Need Regulatory Support To Focus On Excluded Strata - G S Sundararajan, MD, Shriram City Union Finance

We do not see people coming into this business in a hurry, as they feel it involves a very high risk. But as new players come in, it will eventually become a low-risk business. Effectively, with more people coming in, efficiencies will improve, there will be more funding, and most importantly, the higher expectation of RoE would not be there.

While most of the other NBFCs are struggling to show growth in a difficult macroeconomic situation, Shriram City Union Finance has logged consistent growth. What are the factors behind this performance?

There are a couple of factors. One is our strategy at Shriram City Union to serve the underserved. We focus on small and medium scale enterprises in geographies where we are very strong. We have a very strong consumer base in Shriram Chits and we eventually ensure that we piggyback on that. This ensures that the customer orientation process is robust.

The second factor is our ability to engage in community-led lending. This has also ensured that during bad times, we do not have to go through a crisis of portfolio quality like others do.

We have set customers whom we know about. We have a set of people who understand what is happening on at the ground level with the customer. That is why I say that while financials do give a certain picture, they do not necessarily give a true picture at this level of business. I am sure at the large and medium corporate level it is okay, but at the micro and small levels it is more of ‘touch and feel’. Of course, I do agree that with our strong network of Micro, Small & Medium Enterprises (MSMEs), we should have had higher growth than what we did.

You also have a gold portfolio which witnessed some shrinkage in the past one year? Was it a deliberate attempt on the company’s part to bring down the gold portfolio?

In fact, we have deliberately brought our gold book significantly down. But despite that, our growth was good. Though gold came back to last year’s portfolio level, that was by design.

What we realised last year was that the gold business was a good and an easy one to do. Hence, all our branches stepped into the gold business, which took our gold loan portfolio to 42 per cent of the AUM. We never wanted to become a gold finance company, but wanted to keep gold as one of products. Then the RBI came out with certain regulations about gold-to-loan value. Hence, we decided to tighten the gold-to-loan value to the 55-60 per cent levels, which was not as competitive as other players. As a result, the gold book automatically came to a low of 24 per cent.

We are happy doing gold and will continue to hold 25 per cent of our portfolio in gold. But for that we would have to grow at 25 per cent in this segment every year. But as of now bringing it down was important, because we did not see ourselves as only a gold loan company and wanted to focus on MSMEs. Our MSME segment has witnessed a strong growth of 60 per cent and two-wheelers have grown at 40 per cent.

Other than MSMEs, where do you see major growth coming from?

The MSME opportunity is available across the country. If you look at the MSME lending, banks are present only at the medium scale levels. At the micro and small scale levels, there are very few who are doing it. That is why we took it upon ourselves 10 years ago. When the reincarnation of Shriram City Union Finance happened, we looked upon the opportunity both in terms of doing business and as an aspect of serving the community.

In fact, we would like to call ourselves a non-corporate financial company rather than a MSME financial company. Our customers are also non-corporates. If you look at products like two-wheelers, other auto loans or even gold, 80 per cent of our customers are small businesses. They give us a different sort of collateral. Therefore, our ability to cater to that segment across geographies is very strong.
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In the recent past, more borrowing has happened from either retail or through NCDs as opposed to corporate borrowing. Was that a deliberate strategy to raise funds?

Even today, 75 per cent of our borrowings are from banks and we would prefer it to remain like that. There are many banks that are ready to lend to us, and hence, we would be able to keep it the same.

What is the impact of the current economic situation on the lending business?

The action taken by the RBI is a temporary measure in the face of devaluation of the rupee, which the apex bank wanted to arrest. Hence, it tightened liquidity. That is why short-term money is costlier today than long-term money.

Fortunately for us, the asset-liability match is too high, with 90 per cent of our book for durations of more than one year. However there is a gold loan book which is reasonably short term. As and when the less than one year rates get cheaper, we would be able borrow against that. But overall, the situation has not impacted our funding at all.

How are you placed on the borrowing front? Should we consider that there are no immediate repayment pressures on the company?

We have 50 per cent of borrowings as fixed and 50 per cent is floating. So, we are hedged very well against the scenario of rates going up or down, as neither situation affects us severely.

Many NBFCs are facing NPA-related issues. What is your strategy to sustain better asset quality?

First of all, we are into community-based lending. The branch in the locality understands the community around it very well. Our relationship with customers is good, as we understand them. KYC on paper is one thing – that is what others do. We undertake KYC not only on paper but also in spirit. Hence, if customers are not able to pay, we don’t go hammer and tongs at them. We try to understand why they are not able to repay. Considering the situation, we provide some more tolerance than the levels that we are allowed to. If even these efforts do not pay off, we invoke the recovery process.

Another important factor is that we do not outsource any of our processes. Customer origination, sales process, verification process, customer service, etc. is all done by our own people. We feel that the moment there is outsourcing, the entire customer fulfillment process develops gaps. If you do not have full control on the process, you end up making mistakes as the other person to whom the job has been outsourced may not have a same philosophy as yours. If you want the process completely as per your philosophy, you have to do it yourself.

Even in a difficult scenario, your spreads have been good. Do you think these spreads are sustainable?

Our spreads are good as very few people are engaged in this business. If more players emerge in this space, our spreads may decline. But we would be happy if this happens, as it would be good for the community. If 10 more entities like Shriram City Union emerge, there would be 10 times more funding available for the MSME customer.
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We are happy about the good spreads, as the rest of our processes are very cost efficient. We have a very frugal management approach and we manage our cost economies extremely well, be it the branches, the people or operational expenses. So, our spreads will remain.

We do not see people coming into this business in a hurry, as they feel it involves a very high risk. But as new players come in, it will eventually become a low-risk business and we can also get more funding for future growth capital. Effectively, with more people coming in, efficiencies will improve, there will be more funding, and most importantly, the higher expectation of RoE would not be there.

Which geographies do you see major growth coming from? Will it be more focused towards Tier II and Tier III cities?

We have a relatively good presence in Tier II and Tier III cities. For us, growth will come from the MSME business, housing finance business and two-wheeler finance business. As we are penetrating more into the chit funds customer base, we have a huge opportunity there. In non-chit fund geographies too, we have opened over 100 branches and pilot studies are going on. Once they are successful, we would have healthy growth. So, we would able to sustain 25 per cent growth over next five years.

What is your current CRAR scenario? Is there any funding requirement in the near future?

Today, we have 19 per cent capital adequacy and Tier I capital is strong at 14 per cent. So, we would not be raising capital for the next 12 to 18 months.

One aspect that the RBI has been looking into is inclusive growth. What could be the reason that this has not been achieved so far despite its sincere efforts?

Financial inclusion can come only when the perception of risk on the part of the bank changes. Today, many PSUs have rural branches, but many of those branches have current accounts and there is no credit growth. Credit can be given if you believe you can recover the money. This only comes with the ability to access the customers and have sufficient knowledge about the customer, the business they are into and their quality of life.

These things, we feel, have to come from the top. The Finance Ministry along with the regulator should say that 25 per cent of the loan book of financial institutions should come from financial inclusion and that it is alright to make losses initially. After three years odd, it is possible to understand the business model and make it profitable. Of course, though the returns may be low, we have to make it profitable eventually. So, if every bank is pushed for next few years and they continue to focus on the excluded strata, we can get results in next 10 years.

We are in a business which others feel is ‘high risk’. That perception has to go, and that can happen only if banks start lending. But for banks to take a step forward, they must have a mandate and some support reassuring them that it is alright for them not to make money initially and for the NPAs to be high.

It is important to understand the segment first. People say that good judgment comes from experience, but unfortunately, good experience comes from bad judgment. You will need to have those experiences and make those mistakes for you to learn and then start taking risks.

MSME customers need a lot more tolerance. They cannot make regular payments as the cash flows are irregular. The 90-day norm of provision is a huge problem, which is why banks are not funding these customers. Today we can wait even if two instalments are not paid, as the NPA norms are 180 days for us. They are trying to reduce it, and if that happens, it may create some problem. At the current levels, a lot more support on the regulatory part is needed to achieve financial inclusion.

You have applied for a banking license. Will this provide a growth opportunity in an already competitive field?

With a presence in all financial fields, we wanted to complete our value chain. Hence, the Shriram Group has applied for a banking license. As for opportunities, we feel that the current customer base and infrastructure would provide us a lot of leverage, as we are serving the underserved. The MSME platform would provide us opportunities in the banking sector too. But the regulatory framework has been made more stringent and the capital requirements are also going to be higher. So, we need to look at our chances of getting the license. It would quite premature to talk about the growth that we could achieve in banking. But we have kept our fingers crossed and hope for the best.