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

Ladies and gentlemen, good day, and welcome to the Mahindra & Mahindra Financial Services Limited Q4 FY '21 Earnings Conference Call hosted by ICICI Securities Limited. [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, Ramin, and good morning, everyone. This is Kunal Shah from ICICI Securities. Today, we have with us Mr. Ramesh Iyer, Vice Chairman and Managing Director; Mr. Amit Raje, Whole-time Director and Chief Operating Officer, Digital Finance; Mr. Vivek Karve, Chief Financial Officer of the company and Group Financial Services sector; Mr. Rajnish Agarwal, Executive VP, Operations; Mr. Dinesh Prajapati, Head, Accounts, Treasury and Corporate Affairs; and Mr. Rajesh Vasudevan, Senior VP, Accounts from Mahindra Finance to discuss their Q4 FY '21 and the full year FY '21 earnings. So without much ado, over to you, sir.

All right. Thank you, and welcome, everyone. It's no secret that the year went by was one of the most difficult years in the recent history any one of us would have witnessed, given the pandemic situation. And if you look at the 3 quarters that went by other than the fourth quarter, which we will talk about, but the 3 quarters went by were very dramatic 3 quarters starting from March -- almost last year's March end when the lockdowns and things like that were announced, which were all an unknown of what that means, can one handle and all kinds of stuff. But over a period of time, the government intervention, the Ministry intervention, regulator intervention tried and stabilize the consumer pressures, and we did sail through those quarters. And then the third quarter was one of its most difficult quarter, given what was happening out there. But interestingly, even then we had talked about the month of December, how it was very different from any previous month, and we have kind of made a statement then to say that if December has reflected what it was, we expect, going forward, things to look good and bright. And we believe that the March that went by or the fourth quarter that went by was one of our best quarters, at least in the last few quarters that we are talking of. And very clearly, March in itself was one of the best months that we have seen from an overall perspective, whether it is from a disbursement that we had during the period or whether when we talk of collection efficiencies or when we talk of management of NPA is concerned, reposition disposals are concerned. So from every angle, we saw that the model was tested for its flexibility. The model was tested for its fundamental. And we are extremely happy to say that we were able to take full advantage of the changing key events of the market in the fourth quarter and did whatever that we are required to do to kind of pull out the numbers that are already with you all. We did see in every line item, there was an action. And I must remind that all of this that happened not that the market had completely become absolutely normal across the country, but I think these are the strengths of model which are built with people who are locally engaged and hired, so who have the better and utmost understanding of what's happening down on the ground there, their connections with the dealers and the connection with the local administration and with the consumer have all put together, actually, added to the outcome of the results that has been clearly seen. We did resort to an aggressive stand on negotiating with customer and settling their accounts rather than allowing them extra time if they didn't feel that they would be able to come out of it very easily. And similarly, even when we repossessed vehicles, et cetera, we did not want to hold them in stock for too long, and we have disposed of vehicles. And as you know, we also moved to bad debt provisioning off contracts, which are of a certain age and above. Instead of holding it and negotiating, we felt it's better to make a provision, and after all, we can follow up and collect from the customer. So we've taken some aggressive stand on negotiating and terminating contracts with customers and as well as bad debt provisioning. And you would see certain increase in those, and I would believe those are onetime cleaning mechanism as well. And -- but overall, it has helped in controlling the asset quality. And also, we are very happy to report that if you look at an absolute value of gross NPA of this March ending versus March '20 ending, we are almost at the same level in terms of the overall gross NPA numbers are concerned. But said that, we did see return of sentiments back to normalcy. While there are certain segments of people who continue not to buy vehicles, whether they are from the school bus segment, whether from the tourism segment, whether from the taxi aggregator segment, people carrier segment, because these are the ones which have not returned to normalcy, even what buoyancy we have seen in heavy commercial vehicle, these are more fleet operator guarding capacity. But sub-5 vehicle owners, et cetera, still not come back to buying vehicles because they did not see sufficient load, whereas for all segments, uniformly, what we have seen is while the acquisition cost of an asset has remained high, their operating cost has also gone up. But unfortunately, it has not been matched with their increased revenue, either through freight increase or through per-passenger fare increase. And therefore that the segment which are sub-5-vehicle, 10-vehicle operators have not really resorted to big buy. But nevertheless, we did see some good buoyancy in the tractor demand. We did see good buoyancy in the car demand. We did see demand in utility vehicles. And preowned vehicle remained aggressive where people did want to buy preowned vehicle, but the supply side also remains. As I said, even from the OEM side, the pressure was on. They could not make vehicles available. Even though it was better than what we saw maybe a quarter before, but still their overall supply position did not substantially improve, as otherwise, our own volumes could have been even a little higher than where it ended. But on an overall basis, we felt that every line activity was well attended to, and we did get benefit of all of that. And looking at where we were and looking more little into what suddenly started to happen post March, we also felt it necessary to continue with our aggressive stand on additional provisioning. And we have kind of gone ahead and maintained the overlay provisioning at that elevated level. We have also kind of made an additional provision as we would think would be required to bring it below net 4%. And the reason to bring it below 4% is also for a very clear reason that the pandemic return has been a little more aggressive. It has been a little more widespread across the country and is also a little deeper in pocket. And therefore, it could take a month or 2 before we can say things are getting to some normalcy. And this segment of customer possibly would remain under pressure for another couple of quarters before they get back to their normal action and activity. So we only thought it prudent to make this additional provision. And at every stage that we've been having discussions with the regulator, et cetera, the feeling on those we carried was for a company like us with a very high capital adequacy and the nature of business that we are in, the expectation was could we not make a little higher provision and keep it to sub-4% level. And we also thought it why not if we can, and because after all, these are only provisions. And as things starts to change at the marketplace, we could always get a write-back of all of this. But at least, we reflect the worst scenario, if you may call, from where we could be. And therefore, we were more than willing to go ahead and take that kind of a position, and that has also kind of been done. And all of you would definitely remember at every stage asking us a question on, is a coverage adequate, should you not make higher coverage, should you not increase your coverage. So in a way now, we have gone to a coverage ratio, which is close to about 60%, so -- whereas the ECL model demands only at about 30% to 35% kind of a requirement. So we feel we are substantially and adequately covered going into the future. And clearly, these sentiments did return back to positive in March, but it has now subdued, definitely subdued from customer side. Even I would say it is a subdued sentiment from our local employees at the branch level because in the last March-April situation, first of all, we were all caught to an unknown, and we were just going along the way everyone was trying to do. But over a period of understanding what the whole thing is and the rural was not as impacted then, but in this round, we have seen it spread across the country. And therefore, we do feel our own employees are also wanting to be a little more cautious and careful. So we strongly think that a quarter -- this quarter would definitely be a very subdued quarter if you were to look at the on-ground reality. And once things starts to improve, it does take a month or so. So therefore, in the first half, we would see little -- I mean the activity levels remaining low. We also believe that the supply side from the OEMs once more may start choking because their own supply chains could be under pressure because, as I said, and I keep repeating, this is across the country. Therefore, the SME segment, who are the component manufacturers and et cetera, will also come under some pressure from their labor force not being there, et cetera, et cetera. And the good news is that unlike in the first round, the first quarter of last year, et cetera, it was a total lockdown. In this round, they are trying to keep the economy going. They're not making it into a total lockdown. But the sentiments definitely are much lower than what it was in the first quarter of last year because they didn't have to face this situation in the district levels or at the rural level, but they are now currently facing a similar situation. But things are on ground ready to take off, if you really ask me. I mean if you look at the infra front, the road projects, the mining, all of them were almost commencing to happen. Tendering out was done. Contracting was being done. So it was almost ready to happen, and then this comes and halts it for a minute. But I would think if we have patience to wait for a quarter or so, we would see those activity bounce back with pent-up demand coming. So the festival season and onwards could be a very, very exciting time to look at even during the year. Similarly, on the agri front, I think the April crop has been pretty good. So therefore, the cash flow from agri will be very, very exciting. And that's a silver line in the whole thing, that the farming community would continue to do well, and we don't see a pressure from that side. And actually, it's very early predictions of monsoon is also kind of relatively average plus or at least good. And if that was to happen, we would very strongly continue to bet that post monsoon, the festival season ending up to March will be a very, very exciting time to look at. So we still hold our position of growth coming back to normalcy and getting to some aggressive growth position. Post September, from an asset quality perspective, I think we would also continue to see improvement to asset quality. We are conscious of the fact that our AUM has degrown during this period. That's also bringing in additional impact on the gross NPA position, but I think that's a matter of time. Once the disbursement starts to pick up, the AUM will start to grow. We are all geared for the growth. We have added 150-odd branches during this quarter, which will all get active during the year. We will continue to focus on the cost control. But our happiness will be when some of the cost, which has not happened because of the pandemic. comes back to reality because that is going to drive the growth. If there is a growth, there will be some costs which will come in. But the variable cost will remain under control. We have taken some very, very clear actions where we don't believe that the cost will jump back to a 3%-plus level like in the past. It will stay put at around 2.3%, 2.4% or maybe 2.5%, depending upon the volume of business. That's what we very strongly think. As I said, asset quality improvement would only be better going forward. From here, you will start seeing further improvement from here. And we are adequately provided, so therefore, the pressure on the period will also substantially reduce having taken that kind of stand. We do believe that we want to continue to maintain the net 4% level of NPA on an annual basis. And we will continue to put all our efforts to first bring down the gross NPA as well as bringing the asset growth to the extent the market allows us. And the third, definitely, there is a gap. We will, if required, to make any kind of an additional provision, a stand that we will also take. But definitely, on an annualized basis -- on an annual basis, we would control and keep the net NPA hovering at the same level and not inch beyond this. We also see not too much of competitive pressure, but definitely, there are players around in different pockets who are trying to enter into some tractor financing. They are trying to enter into UV financing, 3-wheeler financing. Everyone is looking for assets because whichever line of business anyone is, they are not able to grow in that line of business efficiently and, therefore, are looking for different lines of business activity possibility. In the same breath, we are also looking at what are of the alternate possibility, and that's how we have set up our Digital Finco, which will exclusively operate for small-ticket loans for the market and will offer small-ticket loans ranging from personal loans to consumer durables to all of those products to start with, largely, to our existing customers. We have talked about it in the past. But if that is what we do well by ensuring that we use the data well, by ensuring the digital solutions are provided and by ensuring reaching out to all those customers and meeting their small-ticket needs, opens up a large market for us to even look at customer beyond our customer. So we believe that's a good alternative of growth for us. We are still not looking at loan against property as an area that we are very comfortable to be in. So therefore, we will not want to look at that area for growth. We still think that there is sufficient headroom even in the vehicle space for us to grow. And while we have definitely lost some market share in the tractor business, but again, that was more a conscious decision when we decided in certain pockets to go slow, and we didn't find some other alternate competitors have come in and taken some market share. But I think with our relationship or the dealerships with the OEM and with the local team and the consumer out there and with a large customer base, once things normalize, we don't find what we exhaust is a huge gap to be not able to bridge back. But in as far as cars are concerned, as far as UVs are concerned, we have maintained or slightly grown our market share. So overall, I think it's been a conscious approach during the year. We have taken -- whenever the window of opportunity have opened, we have been able to capitalize on that. And we continue to believe that at least for the 2 quarters, our approach will still be a little more quality focused and not growth-chasing focus because we don't see that as an opening up of an immediate possibility. But nevertheless, we are ready to embark on the growth with all resources put in place and well all ready to take it up on that basis. So we think as we close the year '22 going forward, you will see a very different growth trajectory and the different quality of the book, and we believe we have done enough of required cleaning as well as we have done enough of the resource provision and relationship building, and the model has been well tested for its flexibility and its fundamental to be able to gain from that opportunity locally. That's where we are. And therefore, summarily, we would be conscious for the first 2 quarters, while we'll keep our eyes continuously focused on the changing market synergy and the emerging opportunity and will capitalize on it as things open up. So is true with all our subsidiary businesses, the rural housing business has done equally well. We also took a conscious view of asset quality correction in the previous year. They went slow on their disbursements. And I think as they closed the year, they also have substantially brought correction to their asset quality, and they are adequately capitalized. And with sufficient liquidity, they would also be embarking on the growth journey post the monsoon from this year. The insurance broking continues to remain a very strategic business, and they continue to grow in line with the growth of the industry and growth of financial services sector business of ours, and they get the benefit of that growth for sure. The asset management company, which is, again, a small entity for us, but has maintained its asset book and has been able to provide returns to the investors, as promised, and therefore, we will continue to focus on that business from retailing out in that geography, by coming on with products for that geography, but that's still a small business as far as we are concerned. So I think all 3 subsidiaries in India are doing well for us and embarked on the promised journey. And I think even they would start showing growth and our improved profitability over the period of time. Our liquidity position continues to remain very strong. We are holding just partly 3 months plus to meet any kind of eventuality going forward. Our own view is that the interest rates have possibly come off the maximum. It may not probably reduce any further from here. But if at all any during the year, it may inch up a little, but that's not a clear visibility. But reduction from here does not seem to be the truth, but liquidity is sufficiently available. And as you see, capital is adequate. And therefore, overall, we are ready for growth. And we do believe that the current pressure is not a permanent pressure for too long. It may get corrected in the next couple of months. And then after monsoon, one would once again see a return of growth in that market. So I'll stop there and invite questions from all of you. Over to you, Kunal. Thank you so much for joining this call, and we'll now be ready to take all your questions.

Yes. Ramin, we can take the questions now.

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

Yes. I have a couple of questions. Firstly, on your disbursements for 4Q. Some of the disburses like in utility vehicles are lower even than 2Q and a further decline sequentially also. So the year-on-year growth is the -- year on -- time is understandable, but what happened during the quarter? Why were 4Q disburses lower than 3Q?

Yes. So if you see, utility vehicle, clearly, it's an OEM issue. They couldn't make vehicles sufficiently available, and therefore -- and obviously, we lost volume. And second is some of the products that were made available at least from the Mahindra's staple vehicle like Thar, et cetera, which were more an urban-ish vehicle, where we didn't have enough participation. So clearly, these are the 2 reasons. One is, overall, supply was lower, and that impacts our volume directly; and little supply that was available were from certain product lines, which are more urban-ish in nature. And as you know, it's a big waiting list out there. And therefore, financing was not a participation in that front. So these are the real 2 reasons for the utility vehicle drop.

Okay. And what would be your collection efficiency in March compared to, say, last March? And then if you could give some collection efficiency even for February and January?

So if you look at 3 months, Jan, Feb, March, this year and last year, Jan, Feb, March, I think we were at close to 100% or a little over 100% collection efficiency. Stand-alone March truly [Technical Difficulty] reason last year, March, the moratorium had already kicked in, and therefore, the demand itself reduced. But nevertheless, last March was 111% after adjusting for the moratorium contract. And this March, in spite of no moratorium, we were at 109%, 110% collection efficiency.

Okay. Got it. And just in terms of your provisioning, so of course, you did mention about it in your opening comments. But to keep NPL below 4%, would it mean that on all -- I mean what will be the incremental provisioning now on Stage 3? Will it revert back to 37%, 38%? Or...

Look, [Technical Difficulty] from a 55%, 58%...

Sorry?

What's your exact question, please?

My question is that now, so you obviously made a catch-up provision of INR 13 billion in the fourth quarter. But going ahead, say, in the next 2 to 3 quarters, on any incremental Stage 3 loans, what would be the rate of provisioning?

So as I said 4% would be [Technical Difficulty] will go up because of the economic activity, forget the current pandemic situation, even on a normal basis. So we will stay with whatever is the reality of the NPA during those quarters and make necessary correction because the NPA itself will get corrected in the third and fourth quarter. And if that leaves a gap to reach 4%, if there is any, then we would make those provision if required.

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

Yes. A couple of questions. One is on this new sort of lending opportunity that you've identified in digital, I just wanted to understand what is our right to win in this segment? And what exactly is the target addressable market that we are looking at? And if you could give some sort of strategic direction as to how big this could be in the next 3 to 5 years? So some -- how did we sort of select this segment? What is our right to win? And what is our aspiration in this segment? So that is question number one. And second is on the -- so could you give the write-off numbers for the quarter and for the year? Yes. Those are two questions.

So as far as right to win in digital is concerned, any -- for any business for that matter, the right to win is if you meet customer expectation. So we are very clearly understood the needs of the rural and semi-urban customer to start with, which is their small-ticket loan requirement to meet some of their emerging requirements, whether it's a wedding in the family, whether it is any health-related family fund requirement for health or, for that matter, during the agri season, whether for them to buy crop and fertilizers. So there are various needs that have been identified. And the source for those loans in the past, these customers have been resorting to a local borrowing from the family or from the trading community or some of them even go to a money lender. We have also seen some of them don't pay installments to banks or finance company and use that money for these purposes. So what we have started to initially go into, is to a very large existing customer with a phenomenally good track record of at least who have repaid 12 months, 15 months, 18 months of their past loans, and therefore, whatever exposure that we may take is not going to overall increase the exposure on those customers. So clearly, that's a product designing that will enable that. The second right to win comes from your ability to provide them that loan on or just around the time when they actually need it and not do it when they don't need it. So therefore, it is extremely important to have a very high level of local knowledge to understand when and what kind of product is required. The third is provide them with convenience and comfort and not hassle them through the current process that they need to go through the banking system if they were to take such personal loans and which is where we scored over the local currently existing organized system, if you recall. And the fourth is the cost of operations and cost of collection have to be kept under control to be able to make all the money that we are planning to make through this process and, therefore, use digital and paperless approaches and use the available data while designing product as well as while designing credit. And in wherever required, this will continue to remain, to an extent, a phygital model because not everyone would be able to pay only through digital means, not everyone will come and borrow money only through app based. But wherever there is a need for partnering with a physical entity is what will be available through Mahindra Finance's branch team, which comes as a very natural advantage having built such a large branch franchise. So put all of this together is what is going to differentiate us from someone else who will now want to come and start the same day. So we want to be ahead of others to reach that market. While doing that, digital being a very uniform possibility, it will also be made available to the semi-urban and urban customer whosoever wants to kind of get into these kind of loan requirement for consumer durables and those kind of stuff. So [indiscernible] which very clearly tells us that we have a game in hand, and we are going into that market ahead of others, and that's going to position us to be able to take advantage of what we wanted to do and which is where we created it as an independent internal vertical, which will run like a company headed by our COO. Unfortunately, he couldn't be in the call so far, but he would possibly join in as well. But he's going to lead it and ensure that the direction is taken. Aspirationally, we believe that in the 3 years' time, this business can get to -- and it won't build a large AUM because this will normally be short-ticket loans, which will be 12 months or 18 months or maybe less than 12 months as well. But that doesn't matter. But we will have a disbursement target to start with maybe INR 5,000 crores, but it has, in the 3 years' time capable of going beyond INR 15,000 crores, INR 20,000 crores. And that's the size of the possibility. That's the size of our current large customer base and which will build in the next 3 years. And we think that it will build a very strong parallel balance sheet, which will not just add to the overall growth of Mahindra Finance, but also, in some form, will help retain customers and provide the customer when they look for vehicles after they kind of go through this process of even a small-ticket loan.

And sir, if I may ask a follow-up. What is the level of PL on the existing customer, which if you were able to identify what kind of opportunity we have on the existing customer itself?

No. So now it's -- when we tested it out in the last about 1 year or so, I think we are very easily able to do -- I'm talking in terms of number of customers. We are able to scale without good all-India basis, at least [ 5,000, 7,000 ] customers, we have already tested per-month basis. So [Technical Difficulty] proper structure and resource around that. I think it gives us phenomenal capability of going up to upward of 50,000 customers to start with and can scale up to even much larger because don't forget that we already have about 2.5 million customers whom we are servicing. And every year, we add close to 7.5 lakh to 8 lakh customer. And that's the population which is in-house available to straightaway start with. Plus they have their own guarantors, who are independent. And if you take even 50% of them is independent guarantors who have good capability, that adds up to another 2 million, 3 million. So I don't think demand is dearth, number of customers is dearth. I think we have now put in a proper technology, proper resource and the right product decision-making and a clear team focusing on it, and that's where the opportunity is.

Sir, my question was actually on the existing customers. On the bureau, what is the kind of PL that is there on the existing? Since you said that these customers take loans from other finances as well. So the question was actually what is the kind of outstanding that is sitting on the existing? Just trying to understand is it a new market that you're creating or is it an existing market in...

I won't say it is a completely new market. There are people who would have taken, but as I told you, many of them would have been experienced in taking this loan, not necessarily may have a bureau record already because they would have taken from their family, local traders, et cetera. So they will still be 10%, 15% of the customers who originally also had a bureau score when they took loan from us for cars, et cetera, might have taken some personal loans. So I don't think more than 10%, 15% of that population would have taken, from an organized sector, any kind of a loan. And that's what -- see, the other 85% is what we see as an opportunity.

Got it. And sir, the write-off numbers?

So Dhaval, the write-off number for the quarter is both termination loss and bad debt put together is INR 629 crores. Dhaval, this is part of the slide -- Page #34 provides the...

Okay. Sorry, I missed it. Sorry about that.

[Operator Instructions] We take the next question from the line of Karthik Chellappa from Buena Vista Fund Management.

Yes. I have 2 questions. The first one is, this quarter, we have run down some of our Stage 1 and Stage 2 overlay provisions with the result that the provision as a percentage of business assets in both the categories have actually come down. What is your assessment and reasoning behind this? That's my first question. My second question is at a stand-alone level, the employee expenses are up about 32% year-on-year. How much of this is attributable, say, to collection-related incentives, et cetera? And what should be the trend that we should expect going forward? That's all from my side.

No. So let me take the second one because, last year, since you're comparing year-to-year, last year, we had a write-back in that particular account because we had made higher provision for incentives and that was no longer required to be maintained, and therefore, we had reversed those provisions. And therefore, when you compare last year to this year, the growth seems to be higher. But as otherwise, there has not been a substantial growth to employee cost because even during the year, we have not given very high increment. We've just about given 1.25% for the fourth quarter. That is 5-year annual, but it was only given for the fourth quarter. So there is -- truly, if you would remove the provision reversal that took place in the last year, and if you were to make a comparison, the growth would not be very, very high. So it's -- and we have not added too many people. So therefore, maybe a little more detail can be provided by Vishal or somebody offline. But largely, that's one single reason, which is causing that particular difference. So for us, the Stage 1, Stage 2, the provisioning, the reversal that you're talking of, I think it's also kind of arising out of reset of some model, and maybe Rajesh or Dinesh, if somebody can explain to you a little more correctly in technical terms. But Stage 1, Stage 2 is also arising out of the reset. So Rajesh, you are there on the call or Vivek or anybody?

Yes. I can take this. So you're right [indiscernible] Stage 1 as well as Stage 2. So what we have done is we have done a refresh of the ECL model. And when we do the refresh of the ECL model, both based on the historical data as well as forward-looking data, given the fact that [indiscernible] it was in the past, some of the [indiscernible] has improved currently. And especially in Stage 2 because the number has come down, the value of Stage 2 assets have come down from December to March, there is also a write-back on account of that. So these are the 2 primary reasons why we see an impact in the first quarter. I hope it answers the question.

So -- yes, so the way I should understand is the Stage 2 assets that you have right now of about 11% provision and Stage 1 of about 0.8% is in line with your ECL models post the refreshment?

[indiscernible].

That's right.

The next question is from the line of Abhijit Tibrewal from Reliance Securities.

Yes. I think going back to the disbursements, sir, I mean, initially, you explained that some of the supply side issues also led to lower displacements in auto and utility vehicles. But how do we explain, I mean, the lower disbursements in commercial vehicles and construction equipment? I mean if we look at -- I mean at least the auto volumes, I mean they suggest there has been a good growth during the quarter, especially in M&HCVs. That's my first question.

Yes. So definitely, M&HCV volumes have been good, but as I told right at my commentary, [Technical Difficulty] buying large fleet operators, et cetera, who are not our consumers. So we [Technical Difficulty] with large lead operators because their need of both in terms of quantum of loan, period of loan, rate of loan is not something that we are participating in. And then [Technical Difficulty] to take benefit of the growth that we have seen. And we are conscious of that fact, and we do want to shift our strategies from a sub-5, 10 vehicle owner to a large fleet operator financing.

Okay. Okay. Sir, the other question that I had was around the branch expansion strategy. So I mean you have added close to around 140 branches during the quarter. And this would especially star, given that, I mean, over the last 2 quarters, you had actually reduced your branch count to around [ 50 ] branches. And even if we look at the branch additions during the quarter, I mean I see they are largely concentrated in the states of UP, MP and Rajasthan, close to about 65%, 70% of your new branches have come up in these 3 states. So I mean how do you look at, I mean, expansion of branches in these geographies? In other words, if you can give some kind of a geographical color or some thought process that has gone into opening new branches, especially when we were kind of rationalizing our branches over the last 2 quarters?

So clearly, our branch [Technical Difficulty] is very simple. We look at size of a particular branch, how many customers are we handling and the distance of the customer from the branch and, therefore, [Technical Difficulty] of operations and the efficiency that you would get by that approach versus splitting the branch and opening more branch and be more closer to customer. The second that we look always is that what is the emerging potential in [Technical Difficulty], where your consumers are. And if you were to have a branch, is there a potential and opportunity to grow a little more. The third we look for is what are the OEM's plan in terms of penetrating [Technical Difficulty] and what are they expecting from us? And is there a reason for us to participate in that expansion program of the OEM and partner them and go deeper? The fourth, the closing of a branch comes from similar approach, to say that is the branch any more required in the location in which we are because we would have originally started that branch with an idea to do, let's say, a tractor business out there. And over a period of time, we have found that, that area has become multiproduct need and may not be driven only by a single product. Now if your branch is located from where only a single product attention can be higher, then we have to relocate the branch. So you [Technical Difficulty] look at our overall program from some branches were shut and get relocated, some branches split and more branches would get for the reasons I explained. So just one more example would be Maruti is very clearly looking at going deeper into rural pockets, and they have a very ambitious plan of growing from those smaller outlets, which are in deep rural pockets. Now we are their natural partner to [Technical Difficulty]. That calls for us to have more. Now the speed [Technical Difficulty] through MP, UP, Rajasthan, whatever, are all large states and [indiscernible] branch already has become too large and the area that the branch needs to cover also has become too vast. So therefore, we have added our additional branches to be more closer to customers. Those are the reasons. And once you have those kind of more branches and look at much wider coverage and the larger customer base, then your natural growth of your ability to do higher disbursement begins to happen, and you have a more closer connect with the customer when it comes to even recovery.

The next question is from the line of Nischint Chawathe from Kotak Security Limited.

Yes. We ended the year with ROA of 0.4% and return on net worth of around 2.5%. I believe some of the other NBFCs who are operating in very similar segments are yet to report the results. But if I look at consensus numbers to go by, I guess the market is expecting at least a 1% ROA and a double-digit ROE from them. So just trying to understand as to what is it that they are doing differently or we are doing differently and why there is such a stark difference in performance?

So very simply, Nischint, look at the net [indiscernible] INR 1,320 crores of additional provision to bring it to sub-4%, right? If that was not to happen, then I think we would have met all those expectations in some form. But the reason to bring it also below 4%, and we know for a fact that this business in the [Technical Difficulty] not a net worth because these are seasonal businesses. These are Earn & Pay businesses, and it could go through that some time of this kind of pressure. And in the past, we have had, on its own, a net 4%, and now we are by additional provision brought it to 4%. That's the only difference between the model that we run versus someone else runs. But as it go into the future, things starts to correct itself [Technical Difficulty] market improves and our asset growth comes back. And this actually release the provision that we have made already. And you'll suddenly see a jump in [Technical Difficulty] we are willing to go through looking at a very uncertain [Technical Difficulty]. Our capital has gone up, and we have not been able to gear the capital completely [Technical Difficulty]. So the growth has to come back to [Technical Difficulty]...

I'm sorry to interrupt you, Mr. Iyer, but your voice is breaking. You're cutting off. We can't hear you very clearly.

Sorry?

Yes. Your voice is breaking. I request you to move to an area with better reception.

No, no, no. I have a full range. I don't know if that's the problem, everyone is not hearing me. I don't know...

Yes. Yes. Yes. Your voice is a little muffled.

Okay. So let me try [indiscernible]. Is this any better?

Yes, sir, much better. Please go ahead.

Okay. No. So I was saying the capital is large now, and we have not been able to fully utilize it well because the growth is still not there. So once the growth has to come back for some normalcy as well as -- as we know in that market, once growth comes to normalcy, the collection on its own also improves substantially. That will bring down the gross NPA as well. And the 2 together will push up the ROE for the ROE to be better. But as otherwise, currently, it's a conscious decision to meet this extra provision looking a little unknown into the future. And once things starts to improve, even the additional provisions made can get a little released.

Sure. And just -- if you just, what was the feedback on the ground for the last 20-odd days of this month?

So the feedback of last 20 days has been very mixed feeling. I think in the first time, I heard our own employees saying they and their families are wanting to be more and more careful from the situation. It was not what we heard, let's say, 1 year back when the pandemic hit. It didn't reach rural. And they were looking at from a distance from there to say what is the real problem, we don't face it here. But whereas in this round, I think we have been able to see our own people going through this pressure. So that's been one very strong feedback to say that we would also be a little careful kind of a situation. So I would expect, clearly, that not every dealership is going to be up and running, not every branch is going to be up and running for at least for another 1 month or so. The second feedback that we get is that while there has been not a total lockdown announced, but every state is contemplating going through some administrative controls and not allow things to happen the original way. So that's the other feedback that things will slow down a little, which is going to have some impact on the contracting segment. The labor may not be fully available or job on the ground is the third feedback that we surely get. But the positive feedback that we get is customers have the money. The agri flow has been very good. Even the infra contracting segment has already received the contracts, et cetera and, therefore, wants to begin the activity, but that has been now slightly put on hold. So they say, in a month or 2, as things settled down, it will really open up great speed and with a spurt, and therefore, the demand could really spurt from then on. So overall, that's the sense and feeling that we get. But from a customer side, the feeling is we have the money, but we would like to hold it for some time, give us some time, let's see how things pan out. And then we will start participating again in either buying or even discharging...

[Operator Instructions] The next question is from the line of Sanket Chheda from B&K Securities.

Yes. Sir, my question was on provisioning part of it [indiscernible]. So just wanted to...

Mr. Sanket, I'm sorry to interrupt, but we can't hear you very clearly. Request you to use the handset.

Hello, is it clear now?

Yes, sir. It's clear. Please go ahead.

Yes. Yes. Yes.

Yes. So just to dwell, again, on the yearly review that takes place on LGDs and PDs where in your PCI needs are determined. On Stage 1 and Stage 2, you highlighted what was the levels that came out of that LGDs and PDs? But on Stage 3, in last Q4, maybe we thought that the PCI needs to be hiked by at least 30%. So we brought it up from 30% to around 40% levels. What is the current requirement based on the reason that you've done on Stage 3? So why I'm asking is you intend to keep the net NPAs at 4% level. So if at all, going ahead, there are tailwinds along with the growth that persists, are we going to -- are we only going to see provision write-backs with the essence of credit cost completely? So Yes.

Okay. So I can take this question. Vivek here. So as you rightly pointed out, we [Technical Difficulty] bottom of LGD calculation. So we have basically continued with that particular stance. Although the pristine LGD calculation is a number which is lower than that 40%. And going forward, our idea is to maintain the [Technical Difficulty] at an annual loan. So if the [ NPA ] performance is favorable, it will provide us an opportunity to do also.

The next question is from the line of Shweta Daptardar from Prabhudas Lilladher.

In referring to Slide 32 of our presentation, so the number which you mentioned on moratorium availed contracts, which is around 1,470,000-odd, and the number of contracts from where we received 0 payments have gone as high as 270,000-odd, which, quarter-on-quarter, I think, has -- if I just put it in percentage terms, has risen from 6% last quarter to 19%. So -- and while if I look at the table above that, the collection efficiency for the past 3 months have been closer to -- either closer to 100% or higher than 100%. So what has happened with this moratorium availed contracts, were they critical even before the COVID hit us? How does the behavior like what in the Stage 2 almost are now kind of right to fall into Stage 3, so what has happened? What has been the customer behavior prior to COVID as well because this number is only going higher, whereas the collection efficiency month-on-month is only improving?

No. So first, let me clarify to you that they could not have been a poor quality customer before anyways because moratorium would not have been given if they were already a delinquent customer. So that is not right. So they were regular customer, then the moratorium was definitely offered to them. Now whatever slides that you're referring to, Vishal or Dinesh, can somebody take...

I can take this. Yes. So we owe a clarification to you. [Technical Difficulty] is 1,473,094 are those customers who availed the moratorium [Technical Difficulty] amount which fell down in Q4. So out of the 1,473,000 customers, 47,384 customers did not make any payment in Q4. So that is the first line of the table. The second line, you have to read like this, out of this 1,473,000 customers, 274,061 customers have not paid any amount since September. And out of these 270,000 customers, there are 37,263,000 (sic) [ 37,263 ] customers who have not paid any amount in H2 also. So that is how you need to read the table.

Okay. So but again, I'm slightly confused. I continue to remain confused because there you mentioned the amount due in Q4 and the total number of contracts were 1,470,000. But if I look at Q4 collection efficiency, wherein the denominator's current amount of demand due for the month, so that number is still -- I understand it is for that particular month, but the collection efficiency still looks 100%, whereas we still have customers, which you rightly mentioned, in second half did not make any payment at all, which is around, say, 3%.

That's, Shweta, the collection efficiency will be calculated with the total collection against current demand.

Okay. Okay.

Shweta, we can take an offline discussion on this. You can explain her in detail.

Yes. Sure.

[Operator Instructions] The next question is from the line of Rikin Shah from Crédit Suisse.

Yes. Sorry for being a bit repetitive, but it is regarding the decision to bring the net NPAs below 4%, and you do mention that it was based on the RBI's expectation. So if one reads between the line, is it fair to say that this could be one of the softer requirements by the regulator if they were to kind of consider you for a banking license applicant? Or it has absolutely no relevance or no read-through from that perspective, sir?

Honestly speaking, I have no -- absolutely no clue to read into their minds or your minds. It's very difficult for me to answer a survey. But I would like to be more clearer when we say RBI expectations. They all look at the market. They look at our capital position. They look at our past approaches. So it is natural expectation to say that a good brand like Mahindra, a large company like us, very rural-focused company, with high capital adequacy, they will always want to discuss. They deliberate and say, "Don't you want to make higher provision and keep your net NPA at lower levels?" whatever, whatever. Now we will not want to just do it if somebody's expectation is or unless we also somewhere believed to say that what is wrong if you make some additional provision after all it's only a provision. And if the market conditions were to improve, it helps you release back the provision whenever that situation does arise. So I have always said even in the past that provision should be differentiated from an eventual credit loss that the company will incur. Now if we make some additional provision, it is fair to have the provision, and all of us are going through so much of unknown, unknown, right? I mean, I don't think -- all of us, whatever we are saying things may change in a month or 2, et cetera, is more whatever we read the year, et cetera. But there is not a clear -- a full understanding of the pandemic situation, how it is going to pan out or how -- it could be faster than we expect, and then things can start to change. But the overall market condition seems to be a little confused, and sentiments remain to be a little low. So we have taken this decision to do it. And which is why I said it will be an annual feature and not every quarter feature. And you're right, 2 quarters down the line, market conditions may change. Collections may improve. The customer cash flows could be substantially better, and the gross NPA comes down, then the provision may no longer be required also.

The next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund.

So one reason why you said was the 4%, and you also mentioned cleaning up the book. So I just wanted to know whether -- given the fact that Mahindra always getting the customers whose ability may be a problem but willingness is never a problem, is there something which you do strategically going forward, which would shift the business away from the current set of customers? And whether the digital also would include 2-wheeler loans that we had spoken about earlier?

Yes. So the digital will include 2-wheeler loans, but we have not yet started that. But definitely, the 2-wheeler OEMs, the 2-wheeler dealers, and as I've said in the past also, many of the dealerships that we work across the country are also 2-wheeler dealers. So they are continuously in dialogue with us to say, "Do you want to start? When will you start?" kind of a thing. So definitely, that is in our radar but may not be very immediate. But we always consider 2-wheeler as in some form of a personal loan only because reprocessing those assets, et cetera, are not the true answer to success there. So the answer is, yes, 2-wheeler will be looked at. So far as whether the model is undergoing a change, et cetera, I think when I use the term cleaning up, it was more in relation to the bad debts and termination losses that we have incurred. We said we have reviewed all those customers who are a little high aged. And rather than following up and trying to pick up monthly installments, et cetera, it was felt more prudent to negotiate with the customer and settle the accounts with them rather than invest any cost of recovery over a long period of time. Similarly, on the bad debts, wherever we wanted to take back the vehicle, sell off the vehicle, we have done it aggressively rather than holding it and then delaying those actions. It was not from the provisioning perspective. We continue to work with Earn & Pay segment. We continue to work in the rural market. We continue to work with customer who bring in 15%, 20%, 25% margin money. We continue to work with customers who will go through the seasonal impact of the agri cash flows and infra cash flow. So -- and our branches are geared to only handle those kind of requirements, and our people who are recruited locally understand this well. So I want to be extremely clear to say that the model is not undergoing any change nor are we seeing a substantial change in the customer segment and sentiments from that segment. So we are not shifting our gears to say, "Let's go to high-end customer and drop these customers." No, that's not what we are saying at all. The cleaning up comes from, I repeat, from the repossessions, disposals and settlement with aging customer by offering certain concession and closing the contract.

The next question is from Anirvan Sarkar from Principal India.

So my question is regarding your [indiscernible] Stage 3 effects. If I look at the trend in your earlier year, traditionally Mahindra Finance has done phenomenal recoveries in the fourth quarter of every year, which usually led to an absolute decline in Stage 3 effect. And usually that decline has been in the range of anywhere between 15% to 20% on a sequential basis. And given your commentary in the last quarter, where you say that you have not restructured any of your customers because they did not want to be restructured and they were confident of being able to repay in this quarter. We would have expected a similar decline, but that's not the case here. So either recoveries have not happened to the extent that we thought it would happen or it has happened higher than we expected. What is exactly the situation here?

No. I didn't understand why you are saying decline has not happened in terms of gross NPA. Is that what you're saying?

Yes. That -- if I talk of the absolute quantum...

Yes. So if you look at December end, if I'm not wrong, I don't have the figure ready, but I think we were gross NPA of INR 6,600 crores or something like that, and that's come down to something like INR 5,700 crores.

I get it now. Sorry, my bad. So just wanted to -- I mean I have looked at the wrong number here. I apologize you for that. But my question is on the recovery front, so what exactly is -- have you recovered to the extent that we thought we would? Or -- and regarding slippages, what has been the situation? Has it been according to expectations? Or how is it being like?

In my opinion, it has been -- I said it in the initial commentary also, it actually met or surpassed our expectation because, as I said, March stand-alone, the collection efficiency was 109%, 110%. And if you look at each bucket, whether it's in bucket 1, bucket 2 or bucket 3, in every bucket, we have seen reversal and the size coming down, which means the backward flow has been good. And even though the gross NPA is still at 8.8%, it's also caused by the assets not growing. In an absolute term, if you look at our gross NPA 31st December -- 31st March now and 31st March 2020, we are exactly at the same number. So I -- we are more than happy with what has happened even given all the pressures that the market was going through. I think fourth quarter has definitely served us what we were looking for, or in fact, it's been slightly better than what our expectation would have been.

We'll be able to take the last 2 questions. We take the next question from the line of Aditya Jain from Citigroup.

Right. Just a clarification on the ECL model. So is my understanding right that you more or less reverted to the pre-COVID PD/LGD levels in Stage 1, 2, 3? And then the overlay is completely outside of the provision -- of fee assumption for -- in these set of assumptions. But in addition to that, you're taking the overlay is completely management discretion. Is that right?

That's right. Vivek, you were saying something? Go ahead. Dinesh, Vivek, you were saying something? Somebody was saying something.

Yes. I just thought I will share here. There is a continuity of some percentage of overlays over and above the LGD and PD ratio. So if you see the breakdown of the overall overlay, we continue to have around INR 966 crores as overlay. And there is an additional provision which was made as per the RBI's expectation to bring the net NPA below 4% of INR 1,320 crores.

Right. Okay. Just clarity on the cost. So the -- it's within the 2.5% also at guidance, but it's still at 25% Q-o-Q, while disbursements are low on Q-on-Q. So are there any one-offs? Or is there any other factors driving the sequential increase?

Dinesh? Anybody there?

Yes. So in current quarter, there are few one-offs, but that is very small negligible number to share. One is because of the Supreme Court order, there is an interest on interest provision around INR 32 crore worth the provision has been done in the quarter. And obviously, because of this drive of settlement and the repurchase activity, which was done in the current quarter higher. To that extent, there was an incremental higher cost incurred on account of that.

We'll be able take one last question. We take the last question from the line of Umang Shah from HSBC Securities.

Yes. Sir, I just have one question on the rural housing subsidiary units. It's been 5 consecutive years where we have had net NPLs of 10% or above. Should one assume that, that's the nature of the business, and that's how elevated the NPLs will continue to remain going forward as well?

While it has remained at that level, our belief is that the gross NPA of this business may be 6%, 7% and not net at this level. And as I've been repeatedly saying, we continue to have 40% of the book or so, which is coming from Maharashtra. And it's no secret for all of us that Maharashtra has not been going through a great time for -- continuously for more than 3 years or so. We are only now seeing after a good crop, things are beginning to change. And once this state gets a correction in rural housing book, you will see a substantial sudden dip to the net NPA that can happen as otherwise, this is not the level that is expected to be kept for this book. And Maharashtra needs a correction. I don't know if Anuj is in the call. Anuj, you want to explain a little more?

No. I agree with what you're saying that it is our dependence on one state. And the good news is at least in the last quarter, we saw that state also improving when the cash flows improved. Rural cash flows everywhere improved, including in Maharashtra. And -- but for the COVID resurgence in the first quarter, we would have continued to see an improvement in that. And if this improvement continues further, I see no reason why we can't bring the situation under control.

Sure. And can I just squeeze in one clarification from Vivek?

Yes. Quickly. Yes.

Yes, please.

Yes, sir. Vivek, you mentioned that 37,000-odd contracts have not made any payment in 4Q. Fair to assume that these are the guys who haven't paid anything since the beginning of the moratorium, right?

Precisely. You're right.

We'll take that as the last question. I would now like to hand the conference back to Mr. Kunal Shah for closing comments.

Yes. Thanks a lot, the entire senior management team of Mahindra Finance, for sharing their insights and perspective and clarifying all the questions. And thanks all the participants for being there on the call. Thank you, and have a good day.

Thank you so much for hosting us. Thank you so much.

Thank you. Thank you, Kunal.

Thank you.

Thank you, everyone.

Thank you, Kunal.

Thank you.

Thank you very much. On behalf of ICICI Securities Limited, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.