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

Ladies and gentlemen, good day, and welcome to Mahindra & Mahindra Financial Services Limited Q1 FY '23 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 Limited. Thank you, and over to you, sir.

Thank you, Lizan, and good evening, everyone, and thanks for joining us for M&M Financial 1Q FY '23 earnings conference call. From the management side, we have Mr. Iyer, Vice Chairman and Managing Director; Mr. Vivek Karve, CFO; and the group financial services -- for the Group Financial Services sector; Mr. Amit Raje, Whole-time Director and the Chief Operating Officer; Mr. Raul Rebello, Chief Operating Officer, core businesses; Mr. Dinesh Prajapati, Treasury; Mr. Rajesh Vasudevan, Senior VP, Accounts and Vishal. Now without much ado, hand it over to Mr. Iyer for the opening comments and post which, we will have with a Q&A. Thank you, and over to you, sir.

Good evening, and thank you, everyone, for joining this call. Let me first kind of start from what we saw this quarter and what do we see going forward. I think after a very, very long time, we are able to see disbursements continuing to maintain growth. And this is the first time that we have seen the highest ever growth in the first quarter of any year in the past of a disbursement and even sequential growth. So that's one good news that we saw that the demand is holding up, the sentiments are positive. Inventory levels are going up, but it's still an issue from an availability perspective. But nevertheless, we clearly saw demand for vehicles, tractors, preowned vehicle in all the segments that we are operating. And also that given our deeper reach relationship with dealers, and are wanting to get into different segments in the rural market has helped us gain market share for almost all the product lines that we are in. So the disbursements clearly are a good positive from what we are seeing as a growth. I think also from an asset growth, therefore, we have now started seeing the AUM beginning to grow, which is after a very long time. And all the past -- recent past, you have seen our assets activity growing. But we have now started registering the asset growth, and this is contributed by an overall growth from all the products that I just dropped down. On the collection front, we again had good traction even in the first quarter. Our collection efficiencies were pretty good, I would think. And again, this is -- if you look at any time in the past, in the first quarter, we always have had pressure of collection leading to increase in NPA substantially. And very clearly, that trend has been beaten in this particular quarter. And one of the reasons for that is unlike in the past, we saw in this round, the economic activity levels were pretty high, the tourism was at its best, people movement was high. I think all of that definitely contributes to a better customer cash flow, which leads into a better collection for us. All of this put together, I would think that the quarter gone by has been a favorable quarter from our perspective. And I think we clearly see the trends going forward to register even a better trend from what we saw in the first quarter. This was not very contrary to our belief of what we thought would happen. If you kind of recall in the past quarters that we have been talking of, we've been repeatedly saying the rural sentiments have turned positive for us. We're seeing good customer cash flow, and therefore, our belief was that the growth would come back and the asset quality would hold up. We have taken some aggressive stand when it comes to repositions and disposal of vehicles, and that has resulted into a little higher provision on termination that we have done. And again, go back to the last quarter that we discussed of for some high delinquent account, the repositions were aggressively done, and we've been able to transact on those vehicles and liquidate those repossessed assets. But definitely, we believe that this is not what is likely to be as the year goes by because if we are today at 8% kind of a gross NPA number, we don't need to now resort to a very aggressive reposition stand. And also, it is prohibited by the fact that our Stage 2 has also come down substantially to what it was in the past few quarters. So putting all of this together, we are very confident on how it's likely to go forward in terms of asset quality, in terms of collection efficiency in terms of growth. As I said, the sentiments are positive. The contracting segment is doing well. Of course, it's a monsoon period. Therefore, you will see some drag on the contracting activity. But the good monsoon is also a good indicator of how the harvest is likely to be going forward. And therefore, we are very hopeful that even the festival season will be a buoyant festival season. We are preparing ourselves for taking full advantage of the coming-up festival season. And therefore, the second quarter would definitely be a positive quarter if the first quarter has gone the way it has gone, and that will lead into a good second half of the year, and which is where our confidence on maintaining the asset growth in the direction that we are seeing, maintaining the disbursements growth in the direction that we are seeing and therefore, the delinquent NPA numbers would also look very different from what we are already in. Putting all of this together, I would also like to write after a comment on how do we see the new RBI regulation that would come out from October that we need to follow. We very strongly think that the way we are seeing correction to our NPA, the way we are seeing the overall collection efficiency is improving. It may not be very relevant to look at what the number looks like now because what is more relevant is how do we end the second quarter and how do we open up the new account going forward. Our belief is that even if we think a forecasted increase of 2% NPA was to happen to the IRAC numbers, we may not need to have provisions to be made at a higher level given the provisions that we are already carrying. We have taken an aggressive stand to maintain higher coverage. I think we're currently at about 58-odd percent coverage, and we would continue to maintain that level of coverage in our Ind AS and therefore, the confidence that we may not require to make substantial provision going forward is where we come from. But on an overall basis, I think the sentiments are very, very positive, and I've been repeatedly saying that we believe for the next 3 years, it's the rural geography to watch for growth. The opportunities would be phenomenal. The infra, as I said, is opening up in most of the geography. Monsoon is even though it was a little delayed in UP, Bihar, Jharkand, et cetera, but it does caught up. And normally, these states do get monsoons a little late, but it was not anything to be overly worried about. Now it is really a widespread monsoon, and I think that should to be our advantage as we see the festival season open up. On the cost of funds, definitely, we have seen increasing trend on the interest rates. We have taken one price increase of about 40 basis points or so on product. But as we repeatedly say, we will watch this space. We'll watch this space very closely, and then keep increasing our rates by geography, by product at different points of time. And I think we would catch up over a period of time, even through the increase in price. But it will also be an outcome of a certain product mix change as we see preowned vehicle demand being high, that comes at a better yield, tractor demand is picking up. That will come at a better yield. Putting all of that together, some correction to the niche will happen through product mix change. Some will happen through the lending grade passing on to the consumer. But even if we were to retain some rates for some high-end customers, that will be more than offset by a low operating cost for such customers and a very low delinquency from these customers. So therefore, at the ROA level, we may not really have much pressure because of the borrowing cost increase. And even our borrowing cost increase will not all happen at a time, it will definitely happen over a period of time as our cost liability begins to mature. So I would think very confidently of the growth back to disbursement growth happening on all fronts. Clearly, the AUM growth, therefore, beginning to happen, asset quality well under control and our ability to maintain high collection efficiency should all lead to a better profitability and better return on equity as we pass through the quarters ahead of us and as we close the year. No pressure on liquidity. We've been sufficiently, we are, of course, backed up with our own 3 months stock of liquidity even if we were to face any emergency situation. But even otherwise, as we look at the market, we don't have any pressure on the liquidity front. And as I said, on the interest fronts, we are more than preparing ourselves to absorb some and pass on some. Putting all this together, I think we believe the year ahead for us is very, very positive. And if we were to look at the next 3 years ahead of us, we would feel very confident and comfortable about the way we are structured. We are investing sufficiently in our technology space, in our data space, and I just want to take you back to the project on the transformation agenda that we talked of in the March results call, where we clearly set out on how we look at the next 3 years. I think the program is well on course on each of the front. We have taken a very deep dive understanding and initiatives are put in place. And our promise that in 3 years, we want to almost kind of double the balance sheet, seems to be on course in the direction, and we are already seeing the beginning of growth happening. And we are confident that in the 3-year space that we have set for ourselves, we should not lag behind on that strategy clearly. On our various new initiatives, the first one on the leasing front. Definitely, we have seen good traction from the institutional requirement, more so for the CTC car, et cetera. On the retail, we are a little cautious. We want to make sure that we understand the residual value pricing correctly. And as we put in that in place, you would see us also in the retail space taking a better participation. But definitely, leasing, we believe, is a future product, and we see good traction in that front. In as far as our small ticket loans, consumer durable loan, the digital initiative is concerned, that, again, is now well set. The states that we operated in have given us some insights, and we have brought in all those inputs and made necessary adjustments to the product design that was required and it is now beginning to pick up. It's too early days to say what the number will look like during the year. This year, we'll still be setting it up and growing it in a direction. But in the 2, 3 year pace that we are talking of, this will become a very key vertical to really participate on. If you recall, we had talked of new verticals that we would begin mainly also looking at SME and loan against property as the two growth engine possibility. On the SME front, again, we have seen tremendous traction from the Mahindra ecosystem, from the overall auto ecosystem. And we are doing pretty well, both on the working capital support of discount being backed up by the OEM support as well as on the expansion programs of the suppliers. And we would see a growth of this business scaling up well during the 3-year period. This year itself, it should do, at least about INR 2,000 crores or INR 3,000 crores very clearly as a book as we move along in that direction. As far as loan against property is concerned, we are first setting it up. We are taking -- putting a team in place. We have not yet begun any disbursement in that front. But I think before close of the year, we would come back to all of you and tell you how we are setting up and what is the real program. So that's not something which will add to any disbursement during the year. But SME for sure, would add. Leasing and Digital Finco again, may not be volume disbursement this year, but will add up in the following year. But clearly, market share growth, deeper penetration, new segment of customers from the rural and semi-urban segments, what we call as affluent financing, all of that will definitely add up to the overall growth. Fortunately, we are seeing growth potential from all fronts, whether it is in the auto front, whether it's in the car front, whether it's tractors, commercial vehicles, preowned vehicle. In all the fronts we are seeing good traction and good positive demand that we are seeing very clearly. And that gives us confidence that the festival season and run up to March closing will be an excellent 6 months to watch for. Putting all this together, this is where comes our confidence of what we think the year will look like and what we think the 3-year strategy that we put out would look like. I think we are very comfortable to make a commitment that we are in line with our commitments that we made earlier and we believe that we would be able to achieve those targets as we have planned for doing that. I would stop there and then invite questions from all of you. I think we will then holistically cover what the intent and the direction is. Thank you.

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

I have three questions. Sir, my first question is on provisioning. So how do you think we should look at provisions? So you did say that your Q2 -- I mean, you had an aggressive repossession policy, and a lot of it may be behind us. So how do you look at provisions of credit cost? Could you then forecast in the next few quarters that if the macro environment remains as it is to be, then your next quarter's credit cost would be [ INR 700 crore ] minus your repossession losses? So say if you're repossession loss is INR 300 crore odd, maybe it comes down to INR 50 crores to INR 100 crores, and then we're looking at a INR 400 crores to INR 500 crores run rate of provision because that's the most confusing part right now, on how you -- I mean how you could forecast your provisioning, also given the transitioning? Yes.

So let me clarify this question to you before you go to your second and third. I think very clearly, today, the credit cost, taking all the elements of provisioning as well as termination loss and disposal loss, all that put together, if they are at about 3.2, 3.3 type numbers, we would clearly see at least a 1% correction to this number during the year because this is not the same level of repossessions that we will be required to do in the future quarters because this was required to be done from the level of NPA that we were in. And as we were correcting it and as we saw the COVID impact on certain segment of customers who either wanted to surrender the vehicle or move out of the business, we did resort to settlements, we did resort to taking back of the vehicle. I think those elements are all done with. So clearly, one should look at ending of the year as we pass through the next 2, 3 quarters, you would see this climb down, at least by 1% from where it is today.

Okay, sir. Got it. And sir, my next question is on margin. What do you -- how do you see the outlook on margins?

No. So as I said, fortunately, the entire new borrowing cost is not going to impact us almost immediately. It will impact us over a period of time. And we would catch up by our lending rate movement as well. As I said, we have already passed on 30, 40 basis points through our lending rate. And we would continue to watch that space and keep increasing the rate in line with the borrowing cost increase that we are witnessing. So truly, I don't think we should have a huge pressure on the margins as far as through the borrowing cost is concerned. But you will see some compression of the NIMs happening because there is also a product mix change that will happen, which means when we get into a little high-end customer, definitely, the rate at which we do business with them, the yields will be different from other segment of customers. But that should then kind of reverse back itself through lower operating costs and a lower delinquency. So you may see some compression on NIMs coming through a product mix change, but it will also be, to some extent, offset by the change in the, what we call, preowned vehicle financing or tractor vehicle number going up. So put these two together, we should see itself offsetting to some extent. And the borrowing costs, as I said, would be offset through lending. There could be some lags for sure. We can't simultaneously pass on all borrowing cost increase unless the market responds to it in some form. So there could be a quarter or 2 lag effect will be there. But if you were to look at the year-end number, you may not see a very different NIMs number from where we are.

Got it, sir. Sir, and my last question is you are seeing good growth traction right now. You said actual season will be good. So that's one part of the story. And on the other hand, we are faced with a global macro slowdown. But given the segments you are in, those remain unaffected by that narrative, correct? So you would -- the growth outlook for the next 3 to 4 quarters, or say 3 to 5 quarters according to you, should be good enough coming off a low base of COVID?

Yes, surely. We don't see -- as of now, we don't see any reasons to relook at our disbursement targets. We are pretty confident that -- let's not forget that surely, there will be a price increase from OEM, which will come through in the next couple of quarters and that would be an added support to the overall disbursement number. The first is we don't see any volume pressure that we will not be able to get those numbers, and inventory levels are improving and the demand is definitely positive. Add to that, there will be a price increase from OEM, which will also be a good support to the increase in the overall disbursement. So we -- at this stage, we are not really looking at reversing our number downward on the disbursement.

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

Had a few questions. A couple of them relating to the medium-term strategy, right? So first, when we talk about NIM compression due to product mix, is it a customer mix or a product mix? And when we speak about rural affluent category, I believe the yields are closer to 10% versus our current book is of 14%, 15%. So how does one expect the overall yields to trend over, say, 2 to 3 years and also the near term? That's the first one. Second one is on OpEx. While we have talked about reaching OpEx of 2.5%. Currently, it was elevated and much higher than expectations even in the quarter at 3.2%. So what is the cost efficiency measures that we can undertake to bring this back? Thirdly, the question was also relating to housing business, where we saw -- again going up from 11% to 14%, 15% in the quarter sequentially. Any color there? And last question is on the deposits. So we have seen last 4 to 5 quarters of sequential deposit contraction. So is there any rethink in terms of how we want to set up our borrowing mix? Or there is more to it?

Okay. So I will try and answer them, but I don't know if I would remember all four questions. First is on the NIMs. Clearly, when you ask whether it is product or customer, I think, first of all, it will be a customer because when we look at affluent financing, that is high end customer of rural, that's one from where we will get little pressure on the yield. Like you said, they are low yield, but they are not going to be a very large number, which will change the whole balance. The other element of the mix change is the product mix change, which is when you have a higher disbursement in preowned vehicle disbursement in tractors, they are definitely high-yield products, and therefore, that will give us an advantage of the margin improvement and not margin shrinkage. So therefore, you must look at it from both angle. One is there is a segment that we are adding, which is a low-yield segment, but that's not a very large number in disbursement. And second is the product mix change, which will definitely be a beneficial product mix change when we do preowned vehicles as well as tractor a little more than what is happening now. So that's on the product front is concerned. The second on the OpEx cost that you talked of. We have sufficiently invested, and there are definitely some advance investment that's happening. When you take people, when you invest in technology, all doesn't come off immediately in 1 quarter. But if you see the way the asset is growing and the disbursements are beginning to happen, you will see definitely this cost climbing down with the asset growth happening, and we are not proportionately going to keep investing more and more. Only cost that will keep coming for the growth will be the variable cost, which will be directly proportioned to the disbursement that is happening. But on the fixed cost front whether it is on the people front, whether it is on the technology investment front, et cetera, I think we would have more than done enough for gaining the growth that we are looking for. And which is where the confidence that if the asset starts to grow well, and even if it goes up to a 15%, 20% kind of growth over a period of time, we don't have to substantially invest to achieve that, and that's where you'll start seeing the cost coming down. So far as the housing NPAs are concerned, that's typically the business where first quarter increases happening, unlike in Mahindra Finance, where we -- the trend changed because of the earning assets doing better, whereas the housing assets are still dependent on their different sources of revenue, which is more farm-related revenue, et cetera. And therefore their trend couldn't change in the first quarter. And the similar trend of what we have seen ever in the past continue to plague them even in this quarter. They will also correct themselves in the third, fourth quarter, like typical correction that happens. But they are -- in spite of that, we are at an elevated level. They are also looking at their book very, very closely. And we will take some very aggressive corrective stand on settlements with customer, et cetera because what we have seen is the last 2 or 3 years that whatever businesses that have been done, they are at a much, much lower level of delinquency. Some of these delinquencies are struggling with -- of our very initial base when we set up the rural business. And it was kind of an experimentation that we were doing on the low-cost lending there. And that got us some quality issues, and therefore, a close look at that and some corrective actions will be put in place, and you will see that happen in the next 2 or 3 quarters. On the deposit front, Dinesh, Vivek, you may want to take this question, please?

About the borrowing cost rate, sir?

Yes. No, he asked about the, I think, fixed deposit. I don't know. You asked about the total borrowing mix and the...

Yes, sir. So the question, Vivek sir, was pertaining to the absolute levels of deposits in the balance sheet that has been coming off the last 4, 5 quarters. So is that intent, a planned reduction or there is something more to it?

It is not a planned reduction. So fixed deposit is they continue to be an important source of funds for us. And we have recently taken up our risk also in the fixed deposits by almost 70, 75 basis points. And therefore, we expect the flows to start ticking on again.

And any reason why it was contracting for last 4, 5 quarters?

No. So during the COVID period, there was accelerated deposit flow in the FD. And as this COVID situation eased out, because of the rate remaining competitive at a marketplace regarding the flow in the FD reduced which led to a drop in the FD deposit base. However, as we now once again, have started raising the rate, we believe that the flow will start improving further going forward.

Also what happens is every also -- needs to compete with other sources of money. The other sources of [indiscernible] are available in [indiscernible] -- we would remain selective on increasing our FDA. But with the inflationary pressure, which is seen across the sources of funding, we believe FD should start increasing slowly as the share in the overall borrowing mix.

Got it. And just one last clarification question for Iyer sir. In your opening remarks, you mentioned that to comply with the RBI norms, we may not need to take substantial provision. So in the last quarter, when you mentioned we may need additional INR 500 crores to INR 1,500 crores of provision, so how do we reconcile between the two? Now are we confident that we may not pay any additional provisions?

Little premature to make the comment, but when I said we may not have to take substantial, so you can discount that the INR 1,500 may not be the requirement for sure. And then as I told you about the example, if you were to go up in NPA only by 2% and if you have to maintain a net 6%, if you compute it, you will see, we are not required to make any provision because we are carrying substantially high provision in the book already. So our endeavor is to make sure that by September, we do bring down these NPA numbers to a much lower level. and therefore, ensure that the requirement of provisions are very, very limited. But I think if you give us some time to get a much better color, maybe we'll do a specific call sometime in September to even let everyone know how things look like. At this stage, our projection is that we may not be required to take a very high hit in the last quarter.

[Operator Instructions] The next question is from the line of Abhijit Tibrewal from Motilal Oswal.

Sir, again kind of a question on asset quality and the write-offs that we will take in. So while we kind of keep saying that some of ECL provisions on the balance sheet has been kind of coming down, but large part of the P&L credit costs that we've been taking over the last few quarters has been because of write-offs. So you've already taken around INR 4,700 crores of write-offs over the last 2 fiscal years, which is FY '21 and '22. And this quarter, we had another INR 570 crores of write-offs. So basically, is there a way to give some kind of a guidance on what kind of write-offs that you are expecting maybe in this fiscal year? That's one. And secondly, sir, I mean, from what I understand, we have not implemented the RBI NPA circular as yet in our books of accounts, while I mean, everyone else has done it. So don't you think that given that we've not implemented it, customers have not had the time to kind of test it to the new RBI NPA norms? And you'll probably have to go through the same grind again to discipline them to kind of tell them that they need to kind of pay their installments on time. And sir, lastly for Mr. Vivek Karve, what is the quantum of increase in portfolio borrowing costs that you're anticipating, maybe for the remaining 9 months of this fiscal year?

Okay. So far as customer education is concerned, right from the time the circular has come, we have already on the job. And we are continuously communicating to the customer, meeting the customer, and we are seeing definite movement, positive, in the direction of the ability to collect on or before that due date kind of a situation. . So for a time, I don't want to comment on everybody has moved to this some comment that you made, I'm not too sure, but that's not a point of debate at this stage. But honestly speaking, when you need to do it only from October, moving it now, it does not really make any big difference or sense because at the end of the day, 30th September, whatever will remain in your NPA is the one which you will have to collect all installments before they can come out of NPA. And from 1st October, you must make sure that your forward flow is substantially arrested. So if you look at our efforts and see it from the Stage 2 number, you will see that there is a continuous improvement to the Stage 2 that is happening. And we would like to keep a Stage 2 improvement continuing so that we are able to hold customer at that level and not allow them to forward flow. The challenge in the new circular is that when you allow them to become an NPA, you can't reverse them unless you collect all installments and bring them to zero. So therefore, the education, the effort, the internal systemic change, all of the contract allocation to free the executive for collection, all of that is aimed at ring-fencing the contracts from a forward flow from Stage 2 to Stage 3. So that is where the confidence that we have to believe that's why we may not be required to take a higher provision because we, I think if I'm not wrong, in the first quarter last year when we ended, we had a Stage 2 level of upward of 19-odd percent or so. That we have brought it down to now close to about 12% or so. And our endeavor is to keep taking it even lower so that we have a much lower problem to begin with. And similarly, from a gross NPA perspective, if we are able to bring it down to a level lower than where we are, then that further reduces our problem to address this. So you must please look at it from the efforts reducing what kind of a result and therefore, the confidence as to why we would not be required to go in that direction. And as far as your write-off question is concerned, we've made this statement even in the last year's last quarter, et cetera, that we have accessed various customer segments and someone who have been severely impacted because of the COVID and if we think that it's difficult for them to move out from where they are, we have taken a view to make a provision like we moved our -- if I'm not wrong, 100% provision thing, to 18 months and below. And we are continuing to move in the direct element in this quarter. So in this business, to take a higher provision and remain provided for, especially when you have substantial capital support as well is always a good thing because then you can put more efforts through a specific action around these contracts and you can have better recoveries happening. Now to your point of first quarter, if you have had some INR 500-odd crores provision, is that the same number we are going to look at in each quarter? A clear answer is no, and I think someone asked this question even in the first round. And our answer is very clear that we don't need to resort to same level of repossessions that we had in the fourth quarter and the first quarter. That's not the kind of number we will need to look at for the next 3 quarters. And therefore, you will see a lower provisions that we will be required to make on the front of write-offs. And you will also see some recovery that is beginning to happen from all the provided accounts. That will be a good net off that will be available to look at. On the third question of funding, I think Vivek, you will take it?

Yes. So it's a difficult question to answer because it also depends on what further action does RBI take. But our assessment is that compared to the levels of the weighted average cost of borrowing that there as of 30th of June. For the rest of the 3 quarters, we may see maybe a 50 to 60 basis point increase. But it is completely a function of what actions does RBI take from here onwards, which also is, in a way, is also a function of how we would react.

So sir, this 50, 60 basis points is assuming there are no more reported hikes?

No, no. This assumes a further reported hike. So right now, the repo is about 4.9. We are expecting at least a 50 to 75 basis increase, if not in one shot, but be at least in a couple of tranches.

So assuming another 50 to 70 basis points increase, we are expecting weighted average portfolio borrowing costs to increase by 60 to 70 basis points is what you say?

50 to 60, it's a very ballpark estimate I'm sharing with you.

So we have some advantage of ECL. So we have factored that. And based on that, this is what is the estimate.

The next question is from the line of Nagraj Chandrasekar from Laburnum Capital.

My question is on the SME book. The book has grown around INR 1,500 crores, while the disbursement is around INR 700 crores, INR 750 crores quarter-on-quarter. So is there some reclassification here, SME and other parts from the book?

I will not know. Dinesh or anybody can answer? Is there any reclassification?

No, because SME and others is also -- there are elements of our Digi Finco business elements of our leasing business will all be there, right? The green discounting disbursements are also not counted there.

So maybe somebody Vivek or Vishal can provide the number separately later?

Yes, that's what I was -- supply this information offline to you.

And sir, regarding the write-off, do we have a specific criteria for pricing of a loan against providing for the saving? Or how does this happen?

Yes, yes. So it is a board clear proposal. Vivek, you want to explain how we have move from 36 to 30 months and want to 100% provision on 18 months and whatever.

So we have a Board-approved policy. And as per the Board-approved policy, any exposure whether alive or mature, which is outstanding for more than 36 months overdue is an exposure which is written off in the books of accounts. Of course, it's a technical write-off. We continue to put in all efforts to recover money from these accounts, which are written off. And this will definitely -- once you hit it off then it will form part of the write-off line item. And as Mr. Iyer also alluded to 100% provisioning that we have done for all 18 months plus dpd contract, they continue to be part of the gross NPA we are fully provided for. And the 100% provision that we carry on this portfolio is nothing but the overlay that was going on the balance sheet.

And could you give the NPA numbers as for the device RBI? I mean you had implemented it, but...

Do you want me to take this question, sir?

Yes, please go ahead. Yes.

Yes. So there is a reason why we have not disclosed it because as you know, these provisions will become applicable on the 1st of October. So therefore, what is more relevant is the situation or position as on that particular day. And as Mr. Iyer said at the beginning itself that we have already initiated efforts to control these NPAs. And we believe that the favorable outcome will reflect in a much reduced level as on 1st of October. And therefore, number as on 30th June is a very theoretical number, and that's the reason we have not disclosed it.

So given that can we expect further write-offs for a least 1 more quarter given that we like to get that NPA number reduced?

So as I mentioned earlier, our write-off policy is a Board-approved policy and it's followed in a very clinical way. So the RBI NPAs are those NPAs, which become 90 dpd probably come back below 90 dpd, but have not paid all the over-dues and hence, they need to be reclassified as NPA. So there is a difference between the exposures that we are writing off and the IRAC NPA. Hope I'm able to explain this.

Basic question was effectively for what will rise on a -- as on 1st October, we'll have to limit -- reduce the number of -- GNPA number of the lowest amount, right, because those accounts will be hard to get back towards new normal. So there it is logical to have some exit write-off to get that number lower at that date?

No, that's what I'm saying. So it is not about write-off. It is about controlling those over-dues and trying to bring them to zero dpd. So no overdues.

Just to explain to you, if you are willing to take the write-off then we can as well make provision under IRAC also. So that's not the approach. So it's not about taking it off and keeping the NPA load. It's about having a correct level of closing NPA by efforts of recovery, repossession settlements, whatever that we will do. We just write off and bring the gross NPA down once the problem in just keeping it as an IRAC making the provision. The effect in the P&L is the same. So that's not the approach. The approach is to efficiency-wise, do better collections from them, settle accounts with them, repossess and settle with them if necessary. But more importantly, I'm reemphasizing, more importantly, under the new rule, you should have many, many contracts moving towards Stage 2 and Stage 1 and control them there and not allow a forward flow. And which is where the confidence of high collection efficiency, which leads to reducing Stage 2 from what it was to where it is today and increasing our zero bucket and Stage 1 bucket. That is the attempt that we are making. And which is why we keep emphasizing that putting out a number now will be very theoretical. Once we finish with these actions as we reach September, I think they'll be much, much clearer to say what it will look like.

[Operator Instructions] The next question is from the line of Manan Tijoriwala from ICICI Prudential AMC.

I have a couple of questions. I hope I'm audible. I was just running the numbers. So the SME business has seen a decent bump up. So basically, what exactly is the sale of the lending that we do under this segment?

So I think Raul is on the call, he will explain to you in detail, but we stick to definitely the overall auto agri ecosystem when it comes to CapEx and things like that. We have looked at build discounting opportunities from the Mahindra ecosystem and similar like Mahindra ecosystem, as well as we have just about started some lending to well rated NBFCs refinancing a very small portion yet. But Raul, you are there on the call?

Yes, yes. I'm there on the call.

Can you take this call with more detail, please? Yes.

Yes. So thanks for the question. So the SME composition includes like Mr. Iyer said, we have the traditional short-term loans that we classify as business and retail enterprises, and this is largely done in the auto, ancillary, food, agri, processing and engineering space. We continue to do that, and we have increased our distribution. We were, in fact, not in many branches where we also offer our other auto products. So we have increased the strength of our SME team and a large amount of the growth we are seeing because of increase in manpower and distribution capabilities. Second is our build discounting volumes have gone up quite decently, and that is largely again on the auto entity and within the M&M ecosystem. The third business, which we recently started and Mr. Iyer alluded to at the start, the LAP business. We have the policy in place now when we've just started in Q1, which has seen some encouraging volumes pick up, it's again secured business. So that's a business which is incubated. And lastly, we have a line of business which is very well-rated NBFCs. It's a new business, which has just started right now, very small steps here, too.

So this does not have any component of the new businesses that we are talking about here, right?

Sorry, I didn't get that.

The new businesses that we are discussing, so they don't form a significant part of this portion right now.

These are all our growth engines and all of them are kind of adding up because, as I mentioned, our organic businesses also volumes have started to sequentially increase because of the investments we made last year, we started investing in Manpower last year. And that volumes are starting to show now in Q1.

Fair enough. And sir, one question on the tractor segment. What would be the average bid in this segment? And do we -- what is the collection frequency and in the -- how is the [ ENI ] selected?

Yes. We don't publish yields product by product. So I'm not going there. When you talk about the collection frequency, we have a decent pool, which is on a monthly MI. And wherever we give wherein the cash flow from the customer is largely linked to a crop pattern, we do factor that and have a 3 to 6 monthly interval for repayment.

Great. And sir, just 1 last question. So on this IRAC provision was the Ind AS provisioning when we will come to the date when we have to compare and figure out how much provision needs to be done additionally, if at all. So it will be compared on the entire stock of provisioning under Ind AS versus IRAC? Or do you think it should be under the Stage 3 versus the NPA provision that will be compared?

It's a gray area. We will have to look at both and then wait for regulators to respond.

Okay. Fair enough. And sir, so basically, then in December, you had disclosed the difference between your IRAC GNP and the Ind AS Stage 3 was around 6 percentage points. Do you think this number should come down meaningfully, the spread between the two?

Yes, yes. We are already seeing that -- see, that's why I said it is not meaningful to put out anything now. I mean on that day, even our normal gross NPA was much higher, right? That itself has come down now to 8%. So you will see a simultaneous reduction in the gap going down as well.

Right. Fair enough. So it could be fair that this 6% would even half as a difference between the two, right?

Yes. That's why again and again guiding everyone to look at the Stage 2. See, the Stage 2 was very high. One would always imagine that the forward flow from there will happen. As you see, due to collection efficiency, Stage 2 reducing continuously gives all confidence to believe why this gap should be much lower.

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

Just a couple of number clarifications. Firstly, was there any one-off in this -- in interest income this quarter? And it's not in adjusted for the interest reversal had last quarter, why has the top line declined when the loan book has grown?

So Mr. Iyer, if you're okay, I'll take this question?

Yes, please. Go ahead. Yes, yes.

Yes. So your observation is correct. But you have to look at it in the context of the extent of reduction in the gross Stage 3 in Q4 and a small increase in the same Stage 3 level in Q1. So as you would know that when there's a reversal in Stage 3, on the net basis, the interest rates accrued under Ind AS, so which got accrued in Q4. And because there has been a marginal increase in the gross Stage 3 in Q1, to that extent, there would have been a reversal of that income in Q1. So these are running in different directions. And that's the only primary reason why you will see a movement of about INR 100 crores after you adjust for the excess interest hit that we took in Q4. However, at the core level, which is at IRRs that we charge to the customers on a portfolio level, there has not been any material difference between Q4 and Q1.

Sir, just to clarify, the write-back will be 3 months worth of interest?

Yes. But you should look at the extent of the reduction from December last year to March last year, that was quite substantial.

Which was INR 1,000 crores. And if I assume an average yield of 15%...

No, it was -- it was almost INR 2,700.

From December...

From December '21 to March '22.

Okay. Okay. But under Ind AS, anyway, do it on the provision, right? You don't do it on the entire...

No, we have to do it on the net bases only.

On the net, right, exactly. Exactly. So only on the provision. So the provisions have declined by INR 1,000 crores. That can't lead to INR 100 crore quarterly interest income...

So it doesn't work that way. So maybe we can take it offline and we can explain to you, but that's the primary reason there.

Okay. And my next question is just on an absolute basis, can you help us out to model OpEx for the rest of this year? .

What model?

OpEx.

Absolute basis, it will be difficult, but we can give you the guidance on OpEx as a percentage of the loan book. And that is something which we have already stated when we had met after the Q4 results wherein we said that you can expect a slightly elevated level of the OpEx in and around 3%. I think that's what we had mentioned.

But that really means if we reduce OpEx or loss because you are already north of 3.5.

Yes. So there are already some phasing issues balance sheet. The balance sheet growth to that extent will also act as a hedge against the pricing for the higher percentage in Q1. So there are upfront investments we make in Q1. So there may be one-offs which may not have been incurred in the rest of the year.

Okay. So you are confident that the 3% target will be met on the year?

The only way I would like to put it -- the only way I like to put it is for the further growth of book, we don't need to incur any substantial additional cost. If any, there'll be little variable cost that will come with volumes. But all the required fixed cost, whether it is for branches, people, technology, all of that would have been almost incurred. So therefore, the growth of book will not come at the same proportionate increase in cost that we'll continue to have.

[Operator Instructions] The next question is from the line of Nidhesh from Investec.

There's two questions. Firstly, on the IRAC norms, so when we move to IRAC GNPA from 1st of October, will it be on incremental basis that the loans, which will slip into 90-plus post 1st of October, only those loans will be -- there will be differential in GNPA plus Stage 3? Or it will be on the stock of book? That is the first question, sir.

Mr. Iyer, do you want me to take this?

Yes, please go ahead. Yes.

So it will be like this that those NPAs, which are 90 dpd plus as on 30th September will continue to be called as NPAs under IRAC until such time, all the overdues are repaid. So that is the first part. The second part is, those exposures which are below 90 dpd as on, say, 30th September, and get into or slipped into 90 dpd plus on 1st October, the moment that happens, they are tagged as NPAs. And they are upgraded if and only if all the overdues are easing. Today, that is not the scenario. Today, the moment it comes below 90 dpd, they move out of NPA. But come 1st October, they will have to remain in that NPA bucket.

Which means the starting number as of 1st October is the -- was Stage 3 and GNPA IRAC to be same 1st October and then it will diverge over a period of time?

You are precisely right.

Secondly, sir, if you look at the write-off number over the last 5 quarters -- I mean last 9 quarters, sorry, after I COVID, it has been almost 8% of the book has been written off. If we compare that performance with, let's say, some of the unsecured lenders, they've also seen some similar on 8%, 10% of the book being written off during COVID. . So how can we -- how do we think about this? Should we expect significant recoveries from the write-off pull in the future because operating in a secured segment is not leading to significantly different outcomes versus unsecured segment?

I couldn't hear fully -- I got cut in between. What was the question? Sorry. Can somebody repeat? Sorry, go ahead.

I was asking that if you look at the total write-off, which happened in last 9 quarters, post COVID, it is almost 8% of the opening March '20 book, the March '20 AUM. This number is pretty large in my view, if I compare it with, let's say, some of the unsecured segment. They've also seen 10% sort of write-off. So how should we think about this the write-off? It is the actualized costs that has been -- that is gone? Or we expect some recovery from that over a period of time?

No, no. So like Vivek said in between, these are formula-driven write-offs that we take and definitely, there are efforts to even recover. And currently, we are, I think, around INR 20 crores, INR 25 crores a month that we recover from them. And that's now a separate vertical, which is focusing on to even recover better. Now in the last 1 or 2 years, when these write-offs were taken, we didn't have the ability to go back and recover from these customers, these bad debts because of the conditions that we were all in. Now is the cash flow improving, people able to travel, meet people, people are earning all kinds of things happening, we will definitely have to expect that there will be a write-back coming from there on the sense recovery coming from there. And that will, to some extent, offset this. Second, the termination losses that we incur, you will see also improvement in the resale price that will begin to happen in good time. And that by itself will start dropping the termination losses that come in. So you have to look at both of that as to, first of all, do we require to go out and repossess so many more vehicle like we did during that period? The answer is clear no. Is there a possibility to recover some of the write-off amounts? The answer is like 18-plus provider that we make, and then we write off. They are not in the nature of nothing going to be recovered from them. The vehicles are underlying vehicles are available. We'll repossess them. And if we were to repossess those and sell there is no further provision record, in fact, it will be a write-back. So you will see some very differential action that comes through on these write-offs and provided accounts. So you may not have to necessarily see it in the same way that we saw in the last 2 years. The last 2 years has been a very abnormal period where even many people who suffered from wanted to surrender vehicle and get out of the business. And that's not the trend that you would see in all the portfolio.

So any estimate of what -- from the write-off pool, how much could be recovered?

It'll be a very wide guess. I don't want you to hold me to that. But I think clearly, a INR 300 crores, INR 350 crores kind of a number to start with is what we are focusing on. And then it will only keep enhancing from there based on how we see it. We are putting a legal effort around that. We are putting a separate vertical around it. So if this is a guess number now, but maybe another 3 months, 6 months, we ourselves would like to refine this number in that direction.

Understood. And just one follow-up on the first question. Is that -- if the calculation is that the starting GNPA will be paying on 1st of October, then why would we require additional provision already the net NPA is 3.5%, which may further decline...

I think no, the additional provision was talked off from an IRAC perspective. And under the IRAC perspective, if we were to imagine that the gross NPA was to go up and to maintain a net 6% under IRAC versus under Ind AS provision that we have made, if there is any gap between the two, that difference will have to be provided.

But it looks like there should not be much difference.

So that is what I'm explaining that we may not require to have a big difference the way we see our gross NPA is settling down and the way we see our Stage 2 settling down. That is why we are not putting out a number on today's basis. We want to see through this couple of months and then put out a number to say what the reality looks like.

Ladies and gentlemen, we'll be taking the last question. That is from the line of Sanket Chheda from B&K Securities.

So my question was that this reporting requirement offset 6% for reaching 6% net NPA, wouldn't it be a year-end requirement under PSL threshold?

It would be a year-end requirement, but as a company, we would like to see from whenever it needs to be implemented because the -- nobody clearly knows the response of a regulator when they start reviewing you or inspecting you. So they can tell you it has to be quarterly. They can tell you it has to be early. It can be half year. There's nothing that's very hardcore around that. The current belief definitely is that it is to be at the year-end because that's the time they would review you to give you a direction on what you need to do. But if you have to move in that direction, it is better to start from the time the rule comes into play anyway.

So hypothetically, suppose if, say, in October, that number is 7%. We will provide that 1%. We can see for the another 2 quarters, which are usually stronger in recoveries and then also was provided in Q4? Or rather we will do it in October and then reverse...

So there are two areas on this clarification would be required, will the entire provision that you carry under Ind AS other Stage 1, Stage 3, Stage 3 or together is what they will look at it to arrive at the difference or only Stage 3 will be looked at is one question that requires some understanding. Two, if it is only year-ending position, then whether you need to do in that October. These are a little premature, but we will definitely set out and we will tell everyone in that quarter, that if we were to make a provision, what it would look like or if we have already provided, we'll see what is that additional provision. So which is why we are again saying putting anything out on the basis of today's number will be a futile exercise because this is not the number that we are looking at. It will open up on 1st October. It's just a [indiscernible] at this stage.

Got it, sir. But as of now, the understanding is that 6% and NPA is the year-end requirement. Is that right?

That is the idea we look at it. Again, I mean I don't have a clear answer on this because I don't think they have said it from when you need to do. They have just said it is postponed to October.

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

Before we close, I'll just add one more question related to the previous question. If we are carrying the additional provision under Ind AS of around INR 1,850 crores, right, can we use this for the additional requirement under IRAC? And in case there is a shortfall, can we route the provisions through balance sheet because that thing is allowed, right, if the IRAC...

That is allowed, but I think that's not what we would do. I mean, if we have to make whatever little provision, if it does come to that, this is just -- because you often ask the question I'm making an off-hand answer, I would prefer that it moves through P&L rather than directly to balance sheet. . Again, I don't know if Vivek has a view on this, but that's the way I would look at it. But as far as provision that we are carrying is concerned, definitely all provisions that we have at least on Stage 3, whether additional or whatever will all be considered for these offset purposes.

Question was whether Stage 1 and 2 excess provisions in Ind AS versus IRAC...

What I said even in the previous question, that's a gray area, we will have to test it out, we'll have to talk to RBI, then we'll have to take their input and then only decide which way because we don't want to be caught on a surprise by deciding on our own.

Okay. Vivek, sorry to harp on this point again. Even if I look at the Stage 3 provisions, we are almost INR 1,000 crores excess versus IRAC requirement, right? And which is almost 1.5% of our book, even if I were to assume that your gross NPLs will go up by around 4%, and you wouldn't need to put whatever 35%, 40% IRAC requirement. Then this provision should be sufficient, right? Then there should not be any major hit.

No, you're right. You're precisely right. You're right.

Thank you so much. Thank you, Mr. Iyer for allowing us to host this conference call. Thank you, everyone, for joining us.

Thank you. Thank you, everyone.

Thank you all. Thank you.

Ladies and gentlemen, on behalf of IIFL Securities Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.