A: Magma has been a predominantly bank-funded NBFC; our exposure to the debt capital market (in terms of commercial paper) was very low. We planned in such a way that we had adequate line of credit available. Our funnel, in terms of potential lines of credit, is fairly high. While there has been reprising by banks and MFs, funds have been available for us. The message to our team is to continue to lend – focus on meeting budgeted targets is as intense now as it was earlier. However, the launch of the credit engine in October has resulted in higher level of credit rejections, which means now the pressure is on the team to generate more leads to maintain the budgeted targets, as the rejection levels have increased in some products.
A. We maintain our AUM growth guidance for FY19 at 15%. While our disbursement growth was higher at 34%, our AUM growth was lower at 6% in Q2, which means we still have an overhang of the past. Once this is over, we will see continued improvement in AUM growth; we see CAGR of 20-25% over a 5-7 years period. Downside risk to the guidance is change in customer sentiment. Twin impact of higher interest rate and higher fuel prices may dent growth. Also, a prolonged tight liquidity scenario may result in some business flowing to private banks from NBFCs in the medium term, especially from housing finance companies.
A. SME is showing strong traction and it is a high RoA business for us that has stood the test of time in spite of demonetisation and other challenges; it will continue to see good growth. In the ABF business, for a long time, more than 60% of the overall asset book was cars and tractors. My focus has always been to broad-base our product mix so that no single product has an impact on the overall performance. Accordingly, we are reducing our exposure to cars and tractors, and are focusing on used assets and CVs.
Used vehicles include used cars, CVs, tractors, and CEs. Today, close to 40% of our disbursement comes from these assets (at an aggregate level) and they have a weighted yield of around 18%. This segment has a controlled delinquency percentage and therefore traditionally has been the highest ROTA product in our portfolio. Because it is a composition of various assets, you do not carry the risk of a single asset.
Another focus product is LCVs and SCVs, which has grown from 0% to 7%. The reason why we focus on used assets and CVs is these assets are core NBFC assets; also, the rate of interest for these assets is higher.
At the ‘product level’, used assets and CVs are focus products, but at the aggregate level, our focus is on pushing A and B category assets (A and B category signifies least delinquent assets).
A: The market’s view is that opening physical branches has a direct correlation to business volume. Our view is contrarian. Let me explain – today, technology has made such advances. We have fin-tech companies and online lending companies that have no physical branches. We plan to have about 400 branches, which are necessary to be physically present in all critical markets in the country. However, I would rather invest in manpower across markets and equip people to become mobile branches. With the leaps in technology, physical branches will become increasingly irrelevant. Today, my challenge is opex. So I replace heavy investments in branches with investment in people. In the long run, if we can deliver through 400 branches (with the help of technology) what others deliver through 800, we should be in a position to leapfrog over competition in term of opex to assets.
A. In asset finance and housing, there have been fairly dramatic changes. I can safely say that these changes – such as branch grading, product grading, bringing in a credit engine, focusing on product quality and changing the product mix – were the decisions of the respective CEOs. This is a good indicator about the degree of freedom or empowerment that Magma’s CEOs have in term of the direction. There is a review mechanism with the MD, which is very detailed and a very comprehensive. Strategic discussions happen. The MD himself has a couple of pet projects such as ‘customers’ delight’ and ‘people initiatives’. However, he is not involved in the day-to-day operations.
A. Around 14% of our branches are in C category, largely due to high delinquency in the tractor portfolio, and there are no branches in D category. Most of the NPAs in this segment are legacy. This is the only product where we have six-monthly bullet payments as against monthly EMIs in other products. So this is the challenge – due to bullet payments, even a genuine customer, with a small portion of dues pending, would be classified under D. Once these branches start adjusting the product mix (basically tractor becomes a less dominant product and used assets and CVs become dominant products) they will also move to A and B category from C and D.
A: While the current GNPA in the ABF segment would be slightly more than 9%, we expect it to come down to 4.0-4.5% over the next 2-3 years. With 55% provisioning, we see net NPAs at close to 2%. During the peak delinquency period for Magma, tractor contribution to our portfolio was 28% whereas contribution to gross delinquency was 38%. With the tractor portfolio falling to 14%, the contribution to overall delinquency will be far more limited; and with given triggers in place such as branch grading and ‘credit decisioning platform’, we are certain that we will see a very strong traction for our overall portfolio.
A. We have already seen about 70bps improvement in net credit cost. We expect it to improve further by 60bps to 1.5-1.6% over the next two years.
A: In the last two months, we have raised lending rates by 50-100bps across product segments – which is in line with the industry. As the ABF book is fixed-rate, there will be some impact on margins, as we cannot re-price our past book. However, margin pressure for us will be more muted than other organizations (that have been lending at very low rates), as we historically had very healthy NIMs.
A. We are currently making 1% RoA in ABF. Ideal RoA should be between 1.7-2.0%. We expect around 70-100bps improvement in credit cost over the next 2-3 years, led by around 60bps correction in NCL (net credit loss) and 40bps improvement in opex ratio.
A. Normally, Diwali season sees good traction in demand, but it has not panned out this time. Diwali sales came as a shock to OEMs and dealers who had stocked up significantly in anticipation of good demand; in fact, there was significant correction in sales on a yoy basis. There is some tightness in the market in terms of cash-flow. That’s probably because of the interim period between crop harvesting and inflow of funds. Right now, we have been very watchful, and our focus is largely on ensuring collection efficiency – which is far superior to last year. With election in some states, cash flow should improve.
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