Mahindra & Mahindra Financial Services Rating: Neutral; Loan recovery to feel the heat with RBI ban

The RBI last week has banned Mahindra Finance (MMFS) from carrying out any recovery or repossession activity through outsourcing arrangements (third-party external agencies or collection agencies) until the ban is revoked by the RBI. We, note that the regulator has allowed MMFS to continue carrying out all such recovery or repossession activities through its own employees.

MMFS in the normal course of business, repossesses ~4K5K vehicles per month using a combination of third-party collection agencies and its own employees. However, since the company is now required to implement the RBI order with immediate effect, it expects the repossession activity to be impacted by 75-80% – which in our view is significant given that a large part of the asset quality resolutions are effected by MMFS through customer settlements or vehicle repossessions.

MMFS carries a PCR (provision coverage ratio) of ~58% on its Stage 3 assets (including the policy of making 100% provisions on contracts above the age of 18 months). Vehicles that need to be repossessed are usually classified under Stage 3 already and the ban will not have a material adverse impact on the financials or Net Stage 3. In our view, MMFS’ higher dependence on customer settlements is partly because of the relatively more vulnerable customer segment served by MMFS and also due to the significant proportion of captive business underwritten by the company.

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Until such time that this ban is revoked, the repossession activities will be impacted adversely which could mean that the Gross Stage 3 (GS3) for MMFS would continue to remain elevated. This is even more important in the context of MMFS implementing the RBI NPA circular with effect from 1st Oct, 2022.