M&M Financial To Double Housing Loan Book In Three Years

M&M Financial To Double Housing Loan Book In Three Years
A woman walks through her home in a village near Modinagar, Uttar Pradesh. (Photographer: Anindito Mukherjee/Bloomberg)

Mahindra & Mahindra Financial Services Ltd. is set to double its housing finance book in the next three years aided by higher cash flow and the government's affordable housing push.

The segment has grown 40 percent in a short period on a low base, but will soon double to Rs 10,000-12,000 crore, with 20 percent of the growth coming from the Centre's low-cost housing initiatives, Managing Director and Vice Chairman Ramesh Iyer told BloombergQuint. Adequate expansion opportunities will help maintain growth at these levels, he added.

The potential is large and has no relevance to where the market is. It is a complete need-based, cash-flow based demand.
Ramesh Iyer, VC & MD, M&M Financial Services

M&M Financial Services currently operates in the rural hinterland of eight to nine Indian states. Expansion into other states and maturing of the market in states where it is already present can easily double the segment's loan book, he said.

India's housing finance segment, usually considered as one of the safest lending spaces, has seen non-performing asset ratios of up to 13 percent as of the last quarter. Iyer said the number is misleading as credit losses will still be close to zero despite the high level of bad loans.

“What we get as a collateral for small lending is the land that the owner has. Nobody wants to give away a Rs 25-lakh piece of land for Rs 1-lakh borrowing,” he said, adding that the money might come back a little late, but is usually returned in order to protect the collateral.

“The structuring of the programme should be linked to a season while we have a monthly or quarterly structure. Now the regulator wants you to provide the numbers on a monthly or quarterly basis, so you make a provision on that and we know that the money will come in in the next season,” Iyer said. The business has the “ability to price the customer for the risk and cost”, which makes it work, he said.

Also Read: Jefferies Sees Near-Term Headwinds For Housing Finance Companies

Watch the full conversation here:

Read the edited excerpts here:

The great India consumer story and the confidence that everyone is talking about may not be as high as they would think. What is your experience in your businesses and is this a real worry?

It all depends on where you compare it to what. In rural India, the business that I run, has gone through terrible times. In the last two years, what we faced was very different than what we faced in the previous 20 years. Everything happened in this two years.

We came in from a bad monsoon and had demonetisation impact. There is so much cash out there. Then you had the GST impact. New regulations are introducing the change of non-performing assets from 180 days to 90 days, where within the same period we need to move.

I think the sentiments are turning very positive. For the last two years, the monsoon has been above average. Collection has improved and volumes are going up for us. So for us, the story seems to be different from what you just set out.

Is housing finance picking up as a business?

Our housing business is not very large. We are still in villages where we are doing room addition and expansion. Therefore, the potential is so large, and it has no relevance to how the market is. It is a need-based kind of product, but they decide on the basis of the cash flow.

We have grown 40 percent over a period of time out of small base. In a period of 3-4-years, we have reached close to a Rs 6,000-crore balance sheet. The growth in that business will also come from low-cost and affordable housing segment. So, we have participated in government programmes in Rajasthan and Madhya Pradesh, where we have started with our own live space and joined hands with other builders, and getting that benefit. If this book is going to grow, if in next three years, say, it will go Rs 10,000-12,000 crore, then it will double itself. When that happens, 20 percent will come from low cost and affordable housing. 

Would you say the growth rate will remain same in the foreseeable future?

We see that the growth will stay at those levels because the need is so high, and we are not there in every state. We are just operating in eight to nine states. But there is scope to add five to six states in the next two to three years. Also, the states where we have just got into will mature. You don't start growing as you enter. You need to design the product, you need right people, the process needs to work well for you. Therefore, it takes time to mature as far as the growth is concerned. So, the states in which we are already there will be contributing 10-12 percent growth rate, which can go up to 20-25 percent and then the new states come in. Put both of this together, given the size of opportunity, I don't have reason to believe that it will not double itself in three years.

What is the credit quality experience on housing finance side? Last gross NPA as of September is showing at 13 percent. That's pretty high for housing finance.

You have to define the business correctly. We are providing them a small loan for room addition and expansion. So, where will the cash flow come from? We are in an absolute village. Therefore, the cash flow will come from local earning, whether it is farm or infrastructure. Last two years, in both of these states it had not done well. We have large presence in Maharashtra, which went through the most difficult time.

The classic example of this business and how it will get corrected is while it looks to be
this, but the credit loss will be zero. The collateral for the lending is the land the owner has. Nobody wants to give a Rs 25 lakh worth of land for Rs 1 lakh for which the borrowing is done. The structuring of the program should be linked to the season, where we have monthly or the quarterly scheme. The regulator wants to provide NPA details on a monthly or quarterly basis, so you make provisions on that basis. We know that the money will come only in the next season and you will suddenly see 13 percent growth from 3 percent. That's the way in which the business needs to be looked at.

In spite of that NPA, and we got 30-40 percent coverage that we have in the business, you look at the returns that a business gives. So, it also has the ability to price the customer for the risk and cost. When you recognise that the business will be this high cost, both from the credit and operating cost level, and if the consumer is willing to pay the price, then what's the problem?

Is the experience of the segment going to be different as housing finance morphs into rural housing and affordable housing?

It will require a phenomenal product design change and a process change to handle housing finance if you get to that level of housing. We are used to a stable cash flow of a borrower, that every month end he gets the salary and automatically the installments go, on time and he keeps installments as the priority before any other expense.

But if you start moving towards rural, it will be exactly the reverse, as the cash flows goes to daily living. Unless you have clear approach to partner such customers, willing to understand that this will go as a challenge and have a very transparent method of communicating to every stakeholder that this business is not to be measured on half percent of quarterly NPA but measured on a cyclic NPA of 8-10 percent. This has to be done with an understanding of how will it get corrected over the 10 years and what is to be made in business. It requires a very different approach to this business.

What is that for this business for you?

It is just zero. If you pick up the contract of 3 years which is matured, it has paid off all the money. In Tamil Nadu, we had a similar situation of NPA because of absolute drought and no activity there, and cash flows were completely stuck. But after one or two good seasons, all the money is coming back. This business has to be measured differently for each state. Never measure these books on an overall portfolio basis and reach some conclusions.

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