M&M Financial Services Company Update; PSL status removed – minimal impact in near future; Buy; Target: Rs 870 ::Emkay

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M&M Financial Services Company Update; PSL status removed – minimal impact in near future; Buy; Target: Rs 870

RBI removed PSL status from onlending

RBI today in its concall highlighted that it has removed PSL status to loans given by banks for onlending to any NBFCs other than MFIs with prospective effect. The assignments and securitization would still continue to enjoy PSL status.

Minimal impact as of now – 17-18bps on cost of borrowings

Approximately 19% of MMFS’ borrowings are for onlending from private/foreign banks where it gets lower rate of interest of upto 1%. Thus the impact on cost would be limited to 17-18bps and 13-14bps on cost of funds. MMFS has already raised its lending rate by 100bps from May-11 to take care of rising cost of funds.

Competition may increase but not imminently

The RBI has made mandatory for the banks to open 25% of incremental branches in rural areas for banks. This alongwith necessity to contract PSL loans on its own may increase the competition from banks but we see that possibility only in very long term future.

No threat to availability of funding

MMFS currently gets 57% of its funds from banks in terms of loans (excluding assignments) which is 40% over and above the PSL onlending loans. We believe that as banks have been giving loans to MMFS notwithstanding the non-PSL status too, we do not see this as a threat to the availability of funds.

Impact could be higher if assignments also taken off

Assignments contribute ~17% to MMFS’ funding profile. If the status is removed also from assignments, the impact could be higher by another 25bps.