and CFO; Mr. Dinesh Prajapati, Senior VP, Treasury; and Mr. Rajesh Vasudevan, Senior VP, Accounts. Now without much ado, I hand over the call to Mr. Iyer, for his initial comments, and after that, we can have a Q&A. Thank you, and over to you, sir.

Thank you, and welcome, everyone. First and foremost, whatever that we would be saying about likelihood of the business, et cetera, will, to an extent, be a judgment based on how we see things, and it's a little premature and things could change over a period of time. But nevertheless, one has to keep in mind that this is based on what the situation current is. I think -- but to summarily start the whole conference, I would think the entire focus currently is on customer and employee well-being. And I don't think there's so much focus and worry in everybody's mind about how the business and collections from tomorrow is going to be. Nevertheless, that's one parallel track and discussion that we internally have. But paramount concern in everyone's mind is really the well-being of customers and the employees across the country. Also to kind of set the tone right up there, the problem that we're currently facing out of the virus is more a very metro-centric problem. And the rural is still as much insulated as we understand when we speak to different sets of people across the country. The third is we think these are times where one has to completely revisit the entire business model, go much deeper and get a better customer insighting and better understanding of the customers because these are times to even understand customers' thought process on how they think they will, going forward, want to do their business, will they want to shift their business to something else? Will they continue with what they are doing? Et cetera, et cetera. On the economic front, straight away from rural perspective, I think the harvest, which is likely to be good and with the government allowing the farm, labor and machinery to be available at the market, we expect somewhere end of April to mid of May, the harvest cash flow should start coming in. Our expectation is that the government will buy the crops very immediately as soon as the harvest is done, because they don't want to take any undue risk of any untimely rains or whatever, whatever. And therefore, the farm cash flow should start to look up very clearly. But for us, if we have to specifically speak about how are we looking at things, I think our prime focus at this stage will be to ensure that our cash flows are well in place, our ability to discharge liability and to meet interest payments are well in place is what our prime approach at this stage would be and want to kind of right upfront tell you that we are very comfortable given the current position that we are in, and if we were to take a 6-month horizon and believe that the collection should be at the lowest for the 6 months and also expected volumes of business to be low for the 6 months. If we were to stretch ourselves for a 6-month period from now, we still believe that we have enough of cash strength be able to meet all our liability, to be able to meet interest payments as well as to be able to meet our fixed cost cash may be required during the 6 months. So that's one thing that we are very clearly looking at. From a business perspective, I think it's not in a hurry going to return back to normalcy. And some of you have heard us in the past, even before the virus impact, we were of the opinion that the business would return back to some normalcy only post September, October, that's the festival season. And with this new problem that all of us are facing, I would only expect that even that could get stretched a little more. But within the businesses, I would think the farm business could bounce back a little faster. And if the monsoon this year turns out to be above average, then I think the farm division should reflect the sentiments turning positive, and therefore, tractor sales and implement sales, et cetera, could pick up. Even within the vehicle family, I think even when things were to return back to some normalcy as it starts to, I think the pre-owned vehicle will be the one which will preoccupy the demand side for simple reason that people in the current scenario, acquiring a new asset may not be in top of their priority list. And while the need for a vehicle will always be felt, and therefore, the pre-owned vehicle could be something that one may want to look at. When I talked about relooking at the business models and things like that, I think one of the prime direction that we would take from hereon is to completely revisit our -- the entire cost of operations and start looking at the fixed cost and variable cost even more deeper, and we do believe that these are great opportunity to bring down the fixed cost and make it as much as variable as possible, and also to take a very, very strong partnership approach to many of the activities. There are many areas where there could be a renegotiation that could happen in terms of our rent to various branch offices. There could be renegotiation to various other service providers that we have. I think if you were to look at all of that, somewhere, we believe that from a current 3% to asset as our cost, there is a scope to bring it down to up to a 2% level in this current scenario. It is a stretch, we do believe, but I think these are times where even the employees become extremely responsible and I think a call to act very, very sensibility and call to act very maturely can be very easily introduced during this period. I think the productivity drive will be the priority or the top priority in our mind. And we do believe that bringing down cost can be one of our real go forward kind of a situation. We also think with enough of liquidity that's been infused into the system, the interest cost may not necessarily go up substantially. And therefore, we could turn to be an advantage with adequate cash flow situation that we are in, we could discharge some of our liability, which are high cost from the past and get into a new liability stream, which could come at a cost lower. So that would be the other area where we would kind of look at. With what the regulator has come forward in terms of his announcement, giving moratorium to the consumer, I think we definitely want to offer this facility to our consumers. As all of you know that we work with Earn and Pay segment, and they are not earning during this period is definitely a pressure point for them. And they would want to explore the possibility of deferring this 3 installment and then come back to normalcy over a period of time. We do think that the customers will opt for this option. We have started reaching out to our customers. And we think giving them this moratorium will be of a great help to this consumer during this period. There are some confusion around whether the banks would offer moratorium to NBFCs. But to our understanding and when we talk to our bankers, we do get this clear understanding that they are willing to offer us moratorium for the term loan. Whether we would take it or not will depend on how the cash flow, and as I said, we are comfortable from our cash flow position. So we may not necessarily explore that opportunity, but nevertheless, from an industry perspective, I believe that on a pick and choose basis, the banks may decide to give to certain NBFCs and may choose not to give to certain NBFCs if they so think. I would think this will be our clear priority that is ensuring that the cost rationalization as a mega program is taken and the cost is brought down substantially from its current level to the new level that I was talking of. While we talk of this COVID problem across the globe, but when we look at India as a story, it's a very metro-centric problem, which I explained. And as we talk to our people across the country in rural India, I think they're not as badly impacted. While they're all following the administrative direction of keeping the branch closed, et cetera, as partial opening up begin to happen, I think, very clearly, we think that rural India bounce back should be much faster. In this round, we also think that there'll be a lot of new partnership will come together, which is coming together of the OEMs, coming together of the dealers, coming together of the financiers will be the way forward because each one will try to assess the situation and each one will be in this program of trying to find ways and means to reduce cost. And therefore, this will be a great time where each of these enablers as well as the original manufacturers come together and find solutions to this problem is something that we very strongly think is going to be the way forward. We also think with the introduction of various means of repayments like using apps and electronic transfer of funds, et cetera, will become some kind of a practice to certain set of consumers. And we do see even in this round, some of customers who do not want moratorium, who are in the salaried class, et cetera, will want to use these kind of facilities and will help bring down the cost even in that direction. We are very sharply focusing on restructuring some of the functions, which could be outsourced and not necessarily be carried out internally, and that would be one of the approach of moving from fixed to a variable cost of operation. And that will be another way to look at how do we bring down this. From a volume of business perspective, I think the courts have allowed the BS-IV registration of vehicles sold, but has not been registered prior to 31st March. I think there's been an extension of time up to 30th April. So I think the dealers are working over time on finding ways to register these vehicles. And if post 15th, some opening of -- partial opening of things were to happen, one could see some temporary volumes coming through that. But the BS-VI launch will take a little time to get established with the new price announcement and the customer sentiments returning back to normalcy will take a little more time. But as I said, between urban and rural, the rural seems to be little more comfortable than urban is and therefore, return back to some normalcy in rural could be faster. My last comment, if it has to be compared to any resemblance of any event in the past, I think there are shades of some of the events in the past, like the 2008-'09 meltdown situation, some resemblance to liability management is there. Similarly, many times when the harvest fails, et cetera, the consumers do ask for additional time or extra extended time, and a similar situation is the moratorium situation. I'm not too sure that the 3 months moratorium is sufficient as we speak because if things were to take a little longer than one expects, then there will be a rediscussion or a renegotiation with the regulator demanding for additional time, but that will purely come from a consumer need and not from an NBFC need. But that's something that we will be very closely monitoring to see how the things are panning out or changing out there. So to summarily, to put out our larger themes would be, looking at cost from a very different perspective, looking at activities to be more partnership in nature, looking at introducing productivity approaches, cutting off of some of the expenses as well as activities which are not relevant or not required, looking at new models emerging from this disruption that we see, use of technology for a better use going forward would all be our approaches. Great time to be once again engaging very, very closely with consumers and doing a much deeper insighting and understanding their needs in our way forward to design various process as well as redesigning new products that may be required. So summarily, this is how we would approach. We would not be overly worried about volumes to start with. I think that will come to some normalcy from 3 to 6 months as we speak from today. And similarly on the collection front, I would think it would take 3 to 6 months before any kind of normalcy can return to start feeling that collections are beginning to happen. So in this line, the 3 months moratorium provided is a great help to start with. So with that, I'll stop here and open it up for questions. And then I think my team, who each one of them are connected, will participate in providing answers based on those respective questions.

[Operator Instructions] The first question is from the line of S. Krishnakumar from Sundaram Mutual Fund.

While you have nicely presented the current situation and the opportunities for improvement, the ground-level reality, even in rural agriculture area, it seems to be that a lot of produce, fruits, vegetables, are standard also for want of transport, logistics, et cetera. So these are perishables, and it could wipe out the savings or the cash flows for the farmer, which could put lot of pressure on our collections even after a recovery in the economy. What would be your thoughts on that?

So you're right, the vegetables and fruits are perishable, undoubtedly, and they're cash crops. So therefore, they have to be kind of sold and bought money immediately. While I also agree with you that there are these challenges of logistics, but I think that's a loss the system will have to undertake. Fortunate that in many of the states, their state borders are opened for at least the goods to be transported from one to other location, which are essential goods in nature. But not all of them are being able to be picked up. For example, in Maharashtra, there is this pressure of onion needs to come to the market much faster, et cetera. But I think these are systemic loss that one will have to take under the 90-day moratorium that's been given is something in line with that, right? The cash flows are going to be delayed or suffered. I also expect that such customers who are in this cash crop kind of a situation may come back and ask either for more time or even for that matter, may discuss and ask for some kind of an interest waiver and things like that. And we would be very, very open to look at such possibilities on a customer-to-customer basis. And someone who has repaid you up to February very regularly, it's unreasonable even as an organization to not accommodate their request, if it is reasonable. And therefore, my personal opinion on this is while there will be some systemic loss that may get created, when I talk of partnership model, I think the systemic loss will get shared between all the entities to this business because it's not end of the business. Everyone is going to look at what next. So there are discussions with OEMs to say, what costs are they willing to share? There are discussions with dealers. And some portion financiers will take and some portion, possibly the customer will take. But there would be some systemic loss that would happen for sure.

Sure. And sir, lastly, what are the further dispensation that you're trying to seek with the RBI and the government? Is there -- could you probably share with us what are the further measures that you would advise the government to take along with RBI?

So I think at least for NBFCs particular and specific, I think the requests that we are making to RBI is to, in some way, give directions to the bank. They’re to support all NBFCs and not really look at the big ones and leave out the medium and the small ones. Because then we will create unnecessarily further pressure in the system or the small ones not able to meet the requirements and things like that. So that is one that we would ask for. And I think in the moratorium dispensation that was talked about, there has been this discussion on whatever are the balances as of February does not qualify for the moratorium. And most of us who are in the transportation business, we've been representing to say that March is a month where the government bills get settled. March is the month where transporter settlements happen. And therefore, if they could not transact, it is unreasonable to not provide them with that support. There seems to be a positive taking in of this input that we have provided, and we expect that some direction around this will also come through. And the third would be in this moratorium, the securitized portfolio needs to be clarified to say that even they should qualify for some moratorium, subject to, of course, the investor approval being sought, et cetera. So these are the 2 or 3 things that's being really talked to the regulator as well as to the Ministry. And as we understand that, yes, we are very, very open to going deeper to understand about what it is. And something should come through this.

The next question is from the line of Parag Jariwala from White Oak.

This is Parag Jariwala from White Oak. Sir, my question is, you said in your opening remarks that it will take around 3-odd months for disbursement to pick up and also collection will take around 2, 3 months time. So in your base estimates, what are you estimating for the lockdowns to get over? So is it that you expect 15th April onwards there will be a gradual -- lockdowns could be phased out? Or you think it would be higher? That's first. And secondly, if we extend the lockdown for say 6, 9 months, what do you think would be your -- would be the impact on your business?

So I don't know who are we to make the judgment on what would happen post 15. But the expectation definitely is that at least different states will have different approach because it's not going to be one approach across the country. But there would be some partial opening, again, allowing 25% employees trying to come in and all that. But just always bear in mind the opening comment that I made, which is it's a very urban-centric phenomena that we are all facing, and that has, fortunately, a little less impact from an overall business from the rural perspective, but undoubtedly, unless there is a commerce between rural and urban, rural on its own is not going to create a magic because things have to come into urban, urban has to start doing its activity as well. But from 15th and post 15th, I think it would only be partial opening. But the real fundamental question is, how many of us will have the confidence to say, once it's opened up, all of us are going to be on street from 16th onwards. So I think the human confidence to rebuild and to start once again coming back to normalcy by itself will also a little more time it'll take. Because all of us have to be disciplined and more conscious about what we should be doing and what we should not be doing. So surely, that would take. When you talked about a long-term lockout, let's say, 6 months kind of situation, that again, in a way, I said that our focus is to ensure conserving cash to be able to meet liability and interest servicing, plus some fixed cost -- ability to service the fixed cost. And definitely, if we see that things are stretching beyond 2 months to 6 months type situation, if all of us are forecasting, there would be a complete renegotiation of all the cost structure and servicing only the renegotiated cost is something that we would focus on.

Okay. And sir, any brief comments on your collections? Because we tend to collect maximum in the month of March.

Yes. So March up to 19th, we were kind of cruising extremely well, and we thought we will once again have a great March as like any year in terms of collection. And then from 20th to 31st is all of us know what really happened. And therefore, the collections had to be stopped, no movement on the field and customer not able to come to the branch, et cetera, started happening. So these are onetime event which will happen. But now with this 3 months of moratorium that's been provided and which I think and I believe and I hope that many customers will take this because they are not still on the street earning. So it is up to June, one should expect that the collection efficiencies will be very, very low, and we are, in fact, willing to work out a model where we say that both collections and disbursements for next 3 months is virtually going to be nothing kind of a situation.

The next question is from the line of Karthik Chellappa from Buena Vista Fund Management.

Just few questions from my side. There has been some opinions that as far as the moratorium from the banks are concerned, it extends only to term loans and not to working capital loans. And you had also made the comment earlier that we are going on a case-by-case basis. Is that the position currently? And even within term loans, supposedly the moratorium extends only to principal repayments rather than to interest, so any clarification in that regard would be helpful. And secondly, based on the conversations that you've had with your customers till now, have you noticed any regional disparities when it comes to, let's say, the amount of income compression that your customers having? I mean, whether some areas or some regions are doing relatively better than the rest, et cetera. Any color would also be helpful.

So as far as Dinesh can add or Ravi can add more to the first question, but our understanding so far as we hear from different, different NBFCs, I think the -- first of all, the banks are putting a filter because it's their prerogative to give or not give. So therefore, they are very careful to choose whom they want to and whom they don't want to. And you're right, the current discussions are around term loans being given the moratorium, the working capital is yet not being considered. But that's what the smaller NBFCs also have come back and reported to the association saying that they are not considering. And definitely, the interest portion is not considered. Let me answer the second question and then Dinesh or Ravi can chip in to elaborate on the first. On the customer insighting or the discussion that we've had with customers, there are 2 types of the disparity that we clearly see. One, we are seeing where the customer has a little more stable cash flow and not really dependent on daily earnings and things like that. So some contractors, some local employed kind of a customer, local professionals like doctors, et cetera, they are not seeking moratorium. They have money with them according to them in the banks, and they would possibly discharge liability in the next 3 months' time, unless things really go extremely different, and then they want to hold cash as well. So there is one set of such customers who say, we don't need the moratorium. In as far as the geographical disparity is concerned, I think, again, in each state, there are several districts which are not impacted. And the customers think that they want only 30-day moratorium, once they come back on the ground, they will be able to earn to repay. So they are not looking at a 3 months moratorium, they're rather looking at a 30-day moratorium. So we see 2 types of disparity, product-based and customer segment-based disparity and certain geography-based disparity which is district-based. So we also have internally worked out, out of all the districts across the country that we are present, how many districts we think are little hurt by this problem, and it could take 60 days, 90 days before things become absolutely normal, and which are the districts, once the administrator allows activity to commence, would bounce back to normalcy very soon. Dinesh, Ravi, do you want to add on the first question on the moratorium, on term loan and interest and working capital loan? So I don't know what's the way they can come in but my understanding I explained to you that interest is not being covered, and working capital loans are not being covered at this stage as we hear from most of the small NBFCs. And it's by pick and choose by the bank whom they want to and whom they don't want to, and term loans are definitely covered.

Yes. So as we spoke, most of the banks are, in fact, offered a term loan moratorium, they have written specifically to the company. Any guarantee of the -- normally, the working capital, usually, the banks give a rollover. So -- in fact, most of the working capital, banks will be able to give a rollover. This is a higher sort of a cash credit limit. So I don't see a reason for somebody to specifically ask to give a moratorium for a working capital purpose. Their only challenge is that interest portion because usually, companies will pay the interest and do a rollover.

Got it. And sir, just to confirm on your opening remarks, you said that even if there were no collections for 3 months, depending -- I mean, looking at your liquidity position and all your expense control, you should be able to grow on for the next 5 to 6 months, right, because...

Yes, up to September, our cash flows do give us comfort to believe that we can manage liability to be discharged, interest to be serviced and some fixed cost to be met.

And this factors in the moratorium benefit from the bank that has been granted to you, sir?

No, no, no. We have factored moratorium to customer, but no moratorium to Mahindra Finance from bank is not factored here.

The next question is from the line of Nidhesh Jain from Investec.

Firstly, on the operating expenses, you mentioned that your OpEx to asset will -- your objective is to reduce it from 3% to 2%. That is a very sharp reduction in operating expenses. What is the time frame for this reduction, sir?

So it should start maybe immediate, but it would take about 8 months or 12 months kind of a situation because some of them are committed agreements, et cetera, which will take longer to negotiate. Moving some of the fixed to variable will need a lot of communication with different sets of people, et cetera. But I would believe that you would start seeing tickling in of all of this right from month 1, and it may stretch up to 8, 9 months before we see the full benefit of it during the course of the year.

Sure, sir, sure. And secondly, sir, what percentage of our customers have availed or you expect them to avail moratorium?

So we have made an offer to all the retail customers who are in 0, 1 or 2 buckets, definitely not to people who have delinquent account beyond 3, et cetera. But at this stage, when we have reached out to customers, we see about 7%, 8% or 10% of them kind of still discussing whether they need or not need, about 5%, 6% of them have very categorically said, we don't need. But it may go up to about 10%, 12% of their consumer base who may not -- because the customer also doesn't know to -- if they refuse the moratorium, will they not get it later. Some think, if I take moratorium, is it compulsory that I have to take it and pay the interest. So all this kind of clarificatory questions are coming from various locations. So by the time we sort this out, I would expect that finally, about 15%, 20% of them may not opt for it, and they may negotiate for some price reduction and things like that if they were to pay. The balance would opt.

Sure. And just on OpEx again, from which line item in operating expense you expect the major reduction?

I think you will see it in all, including people, to rent, to traveling, conveyance -- see, all -- on every front, you will see, communication expenses, everywhere, you will see a reduction because once it's -- first of all, with volumes going down and things like that and everyone negotiating with each other, I think even asset acquisition cost with dealer, dealer salesmen commission, our own employees' incentive program, all of that will undergo some change during this period.

Okay. And this OpEx is just 1 year phenomena or do you expect that there's sustainable reduction in OpEx?

I think once we get to this, that will become the new model, right? See, that's the whole idea to move from fixed to variable, so that the cost -- ability to absorb the increasing cost will come from the volume increase. Whereas on a fixed, you are struggling even when your volumes are low, you need to incur. So we are -- some of the expenses will get rid of, some of the expenses will cut size, and some of them will move from fixed to variable so that the whole program is sustainable going forward.

The next question is from the line of Dhaval Gada from DSP Mutual Fund.

Sorry to come back again on OpEx. Just wondering what's changed from demon to now where during demon, we had a sort of digitization drive, et cetera, and the OpEx was still sticky around the 3% level. So what's driving this lower to 2%? And second, could you just comment a little bit about the fixed and variable that we have today? And what's going to change materially in this to sort of bring it -- I mean, if you could just highlight 3 or 4 major examples which can drive this journey, 1 percentage point reduction, that would be very useful because, I mean, honestly, it looks very tough given our business model, I mean, for over these years, we've been around the 3% level. So what's driving it to 2% now?

Yes. So from the OpEx side, what are our 3 or 4 major costs, if you see, one is the dealer incentive, dealer commission, salesman commission, which is for the volumes that we get from them. Clearly, there are discussions to say in this difficult times and with volumes coming down and with less competition around there during this period, et cetera, et cetera all put together. There is a very clearly understood negotiation on how that will come down. And I use the term called partnership, where the OEMs are willing to step in and say, okay, we are willing to bear a portion of the cost because they are not going to spend so much money in their marketing budgets and things like that. So it's reallocation happening from a company to going towards the OEMs and things like that. And dealer themselves also realized that they need to forgo some of this because these are the times where they want assurance of finance availability rather than demanding for earnings coming out of this. The other major cost is our people cost, right? So today, we -- if you kind of -- as a whole organization, the variable portion of the people cost could be around 20% or so. And there is a clear scope for that to move towards a 30% kind of a situation. And therefore, people productivity and the performance and the overall volume outcome and collection, all of this will guide the earnability of people, and that will help in a way bring down that people cost substantially from a fixed moving towards variable. And if you were to incur the variability, it would reflect in the revenue earnings as well, very clearly. The other element of that is while you touched on the demonetization, enough efforts were put in to see can customer move from a physical model to whatever extent that they can move towards digital and other model. But it was a very commercial situation required. Today, it's a very, very personal situation, health-based situation. And I think some section of the crowd will move towards new means of transferring money, avoiding traveling. So therefore, we do see a possibility of some of these collections shifting towards digital-based repayment and things like that or at least the willingness to come and pay it in the branch instead of allowing people to come to home and collect money. Some of these changes will happen because of what has been seen on the marketplace and what's been the knowledge about this subject that has been installed into people whatever. The other next big cost for us is really the branch cost and branch rent across the country and related expenses to the branches. Very clear, again, we are setting up service centers instead of having regional offices. So from 85 regional offices, we may come down to 4 or 5 large service centers, which will be operated where the technology-based interaction with branches, with field executives will happen. And the service will continue to remain the same that was being provided. Instead of adding so many regional offices, it will straight come down to service-based operations. And that would big time save the rental and the related variable cost attached to those rents or to those offices. The last would be, clearly, I would kind of advocate to say that there will be freeze on adding of people, which is normally our 10% additional comes from every year adding more people. And in this round, it would be definitely higher productivity expectations from employment. Because there is going to be this question in everybody's mind of these are times where we all come together to ensure all of us contribute rather than ask for more and more people kind of a thing. So if you look at each of these heads, it's not one head where we will save all of this. But I think it will come from various heads. You are right, it's not something that just to buy an interoffice memo, all this is going to happen from tomorrow morning. There will -- that's why I took the time to say it may start immediate but will stretch through the year. There will be multiple teams which will be set -- there will be multiple teams that will be set for this purpose. And each one will have responsibility of handling different sets of expenses. When I said regional offices will be spurned down, there are excellent regional accountants, zonal accountants who will move to service center points and they would very clearly -- there will be kind of responsibility of allocating certain expenses to them, which they will personally monitor and execute. So I think you will see some very specific actions from us on each of this front. And this is a target that we are driving to bring it from the 3% to 2%, who knows it may end up at 2.25%, it can go down to 1.90%, that's not the debate. But a very visible change in the cost structure is what we can promise will happen once we put all these to practice.

Understood. And just one last thing, sir. I mean, I know it's early to guesstimate, but based on your initial assessment, I mean, and taking some reference from the past, what's the kind of final credit cost impact that you could see though this entire event, the net impact?

So exact credit cost, maybe Rajesh or somebody can estimate and let you know later. But I think to start with, the gross NPA will kind of move by at least 200 basis points. If we are at 7, it may go to 9 kind of a thing. But I want to still put a caution around this, is we are ourselves going to very clearly differentiate between people who are already delinquent versus people who became delinquent because of this situation. And my very, very personal understanding of having run it for so many years, I can tell you that some people who have been very regular in their repayment up to February, maybe the 3 months moratorium is sufficient enough for them to keep continuing to repay from the fourth month. But even if not, I think their intention to repay should never be questioned because they're all in the same business. They have been in this business for too long, and they are not going to give up this business just because they're going through this little difficult situation. I would rather, in future, we will try and see how to do that. But we would rather at least when we talk to all of you, we'll try and kind of speak a language of what's the gross NPA coming from accounts which were already delinquent or already showing overdue trends, and the ones which have become overdue during this situation and how they are behaving. I think that will very clearly set out how the asset quality is temporarily going up and then is likely to come back.

[Operator Instructions] The next question is from the line of Prashant Kothari from Pictet.

Sir, I just wanted to understand the impact of LTRO. So far, have you got any funds through that window or not and with remarks on the same?

So Dinesh will answer. So our understanding, the banks are taking internal approvals of their Board, et cetera, for participating in investment through that route. And definitely, we believe that someone like us would be in the priority list of their consideration. Dinesh, Ravi, you want to add what the situation or anything that we know more?

Yes, we have been approved by a couple of banks for taking the feedback to what extent we would be able to place our paper in the early next week. So we have given our possible limits and the possibility that they will go back to their committee for setting up the limits. So we should be knowing which time the possibility of back-to-back bond placement against this LTRO.

Okay. And just my second question. Is there any possibility of a moratorium on our bond repayments as well? Or will it be -- it's just limited to just the bank loans?

So as of now, the RBI circular is only restricting it to term loans and nothing on the bonds. So we don't see any moratorium on the bond at this point of time.

The next question is from the line of Nischint from Kotak.

My question actually pertains to liquidity. When you are saying that you're fairly comfortable till September end, this, I believe, makes an assumption that 20% of your customers are kind of going to pay over the next 3, 4 months. And you have working capital lines and cash on balance sheet to sort of service all the liability. Is that the right way to think of it?

Yes. So first of all, in our assumption, Nischint, up to September, we have assumed virtually no collection, not even those 20% and things like that. But also, we have assumed that the disbursements would be very, very weak or rather absolutely close to nothing. So if at all we need more money, it will be required for disbursement, but not for meeting any liability or interest servicing or meeting fixed cost.

So basically, book will be flat?

Yes, that's the assumption that we have taken because nobody is clear about when will things open up, how the volumes will pan out. Maybe another call 1 month from today will clarify these questions more sharply. But at this stage, we would like to believe collection and disbursements to be an independent activity, which we have to look at later, but more to look at the available cash to meet all liability and meet the expenses.

Sure. And if you could quantify the amount of cash on balance sheet and the unutilized working capital lines that you're assuming in this?

Dinesh, you want to answer? I think it's some INR 4,000 crores.

Yes, we have some INR 4,000 crore of liquid investment pool, and roughly another INR 1,500 crore of line available from the multiple sources. And obviously, we -- as I said, we are speaking to multiple banks for the bond placement for LTRO, those are anyway independent.

And your total liability is basically around INR 5,000 crores over the next 6 months is what you're saying?

Yes.

Less than INR 5,000 crores because you're also including expenses in this.

Yes.

The next question is from the line of Umang Shah from HSBC.

I just have one question related to asset quality. As you mentioned that there could be certain customers who were good paying customers before this event occurred. So from a regulatory standpoint, do we have an option to, let's say, do a onetime reschedulement or restructuring of such loans and not classify it as NPLs or we will have to still classify them as NPLs?

No. I mean, rescheduling is, the 3 months moratorium that would be given, there would be no billing. So therefore, these customers by those installments won't become. As otherwise, let's take the February closing balance items. If the RBI does not agree to moratorium on those customers, then to classify them as an NPA will be necessary, and which is why I explained that we will try and put out to say that increase in NPA is caused by what type of customers and who were already delinquent versus who have become fresh due to this situation. But if the regulator is not comfortable, then to do a reschedulement just for the sake of an NPA number is something that we have always resisted and avoided, even though it could be allowed once maybe, but that is not the route we would like to take.

The next question is from the line of [ Rahul Maheshwari ] from AMBIT Asset Management.

I just wanted to know 2 things that during ILFS crisis, your funding cost was increased and when you had given at that time that 75% of the cost will be the pass-through and the remaining 25% is to absorb. So given right now the liquidity is enough, and as you told that the new -- the current liabilities would be replaced with the new liabilities, can you give an outlook on how your liability structure would be changing and also on the cost of funds?

So Dinesh, you can take this. But fundamentally, structure big-time change won't happen. The mix of funds possibly would remain still the same. But the cost of funds from the banking system, et cetera, would come down. Dinesh, any mix change that you want to talk of? I still think our mix would remain almost the same, maybe very marginal difference.

Yes. Most of the time, the mix will probably remain similar, except for the portfolio sell-down may come down because last 1 year, 1.5 year, we would have slightly increased our securitization portfolio. Given that the incremental disbursement is going to be lower, the securitization pool availability will be also dependent on the new business. So to that extent, obviously, it will show a change in the mix.

On interest cost, cost of funds, is that -- what is the spread that you are expecting? As you told, for next 6 months if there's no collection and weaker disbursement, so how your cost of fund would be moving? And -- means how much you would pass-through, how much you would observe and the impact on the NIMs?

So cost of fund wise, it will not show much move on account of incremental borrowing from the multiple sources, but it will have a negative carry cost on account of the liquidity pool, which you keep holding. And since there is not going to be an incremental business, obviously, on the liquid investment pool, which you will keep holding in your book, we'll continue to have negative cash. So [ would there ] be any additional burden in the spread or margin?

Any range, sir, where you expect the worst-case scenario, like your asset quality moving at max by 100 or 150 bps, so how -- because at the same time, you are talking of your cost to assets by the measures which you listed in a very detailed manner, any range where you expect that, at a worst-case scenario, it can move down to level?

What can move down, please?

The margin, sir.

So I think since there is no big demand that we are forecasting, I will not want to see that at the NIMs level, will there be a big change? I'm not able to see that yet. Because the borrowings are not -- fresh borrowings are going to replace only the past liability. If any, there could be some marginal improvement if the cost of funds in the borrowing side comes down because there is no immediate big-time lending that we are forecasting, right? And even if there was to be some disbursement happening, we don't see pressure of lending rate needs to come down at this stage. The basic availability of funds is going to be the question that the dealers and OEMs will have rather than cost. So at the NIMs level, I'm not able to see there will be a need to work on any compression. But clearly, the pressure will be from need for money for disbursement. So that we are not able to yet see. The sentiments don't allow us to believe that the disbursements are going to look a bit tight. So that is why these kind of measures on cost savings and bringing down the -- controlling the credit cost, if you may call, all of this will help in the final return on assets. While at NIMs level, I'm still not able to see compression. If any, one could maybe look at a very, very marginal improvement if cost of funds was to come down.

Okay. And sir, one more thing, sir, as you are one of the leaders in CV financing in tractors, can you give a perspective that as the situation normalizes, where you told after 3 to 4 months, once the collection and disbursement start, there are chances of smaller NBFCs going for a solvency issue. So what is your perspective on consolidation or the outlook on the industry perspective because as you are dominating player?

So every time there has been a disruption coming to the industry, this question pops up as to what will happen to smaller player and things like that. I think the smaller player also have the flexibility to remodel themselves, maybe cut size, do less business but this is the only business that they do. So therefore, they somehow continue to remain in the system at a regional level. So not too many players would fold off. But definitely, aggression from the players for sure will come down because in this round, the real debate is on the liability side, that how many of them will get moratorium, how many of them will get fresh funding, that's the real debate and not the asset side debate. So therefore, I think the size of NBFCs one can see shrinking from small to medium size will find it difficult possibly raise debt, et cetera, et cetera. Consolidation, again, in this industry, unless there's a strategic fit and a cultural fit. It's not about is somebody available to be taken. But I think everyone will have this question to say in this given situation of so much pressure on the liability side, the capital -- pressure on capital will amount at this stage because how many will be able to raise capital so very easily. Given all of that, even though there may be players available, the consolidation may not happen with that speed. People would wait to see that things really normalize before one can even venture to make it a big size. So I think in this round, you will only see lot of, I would think, process correction, you would see size shrinkage, you will see people moving away from certain class of business because some of them have gone into all asset class of financing. You will see those kind of consolidation within the company happening, but not at an industry level with that aggression.

[Operator Instructions] The next question is from the line of Rajendra Mishra from IDFC Mutual Fund.

So basically, my question is that we have seen a lot of migrant workers moving from cities to rural areas. And there's a -- all those sort of people on the waiting line, so once train starts, maybe they will also move and may not be in a hurry to come back to cities. So looking at our previous experience of demonetization or even before that, some of the crisis, when this large set of labor gets added to the existing set of people in the rural areas, does this increase business potential? Or does this hamper the earnings of the existing pool of people? So how do we look at that? Because suddenly, you will see that the number of people getting into the villages is going up manifold.

So at least my judgment is 2 things will happen. One is in rural, the cost of production will come down because instead of hiring a labor, people who own the land, who have come to city for employment are going back and they themselves will do the farming and whatever. So there is a possibility of cost of production coming down and therefore, leave little more money in the hands of the families out there. My own feeling, and I said it right at the beginning that the rural bounce back would possibility be faster than urban bounce back. And rural will once again open up consumption, and you would start seeing things to become better in rural. I'm not able to make a judgment on, will cash continue the same way? Will it go up? Will it go down? But rural economy will definitely shape up to be the one which is aggressively showing signs. Because you look at all the people who move away from city are people who are either small traders or people who are vehicle drivers and all that. In the past, we have seen they go back and they may put a second-hand vehicle, they may put a 3-wheeler, they may put a pickup van. And I would somehow think that the vehicle volumes, tractor volumes is likely to definitely pick up in the rural India once things do normalize there. What would happen in urban, typically, therefore, is some of this aggregator models and all will find difficult to come back and take time to bounce back because that's very driver-dependent business. Transport, for example, heavy commercial vehicle, it's very, very driver-dependent business. So if these kind of labor go back to their native and don't return, at least my belief is having gone for this harvest, they will continue with farming post monsoon and return only by next harvest, which is November, December. By the time, the urban centers should have settled down, then they will come back. Until then, between April to December, urban is going to find it difficult to get drivers and these kind of small trader shops and all that. And you would see shrinkage of businesses happening in these areas. The 2-wheeler sales can pick up in urban, if people are going to be encouraged to not use public transport as much as possible. People may not want to acquire cars for transporting themselves to office and things like that. You may suddenly see a 2-wheeler sales going up in urban centers and people using 2-wheelers more than anything else could be a possibility. I mean, this is my thought process. But surely, labor migrants from urban to rural will push up consumption story in rural, you will see asset acquisition in rural happening, and some businesses, which are driver-dependent in urban, will go through the pressure.

I think it's a pretty insightful point that you've shared. Another question is on the industry level -- how is some of your competition responding to this whole thing? The way like you said that you will focus more on reworking your business model and cutting costs. So how is some of your competition responding to this whole thing?

So I head the FIDC, which is our federation, Finance Federation. And almost every day, we have been having this call amongst ourselves, where you have big ones like Sundaram, Shriram, L&T, all of them participating. I think everyone's thought process is currently around the well-being of customers and well-being of employees, but more importantly, bringing the points to the understanding of the regulator as to what really the industry needs would be. But some of the points that I've made is also very commonly thought through by all the NBFCs together. They do believe that more partnerships will emerge. They do believe that volumes will take time to come. And therefore, everyone is going to focus on how to bring down cost and how to use technology to bring down cost, how to revisit some of the process. I think it's not going to be very different in people's thinking. But each NBFC has a different product line and a different segment of customer. So their ability to do how much because some of them must be already at a very marginal level of cost and not at a high cost level, right? So therefore, their ability to bring it down beyond that could become a huge challenge. If some of them have a view that the business take much longer or we may want to come out of certain businesses that we are in, they may even look at people rationalization and things like that. So not any one particular approach by any one NBFC, but general thought process is around this.

We take the next question from the line of Kashyap Jhaveri.

Can we keep it as the last question because I have another call to kind of attend. I mean, if others are okay to continue, that's fine.

Sure. We'll take the last question from the line of Kashyap Jhaveri from Emkay Investment Managers.

Just one question. You mentioned that some of the banks have already approached you for limits under TLTRO. Now as I understand, the 2 tranches of TLTRO have already been done on 27th March and 3rd April. So are banks sort of sitting on like liquidity right now and waiting for the participants to approach them? That's the first part of the question. And connected question is, this money will come to them at just about 4.4%, even considering the opportunity cost for SLR, CRR, probably their cost of funding might not cross about 5.1%, 5.3%, what pricing are you expecting from them at this moment?

So as we right at the beginning said, we have also approached banks and we are awaiting their concurrence, and I'm sure we would get some news from them very soon. And you're right, so the bank is going to pick and choose whom to give, how much to give. And therefore, we will have to make in our request application and suitably it will be taken up, and we do expect that we would be in the initial lot of companies who get this funding from the banking system. In as far as the rate at which we are looking at, Dinesh, you may want to add, I'm honestly not aware as to what rate are we really demanding. But obviously, we would be one of the finest rate borrower as we are for every instrument, is my understanding, but Dinesh can be more specific.

So we've spoken to market and the bank. It's just kind of -- the discussion was somewhere around 7% or thereabout. So...

You're not audible. Basically, there is lot of disturbance.

Hello?

I mean, your voice is breaking a bit.

Okay, I will hear and repeat. Dinesh is saying that from the market, as we understand, I think, we are looking at the rate anywhere from 6.8% to 7% kind of a thing given their banks markup. Is that right, Dinesh? That's what you said?

Yes. Yes, 7%, closer to that.

I now hand the conference over to Mr. Alpesh Mehta for closing comments.

Thank you, sir, for all the wonderful insights. So do you want to give any closing comments as such or shall we wind up?

I think my only closing comment would be, these are times where everyone will have to have patience. I think all of us have to more often interact to know the reality and should keep a little of judgmental and speculation out of our thought process because things are very dynamic. And we, as a company, would be more than available to everyone to reach out and give us -- give our perspective of how things are changing frequently. But I think more interaction, more often interaction will -- I would think will be the necessity. But if we see something very dynamic and very different from what we are thinking, we would also come back. But these are times where all of us have to really work together because you also will get a lot of insights as you talk to different people in different parts of the world. And we would be very happy to receive your insights on anything that we should be looking at as well. And that would help us a big way if you can also let us know that if you think we are missing out on any areas to focus.

Sure, sir. Thank you, everyone, and stay safe.

Thank you. Ladies and gentlemen, on behalf of Motilal Oswal Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.