Enough scope to penetrate in rural belts, says Shriram MD

When Umesh Revankar was promoted to the position of managing director of Shriram Transport Finance Company (STFC) in April, the sector for non-banking finance companies (NBFCs) was coping up with some regulatory convulsions that primarily increased their cost of borrowings. Challenges still continue but that didn't deflate the MD’s ambition to expand his business with new strategies.

In a freewheeling chat with Moneycontrol.com's Saikat Das, he explained his ways to keep his business stay insulated to a greater extent from any adversity. Below are the edited excerpts: Q. What is your vision to grow the company in the next five years?
A. There is enough opportunity and scope for further penetration to the rural belt. Economic activities are expanding fast in rural areas. It was not there earlier. This is high time we tap the rural market.
Secondly, our customers too are progressing over the period. Their ability to buy other products is increasing. Here, we are looking at a possibility of cross selling insurance products or other investment products to our customers. We are further looking to introduce products like small SME loans and oans for tyre or vehicle improvement. All these will add to customers’ economic progress enhancing life style.
We have our own group companies like Shriram General Insurance and Shriram Life Insurance. We will sell our own products. For mutual funds or other savings schemes, we will be looking for strategic tie ups with service providers.
Besides, we have 11 auto malls and plan to take it to 50 in next two years. We have expanded activities for our malls. All institutions, which get possession of second-hand vehicles, can come to our malls to sell them. All fleet operations too can sell the same through us. Even individual operators, who depend on intermediaries to buy or or sell can enter our malls to trade directly. We charge commission of around 1% of sales value. Q. Does economic slowdown stall your business growth?
A. Our total assets under management (AUM) was at Rs 40,200 crore in FY12. We would like to growth our assets in the range of 12-15% in FY13 with deeper penetration in rural belt. An economic downturn can reduce new vehicle sales. But existing vehicles (activities) continue to move on. For our subsidiary Shriram Equipment Finance, we are expecting 20% growth in net profit. A lot of road projects are coming up this year. Q. RBI is tightening regulations for NBFC sector. How does impact you business?
A. Overall business is not affected. The demand for loans remains unchanged. However, our cost of borrowings has gone up by 25 basis points in last one year on our total loan portfolio. If you look at only securitized book, it has increased by 100 basis points in the same period.
RBI has recently modified some norms relating to securitization of loans in the bilateral segment. Now, banks cannot ask for credit enhancement for securitized loans. This means, banks have to buy loan portfolios from us without any collateral. Securitized loans are of two types: bilateral and Pass through certificate (PTC).
Most of our securitized loans (80%) are on bilateral basis. Currently, the ratio of securitized loans and on-book lending (direct lending) is 40:60. Despite the new clause, some banks still show interest to buy securitized loans from us. Q. Do you plan to bring down the share of securitized loans?
A. We need to find a way to find a right blend of securitization and on-book lending to keep the interest cost under check. We have no control over interest cost as it remains at elevated level. We will also try to pass on the cost our customers. We will diversify our borrowing resources through retail bond issues and mutual fund instruments. Q. What are your capital raising plans?
A. We do not have any requirement to raise equity capital. However, we are coming out with the retail issue of non-convertible debentures in the second week of July. The tentative core issue size should be in the range of Rs 300-500 crore, though not yet finalized. The option of oversubscription option will be there with similar amount. Bonds’ tenures are of 3-5 years.  We will take guidance from RBI’s July 18 monetary policy to finalize the coupon rate. It should be somewhere between 10-11%, I presume.
The proceeds of the issue would cater to 15 days credit requirement. Generally, we lend Rs 1,500 every month on an average. Generally, we get ratings of AA +/- by rating agencies. Q. How do you propose raise fund via different channels?
A. We want to diversify our fund raising sources. Also, we want to raise more fixed rate borrowings than floating rate resources. As we lend at fixed rates, the same way of borrowing will also be advantageous to us. Q. Market is of the view that RBI will cut 50-100 bps policy rates in FY13. Given this, will fixed rate borrowings be beneficial?
A. The rate of inflation remains at the elevated level. We are not sure how fast it will come down. It all depends on the rate of inflation. In India, interest rates have never gone below 10% for retail business. I don’t think, it will fall below it. Q. Besides financing truck operators, what would be your second strategy to expand your business?
A. We are into total commercial vehicle financing market but not into truckers’ loan only. Now, we are financing vehicles with capacity of one to 49 tons. We are also extending credit for tractors, passengers’ vehicle and construction equipments. So, the range has broadened over the last five years. Q. Did the mining scam impact your business construction equipment business in Karnataka?
A. We only lent to local contractors for their commercial vehicle that used to carry iron ore from the mine site to the port. All we had financed there were not construction equipments but commercial vehicles. However, those vehicles (loans) were under stress due to the crisis. We took some hits on that count. Moreover, we should be able to maintain our asset quality quite well in the future. Q. RBI's draft guidelines ask NBFCs to recognize non-performing asset after 90 days of stop repayment instead of existing 180 days. What are your views?
A. We have told RBI and FinMin that any forced conversion of customers bringing them at par with banking customers will result in financial exclusion. Our customers are mostly non-bankable. We have got positive feedback from them. Q. Are truckers shying away from taking loans due to repeated fuel hikes?
A. At present petrol prices have gone up but not the diesel. We have observed, whenever fuel prices rose, it was passed to end consumers. Ultimately, the fixed income people end up bearing the higher cost burden. The business people or truck operations only pass on the higher cost. That way, our business remains insulated from any fuel price hike.
saikat.das@network18online.com