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

Ladies and gentlemen, good day, and welcome to Mahindra and Mahindra Financial Services Q3 FY '22 Earnings Conference Call hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Alpesh Mehta from IIFL Securities. Thank you, and over to you, Mr. Mehta.

Thank you. On behalf of IIFL Securities, I welcome you all to the 3Q and 9M FY '22 Earnings Conference Call of Mahindra and Mahindra Financial Services. From -- the company is represented by Mr. Ramesh Iyer, Vice Chairman and Managing Director; Mr. Vivek Karve, CFO; Mr. Amit Raje, Chief Operating Officer; Mr. Raul Rebello, Chief Operating Officer, Core Businesses; Mr. Dinesh Prajapati, Head Accounts; and Mr. Rajesh Vasudevan, Senior VP, Accounts. Now without much ado, I hand it over to Mr. Iyer for the opening comments and post which we will have a Q&A session. Thanks, and over to you, sir.

Thank you. Good evening, everyone. Thank you for joining this call. So we had our results announced about an hour back via our Board meeting and the results are announced in our bank. Just to give you a very summary of how the quarter has been for us. I would very strongly think that the quarter has been in line with what we had envisaged for the quarter, which is we were focusing on getting back to a growth in our core business as well as to focus on the collections and the recovery from the NPA accounts. And after our first quarter pressure, we had put out on how do we see the following quarters pan out. And we had kind of put out saying that by end of March, we should reverse at least 80% of the provisions that were made in the first quarter. And as we close the books in this quarter, we do see that we have been able to reverse upward of around 60% of the provisions that has been so far made. What is causing this to happen? And how do we see it from here? Clearly, the segment that we are operating in and the geography that we are operating in has had a decent last 2 quarters. The economic activities have returned back to kind of, I would say, semi-normalcy, though not full normalcy, given certain segments didn't open up fully, but nevertheless, it was substantially better than what we saw in the first quarter. The monsoon turned out to be good. The harvest rent buy was very good. The yields are very supportive. The support price given is also equally good. But we do see that the cash flows from different state governments are being paid to the farmers on certain installment basis. But still, there is a commitment the crop has been bought, and therefore, we don't see a pressure arising from that segment. Rural sentiments are holding a positive. We are seeing demand for vehicles at the dealerships. We are continuing to see the footfall at the dealerships are increasing. But the problem truly is the nonavailability of vehicle, and that is building some pressure on the aggressive disbursements, which otherwise could have been achieved. The tractor business has seen some slowdown and my understanding and belief is that it's at the back of the contracting segment, yet not buying tractors or replacing their current tractors. And that, therefore, is causing a little pressure on the overall volume. But as otherwise, the farm side of tractor buying was very good. And I think it's important also to note that the previous year volumes on tractor had a very aggressive growth and therefore, one has to look at that base and from where that we have to see how the growth is. On the commercial vehicle front, again, there has been a decent movement by the fleet operators. I think the low, less than 5 vehicle owners, et cetera, are still resisting the buying of new vehicles because possibly the vehicle price is too high and their economic viability is not something that is comfortable for them. And therefore, we are yet not seeing buying happening in that segment. But overall, I would think that the volumes are picking up and if the vehicles were to be made available which is what we hear from the OEMs that the vehicle availability will start improving, I think that should result into a good number even for us. All of this has led to our disbursement growth on the [indiscernible] we have seen good traction. Again, demand is very, very high on the preowned vehicle side. But again, there, the supply is a little weak with the new vehicle availability being a challenge. People are not offering to exchange their existing vehicle until there is an assurance of getting the new vehicle. So once that side starts improving, we can even see action on that front. [indiscernible], we have seen good collection efficiencies, and we have been putting this out on a monthly basis. And in December, we actually had 100% collection efficiency. And in the quarter, we had upward of 95-plus percent collection efficiencies. I think overall, the collection efficiencies have been good. Even if you look at our delinquent accounts which moved into NPA in the first quarter, we have seen movement in very large percentage of the accounts, we have seen movement in collection. While, yes, people have not yet been able to clear their entire past due. But for sure, they are able to service their monthly installment and many of them are, in fact, also paying an additional installment. The reason why we are able to see the reversal of NPA happening clearly. I think, therefore, on the ground, the fact is that the customer cash flows have improved, demand continues to be robust, and that is helping us kind of look at both business growth as well as collection and overall delinquent correction as the direction that we have set for ourselves after the first quarter, and we have seen that happen in both the quarters. During this period, we have regained our leadership position in the tractor business, given that the volumes of tractor at various counters where we had a little pressure on the market share has been regained by us by putting in a specific team looking at that specific analysis of various dealership as to where we had lost certain market share. And therefore, what was needed to be done has been done with and, therefore, that has also helped us regain the volumes in tractors and leading to an increase in market share. As a matter of fact, in every product, we seem to have gained some market share, though not substantially in certain products, but every product has shown a trend of gaining market share, whether it is the commodity range of vehicles or whether it is in the Mahindra Auto segment, including the new product launches that Mahindra did of the 700 car, et cetera, which are a short supply product at this stage and is a heavy competition to finance this product from every end, but given our relationship with the dealerships and our local presence out there has helped us gain the volumes in that segment and that adds to the overall volume. So we are confident at this stage to definitely, we make a statement that even going forward, you will see a growth trajectory from our overall disbursement is concerned as well as our collection efficiencies will be maintained at the levels that we are and we would see reversal of NPAs happening for sure, the way we have projected. But of course, all this is at the back of the practices that we had so far, with the new regulatory guidelines that have come from RBI to look at NPA a little differently. I think it's important to recognize that on the ground for the customer, honestly, nothing changes with this kind of regulatory change. Our practices will undergo definite change, the future products that we would launch will factor in this requirement and therefore, certain product designs will have to be done in a manner that can account this. As far as the current book is concerned, I think this will require a reapproach to aligning with the requirement and to meet the customer cash flow as to how do they behave, which way do they do it. So we have taken some very definitive actions in terms of setting up collection war rooms. We have kind of created separate teams for different contract segments, different product applications requiring a different approach to all of that. We have resorted to talking to customers on negotiating and offering them some kind of settlements where they are able to bring in large installments. But all this is definitely going to be an effort on our side to ensure that the requirements are fully communicated to consumer. So it's also about [indiscernible] themselves to this. But as I said, as far as customer earnings, customer cash flows, customer overall business practices, are not going to have a dynamic change because of this changed approach. It will have to be initiated from our side. On the overall cost front, I think various actions that we have put in place have worked in our favor even at this enhanced level of business and at the enhanced level of collections, et cetera. We have still been able to retain our cost of operations to be around 2.7, 2.8x level. And once the volumes do pick up, I think we are a little invested into future in this. But once the overall volumes do pick up and the AUM starts to grow from here, we can definitely see the correction to this number further from where it is. So I think net-net, the point that we are making is that the business is kind of come back and we are seeing growth, and we will continue to see a growth trajectory, which will then lead to AUM growth. Clearly, collection efficiencies are holding up, and that will lead to asset quality maintenance and improvement in asset quality. And as was promised, we would see that 80% of the provisions [indiscernible] getting reversed. The investment in the people front, both in terms of their capability building and competence building is helping us productivity improvement, but also some specific actions on cost taken is yielding benefits of overall operating cost again down. There's a lot of efforts that have gone into the data and the digital front. We have a very large team which is working on it, and there is a core team looking at how the core business and what percentage and what processes of the core business could be digitized, and that would further bring in better improvement of overall cost going forward. But more than that ability to handle larger volumes into deeper pockets. Our [indiscernible] penetrate continues and we have identified to open another 150-odd branches during the year. And I think we will embark on that journey because we have identified several locations, which require a more closer availability to the consumer, which could help us gain further volumes and improve the overall collection. On the liquidity front, we have not had any kind of pressure point, sufficient funds have been available at a very competitive price for us. And that has helped improve the margin when it comes to our ability to borrow at a very, very fine rate. We are also sufficiently carrying liquidity buffer to be able to meet any challenges if it was to come. The pandemic wave 3 was little scary to start with. And there was this pressure on it's spreading fast and it could have a serious impact, et cetera. But I think the good news so far is that there has been no major impact out of the third wave. The branches are all up and working. People are all on the streets, able to meet the customers, customers are able to come to our branches. So all that is happening in a very normal manner, and the third wave has not had its serious impact, except in January. Of course in different pockets, different markets, there were some temporary kind of a pressure that was going through, but nothing in a continuity basis like what we saw in the second wave. So even on that front, there seems to be a better comfort. Overall, rural sentiments, I would kind of say that it is not still at its best. If we were to look at any past history and if we were to say, has the rural come back to complete normalcy, I think we would say it with a little hesitation that it has come back to full normalcy. But directionally, we are able to see quarter-on-quarter things look better. So far, there are no serious signals of things slowing down in a big way. Overall, people have become cautious and they want to acquire an asset or if they want to spend money on any kind of a consumption or whatever. People are literally cautious. People are holding back some money for their future, for sure. But it is far, far better than what we saw at the end of the second wave. So I think if at the end of -- if I had put rural 3 on 10, I think we'd be able to move the scale to say that rural is very clearly now at 6 on 10 or close to 7 on 10, but there is sufficient scope still to improve from where it is now that the schools are opening up. We are sure that the school bus operations will be some good, tourism centers are opening up, so that tourism will pick up. I think overall economic activities are big things to happen. I think we are seeing a lot of directional talk about mining opening up, coal excavation is beginning to happen. So I think all of this will contribute to the overall growth. So I still believe that there is sufficient action and activity on the ground to believe things will go positive. And we remain very positive to see that even this quarter, that is in our hand, we'll see it that way. The month gone by has been favorable month in all the fronts. And therefore, that will remain to be the trend is what we believe, and therefore, we could have a good quarter. We are very clearly reviewing the entire RBI guidelines as required. And as all of us know that the fourth quarter for us is always the best quarter, and we would see a good collection efficiency, a good NPA reversal and therefore, even under the IRAC norms, the gross NPA would stand correctly to a different level. And if there is a gap that we require to bridge by making any additional provision, we would be more than willing to do. As of 31st December, as you've seen, the provision required under IRAC and Ind AS as comfort, we are carrying a much higher provision in the Ind AS since we have a high coverage of [indiscernible]. And in the end of the fourth quarter, there is a [indiscernible] to take the IRAC number as per [indiscernible]. If you were to believe that will remain as it is, no movement whatsoever, then the worst-case scenario is that we may need to do about a INR 1,500 crore kind of a number, which we don't think will be the reality. We will see substantial reversal to this number happening as well. But I just still want to make a mention that all this rule change, et cetera, will require a revisit to how we do certain things in future. But the fact of the matter is that the customers' business, customers' way of earning, customers' way of engaging with vehicle they're developing these cash flows may not undergo any major change because of this. So I would stop here and then invite questions for us to be able to answer. I think the whole team is here, and therefore, any questions that you may have will be jointly answered by all of us. Thank you, and over to you.

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

Yes. Sir, my question on -- was on your last update that maybe in Q4, we are likely to take INR 500 crores to INR 1,500 crores of provision. So I just wanted to understand how this number has been arrived. Is it like INR 500 crore is the best case and INR 1,500 is the worst case? And if that INR 500 crore is best case, then why don't take it in this quarter itself. So what has been the thought process? And how this number has been arrived in particular?

Yes. So I will give you my comments and then Vivek can add to that. So what we have done is we have analyzed the NPA as of today, that is as of the December. And we have seen how many customers are seeing what kind of amount already. I mean these customers were to continue to pay in the fourth quarter. How would they be in terms of their overall repayment and therefore, how many [indiscernible] would actually come out of NPA even under the new guidelines. And [indiscernible] the level of gross NPA that we would reach by that better. And therefore, why consider a provision when we are able to see very clearly that they are able to come out of [indiscernible] carrying an excess provision under the ECL. So we would want to give it a complete try this quarter to reverse them, get them collected, even there could be settlements with customers. All of the actions will be put into place. Once that is done and then if there is a gap and if that requires any provisions to be done is what we would do. And that estimate has led us to believe that, at the worst, what it could be and, at the best, what it could be. Vivek, anything that you may want to add over what I said, you may please go ahead.

Yes. So you're absolutely right, Mr. Iyer. It would have been premature on our part to take any provisions in the third quarter. Because our attempt will be to reduce the NPA which we have [indiscernible] the market at about INR 10,900 crore as of December end to a reasonably lower level. And we're all doing the -- when we said this about INR 500 crores to INR 1,500 crores provision, this is in order to bring our net NPA as per IRAC below [indiscernible] so as to compare with the [indiscernible]. And therefore, we will definitely watch the [indiscernible] during the fourth quarter. And based on what we are able to achieve by the quarter end, we will take a necessary provision. That is the reason that we did not take any premature actions on this matter.

Okay, sir. So I'll put it other way. Unless you see a case where you can raise this 6% under IRAC norms without any incremental provision that is the INR 500 crores the lower end that you have mentioned. Is there a case wherein it is possible that you wouldn't have to even take that INR 500 crores also. And then it makes sense not to take in this quarter. Otherwise, if that is the best case, I think that should have been taken. So I wanted to ask whether such scenario exists wherein you would be able to reach the 6% under IRAC now without taking any incremental provisioning?

So that's a judgement call we are making because, as I said, when we look at how many accounts have shown movement in their repayment even though they are not able to come out of the NPA in this quarter. And the fourth quarter is the best quarter for us from the overall customer collection possibility and also we have aggressive programs of tackling it with the customer where we are negotiating and closing. And therefore, the call is that maybe if we reach the best case, there may be hardly anything required to be done. And therefore, like Vivek said, why take a jerk reaction rather than go through the process that we have put in place.

Okay. Okay. So the range that you are giving is on a very conservative basis that this could happen?

That's right. That's right. Like the INR 1,500 is that if nothing happens to the NPA that is today than what will be [indiscernible].

The next question is from the line of Gaurav Kochar from Mirae Asset.

I had just a couple of questions. Just continuing from where Sanket left in the previous caller. The total -- if I look at the provisioning and the difference that you've given between the Ind AS and IRAC norms, and you mentioned INR 500 crores to INR 1,500 crores as a number. So is that considering the write-backs that you're taking in the 4Q, about INR 500-odd crores write-back that you'll be taking. So is that net of that number? So on a gross basis, is it INR 1,000 crores to INR 2,000 crores? I just wanted to understand that INR 500 crore to INR 1,500 crore number. And if I compare that to the Slide #25, wherein you've given the breakup of IRAC as well as Ind AS, that number looks slightly on the higher side. So the difference in -- absolute difference of Stage 3 is INR 3,700-odd crores. So even if I do a 40% sort of PCR, that number comes to the higher end of the guidance. So I just wanted to understand that INR 1,500 crores or INR 500 crores, how has that been arrived at?

So Vivek will explain, but -- you're right, like a INR 3,000 crores, when I said that, let's say that today's NPA under IRAC, nothing moves in the next quarter, right? Then the high end is that INR 1,500 crore number. And we have made an estimate on how all what all can move and therefore, what can be the low and can be even avoid any provision requirement. So Vivek can explain the logic of what you asked specifically, but that's the way you need to look at it.

Yes, I think that is correct. The estimates that we have put out are based on certain assumptions of how we see the gross NPA by end of the year. And that's exactly the reason that we have given a range because we think today, it is difficult for us to predict what that number will be. But we wanted to be transparent with our investors and analysts, that's the reason that we are put out a range as on date.

Sure. So just -- I mean, any color on what is the kind of estimate on Stage 3 as at the year-end, which is resulting in only INR 500 crores. So is it 200 basis points, 300 basis points improvement in Stage 3. I just wanted to understand the base case, in case of INR 500-odd crore.

So I think our attempt will be to bring our gross Stage 3 to the same absolute level that we started the year with at the beginning of this year.

Okay. Sure. So Stage 3 at the beginning of the year, I'm not wrong, was 7%, sir, if I'm not wrong.

No, it was around 9%.

Okay, 9%, all right. Sure. That was one. And just 1 more question. Just wanted to understand the collection efficiency that you quoted for the quarter at 95%. So once an account becomes an NPA, do you still keep building that customer? How does that process work?

Yes, certainly. I think the account becoming an NPA and billing or not billing a very, very different matter. So the billing will definitely continue. And in so far as any account, whether in whichever stage it is, it takes into my numerator for calculating the collection efficiency. So collection efficiency is completely a subject matter of the current demand, which is the monthly demand that we had and the collections that we are able to make from the customer, both from the overdue as well as from the current demand for them.

Okay. The current demand also includes NPL accounts. So the denominator of 100 will include the NPA demand also. Is that correct?

Certainly.

All right. All right, sir. Sir, just in that context, I mean, can you throw some light on what would be the non-NPA collection efficiency? The blended collection efficiency is 95%. Just wanted to understand ex of NPL or ex of Stage 3, what was the collection efficiency number?

I'm sorry, but actual granularity, we do not normally publish any number. So I will not be able to share that.

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

My question is for Vivek. Vivek, If I look at the GNPA under the IRAC norms, it is currently around 17%, and the net NPA is around 12%. Assuming that we make another INR 1,500 crores of provision and gross NPA, so the IRAC doesn't change. The net NPA for IRAC still comes down only to 9.7% by the next quarter. So I just wanted to understand whether we are expecting -- I mean, I'm just trying to reconsult earlier to Mr. Iyer's comment that even if the GNPA doesn't move at all the maximum provision that we would need be only INR 1,500 crores.

So the way we look at it is like this, so our gross NPA is INR 10,897 crores, the IRAC required provisions for GNPA is INR 3,189 crores. But you would also see there is INR 1,877 crore of overflow that is the excess of Ind AS provision over IRAC provision. And if you are appropriating this number to the GNPA, that number comes out about 9.9%. And from -- because what is this whole idea of IRAC provision? The whole idea is that we need to be below 6% at net NPA level. And we also need to be adequately provided for on all the standard assets. So far as the provision required to meet both these requirements, if fully covered by the provisions that we are making under Ind AS, we should be good. That's how we are looking at it as of now. And then we have put out a number of INR 500 crores to INR 1,500 crores depending on the range of GNPA number that we should be able to reach by end of the year.

Okay. And this is helpful. And in this case, what we are saying is that if we appropriate this excess INR 1,877 crores. As of March, we would not have any excess provision over the IRAC, right? Then our Ind AS provision would broadly be similar to IRAC.

You're right. We would be adequately covered. And while doing so, we would be achieving 2 targets. One, in Ind AS, we would be below 4%, which was the regulatory expectation from RBI to bring that number below 4%. And as for the IRAC, we would be below 6%, so as to make the PCA norms.

The next question is from the line of Kunal Shah from ICICI Securities.

Yes. So on this moment of Stage 3. When we look at it, there has been INR 1,800-odd crores, which have got resolved. At the same time, there is huge net addition as well of almost INR 1,360-odd crores. So I'm not sure maybe how should one look at it? Because I think the last time it was quite contained, and this is not even the forward flow. So anything to read into this?

Dinesh? Vivek? Somebody is taking this?

Actually, I lost, if possible, if the question can be repeated.

Yes, Vivek. So I was just checking that in terms of the Stage 3 movement, okay? So obviously, that there is a revolution of INR 1,860 crore and there are forward flows of INR 340-odd crores. But still, there are net additions of almost INR 1,360-odd crores, and that seems quite high compared to that of what we saw in Q2. So is it because of some unseasonal rainfalls or floods or any particular geographic you will be paying because this net additions seem to be on the higher side.

No, I would not call any specific reason for this. It typically happens. And so far as the overall trend is decelerating, we should be okay with that. Because the business is like the business is all about Earn & Pay, so there will be customers who will enter, the customers who will exit. However, so far as the overall trend, which is what we have demonstrated that from 12.7% we have brought it down to 11.3%. And another thing is why there would have been addition in Q3. It doesn't mean that these guys who entered Stage 3 did not pay. So they have made a past payment [indiscernible] 50% of the exposure belongs to people who have done past payments during the quarter. So we don't want to read too much into it. This is business as usual, and this is how the Earn & Pay customers behave.

Okay. Okay. And maybe in terms of GNPA, so INR 10,897 crore is the current number. And for 6%, we need to get the net towards INR 3,800-odd crores. And I think adjusting for the outstanding provisions which are there even under Ind AS, we are somewhere around INR 5,300-odd crores. So that's where maybe at the upper end, we are saying it's INR 1,500 crores, which can sit even if there is no recovery, which happens in Q4. So that's the...

It's absolutely correct.

Perfect. And what could be this number of GNPA as of September and as of maybe net NPA, we have done some allocations from INR 3,200 crore to INR 3,700 so net NPA would have come up. But if I have to look at GNPA as of September, how much would that have been?

See the thing is, the daily stamping started only...

Yes. So you would have...

So the IT system capability was insured only from that day onwards. Other than that, we are -- the systems are not equipped to look at that data, to be very frank.

Sure. Now the only thing was almost 30% of Stage 2 is something which is getting classified as GNPA. So which is maybe much higher okay compared to what we are looking at for peers. So I don't know maybe is the collection efficiency out there quite comfortable because when we look at the difference between GNPA and Stage 3, that is almost 30% of our Stage 2 assets. So that seems to be quite high.

But I would say that, that is typically the nature of our customers. Our customers are -- many of them are first-time borrowers, they're Earn & Pay vehicles. Their cash flows are completely dependent on vehicles. So it is not unusual and that is the reason why Mr. Iyer, in his opening remarks, said that if you need to control the GNPA flow forward going forward, we may need to reexamine the kind of cohort that we would like to give loans to or we may have to make certain amendments to collect -- the way we collect from these customers. So these are the initiatives that we -- they're the initiatives that we will take. [Technical Difficulty]

Yes...

[Operator Instructions]

Am I audible now?

Yes, Vivek. You're audible.

Got cutoff for a minute. Did you hear me completely?

Yes, yes, yes. We heard you completely.

Yes. So that's perfect. So -- okay. And maybe even if like 20% of this comes back INR 500-odd crores in terms of the reversal of the provisioning then what will be required will get offset? Now would that be the way to look at it, the way that has been the write-back and maybe whatever is the write-off, that could be that hit to P&L in Q4, broadly?

That's right.

The next question is from the line of Piran Engineer from CLSA.

Congrats on the quarter. A couple of questions. Firstly for Mr. Karve, the net NPL ratio, we are targeting at 6% rather than 4%, is that right? And if so, why because then we can't pay out dividends, right?

So it is like this. There are -- these are 2 different ratios first of all that you are talking about. So 1 ratio is under NPA as per Ind AS, which is in the ECL terminal called Stage 3. So we are targeting a net Stage 3 below 4%, because that was the regulatory expectation from RBI. That is point number one. Point number two is the net NPA below 6% is as per IRAC and this is to comply with the PCA norms, which is the prompt corrective actions norms. And it is not only for the -- it's not just for the dividend. So it is basically to avoid any regulatory action or any regulatory interference from the -- I would not call it interference, but I would say greater degree of oversight from RBI.

Sir, I get that, but isn't the RBI norm, doesn't it take that if you had more than 6% net NPL in the past 3 years, then you have to get it down to 4% in order to pay dividend.

No. no. In fact, if you look at the extent regulations of RBI on dividend payment, they actually talk about 6%, they don't talk about 4%.

Okay. And just to clarify from an accounting perspective, this INR 1,500 crore to -- INR 500 crores to INR 1,500 crores hit is going to go through the P&L. It won't be like an adjustment to impairment reserve or any such sort of accounting adjustment, right?

No, it will be by way of a management over their provision.

Got it. Firstly, we did restructuring in 1Q, which had a 6-month sort of window where we pay lower EMI. I know it's too early to say, but can you talk about how collection trends from that restructured book has been, now that it has come out of the 6-month sort of moratorium?

So I think this is one area that we continuously monitor. As of now, we don't believe there is any reason for us to be very concerned about it. But this is an area that we will keep watching. And any curing that we do out of this pool will be completely a function of how do these accounts behave? Because possibly RBI has already come up with a formula wherein how the curing should happen. And we'd also watch the payment behavior of this customer. And accordingly, we [indiscernible]. In any case, by end of Q3, that is December 31, no curing has been there. So the only change in the structured accounts has happened either because the accounts have got closed or the account that natural progression has moved into [indiscernible].

Got it. And just lastly, if you could elaborate more about your collection war room, then how is it structured? How many people? Just some more details would really help. And if you've really changed some underwriting practices in the past 18 months, maybe in terms of LTV, maybe in terms of avoiding certain types of products or people because the idea is that once all of this is over, COVID is over and this year is done then on a steady-state basis, do we get back to [indiscernible] 2% credit cost? Or how do we think about, say, beyond the next 2, 3 quarters?

So I'll ask Raul to explain the collection war room and the credit parameter changes and how we're using data for better decision-making. Raul, you are there on the call?

Yes, sir, I am there.

Can you go ahead? Can you explain the war room concept and how we have set it up and what we are doing?

Sure, sure. So the collection war room, as you're all aware, was set up after Q1 and the objectives largely were to look at how collections can play a very active role in proactively seeing how the forward flows can be mitigated as well as recover as much as possible from the existing Stage 3. So how we've gone about it, we do have a large collection team. And this collection team has been enabled with a lot of data insights on how to create cohorts of customers, more visibility on how these customer contracts behave not just on minor finance but also how they behave on other lenders. And accordingly, each of these cohorts are dealt differently. So our whole collection mechanism, the way which we approach customers for even settlements and where we have to use legal tools, maybe, for repossession, all that is streamlined basis, this central nerve system that we created a corporate office. Having said that, the collection war room continues to operate with full [indiscernible] even now, considering we had committed as Mr. Iyer said to get back to our GNPA of last year that we will have to reverse significant amount of provision. So the collection war room, besides doing the whole collection activity, also is looking at incremental business, whether we are -- for example, a large number of our customers are using credit. So the way in which we underwrite these customers definitely have got revisited. We are looking at enablers [indiscernible] onboarding itself, and whether it is LTV [indiscernible], et cetera. All of that also is baked into our new onboarding.

Okay. And on the underwriting parameters or anything else did you change?

Sorry. Can you...

I'll request you to come back in the question queue for a follow-up question. [Operator Instructions] The next question is from the line of Karthik Chellappa from Buena Vista Fund Management.

As far as the increase in the Stage 3 is concerned, in IRAC compared to Ind AS of INR 3,674 crores, which is the product that is contributing maximum to this increase?

So this is across segment, Karthik.

So it's not like -- segment like tractor or something that's contributing maximum to this increase. There is no specific product category or segment, is it which is contributing to this increase?

I don't think so. Even in the past, we have explained. Our NPAs or our collections are more geographical impact rather than really truly product impact. Except, of course, when certain times, as we explained, the last 3 or 4 segments, which are not done well. So even within the increased NPA, you will see a similar pattern that you see for our basic NPA. It will not be skewed towards any particular product or anything.

Got it. And given that the increase has come maximum from Stage 2 to Stage 3, why have we taken down our coverage ratio on Stage 2?

Sorry. Are you saying we have taken our coverage down on Stage 2?

Yes, from 13.6% to 12.7%. So if you look at the reduction in Stage 3 loans and the reduction in provisions is actually slightly disproportional. But given that we still have about INR 500 crores to INR 1,500 crores of buffer, which you are expected in 4Q, why did we choose to reduce the coverage on Stage 2?

No. So there are 2 things here. So what we do is there is a quarterly [indiscernible] that keeps happening on the LGD and PD ratios, and this is a feature which is there on a quarterly basis. So based on that, there could be some movement in the underlying ECL model itself. That is point number one. And point number two, if any of the restructured assets have by natural progression moved into Stage 3. So while the coverage on Stage 2 will come down, but actually, as they enter Stage 3, the coverage under Stage 3 will go up.

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

Am I audible?

Yes, Nischint.

Sir, this is actually on the cost of funding. It looks like there was a sharp decline in the cost of funding with quarter. So just kind of curious what really happened? And what proportion of your total borrowings are linked to external benchmark?

Nischint, can I request you to repeat what you just mentioned...

He is saying your cost of funds have come down during this quarter. And what percentage of your borrowing is linked to the external environment linkages? And has anything specific happened because of which your cost of borrowing has come down? Nischint, that was your question, right?

Yes.

Vivek, should I go ahead and answer it?

Yes, please. Go ahead.

So Nischint, as you would have been noticing that we have an advantage of underlying assets, which qualifies for a PSL. So we continue to get a very decent pricing from the marketplace for our -- not only on lending PSL from the banking system but also a decent securitization deal which we have been doing very quarter. So that is definitely helping us reduce our borrowing cost. At the same time, overall market has been quite liquid and which also enabled us to continue to borrow at a very, very decent price. To your point on the -- the last point, what you specified, Nischint?

Linked proportion of...

Yes. Around 17% of our borrowing is linked to the external benchmark, which is either [indiscernible].

And in anticipation of rise in some of these benchmarks, have you kind of effected rate hike on the asset side?

So, not yet, but we are in the process of putting out our prices from the end of this quarter. We won't want to do it immediately because there is still an advantage of the overall cost of money. But as we start seeing the fresh borrowing starts to happen at a new rate, then we would also start pushing up our rate accordingly. Dinesh, maybe there is one more reason it could have come down if some of your past borrowings, which were high-rate borrowings would have matured that you would have replaced with a new borrowing at a low rate.

That's true. In fact, there is still a scope for us to continue to see that our cost of funds will continue to remain lower because our mix of borrowing, if you see our short-term borrowing continues to be at a very, very low. So incrementally, we have a scope to borrow through the short term source.

The next question is from the line of Mihir Ajmera from ENAM Holdings.

Hello?

Mihir, you're not audible. Mihir, may I request you to speak through the handset.

No, there's a lot of disturbance. Maybe we want to take the next question, then Mihir can come back maybe.

[Operator Instructions] The next question is from the line of [ Mahin Gupta ] from [indiscernible].

So this INR 3,700 crores extra that we are sort of showing, how much of this is coming from the impact of reversing the NPL upgrades versus the impact of daily stamping that we might have seen in the last 1 or 2 months?

Dinesh, anybody has got that breakup?

[indiscernible] between the gross Stage 3 and gross NPA, right?

No, no. He is saying that your [ 7,000 versus 10,000, ] the difference is coming from daily stamping...

On account of daily stamping only. Because these are the accounts which, as per our ECL model, not Stage 3, so in terms of their aging, they are below 90 DPD. But because they had touched 90 DPD and they have not come back to 0 DPD, they are being classified as NPA under the IRAC norms. Hope, I've been able to clarify.

Got it. But -- so what I wanted to ask is 2 things that over the next 3 months, would there be certain accounts which are 0 DPD right now or might miss -- look, the question essentially that I wanted to ask is that typically, in Q4, we see a lot of recoveries, a lot of NPL upgradations because people pay up. This time around, because of the NPL upgradation norms, will we be able to see the same sort of recovery that we have seen in the past Q4s?

So as far as the Stage 3 is concerned, you will see the same. But as far as the IRAC NPA is concerned, which is why we have taken the additional range of provision that we may have to do, in case they don't completely reverse.

Got it. And just to confirm, you said that the target is to keep net NPL at 6% and net Stage 3 at 4%, right?

That's right.

But wouldn't that mean that our IRAC -- that the total provisions that we hold under IRAC would be lower than the provisions that we hold under Ind AS. If you're keeping net NPL at stakes in Stage 3 or 4.

No, no. If you look at our Ind AS, I think we have a 50% to 53% cover, right. Under the IRAC, the provision norms are very different from the way the Stage 3 provision norms are under ECL. Vivek, is that right? You may want to clarify? That's the reason that IRAC will always be lower than the Ind AS requirement, right?

Yes, you're right. And also you look at it this way that as on date, we have an excess provision of INR 1,900 crores. And the estimate of INR 500 crore to INR 1,500 crore that we have put out is after utilizing the success. So we are primarily looking at a scenario that in order to comply with both the ratios of below 4% under Ind AS and below 6% under NPA. We should -- we may not have any excess of Ind AS over IRAC, but we will be adequately covered in the same time.

Got it. Sir, just if I can slip in one last question, and this is more sort of the business construct or a change in business that you're talking about to manage these RBI NPL norms. Now what I understand is that a lot of our cash flow is or the customer's cash flow is agri based. And I understand that banks when they lend to agri segments, they get to collect or they get to recognize NPLs in terms of cash crop cycles or crop cycles, logically because that is how the customers make money. So given this constraint, how are we going to be able to collect money on a monthly basis from the customers because this essentially creates a disparity between how regularly we will collect money from the same customer versus how regularly the bank needs to collect money and are we representing this to the RBI because this clearly seems to be [indiscernible].

If I may to attend that, you are right that banks can specifically do for their agricultural loans, which is crop loans so that they have a 365-day norm of even recognition of NPA. But when it comes to structuring loans to underline customers whose cash flows are dependent on agriculture, especially on tractor portfolio. Thereto, we are able to match the requirement criteria to mimic the cash flows of the customer. The difference only will be in the recognition of NPA, which banks probably, especially for their crop loans have a slightly longer duration to recognize NPA.

The next question is from the line of Dhaval Gala from Aditya Birla Asset Management.

Just 1 important question. If you could talk about the growth momentum...

Your voice is breaking slightly.

Sorry, am I audible now?

Yes.

Sorry. Just 1 question. If you could talk about growth momentum coming back with the improvement of pickup in disbursement, but last 4, 5 quarters, there is a lot of noise or stoppages in work because of COVID waves. If you could talk about what type of trend do we expect in the next 12 months when it comes to growth and pickup in disbursement and therefore AUM growth?

So clearly, if you see I alluded to this even in my beginning comments, which is we have started seeing gaining market share in almost all the OEM product lines. We are seeing definitely demand up there, and once the vehicle availability improves, we should start seeing growth continuing in the -- all segments that we are looking at, and we are very bullish about the pre-owned vehicle that is refinancing that is we are very bullish because the demand there is very, very high. We also see very clearly that the commercial vehicle pickup is beginning to happen, though slowly, but that will begin to happen. And last whole year, we had not done much of commercial vehicle lending at all. And with the revised product offerings to certain high-end customer at the rural segment, we are able to also get traction from high-end customers in rural through are smart branches and through our digital initiatives, et cetera. And our additional branch network that we are looking at to go about deeper. Put all this together, I think maintaining a growth of around 20%, 25% is very clearly visible but of course, subject to availability of vehicle, et cetera. The only area where we see there is a little slowdown at this stage is the tractor volumes. But as I said, we are even confident there that once the contracting segments do start participating in the tractor purchase that would also start adding up. So apart from the fact that 1 year, 1.5 years back, definitely, our focus was more on collection, one. Two, the rural was resisting and not adding too much of buying there that was adding to some volume drop that we had. And certain segments were not buying at all. And I'm very reasonably sure that once things open up, like you said, once the COVID is behind us and the tourism starts to happen, schools begin to happen, all those segments will come back to start buying vehicles, which are very strongly our segment of customer. So I think our confidence is high in terms of disbursement growth beginning to happen leading to AUM growth. It is something that we are very confident of. It's -- we are seeing it on the ground, things beginning to change, and we will watch it by the month, not even by the quarter, and we are already seeing benefits of that flowing towards us. Raul, anything else that you may want to add in terms of any particular geography product?

No, sir, I concur with you've covered.

So how strong disbursement growth should translate into AUM growth. Are you seeing the [indiscernible] repayment cycle also moving [indiscernible] to improve the AUM growth?

Sorry, what will change you said? I missed the word. I don't know if somebody else heard it?

What I'm trying to understand is that the strong disbursement that growth should translate into AUM growth as well in the coming years.

Yes, yes, it should. Because so far, the AUM has been a little [indiscernible] because their recoveries have been much higher than the overall growth that has been happening. Once the disbursement growth starts to happen more strongly even though collections should be maintained at a high efficiency level, but the net will start adding to AUM.

So you believe that 20%, 25% of disbursement growth in FY '23 is very much possible.

I would strongly think so because the market would support, I think what we have seen in the previous year is a large part of nonavailability of vehicle has played its role and run up to the next election next 3 years we would see buoyancy in rural and with infrastructure opening up and focus on various infrastructure projects. I think all of that will add to the rural consumption, at least when it comes to vehicles like pick up LCVs, the JCB kind of backhoe loader, these kind of products will all start doing well in the next 3 years. I mean, run up from now to the next 3 years.

Sir, just if I can push one more question. Your outlook on net interest margin and how are we placed in a point of view that there could be some slight increase in rate either by the regulator or the short-term rates moving up already to some extent. What would be our stance? And do we expect margins to remain stable?

So 2 or 3 ways of looking at this. One is we will continuously look at our product mix on the borrowing side to see how do we remain the most efficient and like Dinesh explained our assets do qualify priority sectors so the securitization routes do continue to give us the advantage of borrowing cost. Second is some of our past borrowings, which are actually high-cost borrowing. Even when replaced now, the current rates at which we would borrow would definitely be -- possibly be lower than the rates at which it has been average out in that part. So therefore, even though the current rates may slightly go up, it may not actually increase our borrowing cost overall. The third is once the borrowing cost starts to move, the market does allow you to price yourself for future lending also accordingly. And we have always maintained this stand in just about 15, 20 basis points go up, we won't change our lending rate. But if we do see that kind of a stance and we see 20, 30 basis points and go beyond that, then we will also offer new rates to the customer. And the last is, our focus is going to be a little higher also on the pre-owned vehicle financing, which comes as a different deal. And we have become -- once more we have become #1 financier for tractor, the tractor also come at a little higher yield. So that product mix change also will increase our overall yield at the lending level. Put all this together, I think, to protect the margins at which we are operating, even when the rates were to slightly go up, it's not our major worry at this stage.

Ladies and gentlemen, that would be the last question for today. I now hand the conference over to Mr. Alpesh Mehta for closing comments.

Thanks, [indiscernible]. Thanks, everyone, for joining. Thanks, everyone and the management for joining on the conference call.

Thank you.

Thank you. Thank you all for patiently listening to us. Thank you so much.

Thank you very much. On behalf of IIFL Securities Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.