“We didn’t want to be just another finance provider”

With its unique business model and customer focus, Shriram Transport Finance Company (STFC) has grown rapidly in the commercial vehicle (CV) financing space since it started operations over 30 years ago. The company’s managing director R Sridhar speaks with Moneylife’s Sanket Dhanorkar about how and why STFC chose to focus on this segment and what it has learnt over these years. This is the first part of a two-part interview series.

Sanket Dhanorkar (ML): Your company has a unique business focus—vehicle financing of small truck operators (STOs), a section which remains largely untouched by banks and other players. What was the rationale behind this focus and how will it drive revenues, going forward?
R Sridhar (RS):
Shriram Group has always been looking at businesses where there has been a credit starvation. We didn’t want to be just another finance provider. We wanted to be the only finance provider in this area. This segment has not been selected for profit only. So within the CV segment our focus is the small trucker, who has trouble accessing credit. He has always been in the grip of the unorganised sector. Even if he gets credit from this sector, it is at a usurious cost. So we felt that we have a role to play. If we can cater to his requirement, it’s actually very critical to the economy of the country. The role played by the small trucker is movement of cargo and goods of customers, which is very critical to economic growth. So by making his cost cheaper and providing organised credit to him, we are actually reducing the cost to the economy. So we have chosen this business on that rationale. The business should be unique, (occupy a) niche and it should make sense to the economy.

But the journey hasn’t always been easy. We have always encountered a lot of problems because this customer has been perceived to be risky. The problem is this customer is considered un-bankable. Banks expect one customer to be a multiple source of business. But a trucker is not in a position to even get acquisition credit, forget about other products. Unfortunately because the unorganised sector was catering to this customer, the interest rates were higher.
So once the interest rates you pay are high, you are automatically perceived to be risky. So people had abandoned him. That is where Shriram Transport arrived. It was not without its difficulties. It took around 25 years for us to prove to the world at large that this is also good credit. Once you have changed the mindset, then you can really enjoy it.

ML: What difficulties are you exactly referring to?
Since banks were not willing to fund this customer, they were also unwilling to fund the one who was funding this customer. This mindset changed only after 25 years of operations. Now, it is the other side—they are ready to give more and more credit. {break}

ML: Are you are going to continue focusing on this segment?
We are only financing small truck owners. We are financing whatever he wants. We don’t like being labelled as a second-hand truck financing company. Sure, we do 70% of it, but we don’t stop there. When he (the trucker) wishes to upgrade, we assist (him). We don’t abandon him when the loan is repaid. We now also provide him working capital. Majority of it is operational, but we also finance a bit of personal expenses. So we are partners to the trucker. He is a working partner; we are a financial partner. A financial partner can be paid off over a period of time. So from one entrepreneur we go to another. In this way, we support lakhs of entrepreneurs. We pull these people from the unorganised sector, keep them with us, and some of them over a period of time get upgraded to bankable status. Some of them buy multiple trucks; some people buy an old truck to start with, then upgrade to a new truck. So our job is to facilitate this transformation of the customer. Some customers move on to banks; others stop at us. So we provide the cheapest credit to this segment. So the credit-worthiness of the customer is improved and proven, once he becomes our customer. In the process, we lower his cost of operations. That’s the role we are playing and will continue to play. We will further strengthen it. We are innovating, tracking whatever the customer accesses outside our doors and try and provide that to him also.

ML: You emerged largely unscathed from the downturn by focussing on asset quality and curtailing disbursements. What have you learnt from this period and how has it changed your operational strategies?
What happened in 2008 was unprecedented. The whole world was affected. Big companies and banks suffered. Liquidity was greatly affected. Fortunately, the Indian government as well as our central bank did a commendable job. They brought back the liquidity in good time. The learning which I had was, ‘what can happen will happen’. You need to be improving the risk-management practices all the time. In the finance business, if you have no money and are unable to honour your commitment, then your credibility is lost, which cannot be repaired.

Fortunately for us, we had enough liquidity at the time of the crisis. We anticipated that kind of liquidity crisis. Even today, we keep excess liquidity in the system to meet any such eventuality.

Similarly, apart from the liquidity risk, we are facing interest risk. On the liability side, we have both fixed and floating rate funds. But on the asset side, it’s a completely fixed rate. In the last one-and-half to two years, we have accessed more fixed-rate funds. So now we are almost out of interest rate risk. We have matched the assets and liabilities to such an extent that even if interest rates go up tomorrow or come down, it doesn’t matter.

The hallmark of our success has always been our dealing with delinquency risk. Delinquency risk deals with the credit quality, which has always been good in our case. But the credit for that should also go the customer who took the loan and repaid it. If you have done proper valuation and have sufficient equity of the customer, then the loan cannot go bad. In the first 12 months if somebody has paid, his equity goes up and loan comes down. Here we are almost 50-50, after which there is no possibility of any loan delinquency. Over a period of 30 years, we have learnt how to value the vehicle, how much to lend and so on. The maturity of this business in handling this risk has gone up substantially, which has us given huge strength. We came out unscathed from the crisis, primarily because of our credit quality. It is our obsession and we will continue to focus on it.

(The second part of this interview will be carried tomorrow).

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    SEBI’s circular on funds transfer to client accounts creates confusion

    The market regulator’s December 2009 circular on transferring funds back to client accounts periodically has created market-wide confusion. Many brokers have not followed this rule, which was supposed to be implemented by 31 March 2010

    A little-discussed circular of the Securities and Exchange Board of India (SEBI) to protect investors’ interests has got brokerage houses worried about its practical ramifications and how it will affect individual traders and investors. To bring clarity and accountability into a client-broker relationship, SEBI had issued a circular that described a new model agreement on 3 December 2009. As part of that agreement, brokers have to return the money lying in clients’ accounts “at least once in a calendar quarter or month, depending on the preference of the client.” This was an important step in investor protection since a major cause for disputes between brokers and clients has been the misuse of funds by broking firms. In 2007 and 2008, many customers woke up late to the fact that the balance in their accounts dwindled to nothing after brokers merrily traded with their money, backed by a power of attorney.

    While the SEBI circular will certainly help a client detect such mischief early on, its implementation may create a few hiccups. According to the SEBI circular, “The stock brokers shall take necessary steps to implement this circular immediately and ensure its full compliance in respect of all clients—existing or new—at the latest by 31 March 2010.”

    According to market players, many brokers have not implemented this decision of returning the money once a month/quarter within the current quarter (ending 31st March). Brokers have not contacted them about their preference either. If they haven’t, they have just one day left to completely return the money. One investor told us that neither the broker has contacted him about it, nor is he demanding the money back. Clearly, it is certain that his money will not be returned by 31st March, which is required as per the circular.

    Indeed, if the SEBI circular has to be taken seriously, brokers have to ask clients to square off their derivatives trade and also refrain from buying in the cash market.

    Apart from this short-term issue, there are other practical problems of following this circular. According to one broker, even though the SEBI circular does not specify a fixed date of settling a client’s funds, the exchanges have interpreted this to mean that every client will have to specify a fixed date per month/quarter when his account will be fully settled. This means that the client will not be able to trade (especially in derivatives) for a few days until his account gets fully funded again after fresh transfer of funds.

    The other aspects of SEBI’s 3rd December circular will go a long way in creating investor confidence—especially since brokers have not handled clients with due fiduciary responsibility. Among the laudable changes is a mandatory document wherein the broker will have to make clear the policies and procedures regarding refusal of orders for penny stocks, imposition of penalty/delayed payment charges by either party and the right to sell clients’ securities or close clients’ positions, without giving notice to the client, on account of non-payment of dues by the client. Interestingly, among the changes that SEBI has insisted in its 3rd December circular is that all documents shall be printed in minimum font size of 11.

    When Moneylife contacted SEBI, sources told us that they are looking into the issue. Meanwhile, BSE Brokers Forum members are discussing various matters regarding the circular today at the BSE. The members will be discussing SEBI’s norms on know your customer (KYC) and the Prevention of Money Laundering Act (PMLA) requirements, among other issues.

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    rajesh sharma

    9 years ago

    any solution for sebi December 2009 circular on transferring funds back to client accounts.
    client have facing the problem his sebi circular or any format for stop this problem.

    Sumeet Mongia

    10 years ago

    I look at the matter with different vision

    Brokers uses clients fund to facilitate other clients:- I dont find it a problem since as a client I am never refused if I have money in my trading account.

    Frequent Transactions:- Yes,this creates a problem especially for frequent traders like me.If I have some funds lying idle they transfer it back....then when I want to trade they say I dont Have """"MARGIN""""...this is crazy

    My recommendation is written approval from the client every month for the trading balance and the trades executed.

    surendra jain

    10 years ago

    client a\c should be zero at least once in quarter if it is inoperative\least operative . In case of frequently operated accounts (having tradesmore than 25% of working days) it should be left between client \ broker


    1 decade ago

    Nobody will benefitted with such types of TUglaki Farman's of SEBI's albele Shands. Niegter Client , Adviser or AMC and Mutual Funds Industry.
    No body is work for anybody without any geting somthing. Mata bhi apne Bekar bache se jayada kaihn thode bahut kamane bale bache ko jayada pyar karti hai.


    1 decade ago

    Why not ask Moneylife to come and cook for you and wipe your floors ... in the interest of all players. After all they have committed a crime by writing this when hundreds of journalists in business papers and TV channels did not

    Narendra Doshi

    1 decade ago

    How come MONEYLIFE could NOT make all wake up for over A YEAR !!!

    Even 24 hrs early is SOMETHING better than NOTHING.

    This should be emphatically followed up to its logical conclusion, by MONEYLIFE, in the days to come, IN THE INTEREST OF ALL PLAYERS IN THE FINANCIAL MARKET for transparency.

    R Balakrishnan

    1 decade ago

    This circular is long overdue. Brokers live because of client money. Their undercapitalisation will stand exposed. In fact most brokers live off client money float with themselves. To oblige fat cat clients who do not pay up in time. Fat cats give brokerage, but drain cash.
    The real issue is one of capital which SEBI should address

    ITNL eyes Rs1,300 crore revenue from road projects

    The infrastructure company has received a 300-km road work order worth $1.5 billion from Kazakhstan

    IL&FS Transportation Networks (ITNL), which got listed on the National Stock Exchange today, has said that it is eyeing revenue of Rs1,300 crore from road and transport projects over the next three years.

    “We have orders worth Rs12,000 crore till date and will be executing them over three years. We are eyeing Rs1,300 crore revenue from these project orders,” ITNL managing director, K Ramchand, told reporters on the sidelines of the listing ceremony here.

    “We will continue to maintain our growth at 25% in the next three years,” Mr Ramchand said.

    ITNL is one of the leading private sector build-operate-transfer (BOT) road operators in India. The company is engaged in the development, operation and maintenance of national and State highways, roads, flyovers and bridges across India.

    “We want to diversify into the urban infra space on the railways side. In our current portfolio we have completed eight projects and 11 are under construction,” Mr Ramchand said.

    “We have received a 4.8-km metro rail project at Rs 1,000 crore in Gurgaon and will start construction work in the next two-three months. We will complete the project within three years,” he said.
    ITNL also plans to foray overseas, Mr Ramchand said, adding that the company has received a 300-km road work order worth $1.5 billion from Kazakhstan.

    “We will start construction work in the next four-five months in Kazakhstan and will complete the project within three years. We expect more mega-project orders from both domestic and overseas markets in FY11,” he said.

    The company plans to bid for at least six-eight mega projects worth around Rs4,000 crore in the next three months, Mr Ramchand said.

    ITNL raised Rs700 crore from the capital market and will use the net proceeds to repay its debt and also for expansion.

    “The company has around Rs1,000 crore debt and plans to repay Rs550 crore from the proceeds and (the) balance would be utilised for our expansion plans,” he said.

    ITNL listed today at Rs287 on the Bombay Stock Exchange, a gain of 11.24% over its issue price. On the National Stock Exchange, the stock listed up 3.35% at Rs266.60.

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