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

Ladies and gentlemen, good day, and welcome to the Mahindra Finance Earnings Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference has been recorded. I now hand the conference over to Mr. Kunal Shah from ICICI Securities Limited. Thank you, and over to you, sir.

Thank you, Malika, and good morning, everyone present on the call. This is Kunal Shah from ICICI Securities. So we have with us today, Mr. Ramesh Iyer, Vice Chairman and Managing Director; Mr. Amit Raje, Whole-time Director and Chief Operating Officer, Digital Finance, Digital Business Unit; Mr. Vivek Karve, Chief Financial Officer of the company and the 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, along with other senior management team members on the call for Mahindra & Mahindra Financial Services to discuss their Q1 FY '22 earnings. Over to you, sir.

[Technical Difficulty] everyone, to the call, and good morning to all. So let me kind of first begin with what's happening in rural India, what's happening in the market that we serve. Then I will deal with why -- what has happened and why it has happened that way. And then, of course, the third section on where we see this going. So clearly, rural India went through one of its worst times ever in terms of the COVID hit situation. And out of the 90 days, that was available for operations between April and June, it was hardly around 20 days where there could be any activity. And even those 20 days were kind of hit by part-time operations and not fully available to operate. Things have changed. I think things have gone to definitely moving towards more positivity. Sentiments are returning to some normalcy. And when I say some normalcy, both at the branch level as well as at the consumer level. Quarter gone by, we saw there was scare in people's mind. People did not know what next because I think there were cases heard on and around them. There were people whose families who were impacted. In our own cases, we saw around 3,000-odd people who were impacted with COVID, and we lost lives of at least 60, 70 people in the process across the country. And therefore, there was all around fear in people's mind and the sentiments were very, very low. The dealerships were not open. The mandis were shut. The banks operated for limited hours, and absolutely no movement on the street. So all of this is what got rural to be in a very confused state of affair. Amidst all of this, I think the harvest was good. The crop price was also decent and good. But they couldn't sell all their crop in May as mandis were shut. They started selling it in June. Some part cash flows did come in and some part cash flows will come in July. So if you look at the entire rural prosperity, hinges around people movement and goods movement and of course, the infrastructure to commence and happen. In none of this front, we saw any activity out there, and that's one cause of real pressure that had to be gone through. As things changed from then to now, as I said, dealerships have opened, mandis are opened, banks are operating, our branches are opened, people are vaccinated at least for 1 dose, most of them, people have come back to work, sentiments are returning to normalcy, people are able to travel and meet customers. Customers are able to come to branch. The footfall at the dealerships have gone up. The supply side is getting fixed. Inventory levels are good and decent. The OEMs are very, very bullish about how the market is likely to turn around during this period. And we also hear and see a lot of talks about infrastructure opening up in most of the states because that's one area from where you would see labor absorption happening, and therefore, things are now all set to get into some positivity from here on. In my earlier call, we had also predicted that it will be post-September, that is the festival season onset is where we would see a turnaround story, and with the government push on infrastructure and monsoon supporting the market we believed that the 3 years from then on should be a good period, and we continue to hold our view. Yes. Did we see such a steep pressure that we would go through in this quarter in that rural market? I think we definitely saw it when we had this call sometime [ last week ] of April, we had definitely this understanding that the pressure points are mounting, but we had not anticipated that they would be a complete washout and June would take at least 15, 20 days to bounce back. And that's one pressure that we had to go through for a fact. We have always taken this approach of partnering the customer in these difficult times and not taking any knee-jerk reaction to situations and scenarios, and we continue to stay with that approach of ours. We have not resorted to major repositions, and even if we wanted to, possibly, it would -- may not have been very easily possible to do so in these circumstances. But nevertheless, our approach was not to be getting into major repositions and build pressure unnecessarily on that front. We were not able to reach out to customers, meet them, talk to them. And only telephonic conversations were possible during those periods. And therefore, we were trying and understanding what they are going through, and were trying to reconcile to these scenario of their. If you look at restructuring, which was offered -- which was announced by the regulators, and when we reached out to our customers, some of the thoughts that we heard from them were as follows. Many of them said that they would not want to commit themselves to a long-term restructuring and incur a very high interest burden because they believe that they would bounce back in a very shorter cycle, and they would have preferred a moratorium-like-scenario, which was offered in the first round is what they quoted. Some of them said, if we can pay you some money, please allow us some time, and we would continue to keep making some payments but do not want to resort into restructuring. So eventually, the restructuring was taken by only some of those fleet operators who believed that they may need about 6 months to bounce back, some of the taxi aggregators, the school bus operations, these are the people who then took to some restructuring because they need definitely a 6 months' time to bounce back. Otherwise, many of them believed that in a month or 2, there will be a return to some normalcy and their earnings would return to normal. I think the other sentiment that we saw in the rural market that impacted us is many of the customers did have money, but were not able to come to pay or we were not able to go and collect. That was one that we clearly witnessed out there. And in cash collections, I think you would see this for sure. I think the other area that we saw pressures coming from is customers had the money, but with uncertain future, they did not want to discharge the liability but rather store the money for any future eventuality. And this is what really caused the pressure for us in the third quarter. So if you look at many of the accounts which have moved into NPA category in this quarter, for all standard accounts as of 31st March, and we have put out some statistics there. And we saw many of them have paid even some installments during this 3 months. And there are a large number of accounts who have actually paid more than 50% of their loan already. So we don't see both of this bunch of accounts as someone to worry about as a credit issue, but they are purely an issue temporarily caused by the liquidity pressure faced by the customers in view of either their low earnings during this period or if they had the liquidity not wanting to pay during this period. So we, therefore, believe that while they have to be categorized as NPA as required under regulatory norms, and classically, reserve bank even put out to say that this can be classified as normal account and not an NPA account, but the IndAS accounting possibly doesn't allow that kind of a approach to be categorized something as Stage 3, if they have not paid is necessary, and therefore, we stuck to remain -- keeping them at Stage 3 and making provisions against them. So I would like to very categorically emphasize here that as payment starts to come in, and we are seeing collection efficiency, and I'll deal with it in a minute. We believe as market condition starts to improve and this consumers are able to get back to normalcy in operation. And when I say normalcy in operation, we don't expect them that they will get back to more than 100% like before. But even if they were to get back to a 60%, 70% kind of a situation to start with, and over a period of time to get to full normalcy, we would see a lot of these accounts would move back to normal because they are all customers with good intention to earn and pay. As far as collection efficiencies are concerned, I would just draw reference to the moratorium period. Between April and August, when we had moratorium and as you all know, we had a very large number of accounts, which went into moratorium. Post-moratorium between September to March, we saw very good collections from that market as the vehicles where put to use, tractors were put to use, and we saw recovery happening in a very normal manner. We did believe that the year if the pandemic too had not hit, we would have seen substantial reversal even from that position and we would have possibly gone to the 2019 kind of scenario or the forecast with which we were working. But unfortunately, the second wave hit it very, very hard. As we moved along, we saw April, May, June. April, we had 10, 12 days of working, but the lockdowns had started to happen in states like Maharashtra, some kind of curfew-type situations were announced, people movement were a restricted and all of that started happening. So we did see April collections somewhere around 70-odd percent. May was a washout from an overall activity perspective. It was a total lockdown situation and the collection efficiencies were around 60-odd percent. But come June, I think the collection efficiency substantially improved, even though first 10 days of June was a drag, post whatever happened in June and things started to improve. And if we were to consider including the restructured contract, the collection efficiency went high as 105%, but if that was to be knocked off, we were upward of 90-odd percent by pure collections, which was a direct reflection of the customer intention to come and pay, our ability to go and collect customer using bank transfer, all kinds of formats were used, and clearly, the collection efficiencies started to improve. So going there, I very strongly believe, and that's our conviction as a team and we talk to people across the country is between July to March, you would see substantial reversal to whatever has been built during this period, at least the contracts which have been built into NPA between April and June will reflect a reversal situation as we move to the next 9 months. And as we all know, that the second half of rural is always a good second half. And with expected normal monsoon, I think we should be beneficiary of the changing cash flows of that market, changing fate of that market. We are also seeing very clearly the demand picking up, footfall at the dealerships continue to be high. OEMs are confirming supply availability and supply chain problem getting fixed. And the infrastructure, as I said, likely to open up post monsoon. We'll also see demand for tractor further going up with very clearly infratractor picking up. I'd just like to deal for a minute with the tractor business. There's been this questions about if the industry is growing, why is Mahindra Finance not growing in the tractor business. So tractor business is split into 2 parts: agri-based tractor and haulage tractors. We started originally when we started the tractor business with agri tractor financing to derisk because monsoon, erratic situation was building overdue in that segment whenever monsoon failed. And therefore, we got into commercial tractor financing, which was a good derisking approach that we took, because at the end of the day, commercial tractor that's a quarterly payment possibility versus the agri tractor, which is season to season. Unfortunately, for the last couple of years, we've seen the mining activity going slow or rather stopped in many states, coal excavation was not happening, and the sand bridging was not happening, all of this pushed the commercial tractor to a little standstill. And you would clearly see even for a tractor industry, the growth has come from agri tractor sales, and they have not really registered good growth on the contracting side. And therefore, Mahindra Finance was directly impacted by losing volumes from that particular end. We believed agri tractor was very competitive because it was always a nationalized bank's product. Then came a lot of private bank to participate in the agri tractor because their requirements for priority sector, et cetera, et cetera, maybe. And therefore, the volumes got distributed and divided amongst many, many players. So that's 1 very clear reason, even though the industry registered growth, we could not get the benefit of the growth purely because the commercial tractor segment wasn't growing. So we would definitely believe that as the contracting segment opens up post monsoon, the tractor sales growth that we would see arising out of contracting segments, we should benefit out of that, and you would see a growth pattern back to us. As far as other volumes are concerned, I think it's direct correlation to the volume transacted by the dealer and the OEM, and there has not been any pressure on the market share as far as other products are concerned. We do think that volumes will come back. We do think the pre-owned vehicle will be a good segment to watch for growth, whereas we think that the heavy commercial vehicle could take a couple of quarters more before they return back to normal. So we have based our growth on tractors, preowned vehicle, auto, Mahindra auto products and the car segment. But within the car segment, we are conscious of the fact that the taxi aggregator segment, the tourist segment and the school bus operating segment, which buys the omni van kind of a vehicle, may take some more time because that's not an activity which commence to happen. And even if they were to begin, let's say, sometime from October, where we hear schools could start, where we hear the tourism will open up, et cetera, et cetera. But we very strongly do think that those segments that vehicle only after a quarter or 2, but collections and recoveries will start improving from that segment. My last comment would be, we work with various equipment of these customers across the geography who are providing services to certain fundamental industry. And those fundamental industries are farming, contracting, [ leading ] the education industry, the tourism and all of this, which collectively means we are participating in government and people movement kind of an industry, and which is where our segment of customers participate. And while rural generally believed to be doing well on the consumption side, but if you dive deep and look at these segments, I think these segments have gone through tremendous pressure in the last year or 2, and the last quarter was anything set to them, and which is where the pressure was built on us. This segment is improving and returning back to normal? Yes, of course, with the caveat that we do hope and believe that definitely that the -- not a third wave, which is such a sharp intensity that we saw. The secondly, we all think and pray that the third wave doesn't it come in. And even if it had to, it is not as severe. But we are conscious that we have to be kind of prepared with some of that type, but we still think there is a lot of possibility around in the market. And what we have built as an NPA during this particular quarter is something which we very strongly think are reversible NPAs and they are not credit cost NPAs or a credit based NPAs. So we would see a reversal of that happen. And our whole approach is to first come back to the last March level as we progress on from here. and therefore, get the benefit of reversal that we can over this period before we can even talk of further improvements going over there. So far as the margins are concerned, we -- I don't think we are still under any pressure of our lending rate pressures, and our borrowing cost is one of the best and given that our net interest margins are being held up. You would have seen a dent in our net interest margin. But they come from because of the reversals of income that happened because of the provisions that we make or the NPAs that we have as well as we carry a high level of test for any future eventuality to be met. And therefore, the yields around that are under pressure, obviously. And those 2 add up to a little bit to our net interest margin. But as otherwise, on an overall book basis, I would think that there would be a marginal dip to our yield of about maybe 15, 20 basis points, but that would have also been caused by some kind of a product mix change, but not otherwise. So clearly, we can hold on to our NIMs and our borrowing cost, as I said, is one of the best, and there is no pressure on the lending rate side. We do believe the volumes will come back to normal, and you will see a growth pattern back to us. We are not overly convinced that in this quarter, if we had, had a book of 14% over first quarter of last year, they are noncomparable per se. But post-September, we would see absolute disbursement growth, and that should lead to the growth story and the AUM growth coming back. And as I said, correction of NPA from where it is with a better collection efficiency over the next 9 months should help us get our quality as well addressed pretty well. So overall, I would think that while we have gone through one of its worst time in the 27 years, we have run this business, this was one of our worst quarters. But I would still think that what has been built in this quarter over March is purely temporary in nature, and that would come back and if I have to draw any reference point, there are 2 reference points or 3 different points I can join. One is the meltdown time, the NPA adds on but those days, I think NPAs were 150 days. And therefore, it did not reach a 15% level. But on a 150-day basis, we did see it go up to maybe 8, 9 percentiles, but it slipped off come back very, very fast in 2, 3 quarters. The demonetization time, I think it went up to 14%, 15% type numbers and then started reversing as the market conditions settle down. Even if we were to take the third reference point to the moratorium time, if the moratorium was not to be available, I think we would have reached this kind of level of NPA even in that. But then very clearly, between October and March as market conditions improved, we saw substantial collection and reversal happened, and we are very confident that at least from this 15% level to come back to an 8% type level should not be very difficult if market conditions open up and the results would get to happen. I think with those kind of remarks and on the liability side, we are pretty comfortable. We have sufficient funds to meet any eventuality. On our capital adequacy, we are doing extremely well. We don't have a pressure on the capital adequacy. Our relationship with OEMs, with dealers are pretty good, and we have had several dealer wins, and we have several OEM wins, and everyone is confirming to us about the return of growth for them and therefore, a return of growth for us jointly with them. Our employees are being taken care. We have done various employee-based initiatives to not just retain them, but also for their well-being and good health. And as we said, we continue to focus on our cost control measures. And there are some fundamental costs which are being well addressed and there are some variable costs, which will possibly come back on the return of the volumes and as actions begin to improve. And we would add another 50-odd branch during this period. Last year, we did add about 120, 130 branch, but they will be functional during this year, but we will also add need another 50-odd branch during the year based on the forecast of the growth that we are looking at. So I would stop there, and then -- I think I've covered most of it what I wanted to say. I just wanted to live this final thought. If you think that rural is a market which whenever an impact comes or disruption comes, they are the first to hit very severely, whether it's a monsoon failure, whether it's an economic downturn, whether it is this kind of a pandemic situation, the downturn there is very fast. There have always seen that pickup and uptick is also extremely fast because all the customers that we work with are acquiring assets, which are the basic dilute product, and therefore, they do come back to street again and start putting it back to use for earning project sales. So I think with that thought, I will stop here and possibly now we open it up for Q&A. Thank you. Thank you very much.

[Operator Instructions] The first question is from the line of [ Arav Sangai from VT Capital ].

Hope all well at your end. So I have a few questions. My first question would be a data keeping question. If you could tell me the exact quantum of interest reversals that we had to face through even just to get through the -- what would our NIMs would have been if we wouldn't have such a large slippage?

Vivek, somebody want to answer? I thought it's too...

Yes. I will come in here, sir. This is Vivek Karve. So we had about INR 200-odd crores of interest reversal during the quarter.

All right. Okay, sir. So sir, my second question is again on the provisioning front. So since we had a large slippage, I just wanted to understand what kind of ECL do we project? Because I remember we used to have a 35%, 40% kind of PCR that we used to maintain pre COVID. And now because of our overlay provisions, we are maintaining a 55%, 56% kind of PCR. So like what is the -- like what is your thought process on making a 50% kind of PCR on the additional slippages that like we have encountered this quarter?

No. So if you kind of look at -- I outlined a few segments which are causing the pressure for us. And it's a very [ serious ] management decision to say that it's nothing wrong if we were to carry a higher provision for those segments. And if they were to return to normalcy, we would get the benefit. So far as the basic formula-based ECL is concerned, I think we are still in the vicinity of 44%, 45%. We are not seeing increased loss coming from any repositioned disposal at all. So therefore, we don't think that the fundamental formula is changed. It is just that the management overlay on the basis of those segments where we very clearly see what is the pressure that we go through from the street and therefore, might now remain a little more prudent on that front is the only approach we have taken. And as things normalize, I think we will come back to our 35%, 40% kind of a number. Vivek, you want to [ add ] if I missed or?

Yes. You're right, sir. Just to be specific our LGDs are in the mid-30s. And the overlays have been made on a very prudent basis, looking at the stress in some of the identified segments and also keeping an eye on a possible third wave. But we believe that as the normalcy will return, as was alluded to by Mr. Iyer. There is a very good chance that a significant part of this overlay also may get reversed as the situation improves, and the Stage 3 gross assets start depleting.

Right. Understood, sir. Sir, just 1 last question I had. So I remember when the RBI came out with restructuring guidelines, like you came on TV and guided for a 10% kind of restructuring, which you might expect. So I just want to understand since the overhang of COVID 3.0 is still present, do we expect that in coming quarters since these people -- the businesses that we deal with, they are still not out of the woods completely. We might expect a higher [indiscernible] say in coming quarters and not like -- and an NPA reduction, coupled with a higher restructuring?

So as I said even in my earlier address, we have to go by the customer needs and not by our needs. So the customers still believe that they don't need so much of restructuring and want to incur this additional interest burden, et cetera, et cetera. And in July, we are already seeing activities back to normal and if the third wave was to come and hit and we all hope that they are not as severe, but there could be a temporary blip. But I don't see that we will need to do very a large restructuring. Like in the first quarter, we did about 50-odd-thousand, close to 60,000 accounts. In the second quarter, will there be a very large number, I don't see that because the eligible customers are something like 5, 6 lakh customers. But I don't think we will [ hit ] that kind of a number at all. It will be another 30,000, 40,000 accounts, if at all coming from the heavy commercial segment if they are going to take a little longer or the contracting segment and those kind of stuff. But other than that, I don't see that this number is going to be abnormally large.

The next question is from the line of Mahrukh Adajania from Elara Capital. The line for the current participant is disconnected. The next question is from the line of Karthik Chellappa from Buena Vista Fund Management. The line for the current participant is disconnected. We move on to the next question, which is from the line of Dhaval Gala from Aditya Birla Sun Life.

A couple of questions. One, just to understand, I do understand, I mean, a reasonably good presentation, you've tried to explain a few cycles. Just if you could explain this with the light of restructuring also, I know we did not do much in the last year, but in the current quarter or current year we've done. So if at all, there is any pending restructuring, point number one. And if I have to add the restructuring pool or stress pool looking at Stage 2, isn't it too high versus any of the past cycles? And any special steps which do you think will require to recover or get back to say the improvements you've seen in the last 2 examples you have given of TFC and demonetization when can that be achieved in terms of number of quarters or number of years?

So as far as [ restructuring is concerned ] I don't think we have a very large number pending for restructuring. And as I said, maybe another 300-odd thousand account maximum may come in for restructuring. But if the market conditions continue to be what we see now as an improvement trend may not be required to do beyond that for sure. So first, what steps are we to do to be able to recover all this amount, which we believe. Again, just to repeat, these are all earn-and-pay segment, and as they earn, they would definitely repay, but we have to be available to collect the money either going to them or having the branches where they could come and pay. So one of the basic requirement is the branches should be up open and running so that they can come and pay, and our people should be available to be able to reach these markets and go and collect. One thing that we have done even in the earlier rounds when NPA went up was to create state-specific champions with a crop functionality and with a very clear direction of different bucket collections and focusing on business where there is no divergence of energy to different activity. And we have already done that. We have created a state-level team -- for every state, we have created a team with a very senior person responsible for the state with a team available to that particular individual to be driving that particular state. The states have also been allocated to the product heads at HO level like a CEO, and each of the product it is handling a couple of states, who will focus only on their respective states from a collection perspective and NPA reversal perspective. Because finally, we should all understand that it is not what are the alternate ways by which a customer wants to pay. We can create digital means. We can create branch opening. We can create partnerships for collection. All that is possible and we have done it. But fundamentally, the customer has to earn from the vehicle or tractor that he's using, so that he's in a position to repay, right? So that is what we are now seeing very clearly that there is activity returning back to normal. And once that happens, then this kind of a structure that we have created will help us collect much better from those markets.

Sir, just to get a clarification, if the improvement in the collection efficiency would get more reflected in Stage 2 assets going forward first? Or it would be basically even the Stage 3 assets we'll see -- So if at all, how would you look at it? That today, from an outside world, people will look at the quantum of gross NPL plus the elevated Stage 2 assets, which include some bit of restructuring also and the collection efficiencies are impacted. So if you could give us some confidence that in July, how has the trend been? And if at all, there is any improvement in Stage 2 assets in terms of quantum?

No. So very...

You did run between 13%, 14% in the last year, third, fourth quarter, right, reported numbers, has they come back to that level directionally at least, I mean to that magnitude or it's just smaller improvement right now?

No. So as I said, June itself saw a very high collection efficiency, right, and we are seeing July a similar trend, which means that normally, one would expect after the July slip-off, et cetera, but what we are seeing is very clear movement in the July collection as well. So our confidence is that this collection will fit both Stage 2 and Stage 3. Just to give you a little more perspective on the Stage 2, right? While we had about 400,000 accounts in Stage 2, we have seen part payment in more than 85,000 accounts received during the third quarter itself while they couldn't move from that stage. And similarly, another 234,000 account, we saw movement in the account. So we very strongly think that at least out of this 4 lakh, more than 3 lakh accounts have shown movement of repayment. And those will definitely roll back to an extent and some of them possibly may stay, but won't build and go forward. Similarly, on the Stage 3, as I explained, there was sufficient movement in account. So if these 2 are seed together, I think very strongly that there would be reversal happening in both depicts. But one thing we should note is when Stage 3 reversal, it could come to Stage 2, may not go to Stage 1 or 0. So to that extent, there will be some buildup in Stage 2 happening. But even from Stage 2, some things will roll back. So please read it in a totality to say that when the overall cash flow of the market improves, you could see reversal of provision happening from Stage 3. You will see forward flow getting arrested and that's the reason we believe the gross NPA numbers will start climbing down. And we very clearly see roll back from Stage 2 happening and our Stage 1, which normally used to be between C1, I think used to be some 13-odd percent, possibly, we will go back to those numbers in the next couple of quarters. Will all this happen in this quarter? The clear answer is no. They may not happen in 1 quarter. But will we start seeing trends of reversal and definitely we will arrest a way forward? I think I'm very confident to say that the way forward will be arrested. The trends of reversal would be seen. And then the next 2 quarters would definitely give us the opportunity to reverse this much better.

Sure, sir. It's useful. The other question is maybe because of the pandemic and the current one-off type of impact. But today, our net NPL numbers is pretty high. Is there a possibility at RBI or rating agencies put any pressure come clamp on this type of number?

My personal opinion -- this is not based on any discussion with anybody. So this is my personal opinion. I think the normal reactions are never on the basis of one. They know that for what reason as the gross NPA has gone up. And in spite of that, we have made 53% cover. So they know that directionally, we are maintaining a higher coverage ratio, and they would want us to understand in 1 or 2 [indiscernible] see things happen because we are adequately capitalized, and we are carrying sufficient liquidity. So I mean what will the rating agency look for on an RBI look for that we shouldn't be on a default side. If those 2 ends are well taken care, then I think they will have patients to see for 1 or 2 quarters before they can react. And I think in those 2 quarters, we would reflect the directionally how things are changing. And therefore, the risk of any kind of reaction, I think we would definitely avert at this stage. But we have not had the discussion for me to make this comment, but my being in the industry for so long and understanding the situation, I think it's never on 1 quarter reaction basis.

Sure. Just a last piece of question, if I'm allowed. Your expectations on outcome for AUM growth maybe [indiscernible] in the coming quarters and possible revenue -- basically margin progression.

So, so far as margin improvement is concerned, I think our best margin are lending [indiscernible] this kind of one of the lowest. So I don't think we are seeing a margin expansion from here arising either out of lending rate improvement or borrowing cost coming down. We don't forecast borrowing costs to come down from here at all. And we are holding, I think, 4, 5 months equal end requirement of funds, so that pressure of holding that money will always be there. So I think we are okay on the margin front where we are. As far as the growth is concerned, I think AUM growth will also take a quarter or 2 because we would start disbursing and the improvement in disbursement will happen only from now on. And as we reach March, you would see AUM growth beginning to happen. But to expect in this quarter, will there be an AUM grid, may not be there because you just do INR 3,000 crores, INR 4,000 crores of disbursement is what I think we have done in the first quarter and enough accounts do mature during this period. So I think give us maybe a quarter or 2 more at least we will watch for how the disbursement growth happens, and I'm very, very bullish to believe that September -- post-September, the demand for vehicle tractors preowned vehicle will definitely be high and we would benefit from that. And once that disbursements pick up, I think by March end, we should register AUM.

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

Yes. Sir, just a couple of questions that you've given a table on what percentage of NPLs and what percentage of Stage 2 are in the recoverable bucket in terms of either part payments or less than 50% of outstanding. So what will be the mode of resolution or upgrades to these accounts? I mean are you confident that they payback or there'll be a onetime settlement or there will be recovery repossession? I mean how does -- what will be the mode? Is it just an upgrade on payback because things have opened up?

Yes, yes. This is not collection. What we have reflected there as solvable are solvable through collection.

Got it. Got it. And what is the write-off number for the quarter?

I think very, very low. I don't exactly know.

Yes. So I'll come in here. It's about -- all put together, there is bad debt plus reposition losses put together is close to about INR 300 crore.

Got it. Got it. Got it. And sir, the other thing is that net NPAs at 4% is a given now, right, by the end of the year, not necessarily in the first 3 quarters. But by the end of the year, we should have net NPLs at 4%.

That will be our endeavor, and we hope that the gross NPA comes down to make it net for and we don't have to make additional provision.

Okay. But any target by -- through -- I mean, for gross NPLs by the end of the year?

I think given where we are, and as I said, corrections would take 2, 3 quarters for all of this to reverse clearly, at least our first target would be to reach definitely a March level so that we don't have a provision burden for the year if we reached last March level.

Okay, sir.

What we meant was the gross NPA. And given the provision cover, we will naturally reach the -- meet NPA, read it as that.

The next question is from the line of Manan Tijoriwala from ICICI Prudential Asset Management Company.

I have a couple of questions. As we are contained in disbursement, so is this primarily due to stricter underwriting norms or are you guiding growth only post H1 on this year? So are we seeing a pale infra also being involved in collection? And just linked to this, so how has the on-ground collection team shaped up in the past 1 to 1.5 years. So is there an increase in employee count in the collection team and what was the count pre COVID?

So I missed you in the first question. First question was have you [indiscernible]?

Sorry, I didn't hear you. Hello?

Was your first question [indiscernible] norms are we losing [indiscernible]?

So my question is, sir, so we are constrained in disbursement. So this is primarily due to stricter underwriting? Or are we doing -- or are we guiding growth post H1 because sales in size is also helping out in collection?

No. See, the total volume of the market [indiscernible] so it is not that we have tightened and there is no volume available and everybody is diverted to collection. No such steep actions taken. But clearly, overall volume of the market was low last 1, 1.5 year. I mean if you see Mahindras have not been able to sufficiently supply vehicles, there has been a constraint. Maruti volumes were low from availability perspective. So tractor was 1 number, which was growing, and I right at the beginning, explained about the tractor in the agri was growing and not in the contracting segment. And even in the preowned vehicles, with lower repossessions by all the banks and finance company, the supply side on the reprocessed vehicles were also very, very low, leading to low secondhand vehicle financing. So definitely, some norms would have been time during this period to ensure to adjust to the current scenario. But largely, the volume shrinkage is caused by low volumes transacted by the industry overall. So it's not that everyone is diverted to collections and things like that. We have sufficient people on the collection front. We have sufficient people handling the business team collection. So there is no dearth there. We have added people who asked a question, how many people have we added. I think we did add 1,000-odd people during last year to augment the collection efforts. But again, I want to repeat myself, the lack of collection or increase in an NPA will not ever be out of lack of effort from the team side or lack of alternate methods provided to customers to repay, et cetera, et cetera. The fundamental pressure on recovery comes from customer inability to earn sufficiently during the month to be able to distort their liability. And therefore, we are not short of branches, short of people or short of methods. And there are a lot of in-house training program by senior team, which happens to the field executives. There are a lot of MIS mechanisms by which the team is guided. There are a lot of communication that happens with the team, and there are supervisory methods by which review takes place. So I don't think there is anything lacking on the front of people's capability, number of people available, deeper penetration through our branch network as well as technology support and partnership approaches. We are just waiting and the market conditions improve, we would see benefit of all this low towards.

And I do assume the vaccination level on the collection team will be similar to what you have given on your employees. So 70% have taken 1 dose and 7% have taken both doses. So will that be similar for the collection team?

[indiscernible] 6,000 people, including the collection team, et cetera, that statistic is being talked about.

Fair enough, sir. And sir, can you provide any insight into geographical performance of the portfolio, so where you have seen some in having some better asset quality or you can highlight somewhere you have asset quality being much worse than you on the average.

So I can -- I mean, I don't have it ready with me, but from my review understanding, I can tell you there will be a few geographies like Bihar where mining was impacted. Therefore, you would see the tractor portfolio put in the contracting segment will have some pressure. You would see in UP a similar pressure on those kind of front. You will see in Karnataka in that kind of a front. Maybe in Guwahati, that is in West Bengal and Assam, you would see from the taxi operations front. So I think different products, different geography will have a different phenomenon to look at. But by and large, in this round of COVID impact with no exception, every state and for every product has gone through the same pressure.

The next question is from the line of Anand Bhavnani from White Oak Capital.

Sir, I just wish to understand the slippages that we are seeing and the elevation in Stage 2 that we have seen, in your reconning is this to what is happening across all the players in the industry? Or is it higher for us due to any specific reasons if you can give us some sense?

So I may not be able to fully comment on if everybody going through this. But one thing I can surely tell you Chairman of FIDC, what we hear from every player when we meet as an NBFC body is everyone has got a pressure. Is the degree of the pressure same? May not be so. Because if we are in certain segments of vehicles, which others may not be, like, for example, in our car segment, we do have very clear lead taxi aggregators, tourist vehicle and the school bus operating omni vans, not be a product for many of the other players. So therefore, in that segment, they may not have a problem. There are people who are in tractor business, but if they have larger agri tractor, they will have less problem compared to us as a tractor problem because we do have a lot of contracting segment tractor. And by nature, we are a very large player in that segment. So therefore, our pressure point could be high. The reverse could be true when it comes to heavy commercial vehicle. While we do have problems of heavy commercial vehicle, but the volume that we do on heavy commercial vehicle could be much lower than the other players in the market, and therefore, the problem size could represent it differently. So is everyone having a problem? I think my answer would be a clear yes. Is everyone having the same degree of problem? My answer would be no, different players will have different levels of problem for different product lines. And is everyone done the same level of restructuring? I think my answer will also be no for that. If we have done 2%, somebody might have done 5%, somebody would have done 9%, 10% also, but that's an individual call a company makes based on their profile of customer and the product line that they have.

Sure. And second question is a bit more wider in scope.

[Operator Instructions] The next question is from the line of Amit Nanavati from Nomura.

Just wanted to check if you can give some color on -- so you've given color where at least 80% -- close to 80% of our Stage 2 customers are at least part paying. If you can give further split between someone who's paying more than 50% of dues and someone who paying even less than 50% of dues will be helpful. And secondly, I'm looking at the incremental ticket size of the NPA formation, it seems to be relatively lower versus our stock NPA ticket size. So if you can just highlight which segment it's coming from?

Sorry, I didn't understand the second question, but let me give you the answer at the first, then I'll take your second question. So far as the movement on the Stage 2 is concerned, right, I just revealed out some numbers, which I had said earlier, right? Very clearly, around 84,000 contracts from people who were in Stage 2 even in March have registered moment, and another 234,000 people from a 3 lakh account, which moved into Stage 2 this quarter have moved. So they would not have paid 50% of their installment due during this quarter. Otherwise, they would not be in stage, but they would have paid 50% of their contract value what is due to them. Let's say, if they've taken a INR 1 lakh loan, at least 10,000 of them -- about 80,000 of them, I'm seeing are someone who have already paid more than 50% of their account and things like that. So I think when we say 50%, we are talking of about 8,000, 10,000 people who would have actually paid 50% of their loan already. But as far as part payment movement is concerned, if 3 installments were due, they would have paid 1 installment during the court. And the reason why they are in Stage 2 is that their 2 installments are outstanding, right? So therefore, they would not at 50% of the installment due of the quarter.

Yes. So we wanted to check was someone who moved in Stage 2 say in the month of May or April because we would not have collected or they would have not paid. But at least in the month of June, what percentage of this [ pre 26 day ] contract are actually paying at leadt their June dues or at least more than 50% of their June dues?

No. So I don't have it by month, but I can tell you that 310,000 accounts actually are moved to stage 2 in the month of April, May, June. And out of the 234,000 accounts have made payment during this quarter.

The next question is from the line of Rikin Shah from Crédit Suisse.

So firstly, on the asset quality side, both on the absolute as well as relative basis, the deterioration has been higher than the peers. What I'm specifically looking to understand is, a, what is our typical loan approval rates? B, what is the proportion of new to credit customers for us? And c, I heard that we have set up bucket-wise collection teams. But before that, did we not have a soft bucket and hard bucket collection team because the Stage 2 loans have also doubled from the steady state normal levels. So that's the first one. And second one, I just wanted to understand when you say that 80% to 90% of contracts could see reversal, those will be from the Stage 3 and 2 kind of movement basis, right, not on the P&L credit cost because even during the demand, we never had the net write-backs in the provision terms. So we always had some kind of credit cost in the subsequent quarters as well.

I'm not sure of the last point that you're seeing. Because at least from these accounts, if they reverse back, you will get a credit back. But obviously, there will be some new accounts coming in, and there will be some additional provisions, if at all required to be made will be made. But as far as the buckets are concerned, we always had, for the last 5, 6 years, we created this bucket approach of soft bucket, hard bucket and NPC bucket. My clarification was someone asked a question about how is the focus on collection and what are we doing, do we have sufficient team, et cetera, et cetera. And that answer to that was we already have a bucket-wise team, and then we have sufficient people in the team who are being trained for handling those situation better. I think you started off with something called what is your accrual or something. I didn't understand that question. Please, Dinesh, Vishal, anybody if you have understood...

Yes. It is the loan approval rate that he wanted to understand.

Okay. No. I mean, basically, are you trying to find the AUM degrowth? Is that your first question leading to?

No. So actually, I'm trying to understand if, say, for example, 100 borrowers are coming to you for a loan, what is the typical rejection rate that we have [indiscernible] approve?

Okay. Okay. Onboarding is how much?

Yes. Yes.

So there are 2 types of onboarding. One is before we take them even into our system and call it as an inquiry, there is a reduction that takes place, and that percentage is very, very high. But once they have moved into our system, after the initial scanning is done by the field executive and the local team, then the rejection is by a systemic approach of various parameters and there the approval rate could be upward of 80%, 85%. Because they are the scanned customers who have met most of the criteria, but maybe rejected because they're asking for a low rate or they are not willing to give a guarantee or they are suddenly asking for a higher LTV, those kind of things. but by a profile of a customer's credit acceptability, that rate will be very high rejection before they move into our system for approval.

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

I have 2 questions. The first one is on the broader rural economy. We've heard that there's a lot of state government spending which is happening in the rural economy. And like, for example, for tippers and such construction equipment demand has actually been very robust, and the contractors are getting paid. So I wanted to know your view about that as well as rural income per se because there's been a lot of migration away from cities. And so there's one chunk of income which they used to get which has been lost. And whether that is affecting the rural economy. And the second question is regarding the collection efficiency. I think you mentioned some numbers for July. I'm wondering whether I missed it. So please do let us know a collection efficiency for July.

So let me clarify to you. I didn't put a number for July. I just said that the July collection efficiency continues to be as robust as what we saw in June. And [indiscernible] put out a number, but you will see a very robust number and then I'm comparing it to June. So far as the rural economy is concerned, yes, we also have a similar view that not all states, but we are seeing signs of local spend happening at different state levels and going to absorb a lot of construction equipment papers. And if you recall my comment that I made earlier, in a couple of months, you would also start seeing demand for contracting tractors which are used for haulage [indiscernible] to pick up in the same direction, and we do definitely see those [indiscernible] out there. So far as the be movement is concerned, yes, you're right. A lot of people do otherwise used to be engaged in various midtown cities, semi-urban markets, et cetera, and having some parallel income and remit them to rural have kind of the slowed down for sure. And that's one of the reasons why the consumption also declined. But I think those are very temporary phases. I don't believe a large population will continue to remain only in [indiscernible]. As we open up in different cities, you can come back to the cities for their earning. So temporarily is there a [ pressure ] the answer is clear yes. But will it be a permanent dent or a shift in the fundamentals for rural economy, my answer is no.

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

My question here is that on the collection efficiency front, I mean, you have reported June to be like almost like 90% collection efficiency. And if I compare the numbers with previous year similar numbers, they are much better. So in that sense, I'm just trying to understand as to why was the need to like create such high provisions and such high provisioning cost in 1 quarter? Because if you are seeing the visibility that similar last year, things are going to get better. What was really the driver to activate a high provision costs? After like taking significant write-offs and provisioning, even last year, you have done similar -- much higher numbers.

Okay. So 1 is last year's first quarter comparison to this year's first quarter from an efficiency perspective could be slightly misleading because last year first quarter was with moratorium. So therefore, the demand itself was low and therefore, the collection [indiscernible] there was no, what you call, moratorium or anything. So it's from an absolute demand perspective. So far as [indiscernible] and we have put out very clearly certain segments where we continue to see pressure. This is anybody's guess, right? It didn't make sufficient provision and if our gross NPA was this high, somebody would have said, oh, why aren't you making sufficient provisions and you are carrying such a high net NPA. When we make a higher provision, obviously, is this costing also comes to us was there a need to. We, as a management, have taken a very conscious call. And we said that there are some segments which are going through pressure. There's nothing wrong prudently [indiscernible] of course, this is a provision, and it is not a write-off for us [indiscernible] have gone out of our ranks, right? [indiscernible] it shows a loss for a quarter because we have made such high provisions, it's fair and fine with us, but it will get reversed as I have been explaining all through that when [indiscernible] will get normal. Yes, if you had taken a write-off of these values, then you're right, if things are going normal, why do you want to take a writeoff. These are just provisions made -- and under the IndAS accounting, there is this judgment to be exercise and to look at how the market conditions are and make this provision and get the benefit of reversal if suppose to happen. So I think you must limit that to say that the cost is called by the management prudently making this provision. And we are confident that in the next 3 quarters, you will see benefit of this flowback.

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

Yes, yes. So how far do you think are we from pre-COVID level as far as collections are concerned from the [ delinquent loans and on Stage 3 loans ]?

See, if I take June as a singular month and compare it to pre-COVID June, I think we were almost there. Because normally in June, we get 95%, 96% collection, sometimes slightly more maybe, but I would think that June was a very good representation. And without putting out a number, I can tell you, July almost represents that. So I would think that the pre-COVID collection efficiency, at least have seen in this month. And we saw it also post moratorium like last March, if I'm not wrong. We had 107% or some number, 107% or 109% efficiency. And that was as good as pre-COVID number. So the fun of this market is when it dips that I told you a bit sharply, but even when it bounces back, it bounces like the speed. So therefore, to compare it to pre-COVID, certain months are like pre-COVID and certain months are disastrously [indiscernible] like for example, if I have to take May collection efficiency, that has never been our situation of collecting so low ever. And the market was the fact. So I think, Nischint, it's a very difficult balance to say, okay, is all 12 months come back like before pre-COVID, my answer is still no. Maybe we are another 3, 4 quarters away. There is no third wave, I think from third quarter, we will start seeing, generally, we are like pre-COVID times. But if you take a specific month, there are certain months like pre-COVID, certain months worse than ever.

Any conversations on interest rates going down on the asset side?

I -- my view at least is that it will not go down from here. Because there is a [indiscernible] which drove that, but maybe Vivek and Dinesh are better judge for that.

Yes. So I'll come in here. if your question was more on the lending rates. I think that I thought you asked on the asset side.

You said asset side?

Yes. Yes.

Asset side will be linked to the demand of the market. There is no competitive pressure for rate put on for sure. But if our borrowing cost is good and if you are able to pass all that to the customer and can acquire some better customer and larger customer base, I think that will be a very conscious call. But from a market perspective, there is no pressure to drop the rate.

And finally, if you could comment a little bit on the Housing Finance business in terms of what is happening out there. We saw the number, of course, but any kind of changes that are happening out there?

I think their pressure is as much or higher than our pressure because ultimately, the asset is not even an earning asset. So therefore, the customers definitely are on a wait and watch mode. they have the money, but they say they want to pay you get a little more normalized. So I think there, the improvement will be seen post monsoon and not before that for sure. because they are also the harvest and the crop money that they get. And I keep telling this, we have a large exposure in Maharashtra. And clearly, Maharashtra is the one which was going through a problem and this round, they did well. And if the monsoon turn out good and the crop turns are good, then post October, you will see a correction in Maharashtra for sure. But from their stored money, will they start paying for their liability? I hold my views. I don't think they will do that in a hurry.

The next question is from the line of Abhishek Murarka from HSBC.

So a couple of questions. One, on tractors, you made a differentiation between agri tractors and commercial tractors. But in reality, how is it possible to differentiate this? How -- and what proportion of your tractor portfolio would you say is agri? The second question is actually, there's been obviously a change at the board -- I mean, change at the parent level in terms of new management. Have you been discussing anything from a business strategy perspective to make the current business less cyclical? And can you share any new plans with respect to Mahindra Finance going forward?

So 1 very clear differentiation between agri and commercial tractor is commercial tractors are registered, whereas agri tractor are not necessarily to be registered, not required to be registered also. So that's a very fundamental level difference that one can see. Second is the repayment structure for non-agri tractor would normally be quarterly payment, whereas an agri tractor would be half-yearly payment into the crop patents. And third, of course, the differentiation is very well understood by the team, which is operating at the local level, and they will, therefore, very clearly know through the interaction and appraisal methods that which are the factor in which are non and non-agri tractor. So they are not very difficult to be understood. The only challenge will be there are some tractors which are used for agri and then also is diverted for commercial purposes in off-season, and those gets recorded separately. And in our internal MIS, we have a very clear differentiation between the 3 of them. And I don't have the number very readily with me. I don't know if Rajnish knows the number. Pure agri in our case could be around 25% or 30% of our portfolio is my guess. But Rajnish, do you have the number?

Yes. Not exactly, but you're right, agri is 30% and majorly, it is haulage and haulage plus agri, altogether.

Okay. [indiscernible] now as much is coming to corporate is concerned. Anish is the Group CEO, and then he's also Chairman of Mahindra Finance. So first of all, there is a lot of synergy and understanding of the group's expectation and what the group thinks about et cetera. Have we had any plans of new business model, new fundamental change, et cetera? You must have all read and seen. One of the biggest introduction is the digital fincorp. So we've created a separate vertical within Mahindra Finance, and we run it like a company internally, while it's just SBU within us is on the digital finance side. where we have Mr. Amit on this call. He is the CEO of the business. He's in the Board as well. And he's got a team under him, which is end-to-end provided for technology, for partnership, for HR, for processes, for customer-facing product acquisition, all kinds of stuff. And that is one business that we believe will be a good addition under derisking and the game changer internally to a larger extent. And he will use the physical support that's required for that business from Mahindra Finance and the Mahindra Finance core team will take the digital support that we require from that business. So in a way, it helps Mahindra Finance core business digitize through that And he gets the physical help from us, so in a way, it's a physical business. We have also kind of put in a team, which is focusing on the data side of it, and we are crunching all the last so many years of data that we have of customers, guarantees, OEMs, all kinds of stuff, and we are able to come out with very clear directional approach to where to lend, what to lend, how much we lend on what to lend as well as on how to recover, where to recover, where to repose and all those kinds of forecasting approaches. So that's the other fundamental shift and change that we have seen. My last comment in that direction would also be. We are engaged with a consulting firm, which are going deeper into our NPAs and slicing them from various angles and possibilities to really arrive at the root cause of why certain things must be happening, and then to get that corrected over a period by certain process change on a policy change. So these are the 3 I would think approved change that has come in with the interaction with the corporate. And at the corporate strategy level, at the GSO, what we call as Group Strategy Officer, there's 1 Amit Sinha, who is joined in as Head of that, and he's coming from 20 years in consulting experience from [indiscernible] et cetera. And he works very all with us to help us understand our strategy and also help redesign it wherever and whichever way required to be done. Sorry, my last comment is, we have a group CTO by name Mohit Kapoor, who works with us with 50% of his time devoted to us. And he's looking at our technology readiness as well as the gaps that we have and we engaged Ernst & Young to do the gap study of our technology and adequate investment would go into bringing in the required technology and appropriate technology and change course of the direction. So these are the...

And if I may just add, the group strategy ahead is also on our board.

Due to the time contain, ladies and gentlemen, we'll be taking the last question now, which is from the line of Sanket Chheda from Batlivala & Karani.

So my first question was on your guidance on maybe Stage 2. So as total pool now being 19% in Stage 2, 15% in Stage 3, we have about 1/3 book which is kind of stress. And on that stage we have provisions of 54%, and we see that our LTV-based provisioning is about 35%. So if we keep that 35% an extra 20% to Stage 2 in addition to the overhead that we have, we have as good as about 30%, 35% provisioning on an entire stage. So when you were saying that reversal in a quarter or 2, there should be certainty that there should not be any incremental provisions unless you feel that this 35% should go up further in terms [Technical Difficulty]. On growth you said, by Q4, we could see some AUM growth for the next 2 quarters, while we believe that the repayments will pick up. I just wanted to get a sense whether we will report -- start reporting positive AUM growth from the next quarter, that is our disbursement would at least match our collections, which would see some jump in the next 2 quarters.

Yes. So far as your NPA is concerned, you are right, we didn't also see any increase to those numbers, if at all, any were our endeavor is to see that Stage 2, Stage 3 together can 10% rule back from a 35% candidate come back to a 25% over a period of time and which was our normal base in the past, and that's what we are going to drive it for sure. And you are right for it, it stays there, is there a need for more provisions? The answer is no. So far as will we start seeing positive growth in the AUM, as I said it's too premature to say immediately next quarter there will be a positive. But disbursement growth visibility will be clearly there compared to previous year. And as we close March, I'm hopeful that there would be a trend of AUM growth visible. I did be in the very next quarter. I don't think so it will happen with that kind of speed because it will be the first quarter where we would have some disbursement happening, but there will be contracts maturing as well. But 2, 3 quarters of disbursement should help us start building.

So sir, on 3, you were guiding from 15% to maybe 8%, 9% level and typically Stage 2 average 12%, 13%. So ideally in 3 quarters, can it come down to 20% or the current 35% number? Or it will take FY '23?

I said [indiscernible] is our endeavor. It may not be 20% immediately, but 20% is our endeavor on Stage 2 and Stage 3.

Okay. And sir, lastly, on PCR, since we have an endeavor of maintaining 4%.

Okay.

I would now like to hand the conference over to Mr. Kunal Shah from ICICI Securities for closing comments.

Yes. Thanks to the entire management team of Mahindra & Mahindra Financial Services for giving out such a detailed explanation, and all the best for the process. And thanks all the participants for participating on the call. Have a good day. Thank you.

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

Thank you, Kunal.

Thank you, Kunal for hosting us.

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