You have reported a loss during the quarter. Clearly there seems to be an impact of the Second Covid Wave. Was the impact felt in all segments that you are currently present in or was it very specific?
We do a lot of work in semi-urban and rural markets and rural was the most impacted in the Second Wave. Also, the segment of customers we work with are all earn and pay segment which means they are either in goods movement or they are in people movement and during a lockdown, out of 90 days, people could work for hardly 15-20 days and that also part-time. So the customers were not earning enough to be able to discharge the liability but these are customers who in the past have paid very regularly and they were very standard accounts as of 31st March.
Now when they have one or maybe two instalments outstanding in March, suddenly after three months of a situation where they cannot earn to pay, the account is bound to be going into NPA. There was the possibility of a restructuring of accounts, but our feeling and the customer themselves are saying that if things are going to get normal in a month or two, why do you want to restructure and burden us with higher interest going forward?
So we have also taken the view and we looked at the customer account movement and we have seen a very large number of accounts have already paid more than 50% of their loans in the past, So, there is hardly any liability left to worry about. Second, even during these three months of difficulty, we have taken a very clear view that these are extremely good customers and therefore even if we have to show them as an NPA by the regulatory requirement, that is fine with us and we have made a substantially higher provision and been very, very confirmatory. As things start to open up in the next three quarters, we will see a reversal of all that is being done. It is not to be looked at as a credit-based NPA. These are all liquidity pressure based NPAs and will reverse in the next two or three quarters.
Are you getting a little bit cautious about lending? Also how are you seeing the demand situation pan out amidst the segments that you are present in?We should not forget that we are just an enabler. Unless the vehicles and tractors and pre-owned vehicles get sold, there is not a role for us to play. We do not want to be seen as those generating sales by pushing loans because that may not be the right approach. So there has to be a fundamental demand for the credit to enable that demand to be fulfilled. In the last whole year, availability of vehicles was an issue and nobody knew what the impact of Covid would be. There was definitely a slowdown and it was a wait-and-watch situation.
Post that, between October and March, things started to become normal and demand started picking up and we also participated in that demand. Unfortunately the Second Wave came and hit it very hard. Dealerships were shut, RTOs were shut, people could not move so obviously the sales went down. With June opening up, we saw volumes coming back. Inventory levels are good, customer sentiments are returning back to normal and they are visiting showrooms for buying vehicles etc. That is the trend we are seeing going forward. I have said this before and I am saying it again, the demand during festivals will be one of the best and that is a turnaround plan to watch. In these two or three months, things will stabilise and post October, there will be substantial demand and we would benefit from that.
We take your point in terms of your expectation that things would improve rather quickly going forward, but then gross NPAs have reached over 15%. How do you see that ratio moving over the next couple of quarters? Also, given the uncertainty of a third wave, are you increasing your provisions ahead of time?
Let me clarify this increased NPA that we see. We do not even have to even go that far to see how it behaved then. Just take the Covid-1 situation. If the moratorium was not there, the gross would have looked similar to what it is looking like today.
Post moratorium, all the customers came back to normalcy and between October and March, every month, collection efficiency was over 90% plus. And that is how the NPAs stabilised at that 8-9% as of March. I do not think you will see a very different situation and I am repeating again that the NPAs in April, May, June are not credit-based NPAs. They are liquidity-pressure induced NPAs and are temporary. These will reverse in the next three quarters as the rural market normalises.
Even at a gross NPA of 15%, we have consciously provided substantially higher coverage and we are at 53% coverage to these levels of NPA. If the gross NPA drops from the current level by even 4-5% in the next three quarters, we are substantially overprovided and therefore it is a write back situation we would look at.
Would there be need of prudent capital raising over the next one year?
Capital adequacy today is at 23% and tier-1 is 20%. After making these kinds of provisions for NPAs, we are sufficiently and adequately capitalised. We are really looking forward to and waiting for the turnaround in the market for growth to pick up and then we will see an aggressive growth in that market which will also help better recovery. This is a very unique market.
As disruptions happen these customers do get impacted the fastest and the steepest, but as soon as things begin to change, they bounce back with the same speed. Take any year when the monsoon has failed. The customer goes through very difficult times and the NPA goes up and growth picks up as soon as the season becomes normal.
When growth returns, there will be improvement in collections because that is a direct reflection of the improvement in the cash flow.