Shriram Transport Finance expects formal economy to benefit from GST

On business front, he has seen the fastest growth in construction equipment segment.

Below is the verbatim transcript of the interview.

Anuj: With the kind of monsoon predicted, second normal in a row, do you expect a lot of pick up going forward in terms of disbursements, in terms of overall income and profitability?

A: We do really expect good pick up. Back-to-back good monsoon is always good. This is what happened in 2009 and 2010 and we had a very good pickup in 2011 and 2012. The Indian economy was booming. So, similar demand I expect from the rural economy because rural economy forms 60 percent of the population, 60 plus and also informal economy i.e. small sector which also is 40 percent of the GDP, these are likely to get a better demand and the consumption is likely to go up from these places. So, consumption going up, demand going up, definitely there will be a more economic activity in the rural. So, that should give a scope for us to lot of increased demand for credit.

Especially I feel a second half of the year will be more crucial. First half of the year, yes, it will be good but the demand pickup will take some time and we are witnessing that the winter crop i.e. wheat and other fruits in the northern belt and central India is quite robust and the robust output of the winter crop, rabi crop is really helping the rural economy by having higher income. So, the higher income at their hand is visible, but it gets reinvested in the farm activity immediately. It may not be spent, but the real spend comes in festive time, October-November. So, I expect second half of the year to be very good.

Sonia: There is an expectation and a view in the market that there could be a transient negative impact on demand because of goods and services tax (GST) coming through over the next say three to four months. Is that something that you would expect as well?

A: Yes I do expect. There would be a disruption, in the sense a small informal economy or the players getting adjusted to GST will take some time. However, the government has prepared the machinery quite well. There has been good talk, but there has not been discussion with the players who are likely to be the user. The user needs to be discussed and they need to be taken into confidence, they have to move into GST regime. So, I think that will take time, that will be a temporary disruption and it could be medium-term disruption for some of the sector but I think the formal economy will benefit at that time.

When I say formal economy, the larger manufacturing units who are more organised, who are already in the system, so, they will get benefit. So, I think there will be some benefit accruing to formal economy in a bigger way and the smaller players will have some kind of a disruption, but they will catch up. So, it is a matter of time. I think any big change in the tax laws, this is bound to happen and that will have a temporary disruption as far as consumption and demand and manufacturing all are put together and by December we should be normal is what I feel.

Anuj: A word on asset quality as well because we have seen a bit of a worsening of asset quality over the last four quarters gradually, last quarter in particular was quite bad.

A: This NPL formation, especially on the gross, it happens because of various factors. Now, we have moved into 120 days in the last quarter, plus we have seen the demonetisation impact in the third and fourth quarter. So, in the Q4 we are going out of demonetisation impact, the impact was visible for us in Q3 and Q4 it is slowly waning and now remonetisation has helped people for easy currency movement and people are coming back into normal way of doing business.

So, because of that there is elevated level of gross NPA. It should not really worry us, it is only delayed payment. Delayed payment do not worry us unlike the sticky bad loans. These are all only delayed payments and I am very confident that next two or three quarters we should be able to get over it and we are getting into 90 days, that is the last hurdle, we are getting into 90 days in the last quarter and after that it should become very comfortable situation for us because we can be really able to progress from then onwards.

Sonia: You had mentioned at the start of the interview that there is an increased demand for credit that you are noticing especially in the rural market. Can you tell us exactly in which pocket, whether it is in light commercial vehicles (LCV) or are you seeing it in passenger vehicles, heavy and medium commercial, where do you see the fastest growth from here on?

A: The fastest growth as far as volume is concerned, it is on the construction equipment especially earth moving activities like dumpers, backhoe loaders, and excavators. We are seeing increased demand. The LCVs are again demand in the northern belt so what is happening is used vehicle demand is going up in the northern and central belt because of increased economic activity in the rural belt on the farming and agricultural activities. So, that is yet to become a proper demand in the formal economy. So, when I say formal economy India urban centric. Urban centric is mostly construction related and rural is basically on LCV, tractor and passenger because of higher economic activity there.