Bankable | From dealing with Covid19 disruptions to facing competition from banks, what does the future look like for Mahindra Finance?
In conversation with Vice Chairman & MD Ramesh Iyer.
In conversation with Vice Chairman & MD Ramesh Iyer.
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00:00 Hello, and welcome to BQ Prime. You're joining us on a latest episode of Bankable, where
00:26 we discuss with some of financial services industry's biggest leaders on how they're
00:30 seeing the current market evolving, the business environment shaping up, some of the opportunities
00:36 that they see coming up for their businesses, as well as the challenges that they want to
00:40 overcome. To discuss this further, I have with us Mr. Ramesh Iyer, Vice Chairman and
00:44 Managing Director of Minds Up Finance. Mr. Iyer, welcome to this conversation. I want
00:49 to start this chat with something that an analyst has noted in a recent report about
00:56 your company, is that this is a credible turnaround story. But execution is still key. I wanted
01:03 to get a view on this turnaround story that is happening at Minds Up Finance. You had
01:07 a tough couple of years, especially with COVID playing a problem with your borrower base.
01:14 But since then, things have consistently been improving. So if you can just take us through
01:18 what has changed at Minds Up Finance so far.
01:21 So this is a 30 year old model, right? And we've always chosen to be in the semi urban
01:25 rural market. We have chosen certain segments of customers who are self employed, traders,
01:32 farmers, contractors. And that's a segment we worked with. We built a very strong retail
01:38 channel, close to about 1400 branches, have people locally recruited who understands the
01:43 market well. That's where this business was built around. You're right, when we went through
01:49 the disruption due to COVID, this segment of customers were the worst hit. And in that
01:54 particular quarter of the second wave, in fact, we booked our highest losses. And our
01:59 provisions went up or our gross phase three went up to about 15%. We had even said then
02:05 that the customers are there, the assets are there, things have to change on the ground
02:09 for things to improve. So that's the first turnaround if you look at things have really
02:13 improved the economic activity has picked up, whether it's the tourism, whether the
02:17 contracting segment, all of that is doing well. So therefore, the customers are doing
02:21 well on their own. Second is when we went through those disruptions, clearly we kind
02:26 of identified as to which geography which product which segment of customer is having
02:30 the highest stress. It's very important in this market or in this kind of segment, that
02:35 we partner the customer and don't take extreme actions, imagining them to be a failure of
02:42 default, they would bounce back. So we took a partnership approach. And then of course,
02:47 there was great support that was available from the bank, as well as from the government
02:52 in terms of moratorium in terms of restructuring, we did provide them to the customers. But
02:58 even more important, I think we resorted to a more closer follow up and agreeing to collect
03:04 in a month, maybe more than once or twice. If somebody is not able to pay all the installment
03:09 at a time, if they were to pay it on a weekly basis, we did resort to even those kind of
03:13 connections. All of this helped that customer to come out of their difficult situation.
03:19 And we saw a turnaround there very clearly, where the gross phase 3 has now come down
03:23 from 15% to sub 4% in a period of less than 12 months to 15 months. So that's one big
03:29 shift that's happened. I think second is there was an enormous focus on ensuring that
03:35 the customer forward flow does not happen from stage 1, stage 2 to going to stage 3.
03:39 So that's the other block that got created, the entire allocation of customer contracts
03:44 to various employees, their compensation around that all of that were restructured in a manner
03:49 where the focus substantially improves. This is from a past book. And as far as the new
03:53 book underwriting is concerned, we did use various rule engines based on these historic
03:58 experiences and brought in certain norms, which would filter some of the customers to
04:04 be not eligible to become those kind of credit. And therefore, if you look at our new book,
04:08 they are behaving extremely, extremely high quality. And therefore, they are at sub 1%
04:13 kind of an NPA, 2% kind of an NPA in different geography. And therefore, the future book
04:17 that we are building is of a very different quality.
04:20 Okay, but how long does it take for this book to sort of replenish itself and become mostly
04:26 new?
04:27 So typically, we have a 30 months book. And when we did face all the disruption, the book
04:32 would have run already 10, 12 months, 15 months. So there are different stages. But I would
04:36 imagine that let's take pre 21 book will kind of go out in somewhere in 25. And therefore,
04:43 by the time as we built a book, then you will see a new quality book roughly two and a half,
04:47 three years.
04:48 I want to touch a little bit upon the customer base and the kind of recoveries that we've
04:55 seen. But before that, transformation is also happening in terms of a technological transformation
05:00 that you want to take in you have a 2025 sort of vision that is being implemented. What
05:07 is it that has led to this technological sort of transformation to be taken up as a campaign?
05:14 The reason I'm asking that is because tech evolution is something that happens across
05:17 all institutions. So what is the reason for this to have been such a big part of your
05:22 transformation?
05:23 So again, go back to where were we working and what's the readiness of the customer?
05:27 So it first comes from the readiness of the customer to be able to use all of this. Second
05:33 is what's the overall ecosystem support that you get? Earlier, many of our customers were
05:37 not even in Sibyl. They didn't have a score. Now that many of these customers also have
05:42 a score, we are able to use this data and use the underwriting from a very different
05:47 perspective. Many of these customers were cash paying customer. I mean, we are at a
05:51 stage where more than 90 percent of our customers were paying in cash. When we look at it today,
05:56 just about 35-40 percent of the customers are paying cash, which means another 60 percent
06:00 of them have moved to paying through various electronic means. So if you fundamentally
06:05 look at it, the change is always caused by the need of a customer. It's not our requirement
06:10 that we want to invest in technology. It's the need of the customer. So you give them
06:14 better facilities, give them better experience, give them more methods and means to repay
06:19 and therefore all these investments.
06:21 Fair enough. I want to touch a little bit about the one thing that you pointed out in
06:25 your first answer, which was that you broke up the repayment cycle according to the customer's
06:31 needs. If somebody can't pay in one go, split it up into four, do a weekly payment. That's
06:35 a very microfinance inspired sort of repayment strategy. I'm trying to understand because
06:41 your business is not microfinance. You're not dealing with that, right? You're dealing
06:45 with small businessmen, small entrepreneurs who will probably need commercial vehicles
06:51 or other business loans to develop. This marrying of microfinance or, you know, a small value
06:59 loan dispersal strategy with slightly bigger loan accounts. How has this come about? Because
07:06 this is not just my mind, I'm seeing this across other companies as well. Everybody's
07:10 been sort of implementing this strategy. How has this marriage happened?
07:13 So I think it's fundamentally to understand we are not giving them a weekly payment for
07:17 their just one month installment. They are all customers who are built overdues. And
07:22 they need therefore that kind of a time to be able to pay for the past dues. That is
07:27 what they are taking, you know, certain part payments on a weekly basis. In a month, are
07:31 they able to pay their full installment at a time? The answer is still yes. But if they
07:35 already have two more installments to be paid, can they pay us two installment, three installments
07:40 on the same date? The answer is no. And that's how it gets split. So it's not that one installment
07:44 is split into four weeks. It is a two installments or two and a half installments outstanding
07:49 is split into four weeks. So typically per week or a 10 day collection would be like
07:53 a 50 percent of the installments.
07:55 Understood. Okay, fair enough. Coming to your business now, you've established yourself
08:01 as a commercial vehicle, largely tractor financing business, right? And that's that that was
08:06 the original business that Mind Your Finance did. You also developed the other segments
08:10 in your portfolio. You're looking at unsecured credit. I want to understand the evolution
08:16 of thought behind how your loan book should look like.
08:20 So as far as the book is concerned, I think we'll still be very heavy on vehicle tractor
08:24 as a book. Because we currently have about 85,000, 86,000 crore book, which is upward
08:30 of 95 percent is still vehicle and tractor. Is that going to run away? The answer is no.
08:35 Look at the year 2025, when we talk of lakh and 25,000 crore kind of a book number, we
08:41 still believe that about 20 percent may come probably from or 15, 20 percent will come
08:46 from non vehicle. So therefore, it will still be very vehicle heavy, tractor heavy.
08:51 Now, as far as the need for other financing comes from again, ask of a customer. Like
08:56 until such time we were able to understand as to where else and what else they borrow
09:00 for. We were restricting ourselves to this. When we look at now many of our customers,
09:04 they do take personal loans, they do take consumer durable loans, they do take it from
09:09 other sources. Therefore, the fundamental question that we had to ourselves was can
09:14 we design a product and deliver this to our existing customer? So therefore, our unsecured
09:19 loan book will first be built through our existing customer. Once we test it out, understand
09:24 that well, deliver it against the ask, then we'll brought basic to even non-Mahindra
09:28 finance customer going forward.
09:30 As far as other than vehicle and unsecured loan concern is the SMB. We were into SMB
09:36 financing, maybe even four, five years back, we had built a book about about 5, 7000 crore.
09:40 I think the market conditions did go through a difficult time and therefore, we kind of
09:44 went slow on that. That's where we are coming back and very clearly we are looked at auto
09:48 engineering and agri as the three industry vertical where we want to participate. And
09:53 therefore, it's not something new, but definitely it's something as a grow forward, you know,
09:58 growth story for us. And clearly we think as we reach 2025, we should be about 15% of
10:04 the book coming from non vehicle.
10:06 When it comes to core principles of lending to the segment, right, the segment that you're
10:10 in, for whatever reason, they might be a small borrower, but they reflect the sort of economic
10:19 mood of the country as well, right? Whether the rural parts of India or semi urban parts
10:25 of India doing well or not is key to how the overall country is doing. To your mind, what
10:30 has that evolution? Well, let's take COVID out of the equation, but over the last 10
10:37 or 10 or 15 years, what does that evolution look like?
10:40 So clearly this market looks at three or four cash flows. One, it looks at the farm cash
10:44 flow, it looks at the tourism as one important element. General people movement is the other
10:51 they look at. In the contracting segment of the cash flow is what they look at. If you
10:56 kind of currently you look at it, I think all of these are doing extremely well, right?
11:01 So therefore all the four cash flows which drive this market is doing pretty well. Minus
11:06 COVID, you're right, is the time where we had a maximum pressure because none of this
11:09 was doing well. But historically, if you look at when contracting and the farm does well,
11:15 the rural market does extremely well. And we are seeing that clearly happen, right?
11:20 So I don't think some basic fundamentals in rural as a cash flow has changed substantially.
11:26 It just the overall activity level from these four elements of cash flow that I talked of
11:32 are doing extremely, extremely well. And that's driving the real growth. Now for us, in addition
11:37 to all of this, we have looked at certain high end customers, we call them as prime
11:42 customers, something that we were not very actively participating in, because they were
11:47 very bank like customers. And their ask of the lending rates were pretty, pretty low.
11:52 Now when we are into this segment of customers, which are other than Primex, we rediscussed
11:58 with the various dealerships and we have said if we are willing to participate here, why
12:01 don't you give us a portion of that business? Now, therefore, the two together make sense.
12:06 Otherwise, just as a Primex customer at a net interest margin level slightly lower may
12:11 not make complete commercial sense to us. But when we look at it as a total, then it
12:15 makes a phenomenal sense to us. So, therefore, that's a new segment that has come to us in
12:20 the vehicle business. And that brings while at the net interest margin level, it just
12:25 shrinked a little, but cost of operation and the credit cost for those customers are so
12:30 low that at an ROA level we still cover up.
12:34 So it is a very profitable business for you as such then. But prime customers, as you
12:39 said, they are bank like customers. So there is a competition element to this as well.
12:44 How is the banking competition looking like for you? Because I don't see any other NBFC
12:49 being quite as close as to how far your business has expanded. But banks definitely, the competition.
12:55 Of course, banks are definitely there. But again, what is the ask of those customers
13:00 as well? I think a faster decision to lend, right, to a partnership approach, and three
13:07 is to be able to meet their requirement. Now, definitely, even the banks can meet and even
13:11 we can meet. But there is still an element of dealership decision as to when they are
13:16 the prime seller of the vehicle, they do have some say in how do the business gets diverted
13:21 to different entities. Now, what we have done typically is we have a large customer base.
13:27 And just to give you a number, we operate in 400,000 villages of this country. And we
13:31 have therefore something like six, seven million customers that we have worked with. We have
13:35 created a direct marketing vertical. What this vertical does is to reach out to our
13:40 existing customers and through them source more business. So, in a month we see about
13:46 15 to 18 percent of the business that we do is self-generated.
13:49 Now, this is the business that we bring to dealership. And we make a huge strategic difference
13:55 at a dealership when someone as a financier can bring business. And I think that is a
14:00 value proposition on which we sign up with the dealer. And therefore, there is a natural
14:04 advantage to get these kind of customers. While we have to be as efficient as any other
14:09 provider of credit, both in terms of rate and in terms of service. And if you are able
14:14 to do that well, then I think the opportunity is still there.
14:18 I will touch upon the regulatory environment a little bit. So, with NBFC such as yourself,
14:26 there is a differentiated sort of regulatory framework that the RBI has introduced. Large
14:32 NBFC such as yourself occupy that top layer and they get regulated in a way which is akin
14:39 to banks. At least that is what the regulator says. I am curious to understand, is there,
14:45 does that significantly increase your burden or were you already doing a lot of what the
14:50 RBI is already asking for?
14:51 So, you know, almost all these regulations are coexisting regulations. They get a little
14:56 more tighter and they get monitored even more closely. Now, our belief has always been the
15:02 higher the tightness of the regulation, stronger the model emerges. It is always very difficult
15:09 to accept and implement immediately. I mean, let us take NPA as just one item to discuss.
15:15 When I started this business, I remember the NPA was 365 days long. Then it moved to 180
15:21 day long, it moved to 90 day long. Now daily stamping is required. Now, did it not build
15:28 pressure on the organizations? The answer is clear, yes. Because ultimately it is not
15:32 about us bringing about the change in the method of calculating it. It is about convincing
15:37 the customer to accept the new approach. So, therefore, it takes a little time. But once
15:42 it has got accepted, then you look at the quality of book because of that. It substantially
15:47 changes. So, regulations will come, regulations will get tighter. I think all of us have to
15:52 look at our business models and see how do we factor this regulation into it. We have
15:56 to look at the segment of customer and ask a question, how do we communicate and convince
16:00 the customer around it. We have to look at our internal process and see what kind of
16:04 training we need to implement so that everyone understands it the right way. And lastly,
16:09 we will have to look at how much of it we will continue to do in a physical environment
16:13 versus how much of it can be controlled through technology interventions. And thirdly, how
16:19 much of it can be really outsourced and controlled rather than doing it all in-house. I think
16:23 that is the evolution and I think regulations are here to stay and will become more tighter
16:28 but the models will get stronger.
16:30 You mentioned at the beginning that this is a 30-year-old model, right, the NBFC as a
16:35 business model. What is the premium at this stage? I will supplement this question with
16:41 we have seen this large housing finance company merge with a bank that it started. They said,
16:50 one of the pointers that they mentioned during the merger was that the arbitrage is gone
16:54 for us to maintain a bank and an NBFC. Of course, your group does not have a bank. But
17:01 is there still business sense in continuing to be an NBFC with the regulations being so
17:06 tight?
17:07 I mean, we have had a 27 percent stagger from the time we started to today. If you look
17:13 at our March closing numbers, we had a 50 percent plus growth. Look at our first quarter,
17:19 we still have a growth of 40-50 percent. I think is there still headroom? My answer is
17:24 yes. Because NBFCs are designed to deliver for vehicle financing as a primary product,
17:31 historically, if you look at it. Having done that well, is there an opportunity to do other
17:37 products to your customers and like your customers? We just discussed about our unsecured loan
17:42 SME segments, etc. I think I would think there is a phenomenal role there. You have to differentiate
17:48 yourself from the other providers. Either be closer to customer, go more deeper. Understand
17:54 needs of the customer, design products around that. And three is partner the customer in
17:59 difficult times and provide them solution and maintain a book in a manner that you are
18:05 rated well. So we enjoy a triple A rating. So therefore, we have an advantage in terms
18:10 of our ability to source ourselves enough funds at an appropriate price. And therefore,
18:15 there is I would think that there is sufficient headroom left.
18:18 Okay, fair enough. Coming to the business aspects of it now, into your view, lending
18:27 to the segment, what is the biggest opportunity, let's say five years in advance, five years
18:32 ahead of us at this point in time? We are in 2023, let's say 2028. What do you think
18:39 is going to come up as the segment that probably everybody should be watching out for as a
18:45 growth opportunity? So I think first and foremost, I would think
18:49 is that credit is becoming very, very formal for every customer. There was a large credit
18:57 informally going to one segment of customer. I think that will start shrinking, which would
19:02 mean that the customer base eligible for credit will keep widening. Now, once that happens,
19:09 you will find the credit growth naturally happens. Two, I guess is we have always been
19:13 talking about age of our population is much younger. And therefore, the younger population
19:19 is more aspirational into experimenting as well as getting into new avenues of possibility.
19:26 So, therefore, there will be many opportunities like maybe an education load will become one
19:30 of the biggest market of future. Housing will become even beyond urban and semi-urban. Rural
19:36 housing will become one of the biggest opportunity. I think entrepreneurs growing their business
19:41 to different size. We talk about India manufacturing to a semi-segment will become a very, very
19:46 big segment going forward. I think all of these are segments which one has to watch
19:50 for and they will open up phenomenally. Okay, touch a little bit about the recovery
19:55 side of the story. Now, there was an instance that happened a few months ago, think about
20:01 a year ago, where Mainz of France's name was pulled up. What should a lender do in
20:10 a situation when repossession, that is one part of the recovery story. Repossession is
20:17 the only option and there is a legitimate opposition from the borrower for that repossession.
20:25 How should a lender handle it? Because there is a legal provision, sure, but on ground
20:30 things do not actually pan out the way you want them to.
20:34 So you know, historically, again, if you look at this business, when someone becomes a chronic
20:39 defaulter, you have to look for at the local level, who are the opinion makers and how
20:45 do you reach them out? And how do you convince them of what is happening? Because today,
20:51 because there are few defaulters in a village, nobody in the village wants that you stop
20:55 lending. Correct.
20:56 And this message has to go down very clearly to everyone out there. While we know there
21:02 will be some failures. So the first thing that even as a financier we have to do, I
21:06 guess, very surely, is differentiate between intentional defaulter and circumstantial defaulter
21:12 and we cannot deal with both of them in a similar manner.
21:15 So circumstantial defaulter will have to have a partnership approach and then give solutions
21:20 and come out of the trouble. So far as intentional defaulters are concerned, I think we should
21:25 not spend too much time trying to do it all by ourselves. We should press the legal button
21:29 as quickly and as early as possible. Reach out to the local opinion makers and convince
21:34 them as to why this is not as a good thing and therefore what kind of support are we
21:40 required. But fundamentally, I think none of us as financiers should try and do things
21:45 which are not regulatory framework allowed. So we have to take every step which is the
21:49 right step to do. Involve the local administration. I mean, I don't think there were practices
21:54 of informing the police well in advance to seek their help for such chronic default settlement.
22:00 Like you said, on the ground, impulsive decisions sometimes get taken. I think that maturity
22:04 needs to come in and which means there is a continuous need for education and training
22:10 of people on ground and a good supervisory layer about that to make sure things are done
22:16 the right way. But since you touched on the incident of a year back, it was very unfortunate
22:21 that we got dragged into it and then finally legally got sorted out to say that we were
22:25 not involved in it. And therefore, these things do happen sometimes and if you are unfortunately,
22:32 you know, at that time there, you may get dragged into it. But there is always a lesson
22:36 that needs to be learned out of all of this. Fair enough, sir. Let me also touch a little
22:42 bit about the intention of the borrower. Now, you said that circumstantial borrowers and
22:47 a chronic borrower, you know, somebody who is intentionally sort of defaulting, they
22:55 need to be treated differently. But India's financial system is built on this belief that
23:01 everybody wants to repay money. Nobody really actually wants to take the banks or the NBFCs
23:07 for a ride. With the increasing debt levels, right, and new to formal financial system
23:15 borrowers coming in, has that changed at all? Or do you still hold on to that belief that
23:21 everybody in India actually is afraid of holding on to debt for too long and we want to repay
23:25 as soon as possible? So, I have seen that 95 percent of the people
23:28 who borrow repay very regularly. 90 percent on or before due date, another 5 percent on
23:36 a little follow. The problem is with the last 5 percent. Now, this last 5 percent has all
23:41 kinds of combinations. It has combinations of even sometimes wrong lending. You are in
23:47 a hurry to lend, you overlook some document, you overlook some input and you end up giving
23:52 it to a wrong person. There are also certain over-aspirational individuals in that last
23:57 5 percent who want to experiment getting into some business because there is a debt available.
24:02 I think those are the ones I keep calling them as, you know, how to differentiate them
24:06 between circumstantial and intentional. The fundamental to success of this business will
24:11 always be not to breach on loan to asset value, at least on the retail front. If you have
24:16 a customer margin money of at least 20 percent, 15 to 20 percent, chances that the customer
24:22 will intentionally default will substantially go down because they put in their 15 percent.
24:27 That is not changing. Skin in the game, essentially.
24:29 That is not changing. Okay, fair enough. I want to pick on the last
24:33 couple of questions for this conversation. One is your promoter has looked at a bank
24:39 as an investment strategy. I know it is very difficult to pin what the intention behind
24:48 that is. But is banking even something that is worth pursuing for an industrial corporate?
24:57 So, you know, we have said it several times in the past. As an excellent corporate, as
25:04 a large financial services player, banking as an opportunity, have we looked at in the
25:10 past? My answer is yes, we will look at it, we have looked at it and we will continue
25:15 to look at it. So, that does not take away anything from there. You yourself said the
25:20 regulatory framework today for industry houses is not allowing probably setting up of a bank
25:26 and therefore the regulatory framework has to change. Beyond that, you know, the interest
25:32 in the banking industry will always have to be there for large corporates.
25:36 Okay. Why? What is so special about banking for a corporate?
25:40 I mean, that is the ultimate financial model. Oh, fair enough. That is that is sort of the
25:46 peak of the financial services business. Yeah.
25:48 Fair enough. Last question I wanted to ask you in terms of the challenges that are coming
25:53 up in your business. I mean, asset quality is more or less now stable. Going ahead, because
26:00 in a recent meeting, there were some news reports. I do not know if you want to comment
26:04 on that or not. But the Reserve Bank of India seems to have pushed up vigilance on unsecured
26:09 lending amongst NBFCs because they think that it is going on too fast. They have said this
26:13 to banks as well. But do you think that that is likely building up as a difficult sort
26:19 of business in the future? So, you know, between secure and unsecured,
26:24 unsecured will always be a difficult business when cycles, credit cycles start to hit. Unsecured
26:30 loans are expected to behave in a manner different from a secured loan, undoubtedly. But also
26:35 it is important to understand that unsecured as a percentage to the total book of many
26:40 of the NBFCs would be a very miniscule percentage. Some business models would have been built
26:46 purely on unsecured. Correct.
26:47 They would have different approach, different precautionary method, different credit assessment
26:51 methods, different risk taking ability, etc., etc. But if you are looking at an NBFC like
26:56 us, let us say, even if we were to do a thousand crore of unsecured lending on a one lakh crore
27:00 book, it is hardly any percent. Correct.
27:03 Exactly. So, therefore, I think one has to start differentiating it very, very independently.
27:08 You know, the focus is very high on unsecured loan because that is the fastest growing.
27:13 But when you look at the fastest growth as a percentage is over a base, right, and the
27:18 base has been very, very small. So, therefore, the percentage should not kind of built any
27:22 pressure. And the second thing is, as I said, mix of a balance sheet of any financial entity
27:27 should be seen as to what percentage is unsecured. And if a larger percentage is unsecured, then
27:32 how the whole business has been built to ensure that they perform adequately well is the way
27:37 one should really approach. And what is your advice to young upstarts
27:42 in the FinTech industry who are really chasing this business?
27:44 No, so I think my advice is, in fact, I met some of them even in one of the conference
27:48 when I was addressing them. I think while you do everything right to lend right, you
27:53 put in the right data, you put in the right technology, all of that is fine. But lending
27:58 will always have equal weightage for recovery. So, you must build capability within yourselves
28:05 or partner with someone who has the capability that if there was to be a situation where
28:10 recovery gets difficult, then you have an excellent fallback on who you can depend for
28:15 that purpose. So, do not build a model purely just on lending, imagining that everything
28:20 is done right and therefore nobody will default. I think cycles will tell you that there will
28:24 be defaults. So, therefore, build that capability or build that partnership.
28:28 All right, Mr. Iyer, thank you so much for joining us on this conversation.
28:30 Thank you. Pleasure talking to you, sir.
28:31 Thank you.
28:32 [Music]