Daybreak - How Mahindra Finance dealt with the RBI curb on recovering loans via third party agents

Episode Date: January 18, 2023

For Mahindra Finance, the RBI directive against it couldn't have come at a worse time. The rural financier had barely recovered from the effects of the lockdown since it had higher bad loans than its rivals. Add to that the dent on its reputation.How did the NBFC deal with the RBI's restriction on using third party agents for repossession? Tune in to find out.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Ramon Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. The following episode contains references to a disturbing incident,

so please consider this a trigger warning. It was in mid-September last year when tragedy struck the town of Hazari Bagh in Charkhan. A 27-year-old pregnant woman was crushed to death under a Mahindra tractor. Behind the wheels was a recovery agent who worked for India's largest rural non-banking financial company or NBFC. The agent was forcibly taking the tractor away that the woman's father had bought through a loan from Mahindra finance. The father had missed six EMI payments during the second COVID-induced lockdown.

The total amount due was 1.3 lakh rupees and he was short of 10,000. He begged and pleaded, but the recovery agent paid no hate and drove on. And that was when his three months pregnant daughter came in front of the tractor to try and stop it. She died the same day. The tractor still stands in front of their house as a sad reminder of the tragedy. Mahindra Finance decided, after all, to not. repossess it. But it did not save the company from the anger that came its way. There were protests and people demanded the arrest of Mahindra Finances recovery agent and manager. You can imagine what

happened to the company's reputation. The evening after the incident, Mahindra Group's managing director and chief executive officer, Anish Shah, expressed grief in a Twitter statement that said that they will investigate the incident from all aspects. Naturally, the news caused a furor and the country's central bank, the RBI, took notice. But Mahindra Finance is not the only company that employs third-party recovery agents who are usually local strongmen. A week later, though, came the big blow. The RBI wanted to set an example and so it did. It banned Mahindra Finance from using third-party agents for repossession. This was just when the RBI.

the NBFC was beginning to do better financially after being hit by the pandemic. And then, in the first week of January this year, four months after this incident, the RBI decided to lift the restrictions on Mahindra finance. Today, I will tell you how the ban impacted Mahindra finance and how it forced the NBFC to bring about a change. Welcome to Daybreak, a new podcast from the Ken. I'm your host, Nidha Sharmah, and I don't change. chase the new cycle. Instead,

thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Wednesday, the 18th of January. For Mahindra Finance, it was not just a ban that came as a big blow when it was recovering from the pandemic-induced limbo. It was also the timing of the ban. After a sharp decline in the year that ended in March 2021, its loan book remained almost stagnant for an entire year. Due to the COVID-related stress,

it posted a loss of over 1,500 crore rupees in the first quarter of the year that ended in March 22. And even though it got back to profitability in the next quarter, they were muted. In the second quarter of the year ending in March 2023, its profits have compared to the same period the previous year. But thanks to strong disbursement, In the second quarter of FY 2022 to 2023, it registered a 9% growth.

And just then came the RBI ban. The timing could not have been any worse. You see, every year, October and November marked the beginning of the Karif harvest season. It is the busiest season for rural financiers. Farmers use the money that they get from their harvests to pay back their EMIs or to buy new assets. But there are also some who end up spending all their money just to see their harvest through. So in these months, the role of recovery agents becomes critical. This is when NBC's make up in terms of the recovery of bad loans.

Bad loans in the agricultural sector are not rare. We have to remember that agriculture is a volatile economy. A lot depends on the weather, which, as we all know, can be quite unpredictable. So when the harvest is good, it is the perfect time for NBFCs to recover their bad loans. But for Mahindra, this was exactly when it had to scale back its third-party recovery agents due to the RBI ban. A senior official who handles the non-performing assets vertical in one of the leading NBFCs told the Ken, and I'm quoting, recovery agents are generally socially influential Bahu Balis or the local strongmen. The regulator RBI has mandated proper police verification before recruiting agents.

But that mostly goes unchecked. Incidents of physical fights while carrying out repossession are common across lenders. End quote. The Ken spoke to four out of the nine analysts who attended Mahindra Finance's last earnings call. All of them were of the view that this accident could have happened with any of the NBFCs. One of them told us that recovery agents are not exclusive to any of the finances. It could have been any company. But since the accident was big, the regulator had to react.

So the RBI ban hit Mahindra Finance at the worst possible time. But how did Mahindra Finance deal with this ban? After all, it was demanding the company to make some fundamental changes in the way it operated. third party recovery agents had been playing an important role for the NBFC. Since it could not repossess anymore, the company decided to make some operational changes. Also, at the same time, it had to keep its NPA or non-performing asset numbers down. So Mahindra Finance altered the way its recovery agents had been interacting with defaulting customers. Instead of taking the usual legal route where after four untrue,

paid EMIs, agents can repossess the asset, they began proposing an informal understanding. Defaulters were asked to pay at least one installment along with a plan for regularizing their loan repayments. Mahendra Finance decided to introduce a termination settlement program for defaulting customers. After repossession, NBFCs usually sell the vehicle to recover their money. But the full cost has never realized since vehicles, are depreciating assets. So settlement values were quoted to borrowers accordingly. An analyst at a Delhi-based brokerage helped us understand. For example, if a defaulting customer's total due is 1 lakh rupees and they are unable to pay, they are given the option to settle the loan

by paying anywhere between 70 to 80% of the due and the vehicle is not repossessed. Also, in the absence of third-party recovery agents, Mahindra's network of over 1,000 tractor dealers came to its rescue. One of the participants in the NBFC's investor meeting told us that even before the ban, a lot of the tractor recoveries were made by Mahindra's dealers themselves. And to offset the loss of manpower, the company also decided to onboard human resources

provided by recruitment agencies such as Team Lees. Earlier, they would work as off-roll employees under Mahendra Finances managers. But now, they are on the NBFC's full-time employment contracts. But all this was how the company had to alter its operations post the ban. What about the dent to the company's reputation? After all, the NBFC operates mostly in rural and semi-urban areas where word of mouth plays a huge role. Top of that, Uttar Pradesh, Bihar and Jharkhan together account for almost one-fourth of Mahindra finances total customers.

So what did the company do to recover from the loss of reputation? Right after the tragic death of the woman, there were huge protests in the area. Local politicians, farm leaders, everyone was demanding that Mahindra finance be held accountable. The company had to shut down its offices in Hazaribagh and, employees decided to stay home out of safety concerns. Some even had their families asked them to quit working for the company. After three days of the incident, news came that a team of five top bosses from Mumbai, including Vice Chairman and MD Ramesh Ayur and CEO Raul Rebello,

were to fly down to Jharkhand. Employees finally gathered the courage to step out of their homes. Meanwhile, Ayur and Rebello visited the victim's family. Bello was tasked with taking stock of the situation as the collections department was under him. The Ken spoke to an employee in Ranchi who did not want to be named because the company had issued strict instructions not to talk about this matter to the media. The employee told us that the situation in Hazaribagh stabilized only after the Mumbai team arrived and spoke to all the stakeholders.

In Ranchi, meanwhile, where the company's regional headquarters located, employees prepared for a long day. A meeting was scheduled and everyone was asked to be present. NPA team heads had instructed their juniors to go through the company's internal human rights module which talks about how to resolve issues with fairness and equity. Another employee who was at the meeting told the ken, and I'm quoting, the entire matter was discussed in detail.

Employees were told how the situation could have been handled. calmly. And team heads were told to sensitize all collection agents on the best practices that needed to be followed. End quote. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma your host and today's episode was edited by my colleague Rajiv Sien.