Chennai-based Shriram Transport Finance (STF) ranks among top-rung non-banking finance companies in India. The company, engaged in financing trackers for buying used vehicles is bracing up for a regulatory challenge. Usha Thorat committee has just recommended tighter norms for non-performing assets at par with banks.
According to Umesh Revankar, managing director, STF, the proposed norms of reducing the period of classifying non-performing assets from 180 days to 90 days will erode Shriram's profit margin in 2013-14 and 2014-15. Such measure will also lead to contraction of customers' base and ultimately end up in financial exclusion.
Also read: New NBFC norms will impact margin funding: Nirmal Jain
Meanwhile, the company is banking on its lower rate of credit loss, which is just at 2%. Moreover, the option of writing back of provisions (at the termination of loan period) remains a support against any decline of profit margin, Revankar told moneycontrol.com in an exclusive interview.
Below are the edited excerpts:
Q. What is the demand scenario looking like at, at present?
A. There is no upward demand. However, we see opportunities to grow. There are enough markets, still untapped by us. Those are gradually opening up. For example, rural market offers huge potential. People are now able to invest on vehicles and make a business out of it. It is a key trigger.
Besides, road connectivity coupled with mobile connections provides lubricants in the rural business engine. Whatever they produce, they can quickly sell those to the rest of the world. It was not possible 7-8 years back.
Q. How do you plan to expand your loan book?
A. Loan book expansion has been around 15% year-on-year. As per September quarter, total loan book stood at around Rs 44,000 crore. We expect to grow our loans at the same 15% in third quarter as well.
Besides, auto malls are contributing to our business. So far, we have got 15 big auto malls. We plan to add another eight by March, 2013. We should be touching 40 by March, 2014. Auto malls cater to transparent and fast transactions. Transparency is highly supportive of disbursing faster loans.
Q. In line with banking standards, Usha Thorat committee has proposed a lot of regulatory changes. If implemented, how would those impact your company?
A. We may be impacted due to higher provisioning norms against bad loans. The committee proposed to lower the period from 180 days to 90 days. Provisions will go up due to this. Consequently, profit margin will come down. In FY14, it proposes to adhere to 120 days and then by FY 2015 it will come down to 90 days. They want it to do this in a staggered format.
However, profitability of the business will not change. Our actual credit loss is currently at just 2%. Hence, we will get write back of provisions. Neither our business model nor our customers will see any major change.
Our fear is, if at all we move to 90-day norm, we will have to start pressurizing customers for early repayments. This could shrink our customer base as some clients may exit from their business due to sudden repayment pressure. Ultimately it will lead to financial exclusion.
Q. Do you agree with the proposal to de-register NBFCs with less than Rs 25 crore asset base?
A. There are around 12,000 RBI registered NBFCs. At least 800 NBFCs are reasonably sizable. They are with Rs 5-10 crore AUM. There are many family run NBFC businesses, which are catering to the need of local community. Perhaps, those are not scalable business.
If local people are denied access of those smaller NBFCs, they will have no other option but to connect local money lenders paying higher rate of interest. Money lenders are not controlled by RBI. Ground realities are something different.
Q. Will government reform measures facilitate your business growth?
A. Reform measures would not have any direct impact on our business. The major thrust will come only when there is more capex expansion. Higher investments will push up demand for used vehicles. Even road projects also would add to our business. Unless the government pushes for infrastructure, I don’t think, capex will happen.
Secondly, power is another issue. India is power starved nation. This hit us very badly in the last summer. Big industries can put up their own captive power plant but it impacts smaller players.
For example, poultry is the industry that is hit badly. Production of eggs came down by 50% in Andhra and Tamil Nadu. Consequently, the truckers (our customers) cannot make more trips even if there is demand.
Q. Have you appealed the regulator in this regard?
A. We have approached to the regulator telling about the difficulties of our customers. RBI does understand but somehow, they are in a hurry to make NBFCs at par with banks.
Q. Any new business initiative on the anvil...?
A. We are internally thinking that if economy is coming back into shape, we may get into rental business of vehicle and equipments.
For example, if you need machinery or vehicle for six months to meet your production requirements, you can hire it from us instead of purchasing it. We have discussed this at management level but not at board level.
Q. Are you open to inorganic growth?
A. Rightly now, I don't see any opportunity. However, if there are good opportunities, we will definitely look into it.