Banks not giving moratorium should not lead to Asset Liability Management (ALM) mismatch: Mr Ramesh Iyer, Mahindra Finance

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Banks not giving moratorium should not lead to Asset Liability Management (ALM) mismatch: Mr Ramesh Iyer, Mahindra Finance
Over 75% retail borrowers have opted for loan moratorium
Edited excerpts of an interview with Mr Ramesh Iyer, Vice Chairman (VC) and Managing Director of Mahindra Finance dated 27th April 2020:

• When asked about the collection efficiency after Non-Banking Finance Companies’ (NBFC) operations being partially resumed, he replied that April was not expected to be good for collections because the moratorium was just announced and he is sure that most of the NBFCs would have made some collections.
• Mahindra Finance had about 15-20% collection efficiency but that largely came from the farming community. He is of the opinion that April and May both where the moratorium has been given, no one will want to come and pay.

• He informed that more than 75% of the customers have opted for the moratorium. Initially it was only about 60-65%. Then subsequently they would have reviewed their own situation and would have felt opting for moratorium. He believes that the 25% who are not asking for it, there would be about 4-5% or maybe little more who are fearing the interest that is going to be charged for the moratorium period and therefore they would have made the payment. They might not have the money to pay but fearing the interest, they would have made the payment. But they would come back and possibly negotiate on the interest and take the moratorium.
• When asked about the Asset Liability Management (ALM) mismatch due to the moratorium, Mr Iyer stated that it will depend from NBFC to NBFC. Mahindra Finance in particular always had a good match of ALM. So, banks not giving moratorium should not lead to ALM mismatch because he expects that the disbursements to not be there. Therefore, if the collections are not there to that extent that disbursements are not there, it should kind of offset each other to an extent. But again, it depends on each NBFC independently but the large ones should not have a mismatch.
• He further clarified that some of the banks are giving moratorium on the term loan. The Banks have not announced that but most of the private banks are giving moratorium on the term loans to NBFCs also.
• When asked his opinion on the Franklin Templeton issue is going to further tighten the liquidity in the system, he said that clarifications have been given. Even Templeton has put out some notes. So, this is a one-off case but definitely, whenever something like this happens, it does build up pressure in the system. But in any case, mutual funds were not actively providing funds to NBFCs in the recent past given their own redemption and inflow being a little low. Really what we are looking for is liquidity from the banking system and with so much action already taken by the RBI to provide liquidity in the system, he personally believes if the banks do open up to NBFCs and start providing them funds, then liquidity by itself should not be a problem.
• When asked about his outlook on rural economy and impact on rural cash flows, he said that it is not the farmers who are hugely impacted because it is not across the country that everyone is impacted. After analysis it is found about 65-70% of the districts do remain free from this problem but, the fact is because of the lockdown, the activities are low. But what is important and interesting is that the harvest has been good; wheat output is good, sugarcane is good, potato, onion is good, pulses are good and the government will buy and they will warehouse these products. So surely the farm cash flows should improve and the collections seen in April are coming from the farming community. So, he is not of the opinion that the farmers are impacted.
• He also informed that there is a demand for tractors. The dealerships in some of the locations have opened up. But because of the lockdown there has been a slowdown in the activities. If two months of activity is lost, there would be pressure in the collections and the consumers even if they have the money would like to hold it back and wait and what next happens. So, to that extent, the overdues will go and with three months moratorium provided by the Reserve Bank, if things were to regularise if not from immediate June but even in August, things should settle down well and we should not see increase in NPAs.
• But yes, if this was to get extended and not stop at May and was to continue to go longer then, one will need to relook at the situation and what happens next. But he believes that post August, things would start to look better and definitely rural is not as badly impacted as urban is.

Consensus Estimate: (Source: market screener, investing.com websites)

• The closing price of Mahindra Finance was ₹ 155/- as of 27-April-20. It traded at 0.76x/ 0.70x the consensus BVPS estimate of ₹ 189/205 for FY20E/ FY21E respectively.
• Consensus target price of ₹ 305/- implies a PBV multiple of 1.5x on FY21E BVPS of ₹ 205/-