“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?
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?
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?
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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    ‘Small finance banks needed for financial inclusion’

    A financial expert says that smaller entities with emphasis on good corporate governance, high-quality lending and low-cost structures can help to provide banking to low-income groups

    Small finance banks need to be set up in order to achieve the government’s objective of making available banking services to low-income groups at an affordable cost, a leading financial sector expert has said, reports PTI.

    “We need to fall back on the commercial banking model for seeking a satisfactory solution to the problem of increasing financial inclusiveness. Setting up of small finance banks that will have linkages both with big banks as also with small entities will help in widening access to retail clients,” said RH Patil, chairman, Clearing Corporation of India.

    So far, the concept of small banks has not found favour due to the unsatisfactory track record of many existing small banks which have poor governance structures, excessive government and political interference, and unwillingness of the regulator to undertake prompt corrective actions, he said.

    “But compared with other options like co-operative banks or the Regional Rural Banks, the proposed small finance bank model will prove to be a far better choice,” he said.

    There should be strong emphasis on good corporate governance, high-quality lending and low-cost structures for these banks, Mr Patil said.
    “Given the nature of their asset portfolio, it is necessary to stipulate a strong capital adequacy ratio. To begin with, each bank should have a capital of at least Rs200 crore so that only relatively strong candidates jump into the fray,” he said.

    Mr Patil said that small finance banks should essentially be like regional area banks, with their area of operation well defined at the time of granting them a banking licence.

    Up to four-five candidates may be considered for grant of small banking licences in any region. “Licences could be given to NBFCs which already have a good governance track record in areas such as housing finance, retail business and leasing, and industry or corporate houses with a good governance track record,” Mr Patil said.

    With regard to NBFC applicants, the Reserve Bank of India needs to be particularly careful in its scrutiny as the experience so far has not been “uniformly satisfactory”, he said.

    While these banks would be pursuing mainly the inclusiveness agenda, they need not be precluded from having a small part of the business in favour of large clients so that it is possible for them to have cross-subsidisation in favour of smaller clients, he said.

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    kishore ghiya

    1 decade ago

    Mr. R.H.Patil seems to be ignorant of power of cooperative banks. After madhavpura scam which actually was scam of ketan parekh whom mr R.H.Patil at NSE and bank of india at RBI allowed any coperative sector was used by scamsters. There is no fault in cooperative banking sector. It is unwillingness on part of RBI to issue fresh licences. They amy allow new self group with raised entry point norms upto rs 10 cr. They may allow them to function with more regulations, but closing the doors for new licences has resulted in denying financial inclusions to small traders.
    Even in USA today savings and loan associations are allowed to open and wworld over co operative banking is flourishin and adding to gdp in thier countries. In India it RBI and only RBI responsible for the mess. RBI ahmedabad office was in full knowledge of madhavpura scam Hundreds of complaints were there. The UBD regional manager was found hobnobing with madhavpura scamsters but nothins has happened to him. As a person connected with cooperative banking in gujarat i request mr R.H.Patil why world over co oprative banking is still flourishing and allowed to grow and why stopping of new licences. Mr. Patil is also aware that new small and medium stock exchanges are not allowed to come thanks to such people who are policy makers and regulators in new delhi. Reliance power IPO of 2008 has done more harm to equity cult then hundreds of small companies. The greed or merchant bankers and indian promotors have killed the equity cult. I hope mr patil will say about low participation by indian household in equity investment.
    Kishore Ghiya Rajkot mob 09825217857

    India poised to overtake China: Home minister

    Young CEOs and executives must help to take the country to the next level, says P Chidambaram

    Having shrugged off the impact of the global economic crisis, India appears poised to overtake China’s high growth rate in the next ten years, said home minister P Chidambaram.

    “While the last decade was remarkable and exciting, this decade will be more exciting for India. There is more possibility that India could overtake China's growth rates,” the minister said at a function last night.

    China, the world’s sixth largest economy, has recorded an average 9% growth over the last two decades, while India has seen growth touch 9% only in the three years till 2007-08. But the global financial crisis ate into this progress and growth slipped to 6.7% in 2008-09.

    The Planning Commission, at its meeting chaired by prime minister Manmohan Singh earlier this month, scaled down India’s growth target for the 11th Five-Year Plan period (2007-12) to 8.1% from the previously estimated 9%.

    “We are young and will continue to grow. Corporate India will continue to grow in the current decade. The young CEOs and executives must help to take India to the next level,” said Mr Chidambaram.

    The minister’s confidence also stems from the fact that Foreign Direct Investment inflows— key to growth—have been increasing rapidly, although they slowed down during 2008-09 at the height of the financial crisis.

    Mr Chidambaram also said that India will “become a part of the United Nations Security Council in this decade” and added that there was a need to make India a secure place so that the country's economic growth remained unblocked.

    “There was a fear, but it is over. We are marching ahead to compete with others in every aspect,” he said.

    Mr Chidambaram said that human resources will not be a burden for India in this decade—they rather prove to be an asset.

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    Shadi Katyal

    1 decade ago

    It is self pleasing and makeing fool of the nation. The Home Minister should think before such statments. china was on par or belwo in 1990 but now India will never be able to catch up as China has started collecting Raw materails all round the world.
    we still donot have any infrasturcture of an Industrials nation. There is no power and trained and displined labour.
    Tata and vednta cannot even build their plants or mine and we dream of
    surpassing china.
    Maybe the Minister mean in population as we have no controls over it. Yes we will surpass the world and supply again as inthe past service indsutry. Our labour force is undisplined,untrained,uneducated and will stop work on drop of a pin and sitting in ivory towers our ministers dream but do nothingto achieve such goals.

    Shadi Katyal

    1 decade ago

    If the security codwe doesnot match than the article should be returned so code could be corrected and not just wiped out.;

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