Mahindra & Mahindra Financial Services Limited analyst Q&A

Our first question comes from the line of Mahrukh Adajania from Nuvama Wealth Management.

Congratulations. I had a couple of questions. Firstly, that after the ECL model annual reset, now do you expect credit costs to hold on at current levels given the environment at 1.3 types over the next few or over the foreseeable quarters? And my next question is what were the changes or could you highlight if there were any big or m ain changes in the ECL model that we should know about? So that's my first question. And my second question is on interest income. If you could spell out the exceptionals?

Yes. Thanks, thanks a lot, Mahrukh for the questions. The first one on what -- whether you think the sustainability of the credit cost. I just want to remind that the kind zip codes that we have conveyed that our business model can absorb is between 1.5% to 1.7%. And we're happy that 9 months of this year, we have come down to 1.8%, and we see a lot of confidence in operating within that zip code. Now there will be -- quarter is when things move up and down. Broadly, we realize the handle on credit cost is to keep the stock of GS2 and GS3 range bound, and that's what we've seen in the last few quarters our GS3 and GS2 have been range bound. So, if that remains in line and what we've done in the ECL model refresh also is to make sure that our LGDs are very reflective. The model rightly reflects what should be our PCR cover. So, there are 2 variables that go into credit cost. Management has to ensure that the stock of GS2 and GS3 are on the same level. And the ECL model we believe is reflective of the PCR cover. Hence, the overall credit cost should be in that zone. Now on your second question on the -- what kind of interest income is exception items. There is no exception items in our interest income. The real expansion that you're seeing, we called out the 2, 3 levers. One lever is it's been a year now since we got the corporate agency license for insurance. Earlier on, there were some ways in getting insurance back, but it was a little bit of convoluted through the MIBL structure. But right now, the corporate agency is an in -house insurance corporate agency , s o we're able to get fee income directly through the agency license, which we enjoy in the NBFC. Second big source of income is clearly, as we said, we have now -- MIBL is 100% sub. Earlier it was held between us and AXA. After becoming 100% sub, there is -- it's one of the top 5 insurance broking companies in the country. They are not dependent on only M&M. They have very, very prolific businesses. That business throws up good revenue. It's a very profitable enterprise. It is not capital intensive. So we are able to enjoy dividend payout. It's not a onetime. And by now, I'm sure you'll be able to bake it into your modelling. This is regular income coming in, into our fee-based income. There are other smaller incomes, which is in the form of prepayment penalties and late fees and all of that. But that's really small. The 2 big items in fee -based income is that. Now one more -- there would be kind of impact of, let's say, that is an overall income, right? I mean not in fee-based income?

This is I think the loan income.

Okay. Loan income, I hope I've explained to you the fee -based income. In the loan income, Mahrukh the difference between Q3 and Q2, what we see is other variables at play. As I said in Q2, we have an X amount of trade advance, which is given to augment disbursements in the season. That x amount falls to half in the next quarter, right? So that, let's say, x amount is not interest bearing. It converts to interest -bearing in the next quarter, half of that. And hence, that shows an augmentation in the overall loan income, not fee-based income. Loan income for Q3. And whatever -- because if we have a GS3 improvement, there's a write -back of income reversal that happens whenever we have a positive movement of GS3, GS2.

Okay. Anything on ECL, I mean any major changes in ECL?

No, we have the ECL model basically -- it has been, as I said, the objective is to make it as a representative of our underlying business. So what we do in the refresh is and we've used a very, very prolific -- we have used -- the old consultant used to do it for us. And we have taken in new inputs. We have gone much more granular. So each product, let's say, in wheels, there were 7 products. Now we have gone much more granular in the number of products that are consumed. LGD is again much, much more reflective of the business. Yes, that's what we've done, Pradeep, if you have anything more to add on the ECL methodology, you want to add?

Yes. So one of the major change which we have kind of done this quarter is with the ECL refresh is that we have moved away from the 42 months rolling LGD calculation to a much larger, you can say, period stable calculation, which is aligned with the industry practice. That's one change we have reflected this quarter.

Yes, earlier it was a 42 -month, Mahrukh. For every business, right now we are looking at actually the -- there's something called as the lookout period, where in a recovery period that we do. So we believe the ECL model now will be much more reflective of the underlying LGD.

Next question comes from the line of Abhijit Tibrewal from Motilal Oswal Financial Service Limited.

First of all, congratulations on a good quarter. Raul Sir, just 2 questions. First, on the demand side, while giving the opening remarks, you suggested that tractors is the product which has seen the most benefit from the GST cut. Just trying to understand while we've all seen 3Q numbers and 4Q is supposedly the best quarter in terms of business. So how are you looking at demand? I mean, is the momentum that we saw after the GST rate cut still sustained because when we speak to other vehic le financials, most of them admit that we still see that sustaining, especially in passenger vehicles and tractors. So if you could just help us understand that. And more importantly, how do you view this momentum sustaining when we get to the leaner first quarter after a couple of months from here? If you could just help us answer that question, then maybe I'll take the second.

Thanks, Abhijit. So we saw at least -- was a reasonable amount of demand augmentation during Q3. Thanks to the GST 2.0 enabler. What was clearly encouraging was, let's say, in passenger vehicle, we all know that there was only one story, right? The premiumization story was playing out. And while if you just check most of the OEM data, we've seen at least a bounce back of the entry -level vehicles has showed good promise and being a rural financer, financing also kind of self-employed customers, we were able to catch a decent amount of that demand, which came in thanks to GST. Now has that continued unabated through, let's say, first month of the quarter? Clearly, post festive season and post GST, there has been a little bit of waning of that. It's not continued at the same pace. And I'm sure you would have heard the similar commentary from some of the OEMs and other financers. Tractor, I mean, the rural economy is clearly chugging along much more promising than other segments. And I don't want to just repeat. But the big highlight for us is the favourable monsoon as well as price discovery from agri commodities through MSPs etcetera, has played reasonably well in getting a player like us who is so rural, semi - urban, not just in tractor, but other vehicle categories to see some rural demand -- to ride that rural demand wave. Now too early for me to comment on what will happen in Q1. Our job is to make sure that incremental market share, see our business teams track incremental market shares for every vehicle product. We are keen that whatever commerce is happening and where our business model is highly indexed on, whether it is EV, CV, tractor, 3-wheeler, in the rural, semi -urban, self -employed segments, we look at getting a hig her clip of the incremental market share. And -- if he wants to add anything on that.

No, I think just to add to what Raul said, I think Q3, the growth of the industry was a combination of 2 things. One of course, the pent -up demand of September getting into Q3 because the availability of vehicles were not fulfilled in the month of September and part of it got fulfilled in quarter 3, which also means that quarter 4 may not show the same levels of growth as far as Q3 is concerned. But given the fact that we still have some amount of traction happening in the smaller vehicle segment plus the r ural geographies, I think we are quite optimistic of how it will go in Q4 also.

Got it. The other question I had was around the provisioning bit, while you explained a fair bit of that during the opening remarks. So you also spoke about building some management overlay, which you've also given out in the notes of financial statements. So is my understanding correct that after this ECL model refresh, at least in this quarter, we have not taken any benefits in terms of the PCR and provisions. And whatever release we saw from this ECL model refresh has actually been parked as a management overlay.

Yes, that's right. Your understanding is right. We have quantified the management overlay also. I just also want to draw a comparison. If you recollect in our earlier model also, there was an 18 -month plus we used to keep a certain cover, which is there in the notes of the -- in the presentation. So if we just went purely by the ECL model, there would have been clearly a release in provision. But we thought it prudent also to make sure that there is a management overlay that is created which of course for a business model like ours, I'm sure the EC L tool is reflective enough. But there could be occasions when the management would need to look at outside the ECL, whether there will be circumstances to not really dip into it but instances to basically look at tugging the management overlay.

Got it. And just a follow -up on what you just answered. Basically, what I'm trying to understand is and make sure, during the last Q3 when we had done the ECL model, the first new stack, we saw a lot of volatility in our Stage 3 cover. It actually declined and then we increased the cover. After this, ECL model refresh , which I'm understanding is much more exhaustive that you said would go on more granular -- so we're not expecting further volatility in provision covers from here. That's number one. And I just wanted to squeeze in one last question. Also, I mean, today, I mean, when we look at NBFCs right, at least for a long time, RBI has been, I mean, saying that they don't want to give out one more HFC license to an NBFC or one more NBFC license to HFC. In our case, we already had one. So what was the rationale behind taking this proposal to the boards of -- then you thought of scheme of amalgamation or merger between parent and the subsidiary MRHFL?

Yes. It might be a little early to give you full detail because as you would see from the - - from what we have taken the board, we ourselves are going to do a full evaluation of the merits to do mortgages in one entity versus two. As you know, there is today a duplication sometimes in geographies, etcetera. And there has also been a lot of harmonizing of regulation amongst banks, NBFCs, HFCs, so we're going to completely evaluate whether incrementally is it more efficient to do mortgages along with some of the capital risk weights, etcetera, etcetera. They are going to do a complete evaluation and on balance, finally take a call whether mortgages is more efficiently done in one entity versus two. As you know, today, it's 100% sub really. We have 1,400 branches in the NBFC. We have about 500 branches in the HFC. There could be duplication. At the same time, there might be merits. So at this point of time , we are going to really make sure that we have a 100% evaluation of the merits. And then once that is established, we will, at the right time, come back to both the boards and take a decision. Objective, I think the underlying objective is to play mortgages at scale. To be a scaled player in mortgages, what is the best playbook for participation is what we will evaluate, and the Boards will take a call post that evaluation.

Our next question comes from the line of Suraj Das from Sundaram Mutual Fund.

Just one question. I think on the tractors again. In terms of growth, probably if you can talk a bit more because you saw difference in the volume growth on the industry for a 9- month to 9-month basis...

Suraj, we lost you. Can -- moderator, can you hear him?

No, sir. We can't hear.

So then maybe we can take the next one. But let me just answer. I think he was questioning on the tractor growth. I just want to -- for the benefit of everyone, I know it's a very strong growth, but I just want to give you what has gone behind that. We created 2 different organization structures for -- within the M&M group, as you will know that there is a Mahindra tractor and a Swaraj tractor. In fact, most of our additional manpower and distribution for the year has gone to really equip us to further our moat in tractor finance. And this has played out well, whether it's on distribution, product as well incremental penetration in the rural geographies. This has not just happened overnight, we have been in the works of creating distribution for the last 12 months now, which we are now getting some benefits in the last couple of quarters. Moderator, you can maybe move to the next person in the queue.

Our next question comes from the line of Avinash Singh from Emkay Global Financial Service.

Great set of numbers. Just asking a bit more on the NIM part. And you rightly kind of peel the layers of it. So, if you were to see from here and where the direction of business moving and also the competitive environment, there could be, I mean, as you incrementally go to some of the probably a low-yielding segment or even in the existing segment competition increa ses. So, the yields will come under pressure a bit. Can you also help here that if the fee, that entire interplay of different factors, including your loan- related fee and insurance fee, this 1.5% is it kind of at the kind of level that you're actually going to max out and you see this thing just to improve? And then, of course, on the cost of borrowing side, of course, you will continue to get some benefits from the rate decline, but then again, increasingly kind of have its kind of own impact. So this 7.5% of basically NIM that is currently. Is it a sustainable level you are seeing? Or do you see that, okay, as scope for it to further expand or is it kind of a peaking out? So that's my question one.

Avinash, so a straight answer to 7.5%, no, this is a onetime -- I mean, there are certain structural benefits that we are seeing in the NIM expansion, but 7.5% has to be read in context of that because we've got a loan income delta from Q3 over Q2, as I ex plained earlier, with the trade advance, which was earlier not interest -bearing, but that has run off as well as some of the write-backs because of GS2, GS3. I would look at 7.1% being a little more reflective, the 9 months, 7.1% being a number that can be -- when you look at when we gather at Q4 next quarter, we should see how we are on the 7.1%. I would like to remind everyone that we've had an overall ROA level said, we think the company has to first get to a 2% ROA and then climb up. Now there are various elements in the ROA tree to get to that 2%, right? I mean clearly, loan income is one, fee income is another, COF is another, opex is another, credit cost . So we have multiple agendas and levers that we as management and are working on making sure that the levers are as controllable as possible and there might be an interplay between them for us to get to that 2%. Now are we happy with the way we are incrementally moving towards that with the levers that we've been working? Answer is clearly, yes. We believe we have worked on levers on the income side. We have worked on levers on the fee side, levers on the opex side, on the credit cost side and the cost of fund side. So these are calls we'll keep taking, but these are not tactical. These are in the longer objective of hitting the 2% ROA and then climbing up from there.

Okay. Okay. And on now slightly again on opex part, I mean, given that you are looking to slightly move away also from some productivity gain will be on the wheel side, but this new initiative might require some kind of expenses. This opex, do you see a scope for improvement in opex over the medium term? Or this is where you would be, I mean, over the foreseeable future?

If we look at both opex to average income and cost to income -- and as I mentioned earlier, with the business model and the overall ROA, we can operate within the ranges of 2.5%, 2.8%, I mean 2.5% clearly beyond us now, but we are in investment zone right now. So I do see with the new businesses, etcetera, we have to invest. We have a concept called an operating j aw wherein we are looking at revenue growth actually exceeding opex growth. So sometimes expenses are required upfront, which will deliver long-term, medium-term benefits. And hence, I won't be constrained only on overmanaging opex. For the time right now, for the new businesses, especially, it might be investment time, some of it will be -- we might be able to capitalize those expenses. Some of them will pass through the P&L. So really not looking at being penny wise pound foolish in the overall process.

Our next question comes from the line of Shreya Shivani from Nomura Holdings.

Congratulations on a good set of numbers. I have 2 questions. My first question is on the CV, CE book. While I understand your -- the reasoning for the volume growth of auto industry in the passenger vehicle book and the disbursal growth that we've had. I understand that their entry -level cars were sold. But what exactly happened CV, CE book? Why is there such a large gap between the kind of volume growth the industry is reporting and our disbursal growth in the quarter? My second question is on the credit cost, rather on the provision coverage. The slide that you showed on Slide 14 that the reduction in provisions release coming from the Stage 2 PCR, right? That's at about 8% now. That has been on a continuous declining trend. The Stage 3 you have maintained at 53% range. So what is the thought process going on over there? And what kind of improvement can further continue in that book?

I'll take the two questions first on CV CE. See I think we've basically earlier articulated that in our balancing between the growth, margins and risk for the CV CE business , we saw some structural changes happening in terms of the borrower segment. There is clearly an aggregation happening in that segment for the fleet operators, it is becoming from a unit economic standpoint, not very viable for small operators. And the cost of funds that the larger players enjoy maybe the NBFC balance sheets versus banks may not be as formidable, right? So we have decided to participate in the CV business in a certain customer segment as well as our new versus used CV choice framework to support our overall ROA aspiration. Now for the new CV segment, I think there has been a reasonable rationalization post GST in the ticket sizes. And that's played out. As I said, we don't kind of display that, but maybe in the future, we will show the unit increase also. While we have seen a unit increase because of the ticket sizes, we have seen a sequential decline in the disbursement value. We are again participating in certain segments. As I said, where part not the extreme fleet segment where we can't really price it well, now we're participating in the new to -- new borrower segment, we are generally retail in the retail base. And while I'm sure you would have seen some of the commentary of the other segments. Parts of the participants in the CV business are also going through asset quality stress right now. So we do -- we are not in a very aggressive buildup zone in this segment. Some of the state payments, etcetera, have also seen delays, and we have to be cognizant of the fact and play in balance over there. Before I go to the kind of credit cost question, I just invite my colleague, Sandeep, if he has anything to add on...

No. That's it, Raul.

Okay. On the credit cost, I didn't fully appreciate your question. You were asking whether the stock decrease in the GS2 would have created a release in provisioning. Is that your question?

Yes. So if you see in Stage 2 ECL divided by gross Stage 2, that percentage is declining for you all, right? So your gross Stage 3 PCR, you've maintained at 53% by doing all the overlays that you've spoken about. But there is an improvement in your -- like you're providing less in the Stage 2 book?

I'll invite Pradeep to come and...

So if you look at our Stage 2 book, the overall quantum itself has kind of come down. So that, of course, will give some relief. That's point number one. Point number 2 is that generally, your PCR coverage is a function of your PDs and LGDs. If your Stage 2 book gives you a trend which are better in PDs than both LGDs, then, of course, your overall PCR on the Stage 2 itself will keep on coming down. So that 's a reflective of the ECL model, which is working and giving us that benefit. But largely the benefit is if you look at the provision cover difference is hardly like a percentage point and all. So I think that's the kind of outcome of the ECL model. And if you look at the Stage 3 anyways, if you look at the overall provisioning, at a company level, last quarter, if my provision was total provision was INR4,034 crores, which has come down to INR3,876 crores. If you adjust it for the onetime write-off, then I think we have maintained the overall provision and there's no benefit taken into the P&L.

Got it. So fair to say that in the Stage 2, your PCR, you can keep taking benefit of the PD, LGD trends throughout certain numbers, right? While you will maintain your Stage 3 PCR at a certain level, 53% or whatever range you want to maintain, in the Stage 2 book, you will keep taking the improvement.

So it's -- so even in Stage 3, if you ask me, the PCR has to be a result of the -- your PD is like always Stage 2, one, I think LGDs, and accordingly Stage 2 also moves with the PDs and LGDs -- I think the provisions are generally -- by these 2 factors. That's why we have created an overlay. So overlay, it becomes a constant factor and balance amount is kind of derived by the model. So whatever you can look at this model.

Our next question comes from the line of Umang Shah from Kotak Mutual Fund.

And congratulation on the quarter. Just one question. To the proposal, which Raul mentioned about merging the housing finance subsidiary with the parent company, given that both the entities are engaged into a similar line of businesses of mortgages. I mean just an extension to that thought, I mean, is the management also contemplating merging the MIBL subsidiary with the parent, right? Again, we are now doing insurance broking in the parent, excess capital sitting in the subsidiaries getting up streamed as dividend income anyways. If not immediately, in future, will that also be a possibility?

Umang, for the first question, I'd repeat that on MRHFL it is a proposal to evaluate the benefits. The objective of us going down this path is, one, we do believe that we want to be a diversified financial player, and we want to play in multiple asset categories, which are promising and adjacent. So mortgage, how do we kind of grow mortgages in a scalable manner? That's the proposal on hand. Coming to your second question on MIBL, clearly not, let me just reinstate that we have an insurance broking license which has been maintained and the corporate agency license, these are not to fish in the same ocean. We do realize that the field of -- and the revenue pool for insurance distribution is very wide, and we didn't want to create a limiting factor of just exploiting the opportunity in the M&M ecosystem or the Mahindra Finance ecosystem. We did believe the corporate agency license gives us a goo d ability to maximize revenue, which is there in the low-hanging fruit in the M&M ecosystem and the Mahindra Finance ecosystem. MIBL is looking at insurance distribution across opportunities, general health, life, not in the M&M ecosystem. Think about all the opportunities of insurance distribution, which is available, not limited to the M&M ecosystem is basically being harnessed by MIBL. And hence, there is no thought process. We do believe it's an independent -- it's governed by an independent board. It has its own management team. Yes, we do derive benefits for it because it is a subsidiary. And right now, that entity at the scale it's operating, doesn't need capital and for us to retain too much of its profit, i s going up. And hence, we felt that there is a clear ability for us to plowback dividend income from there. But we are definitely not having any inclination clearly, it's an insurance distribution business, and it will remain that way in the broking .

Our next question comes from the line of Mayur Parkeria from Wealth Managers India Private Limited.

Am I audible?

Yes, yes. Please go ahead. Just check also, it's already 6:55. We can go on a little more. But let's have one question, please per -- if you can.

Yes. So again, you just mentioned about the time and pardon me for a slightly longish question, but this is more -- this is mainly in the context of your ROA comment from a slightly medium- to long-term perspective. I don't know if in the past, as management, you'll have alluded to anything beyond 2% as a number to anchor or guide over a medium to long term. So if there is any, please reiterate that, if any? And -- but the question is more from a slightly longish perspective, historically, when we see, earlier we used to see swing of ROAs used to be very high, right from 3.5% to sub-1%. The credit cycles used to swing from 1.5% credit cost to 3.5% on the P&L, 3.5% to 4% also, and that is where the swing of ROA used to happen. Over these longish years, we understand that the interest rate cycle is lower, hence, our yields are now more in the region of 7% against 9%. So that is a structural thing, which is not go ing to undergo or change in the next 2 years. Having said that, 1.5%, as you mentioned, the credit cost band 1.5% to 1.7% is more reflective of a good credit cycle period. So we are sitting at the bottom of the credit cost cycle in terms of the good period . In that light, ability of the management to increase ROA, where does that come from? And I'm not talking about 10 basis points here and there, but from a slightly medium to large, what is it that one should look at as a structural business trend from the management side? That is first. And secondly, what if there are external factors where the credit cost band goes out of hand. And that -- what are we doing to ensure that the external risk factors and credit costs do not play to our guidance -- to our targeted range of ROA?

Yes. Thanks, Mayur. Very long question. I won't have such a long answer, hopefully. See, one thing on the ROA, I'll maintain that our objective is to get to 2%. And then only after we hit that milestone will we share our plans to go up. But clearly, is 2% the gold standard? No. We do understand that any formidable NBFC from the stable of, let's say, the M&M Group should deliver a 15% ROE and our goal is to get to that 15% ROE. ROA is the biggest lever. And then since we are largely a secured book, the questions on debt equity, etcetera, we currently are even more capitalized than we required to. We can sweat the equity a little more. So do we intend to stay at 2%? I would say that our intention is to hit the 15% ROE also. We believe the way to go there is first get to a 2% ROA and then climb up with the levers which are there in the overall ROA tree. Now your comment on volatility, I'm sure you answered the question also that the huge swings in volatility, I think are behind us. I've just opened up my commentary saying last 8 quarters, we have kept GS3, GS2 range bound. Yes, there was because, as Prade ep alluded to the fact that our ECL model had some periods of consideration, wherein, the COVID period went out, we saw the PCR moving up and down. But right now, we do think our -- if we keep the GS2, GS3 range bound and the ECL model is reflective, we shouldn't see such wide variations. We clearly think a business like us with the choices we have made in the last couple of years, should bring in more stability. The other management levers are in making sure that the business is not so monoline, right? As in if you see, still we are a 90% wheels business. Part of the diversification plan, which I admit has not played out to the level it has. We do understand with a balance sheet of INR1,40,000-odd crores, loan book of INR1,20,000-odd crores, we need to become much more diversified. And that diversification will lead to less volatility also, because as long as we are subject to one industry, volatility is that much more. So part of the mortgage playbook expansion, which will happen out, SME playbook expansion will happen out is really to meet that long -term goals of not being so monoline and not being a subject to more intense volatility than a more diversified player is. So that's largely the objective of why the management is looking at diversification as well as the whole fee-based income, etcetera, that we talked about to avoid in down cycles, extreme volatility.

Sir, this is not a new question, just an understanding, please allow me.

I'm really sorry to interrupt you, sir. But we are well over...

Mayur, just in respect, I can see 7 more people on the list. I'm happy to engage outside this call also, I can give you for clarification.

Our next question comes from the line of Nidhesh from Investec.

Sir, my question is on loan growth that you alluded that you will diversify the loan book over a period of time. But -- so there, I think mortgage is definitely a large opportunity. How should we build the loan growth from a medium-term perspective? This year, I think it's a bit slow. But from a 3-year perspective, what is the aspiration in terms of loan growth that we are having? And how the broadly loan books may look like, basically how the share of these can you -- in your view over a period of time?

Yes. So if you've seen -- thanks for the question, Nidhesh. The recent disbursement growth has been really I would say, if you look at the jaw, we're doing disbursement growth and book growth, of course, is holding up because of previous good disbursements in FY '23 and '24. We will have to make sure that we start seeing a loan book growth, which is in the mid -teens. Now clearly, this year is subpar. As we've seen some tailwinds in tractor, etcetera. But as we start getting more adjacencies fr om SME and mortgages, we do believe that a franchise like ours should look at CAGR growth in the mid-teens to high teens. Where we get that from will be a combination of wheels, mortgage and the SME business. How is the growth going to look -- I mean, how is the mix of wheels, non-wheels going to look at, I'll kind of repeat what I said maybe in the last call that over the next 4 years by FY '30, we do believe across now I'm also talking about mortgages. In the mix, the loan book should read by FY '30 end our objective is to get wheels, which is currently in the combined businesses, let's say, MRHFL plus wheels today, wheels is at 88%. We want to get that down to 70%. That means the mix from the other asse t categories will have to grow which is 12% to 30%.

Sure. And this SME and mortgage will be ROA dilutive or ROA accretive in your view?

In the initial years, as you know, as you build businesses, they won't give you a very strong, but we have a plan in the mortgage business also with affordable housing being a big part of that. So we are not just going to mindlessly grow businesses without ROA, without the ROA attractiveness of the underlying consol that we are looking at achieving. Initial years, could see, as you know, any business which grows in the initial years will take time for the full-blown ROA to play out. Our SME business, in fact, even right now is giving us encouraging signs on ROA.

Our next question comes from the line of Viral Shah from IIFL Capital.

Sir, just first, one clarification. You mentioned that now that we have had an ECL refresh and there's some management overlays also now with us. Do we kind of see a scenario where, say, to a very large degree and extent we are done with the first half, se cond half seasonality in terms of the P&L credit costs. Just one follow -up over here, and then I have one more.

Yes. So Viral, as you know, management overlays can't be used as per discretion. There are only certain occasions where we can dip into it. And we have, of course, had a very detailed discussion with Audit Committee , Board, etcetera. So, this is not to even out quarter 1, quarter 2. Management still has a high bar in making sure that the GS2, GS3 is range bound. We are basically going to exercise onus on the collection, underwriting business teams to make sure that we are not evening out in terms of earnings by creating the overlay. We will still be extremely focused on the operating metrics of GS2, GS3 being range bound, right? So as you would have seen in the past also, the volatility of quarter 1, quarter 2 also has been largely evened out in the last -- in this year and the last year. Yes. Let's go to the second question.

Sure. And HFC piece with the reverse merger, I understand that this is under consideration. But the points that need to be considered are not just see the risk weight, which is kind of realignment but also, I understand there's consideration to be had with respect to access to SARFAESI you're getting, say, the ability to have and operate at effective lower tax rate. A couple of other benefits are also there access to NHB funding. So how do you anticipate doing this kind of the exercise?

See Viral, I mean, I won't go into the details, but there are merits, demerits on both sides. There is risk weight. There is -- I wouldn't say cost of fund is very different for somebody like us. There's very little arbitrage even today between cost of funds across both entities. SARFAESI is only INR20 lakhs, as you know, affordable housing, etcetera, today, most affordable housing starts at INR20 lakhs and above. There are other recovery tools. So on balance, in fact, we will bring this to the goals, we felt that there are merits, demerits on both sides. We will cross the bridge when we have 100% conviction that we will go in one direction. Right now, I would say there are both merits on both sides. Our objective is to play mortgages at scale. And we do believe playing it at scale means that there needs to be some amount of evaluation of whether doing it in 2 outputs will give us that scale benefit.

Got it. And one last...

I just have one question. So this one is fee income jump on insurance, the commission was quite -- the growth is quite healthy. So now that your corporate agency license is now established across, say, 7 partners, what kind of run rate should you expect go ing forward? Is this like a structural margin lever? And how do you think about this going forward?

Yes, I just want to clarify whatever you're seeing in that 1.1% to 1.4% is not only insurance income. There are a couple of things. Yes, insurance is a meaningful part of it. Now we have a growing franchise and all the insurance that we do is a combination of whatever is basically good for the customer, right? I mean we do have customers which come from very deep geographies and our objective is that they are protected and the family doesn't go into bankruptcy if there is an eventuality. So all the products that we sell are very simple, not complicated, good for customer products. With the corporate agency license that has come in, we have been able to have a very decent amount of penetration into the existing M&M ecosystem. I would also like to remind everyone, ever since we reorganized our branch structure, we now have 1,400 branches, which are also distributing under the corporate agency, life insurance, general insurance, vehicle, open market vehicle insurance, etcetera. So have we hit the headroom? There is still, I would believe, headroom for expansion. Are we moving in the right direction in terms of insurance income? Yes. Besides insurance, there are other incomes, which as I mentioned, dividend income from the subsidiary and a couple of other avenues. And we do believe that, yes, we came from a position which was suboptimal. We have climbed to a reasonably good. Have we hit the headroom? I would not say yet. We can still augment this. But this will definitely don't read this 1.4% as a onetime. We do believe that this is sustainable going forward.

Understood. Just one follow -up. So is this -- are you doing only individual? Or are you doing group also in this -- is it only individual fees or you're doing group as well?

What do you mean by group? In the insurance?

Yes, as in group insurance, like say, group credit, life, and so on.

Yes. Both group, individual. Branches do a lot of retail , so it's a combination. And we have set up just for everyone to know, we have a fee and we have a setup an organization structure, which basically supports this from a medium to long term. We are not looking at this being one -off. So there's a proper org structure to make sure that this fee -based income is a big theme and a priority.

Team, congrats on the quarter. I'll make this quick. Just getting back to the first question on loan income. Now you explained that it's gone from 11.6% to 12% because the 11.6% had the trade advances in the denominator. But if I go back 1 quarter, it was 11.7% in the first quarter. So over a 2 -quarter period where we ignore the trade advances noise, it's still up 30 bps. So I'm just trying to reconcile how to think about this in the context of increasing competition, declining yields, etcetera?

Piran, thanks for the question. One needs to also look at the inter-quarter. What happens between the quarters in terms of GS2, GS3 , s o whenever the stock of GS2, GS3 improves, then you have a write-back also, right, in terms of interest income. So it's not only the festival period trade advance, it's also the inter-quarter. So we wouldn't have had between Q4 and Q1, such a GS2, GS3 improvement, which we saw, as you know, and I pointed out, our GS2, GS3 between Q2 and Q3 has seen a significant improvement, and that delta has been enjoyed in Q3 in terms of the loan income.

Ladies and gentlemen, as there are no further questions from the participants, I would like to hand the conference over to Mr. Nischint Chawathe for closing comments. Thank you, and over to you, sir.

Thank you, everyone, for joining us today. We thank the management of Mahindra Finance for giving us an opportunity to host the call. Thank you very much. Good night.

Thank you.

Thank you.

Thank you.

Thank you so much. Ladies and gentlemen, on behalf of Kotak Institutional Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.