RBI action has no impact on business, says M&M Financial Services

The RBI action of barring M&M Financial from outsourcing recovery agents comes after the Harazibagh incident where a pregnant woman was mowed down to death

Mahindra & Mahindra (M&M) Financial Services on Friday said the Reserve Bank of India’s (RBI’s) barring it from outsourcing recovery agents would not materially impact its financials but would temporarily bring down the repossession of vehicles by about 3,000–4,000.

“The vehicles that are repossessed are mostly classified under Stage 3 and, therefore, this temporary halt to repossession activity using the third-party agencies is not expected to have any material impact either on the financials or on Net Stage 3,” the company said in a statement.

The RBI’s first-of-a-kind action came days after a 22-year-old pregnant woman died in Jharkhand’s Hazaribagh while trying to block loan recovery agents from taking away her father’s tractor and was crushed under the vehicle. The loan was taken from M&M Financial.

The RBI asked the company to immediately cease carrying out any recovery or repossession activity through outsourcing arrangements, till further orders.

Shares of the company on Friday tumbled 13.09 per cent to close at Rs 194.45 on BSE. The broader market was down 1.73 per cent.

In the normal course of its business, the company repossesses about 4,000 to 5,000 vehicles per month, using third-party agencies and its own employees. “The company expects this number to go down temporarily by about 3,000 to 4,000 per month as it implements the RBI order with immediate effect,” said the company.

The company said the RBI’s diktat would not impact its collection activities in the vehicle finance business as it has not outsourced this activity to any third-party agency. As of the June quarter, the count of contracts under Stage 3 was 135,000 and the company carried a sufficient provision of 58 per cent on these assets (inclusive of 100 per cent provision on contracts with age of 18+ months).

“Recoveries via own employees may keep cost to income elevated. The company had reported volatility in its earnings and credit costs, which need to stabilise. Its asset quality was on a recovery path. However, with this ban, the company may witness an increase in gross non-performing assets as the pace of recoveries slows down”, said ICICI Securities in a note on Friday.  

Ramesh Iyer, vice-chairman and managing director of Mahindra Finance, said: “We have a detailed policy in place for compliance of third parties, with regard to repossession of vehicles. In light of the recent tragic incident, we have stopped third-party repossessions and will further examine whether and how third-party agents will be used in the future.”

This is probably the first time the regulator has cracked down on lenders on recovery by coercive methods, which is typically a hallmark of outsourced recovery agents.

In June, RBI Governor Shaktikanta Das had warned of taking stringent action against lenders for harsh methods used by recovery agents.

Last month, the RBI issued directions to the regulated entities asking them to ensure that borrowers do not receive phone calls before 8 am and after 7 pm.

“Regulated entities and their agents must not resort to intimidation or harassment of any kind, either verbal or physical, against any person in their debt collection efforts, including acts intended to humiliate publicly or intrude upon the privacy of the debtors’ family members, referees and friends, sending inappropriate messages either on mobile or through social media, making threatening and/ or anonymous calls,” the RBI had said.