Our gross Stage 3 ratio should fall to 8-9% by March: Ramesh Iyer, vice-chairman & MD, Mahindra Finance

Mahindra Finance’s gross stage 3 loans, those which have been delinquent for over 90 days, should fall to 8-9% by March from 11.3% in December, vice-chairman and managing director Ramesh Iyer tells Shritama Bose. If borrowing costs rise by 50 bps, NBFC customers could see lending rates rise, he added. Excerpts:

Your gross NPA figure is Rs 10,987 crore, but the gross stage 3 is Rs 7,223 crore. Why the difference?

The new RBI (Reserve Bank of India) guidelines of November 12 demand the categorisation of NPAs under the IRAC (income recognition and asset classification) norms, which would mean that you have to mark the NPA on a daily basis as well as if they move a stage – from 3 to 2 – you still have to keep them in NPA until the full amount is cleared. That’s the new requirement, but that’s not for the accounting purpose but for return of collectibles. So if our Ind-As provision is Rs 100 and under IRAC it is Rs 110, then we have to make an additional Rs 10 provision or we have to create a reserve. In our case, it’s the reverse. Our Ind-AS provision is much higher than the IRAC provision even though IRAC NPA is higher, which is why we don’t have to make any additional provision requirement in our book.

You need to provide Rs 500-1,500 crore more to meet the 6% threshold under the new IRACP norms? Over what time period?

The rationalisation norms also say companies need to bring their net NPAs below 6% under the IRAC norms, as computed. If you take our Rs 10,987 crore NPAs, we have said if that same number remains as of March 31, then in the worst-case scenario, we have to make a provision of Rs 1,500 crore. Now, we have also estimated that Rs11,000 crore can come down to Rs 10,000 crore or Rs 9,000 crore, then we have to do only500 crore. But if it goes below that, then we may not have to make any provisions. So that’s only an indicative number.

The Stage 3 ratio has fallen sequentially, but it remains in double digits. What is the reason for that and when do you expect it to move into single digits?

If you go back to our Q1 results, then because of the pandemic, the NPA had gone up to 15-16% and we had said we would reverse 80% of this additional provision we are carrying in the first quarter before March 31. As of December, we have already reversed 60%. Just about another 20% is left and that will also be done in this quarter. We’ll get the benefit, given the way collections are going. Clearly, we think 11% can come down to anywhere between 8% and 9% by March and the net NPA is already at 5.6%. We are one of the NBFCs who are carrying the highest coverage ratio of 52-53%. If we come down to 8-9% and we maintain the coverage of over 50%, we will also go below 4% net NPA, which is our other commitment to the market.

There were some movement restrictions in January. Did that affect collections?

No, because fortunately, there was no total lockdown. Even the employees who might have got impacted during this wave were only temporarily out of action for about four-five days. So I wouldn’t say there was any impact, but the media coverage of such waves results in people’s sentiments getting affected. They start to wait and watch. So initially for a week or 10 days, there was a little slowdown, but then that got corrected by the next two weeks. We closed December with a 100% collection efficiency. We would definitely be around 95% even in January.

How do you see higher borrowing costs impacting profitability?

We are fortunate to have a long-term fund which includes borrowings from two years back. They are maturing and they are at a high rate because those days the rates were high. So even if the rates were to go up by 25 basis points (bps) or so, our current borrowing will be cheaper than the amount we are sitting on. I actually see a benefit whenever we correct our past borrowing. Secondly, we have multiple sources of borrowing and our securitisation portfolio gets us a very attractive rate. So we don’t see a major impact of the cost of borrowing hitting us, but if there is a 50-bps increase, I’m reasonably sure that all of us will increase rates to the customer as well. So the yields and margins will definitely get protected.

from Banking & Finance – The Financial Express https://ift.tt/JlSym7t