“We should grow at 20%-25% in the next two-three years”

Shriram Transport Finance Company’s (STFC) managing director, R Sridhar speaks with Moneylife’s Sanket Dhanorkar about the company’s funding, expansion and diversification plans. This is the second part of a two-part series

Sanket Dhanorkar (ML): What are your expectations regarding funding costs and margins in the coming period?
R Sridhar (RS):
Others perceive this business to be risky. When you find something risky, you have two options. Either avoid it altogether or price it appropriately. We have taken the second route. Yes, it is risky, but we have understood, measured and managed the risk. For us, every customer is priced differently depending upon the risk. We have built an organisation which can effectively manage this risk throughout the organisation. We have a net interest margin of around 7%-8%. If interest rates go down, it is passed on the customer.

The same happens if interest rates go up. So we will not operate at 6% or 10%. We will operate between 7%-8%, with some leeway on either side. So the cost of funds or yield is not our problem. Our problem is net interest margin (NIM). Depending upon the cost of funds, yield will change. So yield is the resultant factor of this process. If I borrow at 10%, I’ll lend at 18%. If I borrow at 9%, I will lend at 17%. But if I can do it at 17.25%, NIM will go up.

So we are not worried much about yields. We would rather maintain that NIM because this business requires it. We have measured the risk, so we have to manage within that. Still, we need to give a cushion if it exceeds a certain limit.

Even if the business is not doing well in bad times, we must have the capability to take care of the shock. So depending upon the cost of funds, yield will change.

ML: You have just raised Rs583 crore through QIP issue. Are you also looking to raise funds from an NCD issue? Are there any further plans to raise more funds?
RS:
The two are different. As an NBFC we require capital adequacy. Capital is required to grow. We are maintaining a reasonably good capital adequacy. That’s why we have raised money—to allow us to grow. Again, to grow, we need debt.

So we are going for the public issue of NCDs. We have already done it once; now we are looking for one more issue. There will be many more issues in the future. We have not finalised the issue size yet, but we are looking at somewhere between Rs500 crore-Rs1,000 crore. In this way, we are raising money from retail lenders, banks and securitisation. All three are major resources for us.
Why we are suddenly raising funds is because of our size. After internal accrual, we need at least another Rs1,500 crore to lend. So we will go and borrow this extra money.

ML: What are your expansion & diversification plans, going forward?
RS:
Our basic business, CV financing, is doing well. We will continue to grow in that area. This industry is growing and has come out of its cyclical downturn. So for another two-three years we expect a good pickup in volumes. We are also into second-hand vehicle finance. This segment will also see good demand. I feel that we should be able to grow 20%-25% in the next two-three years in terms of assets.

We are floating an exclusive subsidiary in equipment finance, which is 100% owned by Shriram Transport to focus on (the) equipment-financing business. All these days, we have been carrying this business under one vertical in STFC of mostly small contractors and sub-contractors. But beyond our customer base, there are so many contractors who are in different geographies who require equipment, both new and old. They are not able to access credit. Many finance companies have even exited this space after the global meltdown. So that is another opportunity for us. The government is also giving great thrust on infrastructure. Infrastructure growth requires both CVs and construction equipment. So we feel that this is a proper fit. One would argue as to why are we are going into a separate subsidiary. But the subsidiary is to bring in new management which has better product knowledge, better risk management and better underwriting capabilities. This management will use our existing network and customer base to access and provide different products. In this manner, we feel we will be able to scale up and do better. We believe the next five years will be excellent for this space.{break}

The tie-ups with private financiers is another innovation of STFC. We are the only financiers in the second-hand space. Beyond us, there are only private financiers. There is no organised player. So we go and keep on acquiring market share. This business is relationship-based. We have a limitation to which we can develop a relation. If we have more partners, like private financiers who already have relationships with people, instead of recruiting 5,000 people, it is better to tie up with 500 private financiers. These private financiers have been doing the same business for generations—but at an individual level. They lack resources and money. So we provide them money and become partners. The credit delivery, management and customer relationships are handled by them. We share the risk and reward. This model is very unique.  It is working very well and we will scale it up in the next five years.

We are also starting our CV trading business through ‘Auto Mall’ and ‘One Stop’. As I told you earlier, after providing credit to the trucker, we look around to see what else we can provide him. We have found that he is struggling to buy and sell second-hand vehicles. This is tough as it is dominated by intermediaries and (the) unorganised sector. There is no transparency. It is not a very efficient system. So we felt that we should create a system, a process and facilities which these truckers will be able to use. So we are creating ‘Auto Malls’ in 50 locations in the country, which will physically house stock. It is a place for buyers and sellers to come together. This will be a fee-based model; we are not going to buy and sell.

We are creating ‘One Stop’ which is a touch-screen in our branches. Here, people can register their vehicles, check out the stock and buy. We are also providing refurbished vehicles, which are neither old nor new. Tomorrow, we will look at providing some third-party warranty also. These are some of the initiatives which will get rolled out from April onwards.

ML: How is the company going about acquiring the banking license? What will be the key focus area once the banking operations start?
RS:
We as a large NBFC, particularly in this un-bankable customer space, are well positioned for banking operations. So STFC will apply for a fresh banking license. If we get it, we will carry on the business like any other bank. This bank will be owned by STFC as one of the shareholders. STFC will continue to be a separate NBFC. The bank will remain true to our culture and style of looking at niche businesses.

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