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How does India's Giant, Mahindra & Mahindra Finance Agriculture Equipment?

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Mahindra Finance

When it comes to financing agriculture equipment like tractors, learning from the company who makes them and boasts to be the top-selling tractor company in the world makes a lot of sense. That's what senior bankers from Sri Lanka's Hatton National Bank thought when they visited Mahindra & Mahindra Financial Services Limited (Mahindra Finance) in India last month. HNB bankers were curious to know what lies behind Mahindra's success story. They were interested to learn about the Company's business model and its experience in financing agriculture equipment. This curiosity was sparked at AgriFin's Financing Agriculture Forum 2013 when HNB bankers met  senior executives from Mahindra Finance.

Photo: Mahindra Tractor Dealer

When it comes to financing agriculture equipment like tractors, learning from the company who makes them and boasts to be the top-selling tractor company in the world makes a lot of sense. That's what senior bankers from Sri Lanka's Hatton National Bank thought when they visited Mahindra & Mahindra Financial Services Limited (Mahindra Finance) in India last month. HNB bankers were curious to know what lies behind Mahindra's success story. They were interested to learn about the Company's business model and its experience in financing agriculture equipment. This curiosity was sparked at AgriFin's Financing Agriculture Forum 2013 when HNB bankers met  senior executives from Mahindra Finance.

Study Tour Approach

The four-day study tour in India was facilitated and financed by AgriFin. The HNB team consisted of seven senior staff working on agriculture finance across Sri Lanka in HNB’s Development Banking Division.

The study tour included the following components:

  • presentations and discussions with a branch manager and operational staff at a Nagpur branch and regional office to learn about their tractor finance operations;
  • discussions with a tractor dealer of Mahindra & Mahindra Limited (M&M);
  • interviews with clients who received tractor loans from Mahindra Finance; 
  • visit to the M&M Nagpur tractor factory; and
  • wrap-up discussion with senior management at the headquarters of Mahindra Finance in Mumbai. 

Mahindra Finance Overview

Mahindra Finance, a subsidy of M&M, started its operation in 1991. Since then, it has become one of the largest rural Non-Banking Finance Companies (NBFC) in India. Mahindra Finance operates nationwide with over 700 branches and 13,000 employees. To date, it has financed assets worth over Rs100,000 crores (US$16 billion) for more than 2.5 million clients in 170,000 villages and 5,000 towns across India. Main products of Mahindra Finance include equipment finance (loans for auto, utility and commercial vehicles, tractors, and construction equipment), Small and Medium Enterprise (SME) finance, housing finance, personal loans, insurance broking and mutual fund distribution as demonstrated below. The Company finances both M&M vehicles as well vehicles of other manufacturers and covers a wide range of vehicles from 2 to 16 wheelers. The diversified portfolio and outreach across India mitigate the exposure risk of specific sectors, markets, and regions. Revenues and profits of the company experience a steady growth, and Non-Performing Assets (NPA) remain low at 3.0% (gross, as of end FY2013). 

 

Tractor Financing Model: What Drives Mahindra's Success?

Mahindra Finance focuses on rural and semi-urban areas, targeting farmers with a landholding of less than 10 acres. Living away from major cities or towns, Mahindra's clients have limited access to banks. Many financial institutions are usually reluctant to operate in remote rural areas as transaction costs are deemed high. Recognizing this opportunity, Mahindra Finance has developed a strong market presence in this space.

Since its inception, Mahindra Finance has disbursed US$3.8 billion for 525,000 tractors. As of March 2013, tractor finance constitutes 19% of the total equipment finance portfolio. There are several key success factors that have supported the company’s tractor finance model:

Close coordination with M&M dealers. Mahindra Finance liaises very closely with equipment dealers, particularly M&M dealers. Over the past 30 years, M&M has held the largest market share on tractor sales in India (currently at 41%), thus linking sales of M&M tractor and credit is a key to gain clients.

Mahindra Finance holds rights of first refusal on potential borrowers who need credit to purchase tractors at M&M dealers. Currently, among the loans provided by Mahindra Finance, 78% are sourced by dealers. A dealer in Nagpur covers 800 villages with 60 staff, and possesses the largest market share despite the high competition (12 manufacturers available in Nagpur). The primary clients are individual farmers with 5-6 acres of land. While the M&M dealer staff advise on suitable size and type of tractors and supports operation and maintenance of tractors, the clients are referred to Mahindra Finance staff if they need a loan. The close coordination with dealers helps reduce lead time of transaction and allows quick delivery of the purchased tractors. Structuring repayment to meet farmers’ needs and mitigating risks through security.

Loan Appraisal Process at Mahindra Finance

Loan appraisal for tractors generally entails visiting clients and conducting interviews; understanding their income sources and types and cycle of crops; collecting required documents (identification proof, income proof, land records, etc.); and checking clients' credit records through a credit bureau.

Interest rate ranges from 17% to 25% (flat) with at least a 30% down-payment. Depending on the income cycle of the clients, Mahindra Finance decides on installment frequency (monthly, quarterly, and semi-annually). The company values its ability to structure repayment to match with individual farmer’s income and crop cycles.

Clients are required to have one guarantor, and Mahindra Finance holds hypothecation on: (i) the tractor which the clients has purchased; and (ii) asset insurance for tractors and life insurance for clients in case of accidents or client's death. Once Mahindra Finance and the client agree on the terms and conditions, a loan agreement is signed. All the documents and securities are filed in one file for each client and stored at branch offices.

 

Local staff and relationship building with clients. During the study tour, many staff of Mahindra Finance stressed the importance of close interactions with clients as the best way to understand their intentions and needs, and assess capabilities and willingness to repay. For that purpose, branch offices hire local staff who are familiar with the region and understand the local language and culture, and train them to be field executives (collection officers). The capacity and empowerment of field executives is critical, as they play a key role in improving the recovery rate. Field executives can also quickly communicate the clients’ inquiries to branch offices, as they are frequently interacting with clients.

Understanding the product and its asset value. During the visit, it became obvious that Mahindra Finance staff familiarize themselves well with equipment they finance. The staff often visit M&M factories and dealers, understand the production process, and the types and functions of tractors. The factory in Nagpur houses a training center for all the M&M group employees, which also helps Mahindra Finance staff better understand the M&M products.

Use of Technology and Collection Centers. Mahindra Finance uses hand-held devices for loan transactions. This technology has allowed clients in remote rural areas to make repayments at their door step, and transactions are reported to the branches and management in real time. 

 

The role of technology

The development and pilot roll-out of the hand-held devices started in 2007, and the system is now fully implemented with more than 10,000 devices across India. Each field executive carries one hand held-device, and is required to record all the transactions with the clients at the site. 

Hand-held devices, connected by GPS network, contain updated client information, credit records and repayment schedule. Once a transaction is made, hand-held devices automatically send the transaction details to the company system. The devices also have multiple functions to enable efficient communications with clients; they can transmit inquiries on new loans from a client to branches for prompt follow-up, and send a reminder SMS to a client's mobile phone for an upcoming repayment. 98% of the offices are currently connected to a data center in Mumbai. 

Transactions recorded in the hand-held devices become immediately available for branch offices and the headquarters through the system. This allows management to make on-time tracking of performance, and branch managers to make required follow-up actions. In addition, the hand-held devices enhanced transparency and internal control. As 90% are collected in cash, the company needed secure transaction handling and clear reporting system for better internal check and control. The amount collected during a day can be deposited in a nearby bank branch, and the accounting team of a Mahindra Finance branch office can check the updated transaction records in the system and the deposit receipt.

 

This has increased the efficiency of transaction management, and reduced the time and efforts to monitor the repayments. Mahindra Finance is planning to take this innovation further by establishing “collection centers”. The company is preparing kiosk-type collection centers – 400 centers to be established in very remote areas across India. With a small stall located close to a train station or bus stop, one to two persons receive the repayments by clients, and record the transactions in the hand-held devices. It can reduce the travel time and costs of field executives, while ensuring that the transactions are recorded and available on time.

Photo: Study Tour Participants

Key Lessons Learned for HNB

The learning visit to Mahindra Finance and M&M gave valuable insights to the HNB delegates. They were inspired by how Mahindra Finance has reduced transaction costs and improved transparency by using technology, especially through the hand-held devices. Such use of technology could increase the efficiency of transactions, and enable better communication and quicker service delivery between a financial institution and its clients. The delegates also agreed that the use of hand-held devices could be extended to other services such as utility payments, mobile top-up payments, deposits, and insurance broking, so that the bank can respond to clients’ needs at their doorstep. Currently, HNB clients need to travel to nearest branches to make loan repayments and access other services.

Mahindra Finance’s approach of field executives gave HNB delegates a useful idea of deeper and wider interactions with clients. Exploring closer and more efficient way of reaching clients is critical to understand client needs and ensure higher recovery rate, particularly in remote rural areas. While travel distance and time between villages and branches in Sri Lanka are relatively less than India, allowing various and convenient ways of accessing the financial services could reduce the constraints of clients. 

Finally, HNB has been working closley with major tractor dealers in Sri Lanka. Through the M&M dealer and factory visits, the delegates realized that understanding of products helps better awareness of the asset value and needs of the farmers, and appropriate loan pricing. They agreed that more strategic and closer alliance with dealers, combining equipment marketing, sales and finance could allow both manufacturers and HNB to expand their businesses.