Interview | Shriram Transport Finance not in a hurry to become a bank, says MD Revankar

Vehicle financier Shriram Transport Finance Corporation Ltd (STFC) has managed to bounce back swiftly from the pandemic and will get more bang for its buck post the merger with Shriram City Union Finance Ltd. Besides the merger, the niche non-bank finance company is readying a super app where it can offer a full stack of lending, investment and protection products to its customers.

So, is the next step a banking licence? Umesh Revankar, vice chairman and managing director, says STFC is in no hurry to be a bank. In a conversation with Moneycontrol, he also said rising interest rates and inflation are risks but not worrisome at all. Edited excerpts:

Are you on track with the merger?

We are very much on track. Everything is as per the plan. Internally, we have a deadline of November. By the first week of July we should be able to have meetings with all the other stakeholders, including creditors, shareholders etc. 

Are any kind of rationalisation expected due to the merger? Manpower or outlets?

We have no plans to reduce any outlets. The frontline jobs will be kept; there could be some rationalisation in the back-office jobs. We need to re-skill them and train them. We are not reducing or laying off anyone. Of course, there will be better productivity per employee after the merger. So, if we grow by 15 percent CAGR, our manpower growth could be 5 percent.

What big benefits would be seen from the merger?

The cost advantages will be seen from the third year, not the first year after the merger. We expect a 10 percent gain in the bottomline for the three full years post merger, FY23-FY25. The cross selling of products is the key advantage we will have. There is a very small overlap between the customers of STFC and SCUF (Shriram City Union Finance Ltd). We have been running both companies with a Chinese wall between them. We could have cross sold, but we have not done it.

What kind of disbursement uptick do you expect from the cross-sell?

Around 20 percent of my truck customers are buying the vehicle for their own captive use. It means he is an SME businessman. He needs an SME loan for expansion of business but we never funded such customers. Today, we feel this is an opportunity for us to refer SCUF products since they focus on small-ticket and SME loans. When SCUF customers upgrade they need a four-wheeler or a bigger vehicle. In the past, they never referred to us. But now they will have access. We will also cross-sell insurance more aggressively. We expect 10 percent additional growth in AUM and the bottomline.

What sort of tech upgrades are you looking at?

We will have a super app. We are calling it Shriram One. We want to put all Shriram products on one platform. We will be limiting ourselves to financial products. We also have our insurance and our AMC. We will be able to offer all the lending and protection products of the group. This is the idea. 

Should we see all this as a progression towards a banking licence?

Shriram has been serving the under-served and unserved segment. If we become a bank tomorrow, we need to see whether we will be going away from our core customer base. As long as I do not go away from my core customer, I don’t mind becoming a bank. Also, the definition of banking in India is restrictive. So, we have seen that it is better to be an NBFC. We are not in a hurry. Of course, all arbitrage between NBFCs and banks has now gone away. But this is more to do with accounting, such as NPA treatment, not operations. If we feel by being a bank we can serve the same set of customers, then we would look at that. 

Q4 was a very good quarter for you. What is your outlook for this year?

In spite of fuel price increases, our collections have remained resilient. None of our customers has borne the brunt of fuel price hikes because they could pass it on to customers. There is no idling or excess capacity in the economy. What I can say is that excess capacity was built in 2018-19 and it was unused during covid. This is being used now. So, as unused capacity is put to use, the demand for commercial vehicles will come back. The next three years should be the up-cycle for the commercial vehicle industry. 

What about two-wheelers and the new-vehicle loans segment?

If we see year-on-year, there has been 40 percent growth. We are almost at pre-covid levels in terms of sales. The vehicles sold today have higher capacity. Earlier the most popular vehicle would be a 12-wheeler carrying 27 tonnes. The same vehicle has-31 tonne carrying capacity now. People are now moving towards higher capacity because of fuel price increases. Since the capacity of one vehicle is now high, not many vehicles are being bought.

If not for geopolitical issues, I think the (CV) growth rate would have been much better. The fuel price increase is a downside. People are rethinking or postponing their vehicle purchases because of fuel prices. Vehicle prices have gone up 15-20 percent for new vehicles and for used vehicles, prices have gone up by 25 percent compared to two years ago. For us, this is good in one way because my loan-to-value is better. My loans are safer today because the asset cover is more. 

Your asset quality is better but writeoffs were high in Q4. Why?

There were some pockets of problems, which we had identified during covid, especially in the passenger vehicle segment. Public transport such as school buses were not plying. We had made a covid provision of Rs 2,800 crore against these. We still have Rs 2,000 crore as a provision. Some writeoffs may appear this quarter also. But I may also have some writebacks of provisioning as some loans begin to perform.

You had the advantage on cost of funds so far but since the interest rate cycle has turned, what pressures can we expect on margins?

The 7 percent margin is a normalised margin for us. If you see historically, it hovers between 6.5-7.5 percent. Anything above 7 percent is a bonus for us and anything below shows tough times. We have been carrying excess liquidity to match the six months maturity requirement since covid. Normally, we would carry only three months. So, this reduces the yield as this excess liquidity goes into bank deposits. But it is what our board wants. I don’t expect my borrowing cost to go up for the next two quarters. 

Two years back, I was borrowing around 9 percent but today it is around 7 percent. Around 20 percent of my borrowing is floating and the rest is fixed rate. So, the increase in MCLR by banks will affect only 20 percent of our borrowing portfolio. The average maturity is three years. If geopolitical issues are addressed this year, there is a possibility that the borrowing cost may come down too.