“We are not yet aiming to become a bank,” says the CEO of Shriram Finance

How long were you in discussions with MUFG before finalizing the deal?

Shriram Finance has consistently demonstrated its performance year after year. Be it growth, asset quality or attracting new customers, we are the largest player in the commercial vehicles, MSME loans, two-wheelers and construction equipment segment. We have demonstrated that we can grow these asset classes while maintaining asset quality. The real benefit came after the merger of the group companies into Shriram Finance. Particularly some asset classes we weren’t interested in, including personal autos, gold finance and MSME.

MSME, we mainly did it for dealers, workshops and warehouses. After the merger of Shriram City Union, we have now looked at all MSME segments across the country. Shriram City Union worked largely in the southern region. Through the merger of Shriram City Union and Shriram Transport’s pan-India presence, we offered MSME loans across the country. We focus on smaller ticket loans. This newer customer segment and asset classes emerged post-merger.

The fact that we have shown consistent performance has certainly helped us finalize one investor now. But there has been discussion in the past with several other inventors. We looked at our capital adequacy ratio, which was around 20 percent, and thought about whether we needed to raise capital within 1 to 1.5 years. Last year we formulated a strategy to look at attracting capital – whether we wanted to make such a large investment.

We wanted a strategic investor and were not looking at QIP or private equity investors. We’re glad MUFG came on board. They came with such a big quantity, even we didn’t expect it. Because they have a long-term focus, it made sense for both parties and we don’t have to look at a capital increase now.

You spoke to investors including MUFG, Sanlam Group, Abu Dabhi Investment Authority (ADIA), Temasek and other foreign investors. What synergies did you see with MUFG?

Strategic investors are preferred because they have a long-term view. Every private equity investor would want to exit in the shorter to medium term. We have also had strategic investors in the past. But yes, this discussion came about after we negotiated for months and told them the Shriram story. The great thing is that they have pledged a substantial amount. In addition to the capital they bring, they have a brilliant digital platform and international best practices. They are present in the Philippines, Thailand, Vietnam and Indonesia in the field of retail financing and have ties with banks there. All international best practices can therefore be absorbed. Moreover, with such a large investor, the board is central. Improving governance, cash management, transaction banking costs and newer geographies for incremental lending.

Will the Japanese Yen and US Dollar funding lines now open more fully for Shriram?

When it comes to the Japanese market, we already have a BBB+ rating from the Japanese credit rating agency. We have also made yen issues in the past. There is currently a $150 million syndicated facility open to Japanese investors. That’s why we started looking for possibilities there. MUFG allows the SAMURAI bonds to be evaluated. If our rating improves, it will attract more investors. MUFG is present in more than 50 countries, they will be much more involved with many investors and their expertise would help us.

Will Shriram eventually become a bank?

We have no ambitions at the moment. We focus on the smaller loan card segment and that is our core strength. We don’t see much competition in that area. If there is any benefit to converting into a bank, it would be on the liability side. But we are an NBFC that takes deposits. Whatever liability segment we are in, including bank lending, securitization or the offshore and domestic lending market, I believe we have ample room in each instrument to substantially increase our size. We might double our size in five years if we grow 18 to 20 percent. There are ample sources of liability to grow an NBFC, and with a major investor, that is further enhanced. With capital advantage, lenders will view us more positively. We do not see whether obtaining a banking license provides an additional advantage because we are in the niche segment.

Do you expect to keep your spreads at current levels?

With the fresh capital we are looking at higher growth, of at least 18-20 percent. We will not compromise on our net interest margin; we want it to be protected if it doesn’t grow. Reducing financing costs will certainly help. Operating costs will decrease. All in all, we expect good times to come. We expect that the demand for commercial vehicles will continue for the next three to four years. We are exploring new asset classes and will be cautious with our growth while maintaining asset quality.