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Edited Transcript of M&MFIN.NSE earnings conference call or presentation 24-Jul-19 6:00am GMT

Q1 2020 Mahindra and Mahindra Financial Services Ltd Earnings Call

Mumbai Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Mahindra and Mahindra Financial Services Ltd earnings conference call or presentation Wednesday, July 24, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Rajesh Vasudevan

Mahindra & Mahindra Financial Services Limited - VP of Accounts

* Ramesh Iyer

Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD

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Conference Call Participants

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* Abhishek Mody

Asit C. Mehta Investment Interrmediates Ltd., Research Division - Research Analyst

* Abhishek Murarka

IIFL Research - VP

* Agastya Dave; CAO Capital;Analyst

* Darpin Shah

HDFC Securities Limited, Research Division - Equity Analyst

* Digant Haria

Antique Stockbroking Ltd., Research Division - Assistant VP, Equity Research

* Jamshed Dadabhoy

Citigroup Inc, Research Division - Director

* Karan Singh Uberoi

JM Financial Institutional Securities Limited, Research Division - Vice-President of Equity Research

* Mahrukh Adajania

IDFC Securities Limited, Research Division - Director

* Nagraj Chandrasekar

Laburnum Capital Advisors Private Limited - VP

* Pankaj Agarwal

AMBIT Capital Private Limited, Research Division - VP of Research

* Shubhranshu Mishra

BOB Capital Markets Limited, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Mahindra Finance Q1 FY '20 Earnings Conference Call hosted by JM Financial Institution (sic) [Institutional] Securities Limited (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Karan Singh from JM Financial. Thank you, and over to you, sir.

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Karan Singh Uberoi, JM Financial Institutional Securities Limited, Research Division - Vice-President of Equity Research [2]

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Thank you. Good morning, everybody, and welcome to Mahindra & Mahindra Financial Services earnings call to discuss the first quarter FY '20 results. To discuss the results we have on the call Mr. Ramesh Iyer, who is Vice Chairman and Managing Director; Mr. Ravi, who is ED and CFO; Mr. Dinesh Prajapati, Senior Vice President, Treasury & Corporate Affairs; Mr. Rakesh Bildani, Deputy GM, Treasury and Investor Relations; and Mr. Vishal Agarwal, Deputy GM, Treasury and Investor Relations.

May I request Mr. Iyer to take us through the financial highlights, subsequent to which we can open the floor for Q&A session. Over to you, sir.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [3]

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Good morning. Thank you for joining the call. Unlike every year where I spend less time explaining the accounts, but I think this time, I would put in a little more effort to explain what these numbers are. And Karan, just to correct you, instead of highlight it may be good to call it a lowlight on the NPA to explain because that will then put to rest the confusion that must have arisen out of the high provision that we have.

So just to kind of recap, the Mahindra Finance business model historically has always been that post the March quarter, we do see increase in NPA in the first and second quarter, and as the cash flow starts flowing in, the third and fourth quarter sees the correction. Even the very recent year gone by, if you look at, we started the year at somewhere 9.4% as an NPA and closed the year at 5.6%. Even in the April call, we had made a mention of will 5.6% remain there? And we had said that it is likely to move closer to 7% or so. And we are not surprised that the NPAs moved in that direction. But yes, what else has happened for the provision to remain at this elevated level requires an explanation.

Under the Ind AS, the ECL method of accounting, anything that comes into NPA, we are required to make the expected loss provision upfront. We don't take into the benefit of the period of the contract or the seasonality, et cetera. And therefore, the increase in NPA between March and June has got fully provided in this quarter.

Now look at an example of -- let's say that all these contracts are the customers which are in -- currently NPL. Remain in NPL through the year, we will not require to make any provision on those contracts for the next 9 months. So in a way, to look at it is that the provision required on these customers for the year has all got provided upfront.

Now in order to arrive at the modeling, one way to look at it is to say that if through the year, the income is going to grow at certain level, the cost is going to go in one direction. And if this is the provision which is already made fully provided for, then where does the profit end up? You will see we will catch up for the year.

Now clearly, these are not the only customers or contract that we have in the book. Therefore, there will be some who will come in as an NPA going forward and some who will go out as an NPA going forward. Now will 7.4% therefore like last year, 9%, became -- or 9.4% became 5.6%? Do we expect that the 7.4% will proportionately therefore come down in the same manner? May not be. But we do definitely expect that the last 2 quarters, as we always expected, the cash flows remain buoyant. We will definitely see downward improvement to the gross NPA of these customers.

It also therefore will largely depend on how does the book grow in order to look at how the gross NPA looks like on a grown book. But clearly, we are very comfortable and confident to make this comment, that on these contracts, which are now in NPA, we will not be required to make any additional provision in the next 9 months, looking at the modeling of the ECL that has gone into. This means that if there are write-offs that happened from for these customers, they will only -- line item change will happen. Something will come as a write-off and it will reduce the provision to that extent, unless we see that the value of the asset that we dispose of are substantially lower in realization value as compared to the estimated loss that we have made. But the estimation that we have made is based on substantial data and the experience of the past. And we don't therefore expect that there will be a big difference even to the loss pool, if we were to make a provision for the losses and reduce it from the provision.

Therefore it is extremely, extremely important to understand that while we have registered a good growth in our asset, while we have maintained our net interest margins at around 7.6%, there is a slight dip over what it was as of 31st of March. But that will also again catch up because 2 things that happened here is, one, it is a product mix change; and the second is the little elevated cost of fund. And we are definitely seeing the reducing trend in the cost of money as well. And therefore, if the product mix remain the same, we don't see that we will miss out on the gross spread levels.

When it comes to the overheads to assets, also, there has been a slight increase. But I think there are certain one-timers, which have come into the overheads that we have provided for. And maybe at a later stage, there would be a cost in where we would put in an explanation more clearly on this.

But I think one clarification that I want to offer on the overheads as well. So far, we were looking at overheads just as a percentage to asset, which is important. But it has 3 elements in this cost which one needs to look at: one, the cost of acquiring a business and growing the business; second, cost is towards collections and maintaining asset quality; and the third cost is little investment into future. So in the past and continuing to remain that way is a cost which has been incurred for collections and asset quality maintenance. We have added people. And therefore, as of 31st of March, if that cost has already come in, they continue to remain also in the first quarter but don't produce the same kind of a result that was produced at 31st March. So as we see the year go by, you will see this cost as well get better produced. And therefore, the productivity will kick in for this cost to come down as well.

So our concern honestly is not on any of these line item. While the P&L does reflect the pressure, but it is not a pressure or a reflection of any rural stress that is being generally discussed about. Because one other data point that I may want to offer to prove this point is the collection efficiency of first quarter last year and first quarter this year has remained exactly the same at 92%. So we have not seen any pressure from a cash flow perspective in rural.

But does that mean that customers have enough money, and therefore, why are they not buying assets? I think the customers have money and they want to discharge their liability. But by very clear sentiments, they are not in a mood to acquire asset, and that is very clearly visible from the overall volume shrinkage that we are seeing for OEMs.

In spite of the OEMs degrowing anywhere 15%, 20% for different products at different points of time, we still have added disbursement growth of 3-odd percent. And we do think that come October onwards, we will see volumes kick in. And I am not again saying they are big fundamental change, but they would definitely be a beneficial transactional change because the inventory will be -- put efforts to liquidate by various programs from OEM. And for someone like us who is so deep-penetrated and multiproduct, we'll get the benefit of that volume as well.

And clearly, therefore, our approach to the whole growth story is we believe that the disbursement growth can be somewhere in the vicinity of 10% as we closed the year. And therefore, the asset growth could be upward of 15-odd percent, the way we have looked at for the year. There could be some temporary benefit that we could get if the volumes are higher than what we forecast, but the organization structure is extremely flexible to be able to take benefit of that.

But as otherwise, we think that we have a very strong collection structure, which has the ability to maintain efficiency and which has the ability to bring back the asset quality to where it should be. And we have not seen any changing trend in this quarter as compared to any past. It has always been that the first quarter pushes up the gross NPA and it starts to correct. As a matter of fact, if you look at in this quarter, we have 7.4%. It's 2% lower than we started where we were the first quarter of last year. And because we don't have the luxury of providing step-based provision, we have to take all provisions upfront. Therefore, the P&L goes through that pressure, whereas it will get corrected as we unfold quarter after quarter.

So our summary take is that the performance of the company, while you look at it from a pure profit perspective, it looks to be under pressure. But if you were to look at it from different aspects of how this business is built and compare it to the model of any past experience, we are very comfortable to tell you that we are in the path of definitely growth and we are in the path of bringing about the correction. And we are not worried about, is things slipping? From what we generally hear as the rural slipping.

So that's not our take. Our take is the customers do have money. Customers are wanting to discharge liability. But customer sentiments are not aggressive for them to acquire asset, and therefore, the asset growth could be a little muted. But we don't have a fear on our ability to maintain collection and continuing to show decreasing trend on the NPA front.

I think, overall, this is what we think from a liquidity perspective. I don't think we have had any pressure in our ability to raise funds from the market. We have been able to raise funds from every possible source that was available to NBFC. While the cost did remain elevated last November through up to January, then on we have also started seeing the correction to the cost. But yes, we have committed lines where we have already agreed for certain rates in the past. And until they get replaced with new funds, we will not get the benefit of the changing trend. But surely, we don't see this year to be a year where interest costs will be moving up. We would see this year to be an interest -- a regime where we would see interest costs correcting downward.

As a matter of fact, we would continue to focus on our deeper penetration as our strategy. Where and how required, we would add branches to the extent required. And we would definitely bring in efficiency through better use of technology and data to be able to curtail and control cost. But I've always explained that this is a fixed cost only up to regional level. Then on it's a variable cost. And once we have people in place for handling volumes and for handling collection, to that extent, they will remain variable. And as we complete the year, you will see the efficiency benefit of this cost. While at any point of time, to start within the first and second quarter, it may look elevated, they get offset as higher volumes and higher collections starts to kick in with the same number of people in the second half. And that is why you will always see that beginning of the year, it remains elevated and it kind of tampers (sic) [tapers] off at the end of the year.

So, so much from our side, and then we are open to questions on all these fronts so that we can provide you deeper explanation.

Just couple of lines on our subsidiaries. All our subsidiaries are also remaining profitable, and they don't go through any new problem as compared to what I have explained as what we have from the marketplace. The major subsidiary, that is Rural Housing subsidiary, also has a similar problem in terms of elevated NPA levels. And as we explained even in the -- our last round, it is still cost only through Maharashtra. And the earlier that they would come out, as I've been saying, is around the harvest and plus harvest [time].

At least what we see is a marginal improvement that's already visible in this market. And the pricing power is substantially high to be able to even absorb this kind of a cost. But it's a profit to be made as and how we will start seeing the corrections to come through.

I think as a subsidiary, with the level of pressure the housing ventures went through, there was a pressure on the liquidity front for their ability to raise adequate funds. And given their asset quality, they took a conscious decision to be a little slower on disbursements. But you would see them back in business in terms of line of credit already agreed upon and getting back to business, and we would see correction of NPA happening as we get into the third and the fourth quarter.

As far as the insurance distribution business, again, their profitability has been healthy except to the extent that they have made certain advanced investments into new line of business, including digital means of doing businesses. And the benefit of those expenses are yet to be got by us. And again, they all are investments made to be future-ready and they have been expensed out, and therefore, you would see a little pressure on their profitability. But it is not a pressure out of shrinking margin. It's a pressure more out of investment made and expensed out for future readiness.

As far as the asset management company is concerned, I think we've -- all of us must have read that we are getting into a joint venture with the Manulife, which is one of the leading insurance companies. And we very strongly think that they will bring on the table a lot of knowledge on the business, their technology capability, product designing capability. And with our ability to be able to take them to the deeper pockets and grow this business, we will be cautious in how we want to and how much we want to invest into. But with this joint venture coming in, they're bringing in 49%. The money is actually going to come into the company, and therefore, we may not be required to infuse any fresh capital for the next couple of years based on the projections that we have made.

So far as the Mahindra U.S.A. venture is concerned, again, the market there out is a little slow. And to that extent, the volume for us is also low. But we are continuing to remain profitable giving a return of around 12%. And we do have a penetration of about 60-odd percent in that market. Again, given their growth rate, we have not required to maybe infuse any fresh capital immediately. But all ventures therefore are able to maintain their growth, but the benefit of the growth would definitely be witnessed at least in the Indian businesses. We are very confident to see some growth trajectory post the September quarter, that is from October, the festival season, since almost all businesses are working in the semi-urban and rural market.

So, so much from our side. And we can possibly open it up to Q&A and wait for people to ask us any questions that they have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Mahrukh Adajania from IDFC.

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Mahrukh Adajania, IDFC Securities Limited, Research Division - Director [2]

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My first question is on [any] feelers of asset quality for the second quarter, though not much of the quarter has gone by. But do you have any feelers in terms of how collections are going? Or if it all, there is any stress that you see in the second quarter which is more than what you had expected?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [3]

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No. So clearly as I've said, the customer out there do have money. And therefore, cash flow is not the pressure. Their prioritization is the pressure. So they are not wanting to use their money for asset acquisition, whereas we do see they are willing to discharge their liability. So as we speak, while we are 20 days down in July, we have not seen any new signals of stress for us to worry about, is the quarter is going to go the way that we want it to go.

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Mahrukh Adajania, IDFC Securities Limited, Research Division - Director [4]

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Okay. It's hard to tell -- I mean how do you tell for sure that if the client is not investing in new assets, he'll not stop paying also. That's the issue, right?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [5]

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No, that's not the issue. I think the issue is if the customers are earning from the assets that they already have, they would for sure discharge their liability. They are not wanting to bring in additional margin money to be able to buy asset. If somebody is willing to give them 90% loan, maybe they will put in 10%.

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Mahrukh Adajania, IDFC Securities Limited, Research Division - Director [6]

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Okay. Got it. And the other question is on liability. Of course, with brand you should have no issue raising funds. But there are some reports that banks are now refusing to lend even to the very top-rated NBFCs maybe because a lot PSU banks have hit their limits or whatever the reason. Is that correct at all?

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Unidentified Company Representative, [7]

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No. So as far as banks are concerned, they had a challenge last year for the sector cap because the REC, [PSE] was -- continues to be part of the NBFC sector. So sector limit is always blocked based on how these companies borrow from the banking channel from the PSU bank. So every time, when you go out to them, they will always look at what is there present position vis-a-vis the sector cap. But we are able to still raise from these, all these public sector banks. We don't see that as a big challenge from the public sector bank. The challenge is that still the public sector bank lending rates continues to remain slightly more sticky. They continue to demand the spread over the (inaudible). So I think that is the challenge.

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Mahrukh Adajania, IDFC Securities Limited, Research Division - Director [8]

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And has this spread increased in the last 5, 6 months. It shouldn't have, right?

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Unidentified Company Representative, [9]

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No. So what was increased during the quarter of October to December, that has now reduced. But yes, but it is still -- they continue to remain slightly elevated compared to the other private banks and the foreign banks.

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Mahrukh Adajania, IDFC Securities Limited, Research Division - Director [10]

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Okay. But there is enough from private banks and foreign banks to [reach] offset the PSU gap, right?

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Unidentified Company Representative, [11]

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Yes, yes.

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Mahrukh Adajania, IDFC Securities Limited, Research Division - Director [12]

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Okay. And my next third question is on write-offs. What were the NPLs written off during the quarter?

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Unidentified Company Representative, [13]

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90 crores.

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Unidentified Company Representative, [14]

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90 crores. 90 crores.

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Unidentified Company Representative, [15]

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90 crores.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [16]

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About 90 crores.

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Operator [17]

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The next question is from the line of Abhishek Mody from Asit C. Mehta.

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Abhishek Mody, Asit C. Mehta Investment Interrmediates Ltd., Research Division - Research Analyst [18]

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Just first thing, you just -- you said it earlier, do you still expect a disbursement growth [towards] 10% and AUM growth over 15%? That's my first question.

Second, sir, in terms of NPA provisions of a new accounting standard, are the provisions made more on the macro economic environment? Or is it more of -- more so to do account-specific? You're lending to farmers and people in the rural area? Are there -- because of those, you consider see the provisions in macro or micro?

And third, sir, you told that you don't expect more provision, but if you see the provision, coverage ratio is 24.9%. And the previous rate was I think around 35.1%. So are you still hopeful that you don't expect to see more provisions in the next 3 quarters of the current year?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [19]

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No, so let's first clear the first one, where you said 10% and 15%. Yes, that's our expectation based on the festival demand, that we expect that it will pick up in the auto, tractor segment and we would get the benefit of it as against the current 3% odd disbursement. We think that, that is the kind of number we look at for the third and fourth quarter. In as far as the provisions are concerned, when you say that 35% was the first quarter, but it had gone -- come down to 19% as of 31st March. So I think once an account is an NPA and we make 30% of whatever is the x percentage provision on the base of ECL, I am saying we are not required to make any additional provision on that account based on the ECL calculation.

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Abhishek Mody, Asit C. Mehta Investment Interrmediates Ltd., Research Division - Research Analyst [20]

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Sir, I think you're talking about the reversal which you made in Q4, I think there was provision reverse in Q4. So you're (inaudible) first, second quarter you make a provision. But by the third and fourth quarter, you see...

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [21]

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It's not getting the reversal. Like you look at even last year, we started with 9.4% and ended with 5.6%. And in the fourth quarter, we actually had a credit, right? Yes. But at the same time, it is not appropriate to imagine that whatever account has an NPA, will be the only account which will remain an NPA. You will get some new account coming in NPA, and there will be some from NPA will go out as well. So to that extent, let's say one truck account comes in and a tractor account goes out, there could be some differential provision which will come in because the value of assets are different, right?

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Abhishek Mody, Asit C. Mehta Investment Interrmediates Ltd., Research Division - Research Analyst [22]

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Okay. Yes, sir. Just -- then my second question, just on

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [23]

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Let me come to that. I will answer. Whether the calculations are on the basis of only macro or micro. I think it's a factor of all. We do look at how the macro is. We do look at how our portfolios in the past has behaved, and therefore, what is our experience of that. And we do take into consideration what are the efficiency factors currently enforced. So it is an element of all. It is not just based on certain macro future. To say that, "Oh, everything is going to be good, so no provision required to be done or no loss will happen." Or nor is it absolutely based only on the history to say that -- because conditions historically could have been different from conditions futuristically. So it does take into account all of these elements. It also takes into account various products that is considered in the portfolio to [our advantage]. So it is not past experience of truck will be applied to the current experience of a three-wheeler.

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Abhishek Mody, Asit C. Mehta Investment Interrmediates Ltd., Research Division - Research Analyst [24]

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So you're telling both in the...

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [25]

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All. I'm saying all 4: macro, micro, the current portfolio and the current happening at the marketplace.

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Abhishek Mody, Asit C. Mehta Investment Interrmediates Ltd., Research Division - Research Analyst [26]

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Okay. Okay. Okay. Sir, just a final question. In terms of the NPA in the subsidiary, I think INR 57 crores of provision is put, if I subtract the consol and the standalone basis. So just a...

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [27]

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One second. We'll just look at the number and let you know.

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Unidentified Company Representative, [28]

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What is the question?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [29]

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No, he's saying what is the provision for our subsidiary.

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Unidentified Company Representative, [30]

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(inaudible)

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [31]

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Consol minus -- yes, consol minus your standalone, the difference (inaudible)

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Unidentified Company Representative, [32]

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(inaudible)

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [33]

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(foreign language) INR 57 crores.

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Abhishek Mody, Asit C. Mehta Investment Interrmediates Ltd., Research Division - Research Analyst [34]

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INR 57 crores, (inaudible). That will be only the Rural Housing part, if I'm right. I just want to...

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [35]

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That's only a subsidiary which has the provision. So you should be right. But maybe we can come back. (inaudible) somebody will call you and message you that number. They will just look at it for clarification.

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Unidentified Company Representative, [36]

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(foreign language) Only (inaudible) 1-minute [question].

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Unidentified Company Representative, [37]

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In a moment, we will call you.

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Unidentified Company Representative, [38]

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During the call, we will...

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Unidentified Company Representative, [39]

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During the call, we will tell (inaudible)

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Abhishek Mody, Asit C. Mehta Investment Interrmediates Ltd., Research Division - Research Analyst [40]

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Okay, fine. Okay.

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Operator [41]

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

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [42]

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Two questions first. If we go into what drove the provisioning on the Ind AS, it's typically a combination of the expected slippage or expected loss and then multiply that by LGD. Could you give us a sense, over the last few quarters, which of those variables has moved up? Is it that you're expecting to see greater defaults? Or is it that you're expecting to see a greater loss-given default?

And second, could give us some sense -- there's been a lot of footprint expansion by small finance bank, other NBFCs, et cetera. How is the competitive environment changing for you? And in which verticals are you seeing tighter competition?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [43]

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So by the time they pull out the other figures, honestly speaking, we do not yet see any major competition from any new set of players. These were all existing in some format. The format has changed. Let's say if AU Finance was an NBFC then has become a bank over time or Bandhan was then in microfinance has become a type of a bank. So I don't think we have seen any new player emerge just that the format has changed. And therefore, we do not [commented] any pressure of seeing a new competitive pressure out there or any of this player going more aggressive and pushing us to do certain different things. No. I think it's just that the overall volume of the market has come down and all of us have either maintained market share or some of us have even gained a little market share to get whatever benefit that we give. So I don't think the competitive pressure has substantially changed or increased for anything to go the other way around. The other cost in of what are the changes that has come in, Rajesh will just kind of let you...

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Rajesh Vasudevan, Mahindra & Mahindra Financial Services Limited - VP of Accounts [44]

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There are 2 changes, we have reset the rates of PD and LGD during the quarter from March. So PD has changed by -- no, it has come down by 2%. Our LGD has gone up by 2%.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [45]

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Got it. So -- and is that what -- but you're saying that doesn't necessarily have to do with the extra provisioning that you've taken?

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Rajesh Vasudevan, Mahindra & Mahindra Financial Services Limited - VP of Accounts [46]

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No, no, no.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [47]

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Provisioning is -- if you look at 31st March versus 30th June. And this is typical of the rural model, where the NPA goes up in the first and second quarter and then starts to correct in the third and fourth quarter. So it's just purely number of account going up in this quarter, which will reverse itself in the third and fourth quarter. So even if you look at last year, I've been saying this over, we started at 9.4%, ended at 5-point odd percent, 6% or whatever. Is because what started off as an NPA, the customer starts to get their money after harvest and then they start to repay or they start getting their money from the government treasury for their [infra about the delta.] And they start discharging their liability. So this is typical of this model where you would see a little increase happening in the first couple of quarters and then the last 2 quarters we'll start seeing corrections.

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Operator [48]

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The next question is from the line of Digant Haria from Antique Stockbroking.

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Digant Haria, Antique Stockbroking Ltd., Research Division - Assistant VP, Equity Research [49]

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Yes. So I just wanted -- I know you explained it very clearly, but just to put it in numbers that our NPAs have gone up by, say, INR 12 crores, INR 20 crores for the quarter. And we have taken roughly INR 610 crores of provisions. So which is -- if I just do a like-like, it's like 50% provisions on whatever NPA had come. And is this a reason why you say that for the first year, whatever happens to these account, we don't need to take any provisions? And when...

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [50]

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Yes. See, when we arrive at the expected credit loss, that means we are providing for, in these account, whatever [there are] forecast of losses. Unless that calculation changes substantially, there will be no additional provision required in these accounts.

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Digant Haria, Antique Stockbroking Ltd., Research Division - Assistant VP, Equity Research [51]

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Okay. Okay, sir. And what would -- we have provided under IGAAP, say, last year for the same INR 12 crores, INR 20 crores? Just a theoretical question.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [52]

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Still, let's say that the INR 12 crores, INR 20 crores are all in the first bucket, right? So 10% or whatever we provide -- 15% or 10% that we provide, it would have been, say INR 180 crores.

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Digant Haria, Antique Stockbroking Ltd., Research Division - Assistant VP, Equity Research [53]

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Okay. And versus that, you have provided roughly INR 500 crores, INR 600 crores?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [54]

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Yes, yes. So we provided almost more than double of that or a little more than that.

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Digant Haria, Antique Stockbroking Ltd., Research Division - Assistant VP, Equity Research [55]

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Okay. Okay. Okay. Fine, sir. That was the only question I had.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [56]

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Okay. There was one clarification required by someone asked a question on the housing NPA provision. That was INR 57 crores. Yes, that was the right number.

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Operator [57]

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The next question is from the line of Agastya Dave from CAO Capital.

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Agastya Dave; CAO Capital;Analyst, [58]

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Sir, one just quick follow-up on what you mentioned. The probability of default is down 2%, LGD is up 2%. So my understanding is that it's a rolling -- rolling on number...

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Unidentified Company Representative, [59]

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No, no. It is not 2%. It has gone up and gone down by 2%.

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Agastya Dave; CAO Capital;Analyst, [60]

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Yes, yes, yes. That is what I meant, sir. The PD is down 2%. LGD is up 2%. In my understanding, it's a rolling [all] cumulative calculation. So how much variability -- I mean how do we interpret this variability? Will this be like a minor blip or a fairly big movement? Can you give actually the LGD number, the actual number now?

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Unidentified Company Representative, [61]

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Actual number we'll give you just to answer you. We were at 180 days earlier when the model started. Now as we start replacing by 6 months earlier, 6 months we removed and the recent 6 months we add. As we start coming nearer and nearer, as we become more contemporary, we will be reflecting NPAs recognized on the basis of 90 days past overdue. Hence, normally, NPAs past overdue, the probability of that will come down as compared to the 180 days. Stickiness of the 180 days is much more than 90 days stickiness. Hence, the probability going forward, assuming there are no market turbulence, going forward, the probability of the default will come down. To how much? Of course, time will say. But the LGD will be a factor, as I told you, of supply/demand, resale, all those. I can't comment on the LGD.

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Agastya Dave; CAO Capital;Analyst, [62]

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Yes, yes, yes. I get that point, sir. Sir, my first question was that one of the largest private sector bank, and they have a subsidiary which also is in this business, and on their con call they mentioned that they have seen asset values declining in the auto sector. And hence, they had taken additional provision. So would you -- and you mentioned that you have not seen that kind of impairment. So would you agree with that? I mean are you seeing that? Or is this a minor thing, which is just company-specific?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [63]

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I think it's a outcome of the product mix as to -- like we have almost all products. If somebody has a, let's say, little more of a certain range of commercial vehicle, could they be seeing it a little differently? Or if they're overly present in certain geography and not widespread across the country, then it could be a behavior of a certain geography as well, right?

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Agastya Dave; CAO Capital;Analyst, [64]

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My guess is that they were referring mostly to CVs. That would be my recollection.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [65]

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And more to [CV] and more to maybe fleet operators.

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Agastya Dave; CAO Capital;Analyst, [66]

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Maybe, sir.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [67]

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Right. So therefore, it depends on the exposure that you take on the client in terms of -- suppose I have given 90% loan, right? Therefore my loss ratio will be higher when I repossess and sell. As against...

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Agastya Dave; CAO Capital;Analyst, [68]

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Asset values, as such, sir, are you seeing any impairment there?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [69]

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Not yet to the extent we have the discounts on the vehicle is definitely impacting the resale price.

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Agastya Dave; CAO Capital;Analyst, [70]

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Okay. Okay. And sir, one last question, sir. All this started and -- and when the initial slowdown started last year, people were saying that it is because of the NBFC liquidity issues and also high interest rates. And there was as you have mentioned. So my guess is that if the things have reversing, do you expect this particular change of liquidity situation and lower interest rate, would that sooner or later be enough to reverse this slowdown? Or it's a much bigger structural issue? How do you see it? Because your commentary on how the consumer is actually behaving is pretty interesting and slightly not what I expected. So how do you look at the liquidity part? And...

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [71]

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I'm of a view that neither was NBFCs nonlending nor the interest were the cause of the slowdown in this industry. So I don't accept the theory at all. Because we have not refused anybody to give money. And if somebody else has refused to give it, if the client was acceptable, we have lent to them which is why we have gained little market share. Like us, somebody else has also gained market share. So this could be -- kind of an OEM, out of 10 answers for the slowdown, this could be just one part. But these are not the trigger to either drop it or grow it.

Similarly, interest costs like fuel, if an operating cost for an operator, if he's in a commercial kind of a business, yes, a personal car user may say why should I buy a car if the interest rate is so high, I would rather wait, right? But if you were to look at overall auto industry, it is not represented only by personal use car. There are pickup vehicles, there are vehicles, which are put for tourist use. There are vehicles like Ola, Ubers of the world that are vehicles, which are in people carrier, tourism, there are cargo carriers and they are not honestly driven by interest cost. While, they negotiate for the best interest. No sooner they know their cost of borrowing, they factor it in their pricing to consumer. So therefore, interest is [things] -- normally, I have seen the vehicle decline happens when the capital cost of acquisition goes up. Like if the vehicle price was to go up by 10%, 15%, I think there is a pressure and therefore they say is there an urgency to buy. If their exchange vehicle drops substantially in terms of resale price and that is inefficient margin for the new vehicle purchase, then the vehicle sales go down. Otherwise, through operating cost, there could be a delay but never a decision not to buy because if I have a demand for a vehicle, I would be able to price accordingly. So the operating cost is actually looked at over the use of the vehicle for next 5 years, 7 years kind of a thing and they do believe that they will cover it up.

So I have a very strong, different view on the industry dropping is not an outcome of the operating cost. I think it's clearly an outcome of sentiment in my opinion. Why do I acquire a vehicle now if I don't see a high load factor or a use of the vehicle in waiting to happen. So I think people are waiting for infrastructure slowly to open up, people are waiting for the postharvest outcome of how the yields are going to be and how the farm cash flow is going to be. If these 2 fundamental cash flow starts showing positive trend, my guess is it will start showing a positive trend, given acquisition of the asset classes.

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Operator [72]

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The next question is from the line of Darpin Shah from HDFC Securities.

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Darpin Shah, HDFC Securities Limited, Research Division - Equity Analyst [73]

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Repayment rates are lowest for last -- in the last several quarters. So how do we read into that?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [74]

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Repayment what? Sorry, I missed it.

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Darpin Shah, HDFC Securities Limited, Research Division - Equity Analyst [75]

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Repayment rates within the whole book.

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Unidentified Company Representative, [76]

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CV book growth is there higher. if you see last couple of years, on a low base, CV growth has been almost -- gone up by 7% to 8% on overall book composition. And that book is having -- almost all the loan is in the 4- to 5-year bracket. So effectively that runoff will be slightly slower compared to the other book.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [77]

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And as compared to that, in the earlier book, we used to have three-wheelers (inaudible) so the three-wheeler volumes have come down. So I think both of these factors happened.

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Darpin Shah, HDFC Securities Limited, Research Division - Equity Analyst [78]

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Okay. So that is the only reason you see. You don't see any reason in terms of -- you don't see any foreseeable pain coming because of slower repayments or anything else?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [79]

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If you look at our collection efficiency even in this quarter and compared to first quarter of last year, it is same at 92%. So we don't see nonpayment as the reason for the asset continuing.

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Darpin Shah, HDFC Securities Limited, Research Division - Equity Analyst [80]

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Okay. And my second question is our coverage is still 25% only. So do you see on all your assets or appeared LGDs should be at this level only? Or do you see a chance to increase these provisions because of the way environment is?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [81]

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So see, as I said, we look at various factors to arrive at that. And if we see clearly that some of the factors are very adversely behaving, then we will have no choice but to make those corrections. But otherwise the coverage as -- in my opinion, the coverage has lost its importance. If we are now forecasting the expected loss in making a provision, we don't expect that finally when the asset has to be either repossessed and sold to make losses higher than this. And this is built out of history.

Now clearly, if we think that -- let's -- just as an example. Suppose let's say that certain assets the manufacturers discontinued. They don't produce that asset, and the resale of that asset substantially starts to drop. We will have no choice but to bring in that factor and then accordingly the expected loss will be pushed up. In a regular used product, in a similar pattern of product mix, in the same geography where the economic drivers remain the same, we don't see this factor to change substantially. But if any of these factors undergo change, it will start bringing in, in that formula, to that extent either it will go up or go down, will start happening.

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Unidentified Company Representative, [82]

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Please note that if you recall last March also when we did a write-off, we have a write-off policy every September and March. So whenever we do write-off, the proportion of the contract, which moves out of the NPA for that differential portion of over and above the LGD goes [up] from the provision value. So effectively, the coverage outcome will be a percentage derived based on that. So you will have to consider that factor every September and March for the provision coverage value.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [83]

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Like 35% first quarter last year, closed at 19-odd percent as we reached March.

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Darpin Shah, HDFC Securities Limited, Research Division - Equity Analyst [84]

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So that's why I'm saying. So you feel that in current environment, this should be good enough unless and until something drastically changes?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [85]

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Yes, yes, yes. Surely.

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Operator [86]

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The next question is from the line of Shubhranshu Mishra from BOB Capital Markets.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [87]

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My first question is with regards to any new product that you're launching especially in consumer durables and personal loans?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [88]

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Even if the answer is just they're not game changer. I think we are launching through digitally for our existing consumer. I would more think this year would be a testament of that as to how much of that is required and doable and what is the support OEMs are willing to give. But they would not be some kind of a large disbursement to offset the slowdown that we are seeing in the auto and all that. It'll be a very, very small portion for the year. But that's one product that we are very surely looking at that as our need to be in going forward.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [89]

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And personal loans as well, sir?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [90]

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So this will -- I mean if you look at even consumer durable is as good as a personal loan. So we call them as a small-ticket loan rather than quantifying them as personal or consumer durable.

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Unidentified Company Representative, [91]

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These are credit-based lending models. So effectively, these are first-time properly evaluated credit [customers] and based on that.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [92]

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Good customer, good track record, with a history of current repayment track record of these consumers will be the parameters which will go into deciding, first of all, who should get. And then based on how much have they repaid, we'll decide how much should they be given.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [93]

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So it's a fair assumption that it'll be largely cross-sell product.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [94]

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Oh yes. [Off] to those customers, out of the 3-year loan who have repaid 12 months and they have repaid without a default.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [95]

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Sure, sir. And second, you've been alluding to collections. If you can elaborate on your collections infrastructure, how many people you've deploy, branch level activities and regional, any centralized regional-level activity, that will be very helpful, sir.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [96]

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I think if the company has about 20,000 people, it's safe to assume 35% of them will be in collection. And they would be by branch and they would be assigned number of customer at that level. And they will -- they are being assigned bucket-wise collection, which is someone managing a 0-1 bucket, somebody managing the 2 bucket, then somebody managing the 3 bucket to not allow it to go beyond that. And then we also have a mix of legal and settlement kind of a team attached to the collection beyond 4 and 5 installments so that recovery from NPA accounts starts to kick in. And there are team which is monitoring the repossessions and disposal of vehicles and the stockyard managements.

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Unidentified Company Representative, [97]

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And the first year is also handled by the business team, first-year collections.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [98]

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Yes. So any business that's been done, let's say, this month will be managed for the next 12 months by the business team who have a separate collection team with them. And once they manage the first 12 months collection, then it is handed over to the soft bucket team, which is a pure collection team.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [99]

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Right. Sure, sir. And my last question is with regards to your high NPAs. So they happened in your Rural Housing business, sir. They have been largely sticky at similar levels, double-digit levels, for a very long period of time. So how do we look at the gross NPAs in rural housing?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [100]

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I think if you were to knock off Maharashtra from that, that they come done to a 6%, 7% kind of a level. And I think we assume that, that should be the level this business should see if the geography performance is good. We believe that Maharashtra would start showing correction postharvest, but it's unreasonable to expect that in 1 season or in 6 months all corrections can happen. But Maharashtra will first climb down from wherever they are to a 10%, 12% kind of a level before they can start moving down.

So I think it's safe to assume that until Maharashtra fully corrects, the NPA would be in the range between 9% to 11% kind of a thing. Once Maharashtra corrects, then we'll start seeing it closer to 8%. And one should assume this will start to show color post-October and will take about a year for it to really reach those levels.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [101]

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Sure, sir. And just one data-keeping question. So if you can give me the 0 dpd in each of your asset classes?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [102]

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Each, I can't. But as a book, I think we would be somewhere around 80% or so.

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Unidentified Company Representative, [103]

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80%.

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Operator [104]

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The next question is from the line of Jamshed Dadabhoy from Citigroup.

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Jamshed Dadabhoy, Citigroup Inc, Research Division - Director [105]

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I have one question, which I want some clarification on, on the tractor side. Your presentation seems to indicate that tractor industry volume growth will be between 2% to 4% CAGR on a medium-term 5-year basis from FY '19 to '24. However, when we looked at the group company, Mahindra & Mahindra, their tractor outlook over the medium term ranges between 8% to 10%. So I just want to get a sense of why there is discrepancy between what you all are forecasting and what they are forecasting.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [106]

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I think as a parent, I would think their forecast is more correct than our forecast.

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Unidentified Company Representative, [107]

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[I only add that] -- no it's not -- see, basically what we do is it's a CRISIL report they have uploaded. It is nothing to do with Mahindra Finance. If you see all the reports are OEM reports are CRISIL reports, it is not Mahindra Finance has got any separate projection or something like that. But our -- as Ramesh said, that OEM projection (inaudible)

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [108]

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I mean let me clear -- I mean if we really were to total, and we have seen this not just in tractor. You speak to any industry, you talk to 5 OEMs, you will get maybe 5 different projections that they have in their mind. And you total it up, it can sometimes exceed the total production capacity. So I think we, as financier, while I don't know why this number we are even putting it out as CRISIL or whatever, we are concerned with the volumes available for financing. I mean I don't even care industry grows at 6% or 2% or 5%. We know that we need to do x number of tractors. We know it by geography, by dealer. And we are therefore looking at what is the volume we are producing. Market share is arrived at by taking a denominator of what the dealer says I sold 100 tractors. It means nothing to me. If I do 10 tractors, my income is what we generated out of 10 tractors. Whether the market share is 32% or 2% whether the industry has grown at 10% or 5%.

So for a finance company, the absolute volume is what is the key. But just to get a feel of what someone is talking about, we pick up this number. Now CRISIL says it is 2%. For all that you know, as we speak, CRISIL may put this number upward and make it 5% [post budget] So these are very moving, moving kind of a target and it has -- I don't know how many factors which go into. My personal request would be one should not even try to reconcile these 2 numbers.

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Jamshed Dadabhoy, Citigroup Inc, Research Division - Director [109]

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No I just -- it was just an observation because it's a bit jarring that in the same group, one company has such a different forecast. And I'm not -- if it was year -- for annual forecast or something, I wouldn't even have bothered to ask.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [110]

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One client...

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Jamshed Dadabhoy, Citigroup Inc, Research Division - Director [111]

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Since it's a 5-year forecast. I just wanted to get your sense.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [112]

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No, no, no. One clarification you should have is ours is not a forecast. Ours is a cut/copy-paste sheet of paper. Theirs is a forecast. So you may want to talk to them and understand what goes into their forecasting it. Ours is a cut/copy-paste of CRISIL. I'm sure we would have put somewhere (inaudible)

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Unidentified Company Representative, [113]

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Yes, Yes. We have put.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [114]

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We have put? Okay.

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Operator [115]

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The next question is from the line of Pratik Chheda from IIFL.

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Abhishek Murarka, IIFL Research - VP [116]

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This is Abhishek. So sir, 2 questions, first one is on OpEx. So can you talk about the one-offs that you mentioned in your opening remarks?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [117]

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So this is a little technical. So I will only say that it is arising out of certain variables moving towards retirers like gratuity, et cetera. Other than that...

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Unidentified Company Representative, [118]

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(foreign language)

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [119]

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In India (foreign language) lease rental...

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Unidentified Company Representative, [120]

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See there are 2 changes, one is 116, which is effective from 1st April. So there's been a regrouping of rent into the borrowing cost and depreciation. And then we have -- this year what we did is there was a restructuring of salary components internally. So what has happened is because of that, there is an impact on the gratuity provision. The basics have been increased by 5%. So that has an impact on liability of gratuity for previous years.

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Abhishek Murarka, IIFL Research - VP [121]

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So how much was the individual impacts due to AS 116 and...

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Unidentified Company Representative, [122]

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See Ind AS 116 overall, it is 80 lakhs per month is what we are getting an impact (inaudible). Per month, 80 lakhs. 80 lakhs per month. So INR 2.5 crores during the quarter. And gratuity is around INR 14 crores. And then leave encashment, which also gets revalued because of the basic going change, so be around INR 16 crores. So INR 30 crores totally because of these 2 components and INR 2.5 crores because of the Ind AS 116.

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Abhishek Murarka, IIFL Research - VP [123]

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Okay. But even if I knock off this INR 30 crores, INR 35 crores from your overall OpEx, let's say, that still gives me about a 35%, 36% growth in your OpEx.

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Unidentified Company Representative, [124]

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When you see last year, last year there was a one-off item where we had written back some expense of around INR 25 crores. In last June, first quarter. So there was an excess provision, which got reversed.

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Abhishek Murarka, IIFL Research - VP [125]

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So even then, the growth would be about 28% in your overall OpEx.

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Unidentified Company Representative, [126]

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[Growth] we should remove. INR 26 crores if you remove.

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Abhishek Murarka, IIFL Research - VP [127]

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Yes. 20 -- fair enough. So my point is that you're still growing your OpEx...

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [128]

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You're comparing last June to this June?

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Abhishek Murarka, IIFL Research - VP [129]

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Yes.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [130]

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Yes. So therefore you must understand that number of employees that would have got added during the year. There will be at least 4,000-plus employees we will have added during the year, the benefit of which would have come to us in the month of March. Now you will get similar benefit in this second half.

I think you must understand the use of these employees are not all income-generating employees, right? So therefore, you can't even make a percentage comparison of overheads to income. Many of them, as I said 35% of the employed force, is there in the collection, right? Not all of them are income generating. Many of them are quality correction. So one has to see the NPL reversal that happens as an outcome of this employee and that cost is towards that. Right?

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Abhishek Murarka, IIFL Research - VP [131]

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Fair enough, sir. So basically, I understand you're saying that you're investing in building that collections infrastructure.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [132]

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Not only I'm saying we are building in investment in collection, I'm saying that if you compare last June to this June, in between the number of employees added, it has to be one of the factors of the increase in costs.

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Abhishek Murarka, IIFL Research - VP [133]

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Of course, sir, of course. So my point is still that in a period when your growth is slowing and your revenue growth will also slow down, you were having to put in extra -- you're having to put in extra manpower into your business. And that is sort of increasing your cost growth to about 28%. So given that you already have (inaudible)

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [134]

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My dear friend, I'm only requesting you to don't make this people cost comparison on a quarter-over-quarter because this has to be compared on an annual basis and sequential basis because these are committed people who joined us previous year and produce result to show what we showed in March. Now the same result you will see coming next March as the whole year productivity kicks in, right? At the point of time, it appears to be higher cost because the productivity is low. But in a rural market, as the volumes pick up, as the collections pick up, you will see the productivity improvement and then the cost dropping.

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Abhishek Murarka, IIFL Research - VP [135]

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So on a normalized basis, what kind of increase in cost, overall cost, including the additional branches of people you are going to deploy, what kind of overall increase in cost...

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [136]

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So I have always said that in a business like ours, one way to look at that is what percentage of asset is our cost. So we have always said anywhere between 2.9 to 3.1 in the cost that we incur, 3.1, 3.2 at the lowest productivity, 2.75 to 2.8 when everything is going well. And you will always see this that in the first 6 months, the cost is at that 3.1, 3.2 levels and then comes down to a 2.8, 2.9 as the whole year closes by.

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Abhishek Murarka, IIFL Research - VP [137]

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Okay. Fair enough. And the other questions that I have, again, sorry to come back to that provisioning question. But incrementally, it seems that on the 12 -- 20-odd crore slippage, you made about a INR 500 crore provision. So that's around 40% kind of coverage. So suffice it to say that this is all based on your PD/LGD revised assumptions. So going forward, for whatever slippages happened during the year, again, you're going to have to make that much coverage? Or is that not the right reading?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [138]

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So therefore, if you are at today certain level of NPA, our clear understanding of this business model and historically for 25 years is you will only see this getting corrected to go downward as the cash flows of the rural starts to come in. It is always that sequentially if you look at the NPA will be higher in the first quarter. As we close the year, it will start to decline again.

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Abhishek Murarka, IIFL Research - VP [139]

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Yes. Sorry to just jump in. I understand that part. I'm just talking about the incremental, and given that now your provisioning is based anyway on your ECL methodology, on the incremental you made around 40% provision, which is basically your -- you know what your ECL has thrown up.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [140]

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Yes.

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Abhishek Murarka, IIFL Research - VP [141]

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So whatever happens between now -- whatever slips between now to March on that, also you will need to make 40% or thereabouts in terms of (inaudible)

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [142]

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Let's say ECL changes percentage upward for whatever changes in the marketplace, right? Then on the same account, you will have to make the difference and the reverse would happen. That if the ECL calculation show a downward trend due to changing market environment for favorable market conditions change, you would get the downwards. I am saying that if this number of accounts remain in NPA and if the ECL calculations don't change with the conditions remaining the same, there is no additional provision required on these accounts.

.

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Abhishek Murarka, IIFL Research - VP [143]

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Sir, the question I think most people have is that your ECL calculation itself should not be changing so dramatically because you're taking a long period to calculate your expected credit loss. Your LGD, your PD, you also said that it's gone up almost offsetting each other.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [144]

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Correct.

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Abhishek Murarka, IIFL Research - VP [145]

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The ECL calculation, ECL provisioning required should not be changing so dramatically?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [146]

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We are not changing the ECL so frequently. Please understand that when new accounts come in to NPA, by ECL calculation, we have to make upfront provision for that account fully. And that is causing this pressure. If x thousand -- let's say INR 1,000 crores of gross NPAs come in, on an ECL basis, we are required to make all the provision upfront.

Now if the account moves out of NPA, we will get the benefit. If they remain -- continue to remain in the NPA, we may not have to make any additional provision. The change in provision values not come from ECL changing from 30 to 50 or 30 to 40 or those kind of changes. It's come by the new account coming in to NPA and making a full provision as per ECL need.

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Unidentified Company Representative, [147]

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So the ECL calculation LGD rule changes only twice a year because every June and December, we do these changes, June quarter and December quarter. So previous cycle 6 months goes out and the current cycle of 6 months gets into. So every 6 months we revisit this number to get it more aligned to the current situation. So that is we do every 6 monthly.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [148]

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And they will not have a very dynamic change I can tell you.

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Unidentified Company Representative, [149]

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Yes, LGD percentage as what we spoke to, one of the questions was raised, what was the deviation in the LGD, it was just 2%.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [150]

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2%. Because most of the factors are already considered. It is just that the parameters will not change while the percentage of those parameters could slightly undergo change. Unless we get into a new class of assets altogether and then they bring in a new parameter, that's a different story, but given our experience and most geographical customer segment and product experience, the variability arising out of this will not be very dynamic.

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Abhishek Murarka, IIFL Research - VP [151]

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Okay. So just -- sorry to belabor the point, but just to make one thing very clear. When you say that you are providing fully for the NPA that has come up in this quarter, you mean fully to the extent that the ECL requirement throws up not 100% provision.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [152]

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No, no, no. Not 100% provision. To the extent (inaudible) requirement, [lifetime number is the right term.] Lifetime provision. These asset remaining in our book and if the ECL calculations don't go change, we will not be required to make any additional provisions.

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Unidentified Company Representative, [153]

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These are the lifetime provisions not (inaudible) .

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Abhishek Murarka, IIFL Research - VP [154]

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You're saying fully and 100% so that could have also created -- anyway, I'll pick up it up with Dinesh later. I think I need some more clarification on this.

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Operator [155]

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We take the next question, which is from the line of Pankaj Agarwal from AMBIT Capital.

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Pankaj Agarwal, AMBIT Capital Private Limited, Research Division - VP of Research [156]

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I'm coming back to the same question. So if I look at your provisioning coverage on our Stage 3 assets, it range between 31% to 36%, between 1Q FY '18 to 2Q FY '19. Then it's -- then we dropped to 19%, and it has gone to 24% again. So I'm not able to understand that for first 6 quarters under Ind AS it was more than 30%. It came down to 19% and now it's again going to 23%.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [157]

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So I thought Dinesh earlier explained so that you moved certain assets from there to either a termination loss or a fully write-off. Then the coverage drops and we do that write-off twice a year, once in September and once in March. So you will again see that, let's say, in September we move x percentage of these asset to a write-off category, right, either by repossess and then sale or by customer [completed] negotiating and closing, whichever way it happens. Then you will find that it moves out of gross NPA and goes to termination, and it moves out of termination [-- I mean] moves out of provision.

Supposing there is no difference between what we have provided and what the loss is, the P&L will have no impact. But supposing that bunch of asset do bring in INR 1 extra loss, then to that extent it gets factored in our overall calculation when we reset it at a future date.

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Pankaj Agarwal, AMBIT Capital Private Limited, Research Division - VP of Research [158]

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So if I look at your Q4 FY '18 provisions, it was 31% on Stage 3 assets, right?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [159]

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Correct.

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Pankaj Agarwal, AMBIT Capital Private Limited, Research Division - VP of Research [160]

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Question is that why this 24% can't go to 31% right? Why do you think it will remain at 23% or 24%.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [161]

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It can go, it can go. Why it will remain, suppose we don't have a major write-off in termination until we continue to -- hold the provision, it will go up there.

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Unidentified Company Representative, [162]

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The LGD percentage is around that number what you just mentioned.

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Pankaj Agarwal, AMBIT Capital Private Limited, Research Division - VP of Research [163]

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Okay. Okay. And second question, sir, though you have sequential increase in your NPAs, but don't you think the trend is higher than what you expected at the beginning of the year?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [164]

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No. In fact, if you recall, the April call that we had when we closed March, I very categorically said that it is likely to be somewhere around 7%.

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Pankaj Agarwal, AMBIT Capital Private Limited, Research Division - VP of Research [165]

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Okay. So till now if I look at your numbers, you have seen roughly 200 basis point reduction in your NPAs on a Y-o-Y basis.

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [166]

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Yes.

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Pankaj Agarwal, AMBIT Capital Private Limited, Research Division - VP of Research [167]

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So would you say that even by the end of this financial year, you will see similar decrease in your gross NPA ratio looking at the trends?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [168]

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I don't want to put a number to it, but I can very categorically tell you historically for last 25 years, the October to March collections bring down the NPA much lower than what it is between April to September. And we don't see any changing trend in that even as we speak today.

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Pankaj Agarwal, AMBIT Capital Private Limited, Research Division - VP of Research [169]

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Because, sir, reason I'm asking this question is that if I look at trajectory of NPAs, in entire FY '19, it was roughly 20% Y-o-Y decrease in your absolute gross NPAs. That was a trajectory you had and suddenly this stopped to only 5% Y-o-Y decrease, right? And if I go back to your FY '09, FY '10 numbers, when you came out of the last downward cycle, this Y-o-Y decrease in gross NPA lasted for 7 or 8 quarters, right? So I mean my assumption is that probably you might be seeing reduction in your old stock of NPAs, the similar decrease you saw in the last cycle probably you might be adding some new NPAs because of the stress in the rural segment or the economy. Is it a fair assumption?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [170]

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No. So I want to clarify to you that since the 12-month collections are managed by the business team and if I was to look at the last 12 to 15 months business done, the NPAs are much lower than historic book that we have. So that's the reverse of your thought process. But the second I want to tell you is when the gross NPAs remain at 8%, 9%, 10%, 12%, the chances of they getting corrected when the market conditions improve will be very steep as compared to when you're already at your best level of NPA. So we shouldn't forget that 5.6% was our historic best when it comes to NPA on a 90-day basis and we didn't expect that it will go down from there. It will only go up from there to start with and then come back to. Now this 5.6% becomes 4%, 3%, 2%. It's something that I'm not wanting commit to because it all depends on how harvest, cash flow and all kinds of things turn out to. But definitely, will 7.4% climb down barring the denominator effect, let's say the asset growth becomes negative and not growth, that's a different way to look at. But absolute number of customer in NPA as of today, let's say they are at the 1,30,000 customers are in NPA as of today, when we close 31st March of this year, I can tell you that number will be much lower than this number.

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Pankaj Agarwal, AMBIT Capital Private Limited, Research Division - VP of Research [171]

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Okay, sir. Okay, sir. Fair enough. And the third one, last question, in terms of your growth right, how much you attributed to your liability-side issue and how much to demand-side issue?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [172]

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I think 0 to liability-side issue. The reason is I don't think ever we are in a situation of saying we don't have money, don't do business, okay. Surely, liability side, effect will be somebody says I want a 10-year loan for a truck or a tractor, we will say no. Now one way to answer this is it's a asset-side issue because the customer wants 10 year, we don't want [to give.] Somebody may answer that no I would have done -- liked to do 10-year if I [would] have raised a 10-year money. But those will be a minuscule percentage of the overall. Therefore, the entire growth story is purely arising out of volume from market being subdued and nothing to do with money not being available.

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Pankaj Agarwal, AMBIT Capital Private Limited, Research Division - VP of Research [173]

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And that you would say for the entire auto sector as well?

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [174]

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Of the industry or to us you are saying?

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Pankaj Agarwal, AMBIT Capital Private Limited, Research Division - VP of Research [175]

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No. I mean like auto sales are down in all the categories, right? 10 to 15...

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Ramesh Iyer, Mahindra & Mahindra Financial Services Limited - Vice-Chairman & MD [176]

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My personal belief has always been nonavailability of money cannot be attributed as a reason for the decline in the auto industry. Because if you go and ask dealer, if the footfall at the dealership is very, very high and he is not able to convert because money is not available, then that's the reason. But we are seeing that footfall is low and it comes from exchange program being not very aggressive. It comes from sentiments not being very aggressive to say why in this turn I should buy a vehicle, what can't I wait, right? It also comes from every 2 months there is a new model being launched and somebody says, let me wait for Kia to come then I will decide what to buy. By the time somebody else says I want to come with a new vehicle. So there is a postponement, which is also happening. So it's a factor of many, many things. I would think in that order when an OEM [right stand] reason, surely [even right] availability of finance. But if somebody was to put a weightage to each of this, I think finance should get the lowest weightage.

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Operator [177]

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Ladies and gentlemen, due to time constraint, that was the last question.

On behalf of JM Financial, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.