‘Cash flows will go down... but the collateral will not depreciate’

Mahindra Financial Services' Ramesh Iyer shares his insights on how the industry is tackling the coronavirus crisis

In the closing sequence of the action comedy Tropic Thunder, the heroes are escaping a hostile jungle and angry drug lords. The whirring helicopter is waiting to fly them out, to the safety of their homes. Their period of fear and anxiety is about to end. Now, imagine if lightning struck the chopper down. That’s what the pandemic has done to non-banking financial companies in India. The NBFCs have been struggling to break free of the liquidity crunch, after the IL&FS crisis, which unravelled late 2018. But, by end of 2019, a glimmer of recovery began to show — their borrowing costs began to fall. Then the lightning struck early this year with COVID-19, the situation deteriorated further in March, and retail loans are looking dicey once more. We ask Ramesh Iyer, vice chairman and managing director of Mahindra and Mahindra Financial Services, how one of the bigger players in this space plans to tackle this once-in-a-lifetime crisis.

What’s a typical day like, lately?
This situation has been most unexpected. Besides in-house meetings, we do industry interactions, such as with CII, and discussions about making representations to the government and regulators. Usually, there is one critical call with a banker or regulator. So far, the regulators and RBI have recognised the pressure NBFCs are under in these difficult times and have been supportive. Our steering committee meets every day, when earlier it used to meet once a week. Decisions have to be made at short notice, so the protocol of going through the secretary is out. Through all of this, we keep a close watch on the cash balance. If we need to draw it overnight, it should be possible.

How much of your book is extremely vulnerable to default?
These are times when you don’t use the word ‘default’ but say ‘circumstantial delay’ instead.  Our big market is the ‘earn and pay’ customer and they come from various segments – farming, professions such as teachers and local doctors, transport, traders and contractors. Those in farming and in professions will not be affected since they have a different stream of cash flow. But for those in transport and trading, who form 25% of our loan book, moratorium will be critical. Contractors, who form 20% of the book, will face delay in cash flow. We had started reducing SME loans over the past year with the economic slowdown, and it would be 5-7% now. In my estimate, 90% of the book would be those who were regularly paying and may exercise the option of the moratorium. Another 5% are paying on the basis of their earnings. Therefore, 4-5% will remain vulnerable for a little longer. If things remain as they are beyond April 15, the regulator will get into a dialogue with the industry and take suitable action. Even if things recover, it will take a month for normalcy to return. The recovery will start with farm cash flow, with the harvest looking definitely good, followed by rural infrastructure taking off with mining, road construction and irrigation projects. That’s where assets and labour will be deployed. The reversal of the current situation will start from rural India, like it did in 2010-14.

Do you expect provisioning to be much higher in FY21?
The last quarter of FY20 will not be bad since we were working till mid-March. Though, historically, the proportion of NPAs drops in Q4 (the harvest money comes in during this quarter, the contract bills get settled and so on) this time we may see a marginal increase instead of a reversal. The marginal increase will be because cash flows have got delayed from harvest, treasury bills and municipal bills that get released in March were pushed, putting pressure on collections. Plus, there has been no field activity for the last 15-20 days of March.

We expect provisioning will increase in Q1 and Q2. We will have to categorise NPAs clearly since this is an extraordinary situation. There was weakening of asset quality during Q3. We had 8-10% of our portfolio from HCVs and that industry was going through a tough period. These are big-ticket items and they tilt the balance sheet. Going forward, there won’t be asset-quality deterioration, but there will be delay. Cash flows will go down because of earnings dropping, which will reflect in overdues, but the collateral will not depreciate.

Could sourcing capital become tough in this environment?
We are comfortable enough to not raise capital for the next two years. Our source of money is banks, debentures, mutual funds and insurance companies, besides we securitise 10-12% of our portfolio. Our borrowing is broad-based and we do not expect any of the sources to dry up. There is liquidity in the system and with our pedigree and high credit rating, we are in a good position. In the next three to six months, we will not need high quantum of funds for business requirements since disbursements will not be very high. At a capital-adequacy level, we are at about 19%, and leverage is 4x with March disbursements being low. The auto and tractor industry is down 45% in volume terms, and the number will be no different for finance companies since we are only enablers. 

How are you engaging with your workforce?
Our first level of engagement has been about the customer, to understand who is asking for a moratorium. Our interactions with the branch and regional offices are not about collections but about consumer sentiment on the ground. The second level is about giving the workforce web-based training for various aspects such as customer interaction. Everyone in our staff of 31,000 people was given their salary ten days before the actual date. No leaves have been considered this month, and full salary will be paid.

What kind of impact do you see on the financial sector?
The smaller to medium NBFCs will take longer to restabilise their balance sheets, while the bigger ones will relook at their business models itself with respect to productivity and cost structure. Both will have different approaches. Smaller ones will focus on liability and capital requirements, while the biggies will look at cost of operations and how to increase productivity.