Shriram City Union’s housing finance subsidiary may hit IPO market after reaching Rs 10,000-crore AUM mark, says MD & CEO

What is the update on the merger of Shriram City Union with Shriram Transport Finance?

We have filed our merger application with SEBI (Securities and Exchange Board of India). The merger process entails receiving approvals from SEBI, IRDAI (Insurance Regulatory and Development Authority) and Reserve Bank of India (RBI) before approaching the NCLT (National Company Law Tribunal). NCLT will call a shareholders’ meeting and once we get shareholders’ approval NCLT will pass the order and from that day onwards you can call it as legal day one (of the merged company).

Have you received all regulatory approvals?

For filing a merger application with SEBI, you need to get 75 percent approval from your lenders. We have obtained it. The regulator is comfortable with the merger process, so we do not anticipate any issue from the RBI.

Our team has met with IRDAI officials and apart from a few non-major queries, not much was asked. We expect that approval from IRDAI would also come through. Once the SEBI approval comes in, we will start the NCLT process. By the end of the month (March 31), we should start the NCLT process.

By when do you expect the whole merger process to be complete?

To comment on this is slightly difficult because once we file with NCLT, they have their own process. NCLT is also dealing with a large volume of cases. This is why we anticipate that even if we file by March-end or the first week of April, it will take us five to six months before we get the approval.

If things move fast, we should be able to get an approval (for merger) by October or at best November.

What are the main operational difficulties in a merger of this size?

Externally, there is nothing to worry about, no challenges. In any merger, the most important aspect is people. How do you integrate a 50,000-people team? One company is operating 2,000 branches, the other is operating 1,000 branches.

How do we integrate the teams, branches and business classes? In the business classes, there are not too many issues because the technology we use is almost the same. Credit underwriting parameters may differ from product to product but the basic assumptions and customer segments that both companies address are the same.

What would be your prime focus as the merger goes ahead?

Personally, what I would be doing for the next six months would be ensuring business continuity and creating an understanding between the teams. Making sure that both teams work together so that all products in basket, both STFC (Shriram Transport Finance) and SCUF (Shriram City Union) products, can be offered from all branches and the teams are trained properly.

What are the loan products will you aggressively focus on in FY23?

In absolute terms, the gold loan volume will go up but in percentage terms it will not because business loans and personal loans are growing well and they will continue to grow. Gold loan being a shorter-tenure product, it will not change the AUM mix much. In fact, it may come down from 22 percent to 20 percent or 19 percent because other products that have longer tenures will also be growing.

Notwithstanding that, the absolute disbursements number may go up. All disbursements will go up, business loan, personal loan and gold loan will also rise.

Will you increase your gold loan branches in FY23?

We are looking to expand the gold loan business across the country. We have started gold loans in 70 branches across Punjab, Haryana, Rajasthan and Delhi. This will expand to about 150 branches within the SCUF network by end of the year. We are aiming to add another 150-200 branches of STFC.

This means we would like to double the number of gold loan branches by the end of year.

What are the disbursements targets for FY23?

We are aiming for at least 18-20 percent growth of AUM for the next fiscal on SCUF book.

What impact will the merger have on your funding cost?

STFC is rated much higher than SCUF so there could be an advantage on the borrowing cost but given the current economic situation, the Ukraine-Russia crisis and the US Fed raising rates, I am not sure the RBI will hold rates at this level.

If they do hold rates at this level, we definitely anticipate at least 30 to 40 bps (basis points) of cost advantage going forward.

What is your outlook on asset quality and credit cost?

On the NPA (non-performing asset) side, you will definitely see an improvement in the 90-day-past-due loan bucket and we think credit cost also could come down a little bit.

How much of an impact will the RBI’s November 12 circular have on SCUF’s Q4 GNPAs (gross NPAs)?

I think the impact on SCUF is 0.69 percent on GNPAs. It is at 7.3 percent now, without taking into consideration the November 12 circular the GNPAs would be down to 6.61 percent.

Will we see some of this impact in Q4? Yes, we will. It takes time for my customers to change and my team to change their collection mind-set. You need to educate customers and change the mind-sets of the team also.

Thus, it will probably take a couple of quarters before it normalises. But that is not a major worry because I do not anticipate my credit cost to go up.

Do you think the timeline for the implementation of this circular was appropriate?

Whether I have anything to say to the regulator, it is already done and dusted. The regulator is slowly moving us towards bank-like regulations or even tighter. Today we are probably governed tighter than banks on classification of NPAs.

There are calls for excluding smaller-ticket loans from daily stamping norms…

My contention has always been that we should look at NPAs differently, at least on the products side. Similarly, when you are dealing with a segment that does not have access to credit, we have been requesting regulators to look at provisioning norms differently.

Someone running an industry which has Rs 10 crore or Rs 500 crore turnover versus someone who is doing Rs 5 lakh or Rs 20 lakh turnover a year, if you are putting them on the same level and declaring them as NPA, it is not fair. We have been representing this to the regulator.

Has there been an acknowledgement from the RBI on this front?

Whether there is an acknowledgement or not, you keep representing. What do you do on a daily basis when you wake up? You pray. It does not matter what you wish for, you keep praying, right?

What is the FY23 growth outlook for your subsidiary Shriram Housing Finance?

Next fiscal we are looking at closing at an AUM of around Rs 7,500 crore or so. Right now, the company is at Rs 5,000 crore.

Is this subsidiary looking at inorganic growth options as well?

As far as acquiring companies is concerned, we are not looking at it but we are looking at acquiring portfolios. We have evaluated a few portfolios, but we did not go ahead. We may also not be acquiring the entire portfolio of a company, it could be a part of the pool.

I think we have done some acquisitions of some pools, close to around Rs 100 crore so far. We will be looking at that but we are not looking at these pools very aggressively to push the top line. They have to make sense for us to grow meaningfully. Till now we have been conservative and we will continue to be so. Ninety percent of growth will be organic.

Does this subsidiary intend to raise capital again?

SHFL (Shriram Housing Finance) has just received Rs 500 crore in equity, so I think for a couple of years they do not need any capital. We will see when we touch, say, Rs 9,000 crore or Rs 10,000 crore, then probably we will evaluate whether we will do an IPO or do a private equity round of investment, but it is too preliminary now to think about.

Can you share some insights on new digital initiatives for FY23?

We are working on a lot of initiatives, and one is that every single product we distribute will be available on a digital platform.

Two-wheeler, personal loans we have done, gold we will be coming up in the next couple of months, and unsecured small and medium enterprises we are creating on similar lines.

By the day of legal merger, what we are trying to do is get all STFC and SCUF products available on a single platform.

Will this be a SBI Yono-like super app housing all your services?

Yes, but for us to have a complete ecosystem on one platform it will take at least a couple of years. So the first priority is to get the existing products on one single platform including deposit and lending products which should happen by the end of the year and then every quarter we will be adding new modules to the app.