Mar 07, 2013, 04.48 PM | Source:

Our focus will remain on small clients: Shriram Cap

A prospective banking licence appears to be the latest watchword for Chennai-based Shriram Capital, the non-operating holding company of three group entities: Shriram Transport Finance (STF), Shriram City Union and Shriram General Insurance.

 Arun Duggal, Chairman, Shriram Group
Saikat Das

A prospective banking licence appears to be the latest watchword for Chennai-based Shriram Capital, the non-operating holding company of three group entities: Shriram Transport Finance (STF), Shriram City Union and Shriram General Insurance.

The group believes in doing the business of banking finance through low cost banking models that it has learnt from South Africa based Capitec Bank and Indonesian Bank BTPN. According to Arun Duggal, chairman Shriram Capital, it is keen to enter banking space providing banking services to low income families.

"The mandate to have 25% branches in rural area is not a compulsion for us. Rather, it is our business plan. If we do proceed with banking and are granted licence, we will pick up some of the best features of those two models and try and create a bank along those lines," Duggal told in an exclusive interview.

At the same time, he scotched speculations that the group might convert one of the existing NBFCs (Shriram City Union or Shriram Transport) to emerge as the new banking entity.  It would like to start a new bank a separate entity under the auspice of Shriram Capital.

Below are the edited excerpts of the interview:

Q: New banking licence is making headlines. How do you see Shriram group as a contender for the same?

A: We are interested to enter into banking space for one specific objective. We want to provide banking services to low income families, small businesses, truck drivers, small shopkeepers, workshop owners who are our customers or can be our customers. If the main objective of granting new licenses is to promote financial inclusion then our chances are good.

If there is some other objective like promoting corporate banking, international banking, in those areas we don't have any interest or capability then our chances will not be good.

Q: How do you prepare to start a bank?

A: We have done fair bit of research on what is the low cost operating model that we can emulate. We have researched it around the world. We have come across a couple successful low cost banking models. There is one in South Africa called Capitec Bank. The other one is in Indonesia called BTPN.

We have studied these two models and learned from them. If we do proceed with banking and are granted licence then we will pick up some of the best features of these two models and try and create a bank along those lines.

We are also thinking of appointing a consultant but not now. We will send in our application to RBI by July 1 and we will be able to meet that deadline.

Q: What are your plans for recruitment?

A: We will not start recruiting unless and until RBI gives green signal to our application. Within the group there are experienced and talented people who know the art of customer service. So, we do not require any help from outside at this point of time.

However, we may have to recruit for some specialised functions like treasury operations, forex, remittances, working capital loans and so on.

Q: Under the Non-Operative Financial Holding Company (NOFHC) model (as proposed by RBI) all your other businesses like brokerage and insurance will directly come under the glare of RBI regulations. Is it a hurdle to kick-off banking foray?

A: Most of our businesses are regulated entities. For example our insurance business and non-bank financial companies all are regulated. So, in our case we don’t have any concern on this issue. We will be happy to be supervised by RBI across our business lines.

Q: If granted a licence, what would be your focus?

A: We are very clear about it. We have no capacity or experience in corporate, institutional or foreign lending. Our experience, expertise and area of focus is small and medium size business, rural and small town lending. The reason we are getting into banking is that our customers like those are not served well by the existing banking system. We want to get into banking to serve them and that is all we will do.

We have no intention of serving big corporate houses. Also, we have no capability to serve them.

Also read: RBI issues guidelines for new banking licence

Q: Who are your rivals?

A: It is the village money lender, the informal financier. They are the ones we will be competing with. They are the ones against whom we hope that we will be able to provide better quality services, more timely services, less expensive credit, so that people will migrate from informal to formal system.

Q: RBI mandated 25 percent of branches has to be in rural areas. Is that a stumbling block?

A: It is not a compulsion for us. This is our business plan.

Q: Speculations were rife that Shriram would either convert one of the existing NBFCs into a bank. Which route do you prefer?

A: We are not keen on either one of them. We would like to start a new bank a separate entity under Shriram Capital.

Q: RBI capped the foreign direct investment (FDI) at 49 percent in a new bank for the first five years. It virtually aims at curbing "trading of bank licence". Today, you get license, two years later on you sell it out. Your comments…..?

A: The process of giving licenses for the last 20 years or so has been an interesting one. There were 10 licenses given in 1993, not all of them succeeded. In fact many of the banks were merged or folded up.

Two licenses were given in 2003: Yes Bank and Kotak Mahindra Bank. So, I am wondering why such space of every 10 years gives a few licenses. Why not make it a more streamlined? Invite people in respect of the priorities of the government and accordingly setup a bank.

So, I am not in favour of giving a few licenses every 10 years. First, this should be a more continuous process and it should also be very clear as to why the licenses are being given. So the people who are able to meet those objectives and create the kind of banking services which are needed can apply and are then granted licenses.

There is a very important document called the 100 small steps. It is a report by a committee headed by Dr. Raghuram Rajan who is the economic advisor. This committee has produced a very thoughtful document on the structure and landscape of banking. I think that will play a major role in determining the strategy for granting licenses and that makes several recommendations along these lines.

Q: TPG, a private equity investor has recently sold out 10 percent stake in STF. It is still holding another 10 percent. With this sale shall we assume that you have surpassed the first level of growth?

A: No. Like all other private equity firms, TPG Capital has a defined investment horizon. As a PE fund house, it invests for a period of time. Later, it has to exit their investments. Their usual investment time frame is between 4-6 years. So, TPG has already completed 6 years and that is why they are exiting. They had entered around Rs 150 a share (as against current market price at around Rs 700). They are very happy with their investment.

It doesn't have any bearing to do with Shriram Transport Finance which also continues to do very well.

Q: What would be your role in the proposed bank?

A: In terms of personal appointment and these designations I think, at the right time, we will make the decision. I hope that I continue to play a major role in the bank also.

Shriram Trans stock price

On November 30, 2015, Shriram Transport Finance Corporation closed at Rs 874.10, down Rs 5.2, or 0.59 percent. The 52-week high of the share was Rs 1286.40 and the 52-week low was Rs 761.50.

The company's trailing 12-month (TTM) EPS was at Rs 56.79 per share as per the quarter ended September 2015. The stock's price-to-earnings (P/E) ratio was 15.39. The latest book value of the company is Rs 407.17 per share. At current value, the price-to-book value of the company is 2.15.

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