Interview | Our key focus is to improve asset quality, says Umesh Revankar of Shriram Transport

Umesh Revankar, MD and CEO of Shriram Transport Finance, is hopeful that growth and profitability will improve in the second half of the current fiscal year. But government spending in the next two quarters will be very crucial for revival of economic activity, he tells Neha Bothra in an interview. The NBFC's main focus is to ensure asset quality does not deteriorate, and Umesh expects net interest margin to improve by 20 bps (basis points) in the coming quarters. During this interaction, Umesh discusses growth challenges, business outlook, and puts to rest talks of a possible merger with group companies. It is not being considered and you can say it is on the backburner, he clarifies. Edited excerpts:

What helped you get back on the growth track after the COVID shock?

One advantage we have is all our customers are sourced directly by us. We don't engage any intermediary, so our executive’s relationship with each and every customer is an important enabler. We asked our executives to stay connected with each customer over the phone.

For quite some time during the lockdown, our executives strived to keep in touch with the customer without really talking about the EMI payment, it was just to see their well-being, to understand how the business is likely to move and we realized that there was a loss of demand for goods and essential goods transportation. So, we encouraged the customer, when things started opening up, that opportunity was there to make an earning.

That’s how the constant connectedness with customers helped us bring back business quickly when the lockdown was lifted and our customers were on the move earning again. Complete engagement with customers helped us come back to normal.

What is your business outlook and are you seeing improvement in demand?

For the January-March quarter, as far as the new businesses is concerned, I expect the demand for commercial vehicles, especially in February and March, to go up considerably because government spending has gone up, which also drives infrastructure activity, and that will also push construction sector as some concession given on stamp duty will increase activity and demand. So, Q4 should be good. And, with the pent-up demand, we expect the growth could be anywhere between 15-20 percent.

When total transportation activity in the economy increases, Shriram Transport Finance being the largest player, will get higher market share as the company also enjoys the highest branch network in India.

Do you expect government spending to pick up in areas like construction and infrastructure?

I definitely believe that when government spending goes up, at any point of time, it reaches the customer directly, and translates into business activities in areas like, infrastructure, and road construction. The materials purchased for construction of roads constitute around 10 percent, but other things go into it like labour, transportation, demand for steel, and this creates a big movement. So, I believe the government is going to spur activity and employment, and areas like infrastructure and real estate are important, as they are the largest employer for unskilled and semi-skilled people.

Many such people are in need of a job now because they are the ones who lost a job in the pandemic, and that huge demand will in turn drive consumption. So, I feel government spending is very critical for the next two quarters -- January to June -- as normally by July the monsoon starts and then work on many large infra and real estate projects slows down. So, January to June, government spend would be crucial for all kinds of economic activity.

Are you looking at any fund-raising to meet the anticipated increase in demand?

Right now, we are not planning anything for at least a couple of months. But, post that if the liquidity stays like this and if the price point is right, we may consider raising funds, but that will be to meet growth requirements for subsequent two years. I feel the next couple of years are going to be big growth years for established players. But, we have not planned anything now.

It will depend on the growth triggers as things become clearer after a couple of months. So, if we expect just 10-15 percent kind of growth, then we may not really need to raise capital. But, if it is 15 percent plus for the next couple of years, then we will consider if the market is good. A lot depends on how government spending, economic activity and execution influence economic growth from here.

What are the main pockets that will contribute to the sustainable growth momentum in the medium term?

One thing that has helped us is the rural market. In the last year or two, the rural market never stopped contributing to growth, even during COVID-19. It was active even in April-May-June when our country was under lockdown -- because it was the harvesting time and post-harvest, the grains have to be moved to mills, from mills to the mandis, and so the activity was continuous. In the last two years, we had reasonably good rains also. Therefore, the agricultural output has been higher year-on-year.

That has created an opportunity for building rural infrastructure, which will be self-sustainable because rural areas sometimes become too dependent on urban areas to provide employment, basic facilities like schools, hospitals and the like. Many move to the urban market to fulfil the requirements, but the rural facilities have to become strong for good balance. We believe that over the next 5-10 years, there will be continuous growth in the rural and urban market and the growth can be double-digit over this period. I'm not talking about one or two years. This year, the growth maybe 5-6 percent, but in the next couple of years, we should be growing anywhere between 12-15 percent, that's what I believe.

What about the second half of the fiscal year in terms of growth outlook?

Second half is looking good. There are two things, which are more sustainable. The second half typically sees 60 percent contribution to the economy because of the higher output, festive period, holiday spends, etc. Since the impact of COVID-19 is not much in the second half, it should be much better than the first half.

Also, if I were to compare last year's second half growth to this year’s second half, then by that comparison also it should be decent, as economic growth was softening a little back then. So, on both -- profitability and growth -- the second half of the year should be better.

And what about asset quality? Are you wary of some negative surprises in this area?

Asset quality by and large is steady and we should do well here. If you factor in the Stage-3 numbers (the riskiest pool of stressed assets) and the Supreme Court decision, in the corresponding period last year, it was around 8.9 percent. So, if we improve from that to 7.6 percent, it is going to be a sizeable improvement in our asset quality.

What are the top focus areas right now?

We are focusing mostly on improving NPL (non-performing loans) figures. Ever since the moratorium was lifted in August and some of the customers requested for restructuring, our focus has been on keeping a good track on collections, ensuring recovery, and improvement in profitability rather than growth in the immediate period up to March 2021. Post that, we'll focus more on growth.

What is your expectation on the cost of funds and margins, going forward?

Cost of funds should come down by 25-30 bps incrementally over this quarter and next quarter put together. So, that should help us in expanding our net interest margin by 20 bps, which will also add to our bottom line.

There’s an opportunity to convert into a bank. What are your thoughts?

See, there are certain advantages and disadvantages. The advantage is that if you have a big network through the country, you will be able to get resources for savings and that will reduce costs, the benefit of which can be passed on to the customer. That's one way to look at it.

On the other hand, you have to see if there are any benefits as per your business model, because you will have to maintain SLR (statutory liquidity ratio) and CRR (cash reserve ratio) and then you have to raise fresh resources, keep bank resources, and also interbank loan limitations from a number of banks. So, if at all I have to borrow from the bank for more than 3 years, then I will need to find a replacement for that bank loan. So, I have to find some other source for longer term. Otherwise, I have to get a special forbearance from the RBI (Reserve Bank). A large NBFC (non-banking financial company) will have to think of all this.

If it is a small NBFC or a small startup bank, then one is starting fresh and that certainty makes things easier. Since my asset size is more than Rs 1 lakh crore, whatever I need is of reasonably large size. So, special forbearance has to be there and if the RBI is open to forbearance, then we can consider becoming a bank.

But I also have to look at my shareholders’ comfort -- if the shareholders say they are more comfortable staying as an NBFC, then I will have to listen to that as well because bank ROEs (return on equities) are lesser than that of NBFCs. So, we need to look at the shareholders and also the comfort of staff and employees as NBFC employees are specialised in specific activities, but bank employees have to provide a much wider range of services.

Are you enthusiastic about this option keeping the pros and cons on balance?

We are looking into it, and if we are convinced, and if the RBI is open to forbearance, then we will look at it, otherwise we do not want to look at that kind of possibility. You can't have a goal which you know for sure you won’t reach. While the road map is there, one needs to be very clear, otherwise there is no point in being on the road you don’t want.

The regulatory angle has been a sensitive area for NBFCs and the views are largely divided. Where do you stand?

I believe that NBFCs, especially the large ones, are as highly or tightly regulated as any bank. We will look at the cost and benefits of converting into a bank. Additional costs should not become a burden for the shareholders or others. Otherwise, we are tightly monitored by the RBI, and being an NBFC, I don't think we are anyway less supervised by the RBI.

At what stage is the plan to merge group firms? Has it been put on the back burner?
If at all we feel by combining we have better synergies coming out, and can provide better service to the customer, then we will see. Also, we need to seriously consider and ensure a better return to shareholders. So, in summary, it is not being considered and you can say it is on the back burner.