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

This call is not for media representatives or Bank of America investment bankers or commercial bankers, including corporate and commercial FX. All such individuals are instructed to disconnect now. A replay will be available for Bank of America investment bankers and commercial bankers, including corporate and commercial FX. The replay is not available to the media. Good evening, and welcome to Mahindra & Mahindra Financial Services Limited Q1 FY '24 Earnings Conference Call. This call will be recorded, and the recording will be made public by the company pursuant to its regulatory obligations. Certain personal information, such as your name and organization may be asked during the call. If you do not wish for it to be disclosed, please immediately discontinue this call. [Operator Instructions] I would now like to turn the call over to Mr. Anuj Singla from Bank of America. Thank you, and please go ahead.

Thank you, Carol. Good evening, everyone. This is Anuj Singla from Bank of America Securities. Thank you very much for joining us for the Mahindra Finance call to discuss 1Q FY '24 earnings. To discuss earnings, I'm pleased to welcome: Mr. Ramesh Iyer, Vice Chairman and Managing Director; Mr. Raul Rebello, Executive Director and MD and CEO-Designate; Mr. Vivek Karve, CFO of the company and Group Financial Services sector; and Mr. Dinesh Prajapati, Head, Accounts, Treasury and Corporate Affairs. Thank you very much for the opportunity to host you. I now invite Mr. Iyer for his opening remarks, post which we will open the floor for Q&A. With that, over to you, Mr. Iyer.

Yes, Hi. Welcome, everyone. Thank you for this opportunity. I think, all of you must have seen our results in the numbers, which must be with you already by now. I think, few good things as we kind of begin, one, first time I would think since I've been associated from the inception. This is the first time where we see the Stage 3 number in the first quarter is actually lower than even the March-end number. And that's very, very unusual for this business, because we have always believed that the first and second quarter for rural, the market that we largely represent always has not too much of activity with the monsoons, starts with the heavy summer, moves to monsoon until the festival season begins to happen from end-September, maybe early-October, things then start to begin; and therefore, we always have seen that pressure. Unlike ever before, I think we've seen this number, both in Stage 1, Stage 2, reflecting good holding up. And that is nothing but a clear reflection of the economic activity out there leading to good cash flows. I think, the other good thing that we saw also was that the disbursement for this quarter at a INR 12,000 crore plus number is a very, very high disbursement, considering that we ended the fourth quarter on a very high note, even as the overall industry out there. And that gives us clear happiness to also state that we've gained market share in the product lines that we are in. More than that, in spite of all competition out there trying to do various things, I think, our reach, our relationship, our customer retention approach, all of that is producing the required results that we are looking for. I think, there was always this question on the pricing possibilities and the pricing pressure. Happy to state again that at every stage that we have tried to push up the rate a little, it has got accepted in the market. And therefore, in spite of, again, competition both at product level and at finance level, we have not seen too much of pressure on the ability to pass on price. While you see a little compression to our NIM, that's more caused by we having borrowed fresh money for disbursements and when we reprice our liability, it comes at a new rate, and it does take a lag for us to be able to pass-off. Also, our initiative of focusing on preowned vehicle as an initiative, including preowned tractor is yielding good results, and we are able to see numbers move up in that direction. Also, in the Primex segment that we keep talking about, that in that market as well as in the semi-urban market, when we start looking customers from a segment higher than the segment that we were earlier operating in. There was always this question about how competitive would we be and what are the possibility. And if some of you may recall our past discussions, that we have a 30%-35% market share in the case of Maruti, in rural market, we have a 12%, 15% kind of market share. I think, it makes a big difference when we negotiate with the dealer to say when we are in certain segment, we also need to get certain other segment, and we have been able to penetrate through that. And they definitely come at margins different from the Earn and Pay segment, but they also come at a much low cost of operation and a much low credit cost. So, we are also building a book of way forward, which qualitatively will not only be different, but also has an ability to give the margins because of the low cost of operations and the low credit cost. From an overall demand perspective, I think, we are continuing to see the demand holding up. But at the same time, we are conscious of the fact that we also see the OEM's ability to supply more vehicles; and therefore, some inventory built-up at the dealership we see. But at this stage, dealers still believe it as positive because these stocks are necessary for the coming festival season, and therefore, they see that more as a positive at this stage. The overall economic activity on all fronts, whether it is people movement, tourism, the infrastructure side, the road, all of these projects are in full swing. And therefore, we see excellent cash flow position on the ground. We all started the year with a little fear expressed about how the monsoons would pan out to be. But as we speak, and all of us are exposed to this number, I think the monsoon spread has been pretty decent. And all the relevant states have got decent monsoon, and therefore, the belief is very clearly one would see good yields coming out. And with the election year ahead of us, we also believe that support price would be good. So for a business like ours, which is dependent on infra cash flow, people movement cash flow, tourism and farm cash flow, we are very, very excited that what we see on the ground makes us believe that our strategy that we put out in 2022, that by 2025, we will be of a certain size, of a certain return, and of a certain quality does not seem to be a difficult task in hand for us. We remain invested well in our Project UDAAN, which is a transformation project, which looks at new initiatives on the digital front, new initiatives on the people front and the process front. And we are progressing very, very well on that, and we are almost on schedule for getting the benefits of it. While like we have stated this before -- while it may bring in some cost as we implement this, but the benefit that we would get on implementation of this project will be disproportionately beneficial. So that we would rather call it an investment at this stage and not a cost at this stage. But nevertheless, it will bring -- come in with some cost, which will start showing the benefits around all of this. Our importance to the OEM partners that we work with stays very, very high. We've been having strategic meetings with all the OEM partners, and we do get a lot of information and insights, which makes us important partner for all of them. If I put, therefore, all of this together, and as I said, for the first time ever in the history, we have seen the first quarter showing this kind of quality numbers. And we continue to believe that this will be the trend going forward. And with our forecast of how we see the second half with good festival season leading into good harvest, I think, we are in a great place for us to repeat our past performance that we saw even in the previous years. The cost of borrowing, our belief, is not going to come down in a hurry. While all of us know it is not moving up any further maybe. But we are not hoping on the cost of funds to come down to be able to make better margins. And therefore, our margins will come from our pricing ability and the product mix change that we are envisaging to protect the margins, going forward. As I said, the little dip that you must have seen in this quarter is more caused by we borrowing a little more and replacing our maturing liability. And as we start moving the price up for our new disbursements and as we mix the product with more of even pre-owned vehicle, et cetera, we would see improvement [ to ] that happen as well. There are some specific actions that we have put in place, and we are working on it to bring down our OpEx on an overall basis, while we're seeing some initial trends of that benefit. But I think that exercise is still not over and not complete in itself. And we have identified certain specific areas that we need to work on, and the Project UDAAN that I was referring to, addresses our process deep; and therefore, a reengineered process with use of better technology is what eventually will help us also bring down the cost. We are sufficiently capitalized, and therefore, there is no need for us to, at this stage, look at any capital raise or whatever. Also that, since we were AAA rated a little while ago, we are able to see opening up of new avenues of our ability to raise money. While we have never had a situation where raising liquidity was an issue, but nevertheless, it's happy when we look at -- we get more revenues from where liquidity could be raised and even getting money for a little more long-term possibilities. And therefore, putting all of this together, we feel that we are at the right place and all corrective actions had already been initiated and put in place. Most of them are already working for us. And therefore, going ahead, we are very, very positive of where we see all of this leading to. The management team is in place while we have made some new additions to our management team, but now most of them have been with us for -- definitely for more than 2 years, close to. And therefore, they are also all well in place, not just to understand this business, but also to have a good cultural integration into the organization, and contribute by their experience that they come with from different institutions, and therefore, that adds to the additional benefit of relooking at this model in a different direction. I would only request on one thing as I close, which is you must have seen the news on the acquisition of [ some ] holding by the parent in the RBL Bank. And we would not be able to add any value to any questions that may come in that direction, because it's purely a corporate action. And I would honestly submit and request that we avoid spending any time around that because we would not be having any answers to any of your questions that you may have, except that I can tell you that this is purely a corporate action, and you would have seen a stock exchange announcement by M&M on this. I think with that, I will kind of stop here and invite questions, with clearly leaving a positive outcome that what we see in this quarter gives us a lot of happiness to believe that the following quarters would only be better than what we are seeing. Thank you, and over to the moderator.

[Operator Instructions] The first question is from the line of Manish Ostwal from Nirmal Bang.

And I have a couple of questions on quarter 4 numbers -- quarter 1 number, sorry. So first, on the margin side, you said there is some cost increase and loan mix impacted the margin this quarter. And with the lag effect, the margin will improve? And secondly, the margin guidance which we have given long-term 7.5%. So just because the price action in the coming quarters will take the margin to that level? Or how do you see the margin coming in the rest of the current financial year?

Yes. So, as you are also aware, once we start putting out the new price, you don't get the benefit immediately. But clearly, visibility-wise, you will see it move upward. And we do hope that as we close the year, are we able to get very close to those numbers? Honestly, 7.5% when one puts out, you don't expect the cost of borrowing to remain this high. And, while we believe that the cost of borrowing may not come down, but if we are lucky and the cost of borrowing also starts to come down, definitely, you will see that margin move in that direction. But purely by pricing and with this being the cost, I'm afraid that we may not be wanting to believe that it will reach 7.5% so fast. But clearly, the cost of borrowing will as well come down. And the 2 together will help us. And as I also added, we are kind of looking at more preowned vehicle as an improved growth story for us, and that should also help us in the improvement of margins.

Secondly, sir, I was looking at the Slide #8 and the 22 where in 8, we have mentioned the collection efficiency 94%. And if I look at on a Y-o-Y basis, there's no improvement, even if I look at the full year performance of last year, the collection efficiency is 96%, I understand the seasonality of the business. But despite of the recovery in the market, which is reflecting your loan growth and the vehicle sales numbers in the marketplace, why the collection efficiency has not seen any improvement in our numbers? And secondly, how one should read the trend in your credit cost remaining part of the year versus the 2.1% which we reported in quarter 1?

So in some ways, there was an answer in your question. Seasonality is definitely one answer, and you would see credit cost improve as we go to the third and fourth quarter, and we have seen it even in the previous year, and you will continue to see that for sure. I think, it's also important to understand when you say 94% this quarter, and it's sequentially not much improved. We see this as a good number, and you probably compared it to last year's first quarter as well. And last year's first quarter was also one of our best quarters. So, if we are able to reach this kind of a 94% levels, and if you go a few quarters before, you will see this number used to be a 91-type number.

Yes.

So clearly, we are very happy with looking at 94% as a number for the first quarter. And we are seeing trends continuing in the same way; and therefore, we don't see second quarter to throw up any surprise. And if that was to happen, you will see third and fourth quarter helping the costs the way we are projecting for us.

And the last question on the Mahindra rule.

Mr. Ostwal, I'm so sorry to interrupt. May I please request you to rejoin the queue for your follow-up as we have many questions in turn.

Sure, sure.

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

Sir, my first question is on slippage. I know that you don't spell out slippages correctly, but because the credit costs are slightly higher than expected, could you give some broad color on slippage or at least some broad color on recovery and upgrades of nonrestructured standard loans during the quarter, so that we can calculate or slippage? And then also if you could highlight the amount of interest reversal in, say Q1 relative to, say Q3, right? Because Q4 is anyways strong.

No. So as far as slippage is concerned, if you kind of look at our [Technical Difficulty]

Hello?

Requesting the participants to please stay online while we have the management reconnected. Management we all are reconnected. We have the question online from Mr. Mahrukh.

One second. I have to connect the call inside, because I mean.

Requesting the participants to please stay online while we have the management reconnected. We have the Management reconnected. We have Mr. Mahrukh Adajania on the call -- in the queue.

Yes. Can you hear me?

Yes, sir.

Yes. So I don't know up to where you heard. So let me kind of repeat whatever I said. So, if you kind of look at our Stage 3, they have actually improved over the fourth quarter. And if there was a slippage from Stage 2 to going to Stage 3, then you would not have seen this improvement for sure. Even at Stage 2 level, you are seeing an holding up happening, which means even from Stage 1, the flow is not high. And also, third thing is if you have a 94% collection, it only means that the overall collection from every bucket is appropriate and adequate. And therefore, there is no pressure on, if there any slippage on the credit front. And I don't know on the restructure, you said if you were referring to the COVID-time restructured portfolio, if at all, I think I don't exactly remember but I think when we started, we had some 9,000-odd number.

No, 4000, sir.

Now it is what? It's -- about INR 1,800 crores is what is just remaining there. And their performing portfolio, otherwise, we will have to classify them in whichever bucket we have to classify there.

[ Ramesh sir ],I was not referring to the outstanding or asking you the number. Basically, I was referring to the presentation where you've shown amount of restructured assets, which have been upgraded from Stage 3 to Stage 1.

Okay. So Vivek wants to add. It's a technical thing too.

So Mahrukh, Vivek here. So securing or upgrade typically happens from Stage 2 to Stage 1. And we have very stringent norms for any curing that we do. So the assets which are in Stage 3 would not get cured. That is one. I just wanted to also add to what Mr. Iyer said. If you also look at the GNPAs as per IRAC, the difference between the IRAC GNPAs and Stage 3, that number also has remained range-bound. In fact, over a period of time that number is slowly coming down, which should also give you some understanding on the 3 pages. Just conforming what Mr. Iyer said a while ago.

Okay. So there were no material interest reversals or anything therefore?

Yes, because material interest reversal would happen if there would be a big jump or a big drop in our GS3 because that's where the interest reversal take place, because in Stage 1 and then in Stage 2, the interest approval continues. The question of reversal arrive is only when an asset which was so far standard becomes NPA.

Okay. So when you've returned that restructured assets of...

Mahrukh, one more thing. If under [ index ], there is an interest accrual that happens on a net basis. However, in case of banks, probably we're coming from the banks, where the [Technical Difficulty] has to happen at the moment an asset becomes an NPA. In case of NBFCs, which follow [ index ], the interest accrual keeps happening on a net basis.

Got it. Okay. So when you say restructured assets of INR 466 crores have been cured during the quarter and now reclassified under Stage 1, it's from 2 to 1, right?

Precisely. That's the perfect understanding.

Because the statement talks about Stage 3 first and then about restructured assets. So that's why the misinterpretation.

Don't mix the 2, they are 2 independent indexes.

[Operator Instructions] The next question is from the line of Viral Shah from IIFL Securities.

I had 2 questions. So one was on your GNPA. You mentioned that quarter-on-quarter sequentially, you actually saw a bit of correction. But if I look at it, your write-offs actually were at 1.6%. Now historically, in 1Q, we have seen very low write-off. So is this sequential GNPA result because of this higher write-offs? Number one. And my second question was on basically your repayment rate. So typically, in 1Q, it sees a bit of a decline. This quarter, there has not been as much of a decline compared to the history. So, would that be a function of the kind of change in the borrower mix that you have been trying to achieve in terms of more of mass affluent?

What was the second question, sorry? Missed you?

Second was with regards to the repayment rate. So typically, in 1Q, quarter-on-quarter, your repayment -- implied repayment rate reduces materially. In this quarter, it has not been the case. So is that actually because either you have changed or a reflection of the changing borrower mix of more affluent customers, not requiring Earn and Pay? Or you're actually now starting to structure your contracts more on an EMI basis versus more lopsided in the second half of the year?

So let me first answer your second question and then we'll go to your first question. On the second question, we have not experienced any significant increase or decrease in our overall door-to-door maturities of our loan book. So I think, that's not what we are experiencing today. So probably that should help answer the second question. Your first question was about the write-off, right?

Yes.

And on write-offs, if you look at over a period of time, you take FY '22 and you take FY '23, our total write-offs has been upwards of INR 2,000 crores. However, if you look at the fourth quarter of the current year, that number is much lower at INR 313 crores, and...

Sir, but sorry to interrupt you, sir. But FY '22 and '23, in that sense, was not a normal year. I'm looking at -- on a pre-COVID basis, your typical write-offs in the first quarter used to be less or sometimes even negligible?

However, we have also changed our accounting policy a couple of years ago, where we do the write-off every quarter. Earlier, we used to do a write-off only once in a year.

Once in half year.

Once in a half year, I'm sorry. September and March, we used to do. Now, we do it on a quarterly basis. It may not be like-to-like comparison.

No. And I think also it's important to understand that if the gross NPA absolute value had substantially gone up, and then we bring it down through a write-off, then your answer is right. But if you look at it on an absolute basis, they are in the ballpark of 3,700, 3,900 type numbers. So therefore, they are not held there or corrected through write-offs and whatever is. So I think, I urge you all to also look at a 94% collection efficiency. Therefore, you see that each bucket is holding up to that number. If the collection efficiency was much lower and you say, there is a correction happening to the bucket, then your conclusion that are you taking some write-off, et cetera, is true. But if the collection efficiency are 94, people don't pay us advances, and advances anyway don't get into collection efficiency. So they are pure EMI payments. And if pure EMI payments come, then you will see that stability of each bucket begins to happen.

Got it, sir.

The next question is from the line of Abhijit Tibrewal from Motilal Oswal.

Sir, again, going back to the liability side of things. I just wanted to understand that in addition to the increase in cost of borrowings that we've seen in, obviously, I think everyone is seeing that today, borrowings which are maturing being replaced at higher cost liabilities. In addition to that, there is a lot of volatility that is seen on your [ daily ] line as well. So is that a function of what you were explaining earlier on the call, the Primex customers that we are targeting now kind of reflecting in lower means? And also sir, without increased income reverses and like you explained, we have not had much flows in the Stage 3 or the NPA bucket. So unlikely we would have seen any interest income reversal. So what can [ we experience ] this that we've not had bottom of 3%, 3.4% kind of a Q-o-Q growth in the interest income, which is also reflecting in a good decline in the yields?

I mean, they -- I think, Vivek or Dinesh will provide you the figure, but I would assume that the 40 basis point dip that you see, 50% of it would definitely be caused by cost of money and the disbursement that would have happened now, the benefits of that will only flow later. So if you have a disbursement growth and the proportionate income out of the disbursement doesn't come in, whereas the interest starts to kick-in, right? So you will see some correction coming through this. And you're right. To some extent, the Primex number definitely will bring that pressure, but that's a conscious call that we have made to be in that segment, because that comes with a lower OpEx and a much lower credit cost. And therefore, they shouldn't affect our ROE going forward. So while we may see -- whatever is the compression of NIMs that you see by Primex customer, would be more than offset in the OpEx and the credit cost will lead to a better ROE. So therefore, it's a -- with the consciousness we are getting, but I also want to confirm to you, of the total book currently, the Primex-type customer would be not more than 10%, 12% at this stage. So therefore, they are not going to substantially compress either of the line items there. And whatever view we try and pass on as the lending rate increase, the benefit starts to come only a little later and [ easily ]. They don't come immediately as we pass on. So, I think you would start seeing change on these numbers as we built the assets in the next 3 quarters.

Got it. And just one last question. Sir, now how should we think about your -- the credit cost, essentially, if I look at this quarter, INR 330 crores of write-offs unarguably, I mean, on a declining trend, how should we think about what we call as write-offs or reposition cost or repo cost? So essentially, sir, I mean, is this a trajectory which will kind of continue for the next 2 quarters? And also to trying to understand, I mean, I think in your SEBI release, you talked about your ECL model refresh and how kind of keep moving, taking last certain number of months into consideration. So now, I mean, given that whatever -- I mean, maybe 2, 3 years of last data that we consider, are we now kind of getting into a plane where the base itself will start getting worse in terms of the ECL model? And one last question for Vivek sir. Sir, in terms of your liabilities, how are you positioning your MCLR linked bank loans essentially earlier when rates were rising. I think most of us wanted to benchmark at least 6- and 12-month bank term notes. How are you positioning your MCLR-linked bank terms loans now?

So let me first quickly give you the NPA answer. See, last year, if you look at, we started off with some 7.7%, close to 8% NPA beginning of last year, and that had to come down to a 4.4%. You will obviously have a different level of termination settlements, closures, et cetera. A 4.4% or 4.5% closure of March, and if we believe that, that has to be held at 3.5%, 4% type number, they don't come through these kind of terminations and settlements. So you should understand that we are almost at a level where the NPAs could be as low as it could be, and it can only improve from here because we don't see it flow forward from Stage 2 to Stage 3 and we are not in the best of corporates. So I can give you all assurance that our gross NPA or Phase III number is probably at its best from a first-quarter perspective and no major untoward incidents on the ground, we are very comfortable to be the position that we are in. And to bring a correction to this number, we don't have to resort to any major reposition settlements and things like that. What we are working on is how do we hold each stage at stage 01 and don't allow them to forward flow and which is where I keep referring to the 94% collection efficiency, which gives us that comfortable. So therefore, be rest assured that you won't see a similar large chunk write-offs or terminations like we would have seen in the past when we bring down the gross NPA from a very high level to a level 2. This will all happen by normal method of settlement recovery closure. And if the coverage protects -- 60% coverage is protecting the write-off eventually that is likely to happen through these products. And therefore, you may not see a big hit, let's for a minute, imagine the entire INR 3,000-odd crores of NPAs to be resorted to only by a settlement reposition. Then will it not touches the 40% balance yet to be provided for. I think my answer is clear, yes. And that is where the ECL model works well. And my last comment would be as our book composition keeps changing, we will find that the 60% is a higher coverage because we still use the historic data, whereas the current book is not of similar nature. And therefore, one would only see a benefit of this excessive provision going forward is the comment I would leave you with. And the liability I will ask Vivek to expand.

Yes. So I heard you ask a question around MCLR. But to me, the question was not very clear. So can you please repeat your question?

So essentially, what I'm saying is -- I mean, what you've seen here in [indiscernible] and other peers, we typically consider past data, that could be a 2-year, 3-year, 4-year data for the ECL model and then every quarter after quarter, right, I mean, the recent quarter comes into the PCLR and then subsequently, the whole quarter gets knocked off. So essentially, what I'm kind of trying to understand is this INR 200 crores of increase that we've seen in terms of provisioning excluding the write-offs, what Mr. Iyer was also explaining that at this point in time, whatever provision coverage ratio we are maintaining at Stage 2, Stage 3. When can be that point in time where we can start seeing the requirement for a lower provisioning coverage ratio on Stage 2 and Stage 3?

Now I have a better understanding of your question. So probably, we may have to wait for one more year [indiscernible].

Got it. Got it. Sir, the last question on liability.

Sorry. Sir, were you explaining something on ECLR?

No, no. This will happen in a year's time, right, because we are taking a 42-month average when we arrive at this. And therefore, each year, book as they runoff and the new year book comes in, this will start to show the correction. So if you take April '21 onwards, where we have taken various steps for a metro quality book, so therefore, '21, '22, '23, as we come to the next year or mid of next year, you will suddenly see this playing out very, very well.

You had more question.

Sir, on liabilities.

Yes. Can you repeat that question because somehow there is some disturbance. So if you can repeat your question.

No problem, sir. Sir, what I wanted to understand is in your liabilities book when the interest rates were going on, quite naturally, everyone wants to push it towards 6-month and 12-month NCLR-linked bank term loans. Now that there is, I would say, almost certainty of stability in interest rates reported or maybe an outside chance of a smaller quantum repo rate hike, how are you positioning your MCLR linked bank term loans now with regards to the tenure?

So if your question is that whether we would like to maximize floating rate loans, yes, we would definitely like to take that opportunity. But at the same time, we also need to be mindful of our ALMs. So we'll take those judicious calls from time to time. So it will be very difficult to tell me exactly is there a formula. So yes, there is a broad formula, but we work within the boundaries of the overall ALM that we need to achieve and the opportunities available in the market. As on date, about 38% of our bank borrowings are floating. And in any case, the money market borrowings are anyway fixed.

And we won't break the ALM norms.

Of the entire [Technical Difficulty] 38% is floating. My bad. Sorry.

The next question is from the line of Sanket Chheda from B&K Securities.

Yes. So a couple of questions, pardon me if it's repeating. First one is on your spreads. So while we talked about that maybe 40 bps was out of cost and 20 bps would be out of yield. On your Slide #21, it's the other way around. Actually from, sir, last quarter, there's a 40 bps fall in the yields and about 20 bps in the cost of fund, which is resulting in about 60 bps of fall in the gross spread. That's one. And the second is that the cost of funds have been rising since last 2, 3 quarters. So while I understand that once we take the high, it takes some quarters or comes with a lag, but our yield is even lower than last quarter's Q1. So was just not able to reconcile.

So I think the book also has [Technical Difficulty] which could have been booked, let's say, 3 years back at a very different yield rate. As the book matures and you're getting the new book come in, you will see this compression, which will be visible, which should, therefore, reflect in the credit cost to be not similar to what we had 2 years back. So I think while we should focus on the NIMs, we should also look at how the credit cost is panning out to be to look at the net result. And which is why I was referring to saying that when we start lending new and at a new rate, even the benefit of it won't happen immediately, that will happen on a cumulative basis. And surely -- and I mean, I don't have an exact number, but then let's say, some tractor portfolios have matured over this period, which would have been a much higher yield item. And against that if you're actually growing an asset, which is in a UV or a car, right, therefore, they will be at a different yield. But then the cost of operation and the resultant credit cost for these 2 products will also be very different. So which is why I said that if you look at [Technical Difficulty] depression which has happened due to cost of borrowing, we will cover for that through our [Technical Difficulty] and the product mix comment by increasing our secondhand vehicle financing, you will see the NIM's improvement. While the [ Prime X ] will still come at a lower yield, but they will also come at a lower OpEx and a lower credit cost. I think that's the way we'll have to look at the overall.

Okay, sir. Sir, the second question was again on the write-off trend. Now when we say that maybe all the buckets are already the ideal situation would have been if it wouldn't have affected profitability. So with the help of write-off, we can keep the NPA numbers maybe same or lower in any quarter irrespective of Q1. So just wanted to understand when are we -- when we guide about maybe asset quality or the stress level, then how should we look at profitability in that context?

So this quarter also, it is not affected by an NPA going up or whatever. It's affected by the LGD change, which has come in and there is an additional provision. So no sooner you see the LGD either constant, you will see no further impact. And which is what I was explaining that as the book of the past matures and the new book of a better quality, which keeps coming in, you will start seeing the LGD climb down. And therefore, the higher coverage that we carry actually becomes a reversal benefit even though we held at that.

Yes. So the LGD, I understand the increasing provision on Stage 1, 2. This is the same question. So Stage 1, 2, 3 provisions increasing, I understand that would be out of, say, increased LGD requirement. But top of INR 526 crore, INR 313 crore is a write-off.

Correct. Correct. So that is not a new number, right? But if you historically look at that number on a half-year basis, it will be cumulative of 2 quarters, except that a year back or so, whenever we move to every quarter writing it off. So that number is not a substantially new number, and that is from within the NPA pool. It's not outside of the NPA pool number.

That's right.

Just a minute, Vivek wants to add something.

And if you look at the trend line on the write-offs over the last 6 quarters, that number has been gradually going down. And I think that is the trend we can expect going forward.

But now limited point was that, if we wouldn't have taken that, the NPA would have gone up. Yes, but that's okay. Those were my questions.

Sorry to clarify on this, but this is business as usual. So varying lending business, these write-offs will always happen as per the write-off policy of the company.

Yes. But then that narrative doesn't prove that NPA has [indiscernible]. Those were my questions.

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

My question is on this Tier 1 ratio. It's down by about 100 bps Q-o-Q. And if we look at a slightly longer period also, it has come down quite sharply. I mean last year, 1Q, it was 22.8%. So what is leading to such a high capital consumption?

The disbursement growth. So last year, our disbursement growth was 80% full year. And in the current quarter, the disbursement growth is 28%. And of course, we have not raised any further capital. So it will reflect in capital.

Vivek, the disbursement growth is just 4% Q-o-Q. So will it sort of consume 100 bps because you also have some profits [ to goods ].

[indiscernible] we have 2 categories. And we have so far not any [indiscernible] capital, but that we can always do.

I'm talking about Tier 1. The 100 bps Q-o-Q Tier 1 consumption. So disbursement growth is just 4% Q-o-Q. So risk-weighted assets would have to go up much faster than your Q-o-Q asset growth for this kind of...

At the loan book increase the loan book has gone up 5% on a Q-o-Q basis. [indiscernible] I think it is fully a function of the disbursement and it's [indiscernible] and the rundown. So the net increase in the loan book. There is no other dispensing in this.

No, it just seems like the risk-weighted assets growing faster when we are doing relatively less riskier assets. So that's what I was trying to...

[Technical Difficulty] bank.

Or would it be operational risk when you move into a new year? Would it be...

No. The answer is no.

Okay, okay. Okay. Got it.

The next question is from the line of Kunal Shah from Citigroup.

Yes. So the question again on credit cost guidance, okay? And particularly, any impact of the -- maybe the floods in North because we have almost like 25%, 30% exposure in the northern region?

It's, I think, too premature. We didn't have any collection efficiency dip in North when we look at it as we closed June. And therefore, I don't think that it is caused by that. It's very uniform across. And again, go by collection efficiency, we don't have where we have a stage where we have collection efficiencies were 60% or 70% and somewhere else, it is 100%, 110% to lead to 94%. I think it's pretty uniform collection efficiency across. So we have not had any [ job ]. Raul, do you want to add anything?

Just 1, Raul wants to add something.

Yes. So you're right, there has been kind of quite heightened rain in some parts of North India. But when we look at the long trend, the discomfort that is caused on a weekly basis or fortnightly basis, customers are resilient, and maybe they would miss an installment, but it comes back quickly. So these are temporary [ disruptments ], but nothing that keeps us worried for the medium term.

Okay. And credit cost guidance would be given that maybe write-offs are almost like half if we just look at it in terms of the run rate, annualize this run rate? And maybe in terms of the provisioning write-backs could also be limited because we are already at a low level of Stage 3. But should it be fair to assume that we can still settle at 1.5%, 1.7-odd percent credit cost? Or is there -- maybe it could be higher looking at the Q1 trend?

I mean, see, the only answer we can give is, if Q1 has shown this color and if there is nothing untoward the next 3 quarters, we are very comfortable to believe that it's going in the right direction.

Okay. And one last question on Mahindra Housing. So again this quarter we reported a loss. So there seems to have been a good quantum of provisioning out there. But still net Stage 3 is going up. It's like almost 8.5-odd percent, more than INR 500-odd crores. So should we expect some kind of a write-off out there and maybe some knock on the net worth, which can happen and further infusion into the Mahindra Housing?

I think all the cleaning that was required based on our own business has all been carried out and will now be solved through pure recovery and settlement, and we don't expect anything big to come from there.

Okay. Yes.

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

Just on the write-off amount. So first quarter, I think, usually it's been the worst season for that. So any rough ballpark range of this year's total write-off that we should be thinking about? Any ballpark range would be very helpful.

If I understood your question correctly, is there any guidance on the total quantum of write-offs that we are expecting for the full year? Is that your question?

Yes, sir. That's right.

Okay. So very frankly, we do not provide any specific guidance on these numbers. But if you were to have that I guess the [ current ] quarter's number is probably a good indication.

Okay. So roughly it should be somewhere -- quarterly run rate should be somewhere about the first quarter level?

Yes, it should be in that ballpark. It is -- I'm talking about the write-downs.

Yes. Understood. That's very clear. And secondly, on the cost to AUM or cost to assets. Surely appreciate that. We're in a good benign asset quality scenario, and we are doing investment phase. So how should we think about cost to assets this year versus last year?

Again, the voice is not very clear, but did you want to understand cost of borrowings as a percentage?

No, OpEx.

OpEx as a percentage of assets. Okay.

[indiscernible] So I like to assess year versus last year, how should we think about the ratio.

I understand. Right at the beginning, I commented, we are at 2.8% as against [ 3.-something ] that we closed last year. And we are investing in adequate technology, people, training and all of that for a much preparedness for future growth, et cetera, that we have projected for us. So we would see a temporary movement up committed to the 2.5% that we put out as our way forward. While we would see this 2.8% over in between 2.8% and 3% type numbers. But clearly, you will start seeing the decline of it as the benefit of all those investment starts to flow because while we are incurring it at a cost, we do recognize that they are not a onetime cost, and they are in for much future. And therefore, if one looks at a period for which this is getting done, we are comfortable to believe that while temporarily some increase may see, but that will start correcting itself.

Got it, sir. And lastly, on the margins, the cost of borrowing, how much do we expect it to go up further from current levels through the rest of the year? Any ballpark estimate, assuming there's no RBI ratings anymore?

So at this stage, we are only believing that the borrowing cost is not going to come down in a hurry. But at the same time, we are confident that I don't think we are expecting any further increase to cost. But as our past liability matures and we start getting a new money, it will come at a new cost. That should be more than protected by our increasing lending rate that we are projecting over a period of time. So simple answer would be we don't see a big movement either reducing costs at this stage, not are we expecting new borrowings is going to push up for costs substantially. I think we are where we are.

Yes, I fully understand the current incremental borrowing cost is not going to go up anymore, right? But I'm just wondering the average current book borrowing cost, the cost of fund -- I mean, you were fully repriced to our incremental front-end kind of borrowing costs, right? So how much difference is the incremental borrowing cost versus our current cost of fund?

Yes. So that's what I think he tried to answer. The incremental borrowing cost is not likely to be higher as compared to the current, the cost at which we are borrowing currently.

Of course, our average cost is now more than the incremental borrowing cost...

[Operator Instructions] The next question is from the line of Shweta from Elara.

2 questions. One is, if I look at the disbursement mix, why has there been a decline quarter-on-quarter on the SME side?

Yes. The question is there a quarter-on-quarter reduction in the SME book. Is that your question?

Book or disbursement?

Disbursement.

So the disbursements have grown. The book is a bit flattish over Q4. The reason is because we had the network book, which is running off much faster. We had some lumpy loans which are running off. And otherwise, when I look around the disbursement, we have factoring a 50% growth. And in Q1, we have achieved close to about 45% of that Y-o-Y. So the flattish book is largely because of runoff. But otherwise, from an incremental growth, we are doing well.

Okay. And sir, next question is why there is sequential surge in repossessions, repossessed assets quarter-on-quarter?

Your question is not clear. Is the question around repossession?

Yes. Why have they increased quarter-on-quarter?

No. So when it comes to the year ending, clearly, what happens is we do sell more vehicles. But the number of vehicles repossessed in each quarter would not have gone up. Just the stock would have gone up because we start with a much lower stock as we do the cleaning for the year ending. It's nothing more than that.

Okay. That helps.

The next question is from the line of Umang Shah from Kotak Mutual Fund.

Sir, I just have one question. So one is...

Sorry, sir, if you're on a mobile, we can't hear you.

We move on to the next question from the line of Nischint Chawathe from Kotak Securities.

Just 1 or 2 small questions. Have you raised lending rate for new customers during the quarter?

This quarter?

Yes.

I think not all products, but some select products, there has been a very small increase.

Yes, yes. So we have passed on a marginal increase if you look at Q1 versus Q4. We've been able to pass on a marginal increase. But we don't want to give any forward guidance because as you know, it's becoming a very competitive market and in Q2 and Q3 as the festive season unfolds, we will have to be competitive.

On one part, you are growing the prime segment. And on the other side, I guess this quarter, we saw a fair amount of increase in preowned vehicles ratio on AUM. So just trying to understand, keeping the incremental whatever rate hikes side, from a portfolio mix point of view, are we really shifting towards lower yield assets or are we shifting to higher-yield assets?

So while we have our prime segment coming in, we have clear upper limits on how much will it be as a percentage of our implemental sourcing. We are conscious of -- we have given you guidance on what kind of [indiscernible] be at. So clearly, there is no drastic shift away from our core business, which is the earning pay customer segment. But as diversification requires us to also cater to a new customer segment, we have specific vehicles to deliver and to attract that customer segment, but we have upper limits in terms of what that means as a percentage of our incremental sourcing.

So now does it mean that faster growth in preowned will sort of offset any compression in yield because of the prime segment?

Yes, that's the objective. And you would have heard Mr. Iyer talk about the aspiration to grow. In fact, you would also see preowned vehicles is 17% of our incremental sourcing, and we are looking at growing that segment.

And just very quickly, your growth in operating expenses was in single digits this quarter. Does it continue for the year? Or would you kind of see it coming closer to the 25% going toward that we are doing?

So I think a while ago Mr. Iyer talked about it. So in the first quarter, our ratio is 2.8%. We expect it to inch up closer to 3% for the full year.

Perfect.

The next question is from the line of Umang Shah from Kotak Mutual Fund.

Sir, I just have one question. So given that the outlook is looking pretty benign and collection efficiencies are kind of holding up, all else being equal, how confident are we that we should be able to close the year with NPL levels lower compared to last year and credit costs also remaining in the similar range? Or are we looking at credit cost being higher compared to what we have seen last year?

So first quarter NPL or GS3 is lower than fourth quarter of last year for a model like this, which is for the first time it's happened, I think -- and I repeat myself, if there are no unknown major disruption in the market. We don't see anything very different unlike in the past where third and fourth quarter has always been good, and they would remain good. That's our belief. And therefore, we are happy with where we have ended for this quarter.

Sure. And sir, the credit cost also then should remain fairly range-bound compared to what we have seen last year?

Because you should look at it as follows, right? If there are no new NPAs built out and the existing NPAs are provided for sufficiently when you know the outcome.

Okay. Great. And wish you good luck.

Thank you.

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Anuj Singla for closing comments.

Yes, thank you very much, [ Carol ]. Mr. Iyer, any closing remarks before we conclude?

No, I think the only closing remark that I would make hearing from all the questions is, clearly, we are relooking at our product mix and want to focus, and we are able to reach traction on the preowned vehicle, which will improve the yield and therefore will lead to improving or protecting the margins going forward for sure. We don't see borrowing costs going up beyond where we are. And therefore, the compression coming from the borrowing costs to compress the NIMs any further is not our way forward look. 3 is, if Stage 3 is holding up where it is and Stage 3 is showing correction and having provided for 60%, the uncovered portion of the current NPA pool is only INR 1,500 crores. Whichever way we may want to solve by collecting, by reprocessing, buy selling, disposing it will not be more than that number for sure. And as we see more collections there, I think -- and first quarter has reflected that with the collection efficiency also holding up, we see for ourselves the next 3 quarters to be showing the trends better than what we have seen in the past ever. And the disbursements are holding up, and therefore, growth is something that we are comfortable and confident about in spite of whatever be the competition. So overall, from our perspective, we believe that what we have seen in the previous year, after all the correction efforts that we put the year before is all yielding results and yielding results in the right direction.

Thank you very much. We conclude this conference. Thank you all for joining us. You may now disconnect your lines. Thanks.