In conversation with Umesh Revankar, Vice Chairman and Managing Director, Shriram Transport Finance Company Ltd

Now that the effects of the pandemic are waning, Umesh Revankar, Vice Chairman and Managing Director, Shriram Transport Finance Company Ltd., is of the opinion that the non-banking financial sector (NBFC) will witness good growth once the current geopolitical scenario stabilises

What is your outlook on the Indian NBFC sector?

The Union Budget 2022 has laid out ambitious plans for infrastructure with a capex outlay of Rs 7.5 lakh crore. The intent is to augment infrastructure spending to boost economic growth. Geopolitical risks and economic uncertainties, however, have posed several challenges in terms of elevated inflation and sluggish consumer demand. Credit growth has picked up year-on-year (YoY) and certain segments such as housing and real estate and personal loans are seeing better interest in addition to signs of revival in small businesses, thus leading to better capacity utilisation. The commercial vehicle segment growth is linked to the economic cycle and while demand for new vehicles remains low, we are seeing improved demand in the used vehicle segment.

BS VI and rising steel prices have in turn pushed up demand for the used CV financing segment. The overall NBFC sector could see growth of about 13-15 per cent in FY23, subject to some of these concerns abating. It should also be noted that the recent norms for NBFCs by the Reserve Bank of India on prudential IRAC norms and scale-based regulations will require some adjustments on behalf of NBFCs. These could weigh on smaller NBFCs’ bottom-line for the first two quarters. The Shriram Group has already absorbed the impact in the previous fiscal year.

Shriram Transport Finance’s net interest income and profit after tax for Q4FY22 witnessed healthy YoY growth of 22.16 per cent and 43.87 per cent, respectively. Can you throw some light on the factors that have led to this improvement in financial performance and business operations?

Business sentiment and operations picked up in 2HFY22 with the pandemic ebbing out. With both disbursements and collections improving simultaneously, margins have improved, thus leading to better NII and PAT in Q4FY22. Our yield spreads continue to remain steady, aided by controlled operating expenses and surplus liquidity. As a result, pick-up in demand in the used vehicle segment—where loan spreads are higher—has also boosted growth and profitability. In addition, collections have been steadily getting better and stood at around 104 per cent across January to March 2022. We also witnessed write-backs in our interest income and provisions due to the improvement in asset quality, which has supported profits.

In spite of a chip shortage plaguing the automobile industry, commercial vehicles (CV) sales for FY22 have been strong. What is your outlook on CV demand for the upcoming quarters?

The CV sector is cyclical and demand usually works in tandem with the economic cycle. In 2HFY22 we saw some revival in demand led by easing of lockdowns, pick-up in business activity and increased consumption. However, weak economic indicators and geopolitical uncertainties have again put a brake on GDP growth and demand for CVs remains far from its peak. Transport operators have the space to pass on the cost to end consumers or shippers, but elevated inflation and fuel prices and uncertainty regarding their future trajectory has reduced purchasing power and discouraged new purchases. Consumers are unlikely to rush to buy new vehicles till fuel prices stabilise and as a result, demand may stay suppressed, at least in the first two quarters of FY23 as replacement cost for customers will be higher.

The excess capacity that was built when axle norms were changed and subsequent challenges due to the economic slowdown and the pandemic had pushed down CV cycle demand for a prolonged time from 2018 to 2021. Now capacity utilisation level has reached its peak and we expect the CV cycle to start picking up. We are seeing strong demand for loans in the construction and infrastructure-related vehicles such as dumpers. The demand for light commercial vehicles (LCVs) financing is also consistently improving due to e-commerce and good agricultural output. The heavy vehicle sales have improved in certain select geographies.

The company’s Board of Directors in December 2021 had approved a composite scheme involving amalgamation of Shriram Capital Ltd. and Shriram City Union Finance Ltd. with the company. Can you elucidate on the progress being made on the merger front?

The merger will create Shriram Finance, India’s largest retail NBFC and we are on track so that the merger is likely to be completed by November 2022. We have received approvals from the exchanges and are now awaiting the go ahead from the National Company Law Tribunal (NCLT). We are also awaiting regulators’ approval. We are undertaking pilot projects in branches and in phases will launch products in each branch depending on market scoping. The product integration will also be completed in the next phase over the next three months. The new leadership of five joint managing directors will manage each geographic unit. The distribution and HR integration is also on track. Our people are being up-skilled through classroom trainings and mobile or web platforms and digital tools.

What are your key growth levers?

The key growth levers for the new entity will be better and cheaper access to capital both domestic and international and a wider reach across the 4,000 potential locations of branches and rural centres. The other growth levers will include technological advancement with the single interface of our soon-to-be-launched super app called ‘Shriram One’ and the opportunity to cross-sell multiple products to the existing 66 lakh customers. From the product perspective, the used vehicle segment is seen driving growth more than the new vehicle segment. We are the largest MSME lender among NBFCs in India with an AUM close to Rs 15,000 crore and revival of this segment will trigger further growth. 

Presently, what are your top three strategic objectives?

We would define them thus:

• Deepening Relationships: Build stronger relationships with our existing customers by offering them products that suit their needs. About 20 per cent of Shriram Transport Finance Company (STFC) customers are using CVs for their captive purpose, which means they do have needs for MSME and two-wheeler loans for mobility and need protection in the form of insurance in case of exigencies. Similarly, in Shriram City Union Finance 30 per cent of two-wheeler loan customers are self-employed or entrepreneurs and will need finance. The potential to cross-sell is high and we will look to aligning our financial services’ outreach to consumers’ changing needs.
• Gaining Market Share: We are a market leader and have 30 per cent market share in the used CV lending segment. Strengthening our presence and expanding our reach, specifically in the used vehicle segment where 55-60 per cent of the market is still controlled by unorganised players such as moneylenders and private financiers, is also a prime objective. We are a market leader in two-wheeler finance and MSME finance and with the revival of small businesses we will focus on gaining market share there as well. This includes increasing penetration into both urban and rural centres. We are also working to build partnerships with private financiers in the unorganised market to leverage their local knowhow to enhance our market share.
• Integration: The third and most immediate objective is obviously to prepare the ground for the merger and ensure that the business transition is smooth and without disruptions.

What is your earnings’ outlook for FY23?

The economy is growing and we are now at par with the pre-pandemic levels. In case the geopolitical risks recede, the next 3-4 years will witness strong growth. We are targeting a blended AUM growth of 15 per cent in FY23 with the CV lending business growing by 12 per cent and the two-wheeler, MSME and gold loan business growing faster at 18 per cent. With the investment in the super app our digital lending will allow for better decisions, improved customer experience and significant cost savings. Cross-selling loan products and the merger in itself should throw up several opportunities for both the companies. Up to 30-35 per cent of our customers are first-time buyers and this trend gives us confidence of sustaining our growth and profitability.