“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?
RS:
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?
RS:
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?
RS:
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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