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

Ladies and gentlemen, good day, and welcome to the Q3 FY '21 Earnings Conference Call of Mahindra & Mahindra Financial Services Limited hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kunal Shah from ICICI Securities. Thank you, and over to you, sir.

Thank you, Margaret, and good morning, everyone. Today, we have with us on the call Mr. Ramesh Iyer, Vice Chairman and Managing Director; Mr. Vivek Karve, Chief Financial Officer; Mr. Rajnish Agarwal, Executive VP Operations; Mr. Dinesh Prajapati, Head, Accounts, Treasury and Corporate Affairs; and Mr. Rajesh Vasudevan, Senior VP, Accounts from Mahindra & Mahindra Financial Services to discuss their Q3 FY '21 earnings and also give us the ground level feedback as to what's happening in their area of operations and discuss the financial update that are linked. So over to you, sir.

Good morning, everyone, and welcome to this conference call to discuss the results of quarter 3. Let me begin with what's happening on the business front before we go to everything else. What we have seen, and it's a repetition of what I've said even in the past, that definitely, we continue to see the sentiments remaining positive. And we have seen month-on-month improvement on the volumes. Yes, we have still not caught up with the pre-COVID kind of number and situation, and it's at the back of 2 or 3 things. One, definitely, we have seen volumes coming down because the vehicles are not still being made available sufficiently, both in terms of vehicles and tractors. And what we see in December, at least what we saw from the industry numbers, they are more a bidding number and the vehicles are still not been retailed out. So clearly, we see volumes to pick up going forward, I'll speak about it, but in this quarter, we have seen vehicles nonavailability as one of the reasons. I think we've also seen the other reasons like the cash purchases have once again gone up at least in tractors and in smaller vehicles because when the vehicles are in short supply, we do see people making arrangements for funds with an expectation that full payment made may get done a better allocation of vehicles. And that actually brings down the overall volume available for financing, particularly. That's been the other reason, and that has had some impact on us. And the third reason is there are certain segments of customers who are still shying away from buying a vehicle, while their earnings have restarted and when we talk about collections, we'll talk on them, and the specific segments that we are referring to clearly are the aggregator segment, the school bus segment, the infra segment that is people using their vehicles for infrastructure projects like mining, et cetera. I think these segments are still not buying vehicle and therefore, that segment is definitely registering a lower volume, and that was directly are kind of a business volume out there. Putting these 3 together, we have had little pressure on our volumes as compared to what we thought we would end up the quarter with, but there has been some drop in numbers arising out of that very clearly. I still want to confirm that there is not too much of competitive pressure coming from any NBFC per se in these segments. But very interestingly, we've seen in the car segment, the salaried kind of -- salaried when I say not necessarily high corporate salaries, but even low salary people in that segment are buying personal vehicles and they are looking for a 7-year loan, and therefore, State Bank has been a little more active and aggressive in that space. That volume has gone towards bankers. So put all this together, we have seen, therefore, there's some decline volume that we have seen. But clearly, the visibility for volume is with now -- I mean, discussions with all the OEM, most of them have confirmed rather, almost all of them have confirmed that they are billing sufficient stock in the system. Their production is back to normal. And we do expect that volumes will pick up in the fourth quarter. And you would see a very different number from us when it comes to the fourth quarter number, there would be a growth visibility on the number. And we are also somewhere predicting that it could be as high as what we saw in the fourth quarter of last year. So the volumes would return back to some kind of a growth number from this quarter. But interestingly, we have talked about it. Quarter-over-quarter, we have definitely seen increasing volume and disbursement value, while after the third quarter, it has still not caught up with the previous year. On the interest front, that is on our borrowing cost front, we very clearly are seeing that we have an advantage of funds being available and multi-source funds available, and that has helped us to definitely bring down our borrowing costs while we still carried a large sums of money in terms of a protection fund, if you may call as the liquidity check and therefore, their holding costs that we have incurred for holding such as some have in the bee hive. We have revisited that requirement based on the overall collection and overall availability of funds from the market. And we are recalibrating ourselves, and we will bring down the overall liquidity holding position by at least a couple of months, and that should release cash and ease interest savings on that front. And as disbursement starts to pick up and we start consuming fund and the older funds get paid off and the new funds come in, we'll also see further improvement. So we clearly see in the following quarters, the margins to improve coming from a better liquidity management as well as better mix of funds coming in as we start to consume. On the overheads front, I think we've stayed with our clear focus on looking at various line items to bring down costs. And while you will see that the overheads to the assets have substantially come down, but just to remind, as we've said in the past, as overall volumes pick up and the activity level starts to go up. This will start moving a little up, but we do expect that they will settled down somewhere at 2.4, 2.5 type levels, which should mean a saving of 50, 60 basis points over the past. And we stay committed to ensuring that we, even on a growing basis, we bring down the overheads to at least a level of 2, 2.25 over a period of time. But to start with, we would have a 50, 60 basis point savings. Currently, the savings are much higher. We are already at about 2% level, but that's at the lower transaction levels that we are seeing. Now coming to the overall collection and the delinquency I think right upfront, I would like to state that what you see as our NPA and what you see as our provision my very strong belief is they are very temporary to this quarter, and this is the reason I'm saying that. And the reason why I'm saying that is we have seen substantial movement in various stages of collection. And we are very, very excited about the changes that we have seen to the collection percentages. And on the back of that, if you recall, we had initially forecasted that we would have to do a restructuring of about 150,000 accounts. And when we closed the third quarter, we have virtually done no restructuring of account at all. And why haven't we done the restructuring, it's not that it's our decision not to do. It's ultimately the customer decision, whether they want it or otherwise. So we reached out to all this 150,000 customers across geography in various states and we try to understand what really is happening on the ground when it comes to their earnings. And very important and interestingly, most of the customers have serviced loans during this 3 months. And they feel that taking a restructuring and paying an interest for a longer period will be an unnecessary burden on them. We have definitely recognized the fact and their sentiments. We have also reverified the facts on an overall basis through the month and through the quarter with our branch team. And we are very happy to kind of let you know that when we looked at this 150,000 contracts, which originally we had forecasted will need kind of some restructuring, which were in the 3 buckets of auto, commercial vehicle and cars, and we found upward of 94%, 95% of the people have been able to service their loans during this period and close to about 55-odd percentage of people have actually paid a full installment in all the 3 months. So that's extremely good news from our point of view. And therefore, we took this very conscious decision of not to go in for restructuring, but rather stay with the high level of provisioning if required, and we very strongly think that we are very temporary in nature for this quarter, and we would see them substantially get reversed in the following quarter. Sale is when it comes to the Stage 2 accounts, when we kind of looked at the total number of contracts that are currently in the Stage 2 is about 316,000 contracts, and very interestingly there, again, only 6% of them did not pay any installment during the 3 months. And out of that 6%, mind you, out of that 6%, almost about 2% is someone who is already holding a credit balance, and that's the reason they did not have to pay. And there is another about 1% or so, whose contracts are matured and just about an installment or 2 will be outstanding, who would settle their account. So here, again, the news is very, very exciting for us that while the number have moved up from what it was in September, and I think it's a wrong measurement against September for a very simple reason that they were just out of moratorium, and they would not necessarily lead Stage 2. But in spite of the installments falling due between October to December, we have found that upward of 96%, 97% of the people have been able to make movement or were already holding some credit balance. So we don't see these accounts going into NPA into the future. So 2 things very clearly come out. In spite of not doing restructuring, we are seeing movement in those accounts, and they are expected to reverse from where they are. And in the Stage 2 account, there are substantial moment for us to believe that they would not progress into Stage 3. Even when we come to the Stage 3 account in particular, that has moved to 161,000 accounts, which are in Stage 3. Even there, we have found about 26% of the contracts have started making payments while they have not made sufficient payment to roll back into a Stage 1 or Stage 2 -- I mean, Stage 2 or a Stage 1 level. And that's the other good news that we have is from this 161,000, if another 30,000, 40,000 accounts are likely to roll back, I think we have an extremely, extremely strong position to believe that in the fourth quarter, our NPA numbers and the provisioning numbers should see a great reversal from the position that we are in. And looking at all of this data and numbers, is why we consciously decided to go in for the provision instead of going in for any kind of a restructuring even on a -- to a continuous convincing basis to customers. But if you look at on a gross to net basis and compare it to even last December, while the gross NPAs have definitely gone up, but we have substantially provided for and have increased the coverage, and the net NPA levels have been almost similar to what we had in the last December. So this is the other factor that I would like to remind that if the contracts have moved to NPA. They are not under provided. We have sufficiently moved the coverage to ensure that we don't need to have any further provision coming from them. Because when we look at the underlying assets and their valuation, we are very comfortable and confident to believe that even if reposition had to be resorted to some of these customers, we would not have to book any loss considering that we are already carrying a provision. I will also like to give you one more data point on the moratorium accounts where we have done moratorium -- we've given moratorium to about 15 lakh customers during this period. And then there at least, it's been a very, very interesting news for us, where we have found upward of 94%, 95% of the people have service their loans during the period. And the 6% of people who could not service this loan and the ones who have not paid any amount have already moved to NPA. So there is nothing more which is likely to move from this account into NPA. Putting all of this together, we have extremely high confidence to believe like every year, we would see a real, real bumper fourth quarter with the harvest money coming in and as well as the infrastructure, which is opened up and we are seeing witnessing cash flows coming in from them. And we are very sure, therefore, that all these contracts who are providing their services already by repaying their installments would show very clear resemblance of how they would be really reaping in the fourth quarter. I just have one more comparison to make just for a better understanding, which is we looked at whenever before we had a similar disruption in the near past. And we found after demonetization in '16/'17, the gross NPAs had, even that time, moved to around about 11% or so, and then it kind of fell back substantially in the month when it opened up in the fourth quarter. And the message that is coming out of this very clearly is when there is a sudden disruption that happens in this geography, the customers do resort to holding back their funds instead of servicing their loans. And as things stabilize, then the correction starts to happen very, very sure near clearly. So there are a lot of similarity between what happened in '16/'17 versus '20/'21 when it comes to the earnings of these customers and then their ability to, therefore, reverse it as the earnings begin to happen. Even when we look at the 3, 4 segments that we were talking of in the past, which are under pressure, which is the taxi aggregator segment, the school bus segment, the some mining kind of a goods carrying segment as well as the people carrying segment. And very interestingly, we have found that the contracts, which are in Stage 2 of these segments have also registered a very high percentage of collection during that period. All of them, above 90% or 94%, 95% of the people have been able to service their loan during that period. But yes, not all of them have not paid all 3 installments. Upward of 50% of them would have paid 3 installments. But definitely, they have started repaying. We also looked at October, November, December as 3 independent months and looked at how is the overall collection behavior has been. And we found that while in October, we had a collection efficiency of about 84-odd percent, moving up to 87%, 88%. In December, it has gone as high as 97%. So there are enough indications to believe how things have stabilized during this quarter. And putting all this together gives us sufficient confidence that we would be able to see correction to these numbers in the fourth quarter and not waiting too long as well as we would start seeing the benefits of the volumes kicking in, including a preowned vehicle because we would -- and like us, maybe other NBFCs will also resort to reposition, which was not an action so far. And we will very, very surely know for a fact that the preowned vehicle segment will also start to pick up during this period as the vehicles start becoming available very, very immediately from this particular quarter. Just on the Stage 2, when I was kind of narrating about the 6% of the contract who have kind of not been able to service the loan during this period of the 3 lakh-odd people, which means around 20,000 accounts. 50% of the 20,000 accounts are in tractors, whose money would come in this quarter. Because the yields are out. Their support price has been announced. But in certain states, the cash flow didn't come through, like in NP, et cetera. And it has already started coming as we speak even in January. And you would find that if 50% of them are in tractors, you will clearly see them get corrected during this quarter. I think for us, while definitely, we went through this pressure in this quarter, but I think we were very conscious of the pressure that we are going through. Having looked at all this data, having interacted with customers at large in every state, having taken inputs from our branches and having understood how the overall earning potentials are beginning to happen, I think we have taken this decision to stay with this pressure for this quarter so that we could, once for all really stabilize better. And I want to confirm that this kind of cyclic impact that we were going through, we somehow believe that now in every line item, we have taken sufficient corrective action for us to feel confident that the model is pretty well stabilizing towards the returns that we were looking for. If you look at each line item, the action that we have taken, I think we are getting ready to clearly move towards a growth orientation as well as some ROA levels that we were always wanting to achieve. Our own internal directions are, how do we bring down in this quarter with all these cash flows and the behavior of the customer that we have seen, bring down the gross NPL level to anywhere between 6% and 7%. And we will, for sure, maintaining the high provision levels will go to sub-4% is what the whole -- I mean the attempt is and the whole direction is and with the saving from margin as with the borrowing cost as well as savings from the overheads. With the growth coming back, I think we are all ready for embarking on this stable growth journey that we were talking off. I think I would stop there and then maybe invite questions from you, and then we'll take them as they come along. Thank you. Thank you very much for joining this call.

Thank you, sir. Should we open the floor for Q&A now?

Sure.

[Operator Instructions] The first question is from the line of Mahrukh Adajania from Elara.

My first question is that...

Mahrukh, can you be little more louder? Can you be little more louder, please, sorry?

Yes. Can you hear me now?

Yes, that's better. Yes.

Yes. So my first question is, what was the -- what factors drove the sharp improvement in collection efficiency in December because it's nearly a 10% jump? That's my first question.

Yes. So as I said, it is all completely activity based. And I'm sure the customer must have also cumulated some cash flow in his hand when he starts to repay. I think one thing that we have to understand the sentiment of this market is until they see a stabilization to bear earnings in the market, they always hold back the little cash that they had. So when they saw that the revenues have returned back and they are able to operate at least 20, 22 days in a month, then they're confident built up to say that now we are back to earning. So you look at various segments, I mean, you look at the taxi aggregator segment, right, why are they started to repay because offices are restarted, entertainment is restarted, tourism has restarted in many states, right? The airports have opened up. So their business has come back to some kind of a normalcy. Many of the school bus operators, and when I say school bus, don't look at it as a bus, but the mini vans, the omni vans, et cetera, they have put them into an alternate use because they know for a fact that the schools are not going to open until April. So many of them in the last 4, 5 months have recast their vehicles and have started using it for some alternatives. The mining has restarted, and a lot of governments have released cash during this period. The government has settled a lot of -- I think, up to September, October, billings have all been settled for contractors. So if you put all this together, and then the crop money came in part of -- from some of the states, the crop money started coming in already in November, December. So put all this together, both the infra on the ground operations and the farm cash flow coming together has really pushed up the December collection and so will be January, February, March.

The next question is from the line of Udit Kariwala from AMBIT Capital.

My question is, what went wrong with the guidance of last quarter? Because last quarter also, you are very confident that there will be no spike in NPA. While I agree that you've not taken restructuring, but did you envisage such large amount that it could flow through? That's first. Second, you -- if I understood right, you said that a lot of 1.5 lakh accounts where you ask customers for restructuring, but they have not availed. So does this impact their credit score and what happens because what we hear is that the businesses are reviving? So logically, customers would have availed is what we are hearing. So your thoughts around these 2 things?

Yes. So when we kind of said the NPA won't spike, it was definitely on the basis that if 150,000 contracts that is kind of customers who are under pressure if they were to be given a restructuring. Then you look at our NPA numbers would have been 2%, 3% less in terms of gross NPA if the entire 150,000 guys would have opted, at least 40,000 out of them would have moved to NPA, would not have moved. We have taken a conscious decision since the customers have strategy. The customer has just told us that we will pay next quarter. We don't want restructuring, we would not have agreed to. But they have demonstrated repayment during this quarter. They have actually paid 2 installment, some of the 56% of those contracts are actually paid the entire 3 installment. Now therefore, the need for a restructuring is not felt when they're servicing the contract, right? So it's not a judgmental error. It's a transactional shift from whether to restructure or not to restructure. And not to restructure decision comes from an actual activity of seeing collection and the money flow through. And therefore, the confidence that these contracts will revive itself and reverse itself in the following quarter.

Sir, and in terms of the bureau score, does it get impacted? And what would be the quantum of exposure to this 1.5 lakh accounts, which you are made now?

No. So I think we shouldn't forget that this 1.5 lakh accounts were all regular accounts even before they moved into whatever stages they are. They are all 0 in 1 account, even pre-March, and et cetera, et cetera. They are not kind of delinquent accounts move to normal and all that. So they're all regular accounts. And if you take average of -- I don't have a ready number, but I'm just putting a number around by an average basis, if 150,000 accounts, if you take an exposure of 3 lakh to 4 lakh per guy, that would be the kind of number. But very, very important and interestingly, they're on earn and pay segment. The bureau scores, et cetera, is not something of a significant importance to them or even to the lender for that matter because one should know, let's say, there's no COVID, there is nothing there, even on a natural basis, we have always seen that they do default on 1 installment and 2 installment based on the local circumstances. So I think they are not high salaried customers whose credit scores get impacted and all that. They are on 1 vehicle, 2-vehicle owner using the vehicle locally for their livelihood. And therefore, in these circumstances of less number of days operations, it does get effect there. Their earnings do get impacted. So I think it's not a concern from a credit rating score per se, and the restructuring is the choice of the customer. We can make this offer to them, and they will choose whether they want to or not. But if we as a company feel that without making any payment, they are also not resorting to restructuring, I think we would have had a better discussion with them to make them take it. But when we saw the payments forth coming, I think it's a very prudent call not to burden them with this additional interest, which could then lead to some kind of a further pressure for them. So it's a very conscious call.

The next question is from the line of Abhishek Murarka from IIFL Capital.

Am I audible?

Yes. Yes. Sure.

Yes. Yes. So a few questions. One, when I look at this slide #33, the moratorium availed accounts, I just want to clarify a few things. So out of the 14.97 lakh accounts, so -- let's say, 15 lakh accounts, 6% have paid nothing in 3Q. So around 90,000 accounts have paid nothing in 3Q, right? And if I look at the second line, that 2.75%, is it part of this 15 lakh? Or is it...

No, no, they're all part. That's the breakup part of the 15 lakh.

Fair enough. Fair enough.

So let me just explain to you the 90,000 for a minute. Now you have a further question. You still have something...

Yes. Yes. Can I just complete the question?

Yes. Yes. I'm sorry. I'm sorry. Go ahead.

So out of -- so let's say, 90,000 accounts did not pay anything in 3Q, out of the 15 lakhs. And if I look at 274,000, then 16% of it, which is around 44,000 accounts, which have paid nothing in 3Q and also probably nothing through the first 6 months either. So now the question really is out of these 90,000 and this 44,000, has this 44,000 flown into GNPA? And what about the rest, 45,000, 46,000 accounts? Whether those are still in Stage 2 or they are already in Stage 3?

So this is what I was coming to. If you look at the 90,000 account, right, they are why in Page 2 because they have serviced their current amount, and therefore, they have not flown. But interestingly, there is a substantial part of that 90,000 who actually had credit balance as well as their account has kind of come to an end just with 1 installment, 2 installment outstanding. So whatever were a regular account where the installments have fallen due during this quarter and not paid have already flown to Stage 3, okay? So when we say 6% of them are not paid and if out of that 40-odd thousand people have paid nothing, let's say, and they are not -- they would have already flown to Stage 3. And therefore, I don't know if Vishal is on this call. Vishal, what percentage of this customer in -- which are in the 6%, will be having a credit balance? Is that number available?

Sir, will check. But it will be -- it's around 52% has moved to Stage 3. From the balance, there will be a mix of contracts whether where they will have been tenure completed plus credit balance and then even make up.

Exactly. So let's say that out of 6%, 3% actually needs to be added to that 94%. So technically, the 3% of the moratorium contract who did not pay anything, but they have already moved to Stage 3 and provided.

Okay. And the remaining 3%, you're seeing some sort of either accounts have been closed or they have 1 or 2 outstanding balances and then...

Yes. Or they would actually have -- some of them have credit balance because they're paid in advance. And therefore, they did have to pay during this period.

Sir, 1.5% are credit balance.

Okay. So 1.5% of credit balance, so they didn't have to pay anything. And there will be some who's got a quarterly installment, which would be paid in the following quarter. So technically, the ones who have not serviced anything which Vishal said is about 50% of that. So about 40-odd thousand contracts, they have already moved into Stage 3. So we don't expect any further movement from a Stage 2 moving into Stage 3 in a big way.

Fair enough. Yes. That's what I was trying to figure out. And the second question is disbursements. When I see your competitors and their disbursements for 3Q so far, everybody seems to have reported a pretty sharp reversal in disbursements and back to very close to pre-COVID levels or even higher. But for -- you're still about 30%, 35% below on a Y-o-Y basis in terms of disbursements. So what really made you, let's say, go slow in the quarter? Or is it a function of lending only to M&M vehicles and therefore, losing out some market share? What's really happened in the quarter?

No. So let me first clarify. We don't lend only to M&M. If you look at our disbursement mix, our disbursement mix, 50% comes from M&M, 45-odd percent, and balance comes from non-M&M, okay? Now definitely, in M&M volumes, we had a pressure because they couldn't supply vehicles, and therefore, we suffered a little more than anyone else would have suffered. Second is, it's also important to understand the product mix of others versus ours and the geographies in which we are operating. I'm not too sure that people who are exactly in the same segment and similar products have had a much higher registered growth or whatever and over what base is the growth happening also. So if you look at the only segment from where we have really gone a little slow, which is our conscious decision to go slow, was in the nonMahindra Tractor segment and which I explained even last time, because we were very strongly present in states like Bihar, UP, et cetera, and there were some pressures that we witnessed post-election in this geography. And we resorted to go a little slow. And the second reason is percentage of cash purchase in these tractors have definitely gone up. And when the cash purchase goes up, the available volume for financing comes down and if you are not a significant player, one could end up with not getting the best of customers. So to some extent, we have resorted to go slow on that product. That's an internal conscious decision. I'm not too sure to claim that, that's a very right decision. But based on what we saw, what we heard, what we understood, we took the decision. That may get corrected over a period of time for sure. As otherwise, we have not seen a very sharp decline to a market share or a loss of volume as compared to what everyone else has done, and I'm honestly not exposed to everyone's number. But if you kind of slice it by product, you will find that that's not the right story to compare in the sense of we have not lost substantially for someone else to have gained substantially. But yes, in certain product lines, it could have happened like if somebody is very strong in second-hand commercial vehicles, right? The demand for that product would have been higher, but we don't have that product as our financing product. So therefore, there must be some decline that's happening. If somebody is in a fleet operator financing, we are not financing fleet operator, truck operator, and they were the ones who bought during this time, somebody would have registered a growth there. But if you were to look at Mahindra UV, tractors, car segment and preowned vehicle other than commercial vehicle segment, I think we've got a decent size of the market that was available to be financed, and which is why I said right in my beginning commentary that when the vehicle becomes start available to this market, you would see our number looking very different from the following quarters.

Sure. And just lastly, if I look at Slide 34, the table on cumulative COVID-19 management overlay. So in December, have you used up some of the provisions that you had made? The balance is down from...

Technical if somebody can explain, but my understanding is that...

I can come in here if that's okay?

Just 1 minute, Vivek. Just 1 minute. I think my simple understanding is that the Stage 2 provision is if you're looking at the table is what would have come down from INR 279 crores to INR 17 crores or whatever. And that particular number change is because now contracts are coming to Stage 2 and would have taken a natural provision course. So that's my understanding. Vivek go ahead and explain what technically the whole thing is.

Yes. So I think you have explained the bulk of it. Yes, there is some of the overlays that we were carrying in Stage 1 has now got recharacterized as the normal provision. So just to summarize most of the almost 100% of the overlay provision as on 31st of December will be towards Stage 3.

Okay. So out of the INR 1,400 crores that you provided this quarter, how does that break up into specific and management overlay? Can you give a breakup?

Yes, we can provide that break up to you. So this entire thing is overlay, INR 1,354 crores.

Yes, INR 1,400 crores is entirely overlay.

Overlay only. Everything is overlay only. That's not the entire provision. This is overlay provision.

So Abhishek, are you asking for the charge to P&L this quarter or you're...

Charge to P&L. Yes, yes, charge to P&L.

That is all normal. That will be all normal provision along with the charge on account of termination losses, back debt as well as the people have said.

So that INR 1,387 crores number that you see on the P&L is a total charge for the quarter.

And that is all towards specific accounts?

Yes. Correct.

The next question is from the line of Sandeep Jain from Aditya Birla Capital.

Have you done any write-off in this quarter? And if so, what is the amount of the write-off?

Sandeep, Vivek here. We have done about INR 300 crores of write-off in the quarter.

Okay. So INR 300 crores of write-off you have done in this quarter. So if I can understand, INR 1,400 crores you have provided in the P&L charge. And if I can understand that INR 500 crores is overlay is getting down, right? In the INR 1,400 crores, INR 300 crores is because of the write-off, is that understanding is right?

Yes, we can say that. We can give you some specific numbers, but broadly, yes.

Yes, broadly, yes. Okay. So remaining is INR 1,100 crores. Now the question is when so much of the confidence that the quarter 4 would be good in terms of overall collection and many other things will come back, right? So -- and as Mr. Iyer has also said that the management is thinking to moving on to the ROA trajectory and is stable in terms of asset quality and all. So why if we are so confident we could have taken a more management overlay and kind of then in the quarter 4, if we come across in terms of more collection and then it can be get back. So what is your thought behind there to keep that COVID-related provision here? Because we have created war chest because of this room, right? So what is the overall management thought here not to utilize and remaining INR 1,000 crores in overlay and not to utilize it?

See, what we have seen as collection efficiency as well as what we have seen as each contract serving the customers -- as the customer serving their installment, I don't think it is prudent for us to get extremely aggressive and say, reverse everything and kind of have nothing left out there. We shouldn't forget that we are still phasing situations suddenly, something could emerge and then we run around to say also we now make another provision. So you will see this getting corrected. In this quarter, if we see collection efficiencies hold up the way we saw in the December month and which we -- January, we are already witnessing it to some extent. And you will see a natural correction happening. So we didn't feel the need and hurry to kind of do everything into 1 quarter. We already taken 1 conscious decision of not adhering to the restructuring requirement of customers, right? And therefore, we are leaving with the judgment of the collection and the judgment of its ability to add to pay. Now we will look at it in the fourth quarter, and we see similar trends in which we very strongly believe and we have every reason to believe it's going that way, you would see the benefit of it flowing in. So we just took a conscious decision of not wanting to do everything in the same quarter.

Okay. And in the longer term, if we see some kind of consistency in the performance, so what kind of war chest or what kind of provision we would like to keep in the book? Because the business model is like that, you can see this kind of some quarter, there would be some kind of problem in some of the state or some quarters, there would be some kind of another thing which is coming, right? So what kind of war chest we would like to keep in our book to show some kind of consistency in the performance because pre-COVID, post-COVID, we have some kind of struggle in terms of maintaining the consistency and the profitability.

Correct. So I think one of the approach that we have taken for sure is the write-offs, which we normally used to do twice a year, that's once in September and once in March. We will now make it more stable to say every quarter, we will take a view and then do the write-offs were required. Second is, we will always want to stay and maintain a sub-4% net NPA level. And if that calls for any higher provision to be done, we would definitely like to do. Our belief is that with a coverage ratio of about 35-odd percent, we should be very comfortable to be able to manage that. So in a way, one can consider a 35%, 36% kind of a coverage ratio being maintained, to bring stability to the model because we do expect that in the next 2 or 3 years as things open up in rural, the way we are seeing, we would be in the category of maybe a 6% or sub-6% gross NPA level for the next 3 years site. And if we were to maintain the 36-odd percent coverage, we should be able to maintain a sub-4% net FD. More or less, that's the kind of policy or a process around which we are working. And definitely, we moved to every quarter, we will look at accounts which needs to be moved to bad debt rather than moving it only twice a year.

The next question is from the line of Piran Engineer from Motilal Oswal.

Congrats on the quarter. I just have a couple of clarifications. So firstly, what do you mean by credit balance? So for morat customer paid EMI and during the morat period, does it create a credit balance?

That's right. So they are holding -- see many times what happens with these customers because they have some lump sum cash flow coming from either a sale of a product or by harvest or whatever, they don't necessarily pay you only 1 installment, they end up paying more than 1 installment, right? And then in a future month, when they are not able to service their loan, that credit balance gets utilized. So therefore, we always have -- this is not a new situation. We always have situations where customers are paid more than their normally EMI and run a credit balance.

Okay. That's in a normal scenario. But during the moratorium month, they were not supposed to pay. But if they paid, did you count it as collection for that month and reduce their principal? Or did you -- are you adjusting it against future month as a credit?

So I think Rajesh or somebody can explain better. But if I think we did adjust and try to bring down their overall loan. But some of the customers have insisted that the loan needs should not come down and they would like to keep the credit balance. See, ultimately, it's a customer choice, right? Suppose I come and pay 3 EMIs, we as a company would decide because it's a moratorium period installment coming in, we will want to bring down its principal and reduces total liability. The customer may choose to say, no, I'm expecting the next 3 months to be more difficult. So please hold this balance and when the installment recommences to happen, adjust it toward installment. Don't bring down my principal. Both situations, but I think largely, they reduced principal. Rajesh, you are there on the call or somebody...

Yes, yes. Largely, it has been adjusted in the principal.

Okay. Sir, my next question is, again, on Slide 33, the 274,000-odd accounts, how many of them were NPL during the morat period?

Sorry, how was the?

The 2.7 lakh contracts, which have not made any payment till end September, these are not only standard asset contracts. Those were also NPLs. I just wanted a subset of the 274,000?

1 minute. Let me open. And Vishal, you are there?

Yes, yes, yes. So Piran, it will be a subset of the former and none of them will be NPL earlier because moratorium was only offered to non-NPL customers. So they have a subset of moratorium availed contracts.

Okay. Understood. Understood. Okay. And just my last question is in terms of in December, while 96% is your collection efficiency. Can you just tell us how many customers actually paid you all and how many did not pay you all?

So I think we have 23 lakhs customer live. So -- and we say 96% collection efficiency.

But sir, this includes earlier collections also. So I just want to understand, excluding the earlier collections, what would it has been.

Okay. I think somebody will pull out the detail. I don't have it ready with me.

Yes. We will share it subsequently.

The next question is from the line of Anitha from HSBC Asset Management.

Yes. I had a couple of questions. Hello?

Yes. Yes. We can hear you.

Yes. Okay. So when I compare yours versus your subsidiary, Mahindra Rural Housing, now there, the asset quality performance has not seemed like a similar trend. In fact, it's improved Y-on-Y and even quarter-on-quarter. So how different is that subsidiary versus yours and I understand both are extremely entrenched in the rural areas? So can you give some color on that?

Look, I think we should look at it from where that correction has happened for them. Largely, their NPA numbers were very high in the state of Maharashtra. And we have seen improvement in collection that's happened because of the agri cash flow coming in. Because see, they are not all India present for making a like-to-like comparison directly. So in case of comparison, you'll have to do some specific state comparison between housing and us, and you will see some pattern of similarity. So if you look at their improvement, if it has happened in Maharashtra, and if you see our collection in Maharashtra, possibly would have shown a similar trend. I'm just quoting 1 state example, not necessarily that way. Likewise, if you look at MP or you look at Rajasthan. So what we can do to help you understand this question better, Vishal, if we can kind of make few states comparison where rural housing is present and how the behavior of Mahindra Finance in that state has been as well. But just to be more clear and specific about it, we have taken this view even on the basis of part installments received from the customer, and we see a very visibility of the field. That would be good. We have not touched and done any restructuring of these customers. And in rural housing cases, it is quite possible that installment could have been quarterly whereas we have a monthly installment. Somebody who have paid them 1 installment would be out from a collection, whereas in our case, they have to pay 3 installment to be out. So while the geography is same, the overall structure, the overall program, everything is very different. So it may be a little necessary to go deeper rather than just make an absolute comparison.

Okay. Okay. And then just a couple of more questions like what is driving the good reduction in OpEx for you if I do a Y-o-Y comparison again, because both on the employee front and the other expenses has come down and in an environment where things are pretty collection heavy and follow-up you need to do? What is driving the reduction in OpEx there?

So one is we have been explaining this several times, we have looked at every line item, and we have recast ourselves like, for example, some of our regional offices, which were kind of cost center and not really contributing. And with the use of better technology and use of 1 office to serve more branches, we have been able to bring down the number of regional offices. So that's a direct reduction to the cost one can see. Similarly, we have looked at the security services that were pre-provided across the country for all our branches. They have been relooked in the sense of is there a need to have that kind of a security services now with various other alternate methods of money transfer into the bank, et cetera, happening, not so much cash left in the bank branches. And therefore, that's the other area which has been looked at, and there's been a reduction that has happened. Similarly, on the people front, given the current scenario of what's happening in the marketplace, I think all of us are aligned to a variable structure rather than a fixed structure for certain percentage of compensation for even the field people. And therefore, based on the performance levels that cost has definitely come down. Likewise, every item has been looked at the date at 4-year charges, whether it's telephone expenses and traveling expenses. But please be mindful of the fact that what you see a total reduction is not necessarily the reduction all time because of the transaction levels being low, traveling being less definitely, those costs will, in some form, come back when things open up. But undoubtedly, from a 3% plus to a 2% level, we have some a inch back to an area 2.4 level, but it's a conscious decision to look at every line item and record that expense and to stay at that low level.

Okay. Just 1 final line item or just a question. What is your undrawn lines in addition to the cash liquidity which you have on the balance sheet?

Approximate is around INR 1,500 crores.

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

My first question is, would you be able to share the PD and the LGD for Stage 1 and Stage 2 that you're working with from an assumptions point of view?

Meaning as a percentage, what is the question when you say assumption?

Yes. Yes, as a percentage. So for example, if it's Stage 2 asset, what percentage do you expect to fall into like PD? And then what LGD are you assuming on that?

We will share it with you offline.

Okay. The context in which I asked this question is compared to September, there has been actually a sharp drop in your coverage ratio for Stage 2 assets from about 19-odd percent close to 13%. And you've also used maximum the COVID overlay from Stage 2. So how do you gauge the sufficiency of this 13% coverage ratio for Stage 2 assets? That's what I was getting at.

Okay. So -- should I answer that?

Yes, yes, go ahead, please.

Yes. So if you recollect, in September, there were a few contracts in Stage 2 which we had assessed and the feedback is the second we had created an overlay provision on those, thinking that these are the assets that may -- that we were and become Stage 3 in the third quarter. So when we annualized these contracts in Q3, we realized that while some of them have indeed moved to Stage 3 in which cases we are which is carrying that provision, not under Stage 2, but under Stage 3. But quite a few of those contracts have continued to remain stable as Stage 2 and have actually improved from Stage 2 to Stage 1. So as a result, either the provision has got now recharacterized as Stage 3 or the provision is never required. That is the reason you see that reduction in the coverage percentage for Stage 2 from Q2 to Q3.

To add to it, Vivek, there were also a Supreme court basis decision. Some of the contracts which we have classified as Stage 2 in the earlier presentation and which were -- because of the provision for the Stage 2 look it higher. Because even though the contracts were in Stage 2 -- Stage 3, they were classified as Stage 2 and the provision was made as per Stage 3. So Karthik, that portion will also now is directly reflected in Stage 3.

Okay. So in other words, the 13% range that you have right now more or less matches your PD and LGD models from a coverage sufficiency point of view? Is that...

Yes. You can say that. I think that's a good conclusion.

Okay. Great. So sir, my second question is the 150,000 which were initially up for restructuring or at least proposed to be restructured. The number of NPL accounts we see this quarter is about 155,000, which was about 100,000 last quarter. So can we say out of this 150,000 -- about 50-odd -- 50,000 to 55,000 have actually slipped into the delinquency bucket and you also said that 50% have actually paid all the 3 installments. So that's like another 75,000. So basically, 125,000 would be in either of these 2 categories with the vulnerable category only being about another 25,000 accounts?

So the -- about 6% of them have not paid. Only 9,000-odd contract would be in that vulnerable category, if you may recall. And someone would have not pay anything would have moved to NPA would be, I think, about 40,000-odd not 50,000-odd because 9,000 are still hanging out there. And the ones who have paid are in a regular category. They are not moved to NPA. So 40-000 would have moved.

So the vulnerable account is 9,000?

That's correct.

9,000 accounts would be in this. Okay. Okay. Perfect.

The next question is from the line of Amit Ganatra from HDFC Mutual Fund.

I just missed the earlier point, 1 clarification. This cumulative COVID management overlay of INR 1,000-odd crores, has it been included in this INR 4,396 crores? Or this is over and above INR 4,396 crores of provision?

No, it is included.

So INR 4,396 crores includes INR 1,064 crores already?

Yes, yes. So overlay, is just a slice of the overall total number.

The next question is from the line of Roshan Chutkey from ICICI Prudential AMC.

Sir, what is the Stage 2 asset number, the 14% number looking like as of yesterday, if you can share that number?

Stage 2 what?

Stage 2 asset proportion, which is 14% as of 31st December, what is that number looking like as of yesterday or sometime this week, if you have that number with you?

Sorry to interrupt. Mr. Chutkey, may I request you to speak on the handset more, sir. Your voice is not very clear.

It is clear now?

I think you are on speakers. Can you come on the handset mode, it will be more clearer.

No, I've understood his question. However, this data is an unpublished data. So to that extent, we may want to be quote. Hello?

I think he's gone off the line.

He is on the line. Mr. Chutkey, any other question, you may go ahead.

Hello. Can you hear me?

Yes.

Okay. Sir, if you can just help me understand what the number 14% looks like?

No, that's what I replied. It's an unpublished data because it's a data in the month of January. So we may not be able to answer your question.

The next question is from the line of [ Nousheen ] from Acko General Insurance.

Yes, my question is that how much percent of the book would be secured?

When you secured meaning, I think all the loans are with a vehicle or a tractor or whatever?

All right. Even the rural loans or the SME loans?

Yes, yes, yes. We don't have any -- I mean, kind of unsecured lending, large lending. I mean, maybe a few hundreds here and there could be there. But if you look at the overall book, it's all completely secured loan with an underlying collateral.

All right, sir. And I think that's all, my previous questions have been answered. Thank you so much.

The next question is from the line of Nishant Shah from Macquarie.

Yes. A couple of questions for me. First of all, could you just help me understand which are the portfolios where you would have, say, quarterly installments instead of monthly installments? So is it primarily only in the tractor segment or also others?

Mostly, mostly tractors. I don't know if Shantanu or somebody is on the call or Rajnish, maybe truck, may be very few, but largely in tractor.

Okay. And what proportion of the tractor book would be having quarterly or 6 months of your insolvency, would you have any rough data about that?

Don't hold me to that number, but I would imagine that both quarterly and half yearly together, it should be somewhere around 45%, 50% type levels. Kamath you are on the call? Kamath is on the call?

Yes. Sir, you are right, it is around that number. 45% to 50% is quarterly and half yearly. And some part of our car customers who are actually farmers, they are also in quarterly and half yearly, but they are very few -- very small percentage of the company.

Yes, that will be few hundred.

That will be very negligible as a percentage.

Fair. And the second question on just cash hold segment itself, like in proportion of disbursements I'm seeing as like within our overall disbursement mix, it's coming off quite substantially, like the tractor industry overall has been doing quite well, like the industries only seeing tailwinds. Could you explain like apart from like some supply-related constraints, which you've articulated, like what other things are there? Are we losing any market share or other OEMs just gaining a lot of market share, and therefore, that's what reflecting? How do I think about the asset quality in tractors as well as the growth in tractor?

So I think our overall tractor had 3 elements. One Mahindra Tractor, Mahindra and Swaraj brand together. Second is, we were doing a small number of nonMahindra tractor. And third is we were into pre-owned tractor as well. When it comes to the Mahindra and Swaraj tractor brand because of some supply constraint as well as cash purchases, there is a market share loss that's happened to us, but not to the competition as I said. But overall volume coming down and cash purchase being high, this market share percentage is looking different. So far as nonMahindra is concerned that we were doing about 2,000, 3,000 tractors and I've been explaining this quite a some. And it was spread across, and we have chosen to be a little slow in certain geographies that we were present because of -- when your volumes are less, and you are not a significant market share, and if cash purchases are high, we always have the fear that are we getting the best. So therefore, we did take this year. I'm not saying that this is a great strategic view, and we are right to do that. Somebody else missing very differently about it. But that's our internal view and we kind of relooked at that number, and we've kind of lost that number, for sure, in the last 2, 3 months that we have not been in actually. So far as the preowned tractor business is concerned, I think we are not finding people coming and exchanging tractors to buy new tractors. People are wanting to use their tractors for a little longer than otherwise. Plus, as you know, every one resorted to low reposition even availability of the secondhand tractors and vehicles for financing have gone down. And the 3 together is really causing the drop in the number for us. As we speak, as I told you, the OEMs, at least, are very confident that the supply would get restated and therefore, volumes will go up, and you would see an increase in volume and market share for us from the Mahindra and Swaraj brands. We do believe that in some of the markets where things have stabilized, will we kind of get back to some numbers of the nonMahindra to premature, but definitely, that is the next correction that could happen. But more importantly, the preowned tractors availability will start to improve because we now see as the infra opens up. That's the time the exchange number starts to go up because it's a contracting segment will normally come for exchange programs. And as I've been saying, the infra is opening up in many of the states, and you'll see that volume coming back. And then that's where the new number will start to happen for us, and which is where the confidence of growth for us comes in.

Fair. And just a quick comment, if you can have on the existing customers' asset quality in the tractor segment. As far as I remember, like those were the customers who took the least from under moratorium and they will get the strength in the rural economy. Would -- is it a fair assumption that is probably or best performing portfolio? Or the...

Yes, in fact, always we have been underperforming, if the harvest is good, you will see tractor portfolio performance in the third and fourth quarter substantially improves. And in the first and second quarter, they normally build up. So clearly, we see the tractor performance would be something which will be one of our underperforming portfolio as we speak.

The next question is from the line of Radhika from [indiscernible].

Hello?

Sorry, we are missing you. Sorry.

Yes. So just wanted to like get to the number on proforma GNP, if you can give me?

Number on what you said pro...

Proforma GNP as a percentage?

It is 9.9% of GNP.

Is that the proforma GNP or the actual GNP?

Both are same for us.

Both are same for the NBFC.

Okay. Both are same for you. And also, if you could just like give a little color on like the Stage 2 assets currently, which was at 50,000 last quarter to 93,000 this quarter? And similarly for Stage 3?

Ma'am, I'm sorry, we didn't understand your question. And the data that you're asking for would be there in the analyst presentation.

Yes. So I'm just asking that, if you can give me a little color on the increment -- like the reason why it has increased over the quarter?

Which one? Which one increased over the quarter?

Stage 2 and Stage 3.

No. So as we've been explaining, very clearly the customers who have come out of moratorium post August and the rural cash flow is just about picking up, and they were not able to service all them installed that fell due during this quarter, right? And therefore, they have moved to the respective stages that they have. Suppose they were 1 EMI outstanding and if 3 installments are fallen due during this period, if they're paid just 2, they would stay in the Stage 2. If they have paid all 3, they would stay in Stage 3. If they had paid nothing, or they paid just -- 2 out of 3, they would move to Stage 3. So it's purely arising out of how many installments are they serviced. And which is why I said, we are seeing 94% of the customers are able to make repayments, but not all the installments. And therefore, we have gone by their sentiments and not done the restructuring and let them at the stages that they are.

Any other question, Radhika?

No. No. That was it from me.

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

Yes. All my questions have been answered. Thank you.

Thank you. I think we've finished almost, all the questions. I think we can wrap up. Yes.

Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to Mr. Kunal Shah for closing comments.

Yes. Thank you, everyone, and thanks a lot the entire senior management team of Mahindra & Mahindra Financial Services to share their insights and perspective, which was extremely helpful. Thanks, and all the best for the future quarters. Have a good day.

Thank you Kunal, for hosting us today. Thanks a lot.

Thank you so much. Thanks.

Thank you.

Thank you. Thank you, Kunal.

Thank you.

Thank you.

Thank you. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.