1. THE BUSINESS, INDUSTRY & OPPORTUNITY SIZE
Kindly explain to us the key guiding tenets for your business. How exciting is it to be where SCUF is today?
As a group (Shriram) it’s in our DNA to look at Financing segments – where they find it difficult to get financing – typically the Self-Employed (non-salaried class).They face a shortage of credit – the formal Banking sector is not much interested in them – as they can’t provide salary slips or proof of regular/future cash flows.
But this does not mean we jump into every opportunity in this space. There must be SCALE and MARGINS must be PROTECTED. We get in when a) it is difficult to do b) there are higher margins adequate enough (for the inevitable bad eggs in the basket).
How important is the MSME space in overall scheme of things? How difficult or complex a business is this?
Success in MSME financing business is pretty simple, actually. It’s a plain vanilla labour-intensive game. There are 1000’s of middle level executives involved. It is their persistence and sweat. It will be wrong to say there is a big “classy” process behind this. It is the labour and the humility to relentlessly chase for collections. There is a process for sure, but that process is in building people (like a factory) – who can stay true to persistence and sweat and humility to chase – each situation is different! 80% of our success can be attributed to this patience and diligence at the branch level and only 20% to Intellect-driven systems/processes.
MSME financing is important. We have a dominant position in the small loans segment. MSME pie of the Loan book has been increasing. From over 35% a year back it is now at ~50% levels. It could reach 70% of Loan book in 2-3 years. Gold Loan has come down to ~25% levels – this business we will be doing at our own pace – we are certainly not getting out. There is also 2Wh and Personal Loans which are doing well. Depending on the environment, we will take our calls, we will be nimble.
How well-placed is SCUF in MSME NBFC funding space? When do we see Banks/FIs addressing this space in an institutionalised way?
Banks are not very active in MSME funding where the Risks are higher. When they do fund they are mostly funding “Manufacturing” businesses unlike us where our share is more on the “Services” businesses.
What about PSU Banks? And Credit Guarantee Shemes from the MSME Ministry where funds are available for upto 1 Cr without collateral.
Well these schemes have been there since almost a decade without much of an effect. Our sense is that Bankers are inherently uncomfortable lending where there is no collateral (as recourse to recovery is generally poor in our country). They are not well-trained to study and evaluate or rate a small business that can’t offer much by way of collateral. PSU Banks are used to the Customer coming to them for Loans. They are not used to go to the Customer (save Deposits). Look at the turnaround time – in CGSH schemes and in general practice, is 6-9 months. And then some of our customers tell us – the effective cost is the same.
Where does SCUF see itself 5 years from now vis-a-vis current competition?
We should do 20-25% CAGR over 3-5 years. As & when the economy spurts, we will also do better.
“Scalability” ( how long is the runway? What are the assumptions for growth for the next 3/5/10 years? Can you actually grow outside home base? ) and “Repeatability” (Can you simply keep doing more of the same and what could hinder this – i.e. Recruitment, training, technology, competition poaching etc. )
Scalability – In terms of opportunity there is space for even 100 players to step in and everyone can grow. We are only scratching the surface in terms of what we have touched so far. However this is hard terrain – Not everyone can step in and do what we are doing, as successfully.
Repeatability – As explained before, yes the whole thing is about repeating the same labour-intensive dogged pursuit of collections. At our core, we are an out & out collections company with humility, persistence and sweating as the key cornerstones for our success.
What do you see as the biggest threats to your growth plans? e.g. government regulatory changes, etc.? Is increasing regulatory oversight a good thing/bad thing in the longer term?
We have a feeling things are changing at the regulator/RBI level. They are more willing to listen. The recent RBI report on Financial Inclusion chaired by Nachiket Mor actually speaks highly of NBFCs and the useful role NBFCs can play in India. There is lot of new ideas being brought in by eminent people like Shikha Sharma and Vikram Pandit and others on the panel. Even 2 years back, things were difficult. Now we are very hopeful that things are changing, the regulator will start playing a more positive role.
Our biggest risk is our own execution. As we scale up we should remain glued to the groups conservative ideals, processes and systems. That we do not fall prey to foolhardiness – cutting corners or taking shortcuts. The Economy has slowed down, credit is tight. A growing economy will help us scale faster.
You have applied for a banking license – what impact will this have on existing operations?
Let’s make it clear that we have made a conditional application. Because of our understanding of small business, we believe we can significantly contribute to financial inclusion aims of RBI and Government of India. As our group director has said recently, we won’t pursue our aspiration to become a bank at the cost of our existing business, but only if RBI is willing to support and facilitate us to lend to these segments appropriately.
And what’s the take on Shriram Housing Finance? Do you have big plans there?
Our plans are very clear. It will take 3-4 years before it becomes significant. As mentioned before we don’t do anything that CAN’T SCALE.
2. OPERATING STRUCTURE
Kindly brief us a little on operating structure and major business processes? Why do you have 2 MDs, to start with?
Basically different skill-sets. Mr Sundararajan – MD – ex CMD Fullerton – he is the public face of the company – he meets the press, regulators, media.
Mr Duruvasan – MD – he has been there for last 35 years+ with the group. He joined after +2 level and got his degree by attending night college. He started as a collection executive in chit fund and rose to be its ceo. He was also MD Shriram Life Insurance.
He is a great leader and visionary. Much of what Shriram group is today can be credited to him.
Kindly tell us a little more on his early years, achievements and leadership style?
To give you a perspective in 1990 Shriram TN business was 10x AP business size. In the next 8 years from 1990-1998 he built up the AP business to 2x TN size. He is a great man with an eye for talent – right person for right job – and building teams.
From 1990-96, we used to add ~9-10 branches per year, as we had good teams throwing up good leaders. But from ’96-’99 we added ~25-30 branches every year. Team was flush with talent – we needed to accommodate ~75 people who had grown capabilities for next level of leadership within the teams.
Shriram chits acted as a distribution arm as well. We used to distribute CDs/Mutual Funds. People developed multiple skill-sets – market development, debt collection. Even today Shriram Life Insurance derives 70% and Shriram City over 45% of its business from AP.
Back-Office/IT systems/Risk Management
Business/Strategy – Front Office
Operations HQ is Hyderabad and Business handled from respective regions.
COO – Y S Chakravarti – He handles Operations. The Business guys and the Credit guys report into the COO. The Product heads at branches report into the COO.
And Region-wise there are CEOs for TN/AP/MH and also for North and another for MP, Chhatisgarh, Kerala and Gujarat.
Role Clarity – Accountability
Roles are clear as is the accountability. In his own area, each is a MD, which also means no one can hide behind anyone’s back. There is no overseeing that is needed. No Senior Management reporting/briefing is necessary. The MD usually needs to meet Operating Heads at Board Meetings only. We are all home-grown, grown up on the job- with the business. We are like family comfortable with each other, with clear individual/team goals set for us.
3. MAIN BUSINESS MODELS
You have the MSME CHIT model running in AP/TN/MH primarily referred from Shriram Chits. Kindly brief us on the key characteristics.
CHIT Model -South
As you are aware this is primarily in Andhra Pradesh, TamilNadu and Maharashtra with Shriram Chits customers primarily. This has a run-rate of 250-300 Cr per month. Average ticket size ranges 10-12 lakhs. Some are in 18-20 lakhs. Maximum lending is upto 1 Cr. This is mostly secured business. In AP it is 65-70% secured.
Did the Telengana stir disturb normal operations?
Yes it was affected during that period as normal business was disrupted. However it is back to usual once the protests are over.
You are trying to replicate this same CHIT model in North India?
CHIT Model – North India
We are trying to replicate this CHIT model slowly in North India over last 2 years with small loans. Average ticket size is 2 to 2.5 lakhs. This is kick-started by mining our 2Wh Customer database. Small business owners like Stuffed-toy makers, Ice-Cream makers, Trinket manufacturers. In 2 years time this now has reached a run-rate of ~2 Cr/month.
Also you are trying out basically the regular (NON-CHIT) NBFC MSME funding model in North India.
External Model – North India
We decided to step into the regular CIBIL credit-scored MSME financing model in a slow cautious way, 3 years back. We recruited experienced executive level senior people for the job who in-turn recruited fresh talent for building the Team. In 3 years now this segment’s run-rate has reached ~20 Cr/month. Average ticket size is 20-22 lakhs.
How are you looking to scale this probably important segment?
This has been a learning phase for us. We are extremely cautious here as this was a completely new turf. One cycle of lending and closing is over. The Team is doing very well. Net NPAs are <0.2. Lending Caps were <1 Cr till now. Only recently this has been enhanced to <2 Cr. We don’t have any branch/numbers driven expansion targets. Our philosophy for expansion is – when we have next rung of capable people (home-grown) ready to take on branch leadership roles, only then. Maybe 2-3 years down the line we will have a good crop of capable leaders for expanding presence.
You have been integrating employees from Shriram Chits into SCUF fold now. Is the process complete? What are the overlaps now with Shriram Chit Fund?
OVERLAPS with Shriram Chits
Shriram Chits also plays the role of a distribution arm from group company products, also for SCUF. Employee integration from Shriram Chits is now mostly completed. Any shared office infrastructure (with Shriram Chits) is now owned and run by SCUF, shared by Shriram Chits.
4. MAIN BUSINESS PROCESSES
How do you employ customer knowledge from chit fund history? How is it used operationally? Is there a formal score? If not, how do you prioritise or incentivise better track record customers?
Customer look-up can be done from the Database. It can provide some rough pointers. We have what is called a CHIT Rating system. Customer consistently paying within the month (actual payment date is by 7th) are tracked. Very simply put, any customer with more than 15 installments paid within the month is considered credit-worthy.
When a Loan turns non-performing, what recourse do you have, how do you go about recovering?
We don’t have Big Clients (Big Defaults). Big Clients are not even approachable much of the time. And when you do reach them the refrain can well be “Business/Economy is not doing well. What can I do? You come back when business cycle recovers”. Small clients have an ingrained honour system. They want to preserve their reputation. Our people are able to sit with them in their house and work out a deferred plan (usually they are willing to pay the penalties for late payments). Payments get deferred, but rarely turn delinquent.
What kind of skills-profile do you require for these jobs?
We don’t need MBAs and financial experts. Normal graduates can do the job. We need local people familiar with the terrain. Understanding the customer comes first. People who can understand the customer, work on the relationship, gain their trust and imbibe the groups ethics of humility, persistence and sweat.
What kind of training do you equip employees to deal with – say the tough collection process?
It’s mostly on-the job! Our Management Trainees go through more than a year of exhaustive on-the ground training. Usually it’s baptism by fire from day one – collecting money from tough clients, with monthly reviews.
How do you create the right incentive structures? Loan growth vs profitability vs Collections?
First of all nothing in our business is outsourced! The one who sells/lends also collects. 60% of incentives are aligned to Sales and the balance 40% for Collections.
What about Manager level/Executive level Incentives?
For the Branch Manager it’s is an aggregate of different product lines – MSME, 2WH, Gold. Average of incentives collected by Teams under him. For the Divisional Manager again, it is an average of the Branch Managers reporting into him. Likewise for Zonal Managers.
Any discretionary powers in the Loan Hierarchy?
Not really. The only discretionary power is on the Processing Fees side – some 2% at Account Head levels – marked as deviation – requires Approval.
What is the experience over last 3/5 years versus last 10 years and is there is any clear trend? On collections and recovery of bed debts, say?
In our entire history (28 years+) Collections at Loan Termination has been over 97%. And 6 months from date of termination collections are 98.5% -99%. So terminated arrears are 1%-1.5%. Greater than 180d NPAs are <0.5%.
5. RBI GUIDELINES AND NBFC BUSINESS
Kindly explain the current guidelines and its impact on SME business
Well these were proclaimed in 2012. We have learnt to adjust. As you might have seen we have been keeping ahead of the RBI timeline. We have advanced our NPA recognition norms to 150d from 180d.
As per the DRAFT RBI guidelines, NBFCs may have to move to 120-day NPA recognition norm from April1, 2014 and 90-day norm from April1, 2015. Also Standard Asset provisioning may be raised to 0.40% from 0.25% effective March 31, 2014. Kindly comment how are you prepared for this?
NPA recognition norms may move from 360d to 180d to 90d but as explained before, in our DNA we are a collections driven organisation. There will be delays, but hardly any delinquencies. Our customers are rarely defaulters.
Unlike say Banks (10x leverage) or NBFCs (upto 6x leverage) or even a Manufacturing Enterprise (3x leverage) a small service/trading business capital structure is usually the reverse. It is 3:1 Equity:Debt and in most cases 5:1. The intention to pay is there (as is the capability). Capital is always large (as compared to debt). Unless they have 5x losses they are able to service the debt.
So what kind of impact will these have on earnings?
What about the Securitisation cap impact?
While Securitisation may be the cheapest source of funds for us, does not mean our other source of funds are not okay. Securitisation is not a panacea. You must also look at the time factor involved – 9 months of seasoning vs instant availability. Today because of our reputation and Shriram groups standing we can have immediate access to Funds. If we require 900 Cr, we can get it.
Because of further restrictions on NCDs, etc. dependency on banking sector will increase? to what levels?
See as a group, we have access to comparatively lower cost Funds. Today we are at 15,000 Cr. Shriram Transport has already shown us the way to 50,000 Cr. Let’s reach that phase first. We believe we can reach there in the next 5-6 years without much issues. We can worry about next level of scalability then. By that time Shriram Transport might show us the way to 100,000 Cr.
6. MARKET MAP/COMPETITION
Give us a sense of your market? How is the competitive scenario?
Market is huge. This is just the tip of the proverbial iceberg we have touched. There is room for more than 100 players if need be. We are really in competition with the customer (to accept debt).
Bajaj Finance and some others do Loan against property business for small business and get yield of around 13-14%. They classify it as MSME business. Isn’t that competition?
Loan against Property (LAP) is a different segment – the loan is secured against the property with lower yields like you mentioned. Most NBFCs who mention MSME financing are actually doing only LAP products.
So how is a LAP product different from MSME Financing?
LAPs are usually longer duration products. The customer is typically saying, I have a property. Unlike in our business where the customer is more likely to say I have a business…and I need a loan for my business for 6 months to 1 year (or 2 years).
Is it correct to say ~1/3rd of your MSME loan book is secured which is ~17% of your overall Loan Book (MSME Loans at ~50% of Loan Book)? The question is how do you compete effectively? Are your yields much more comparable to LAP rates for this segment?
7. FUTURE GROWTH/PROFITABILITY DRIVERS
Shriram Chits customer base is your biggest strength. It also enjoys very high reputation with your customer base. Your customer acquisition costs remain low on account of this. But somehow “Chits” business generally has got an adverse image in India. Kindly comment.
There are some rotten eggs in every sphere in India. CHIT as a product is best suited for a country like India. CHIT is used both as a savings product as well as for borrowing for business. Sometimes by the same individual for different needs (savings for his wife) and the borrowing Chit for his business purposes. CHITS were popular even in China, Africa and Italy.
Is it correct to say Shriram Chit fund has ~ 3Mn customers? Is it correct to say currently more than 90% of MSME customers are through Chit fund customer database?
Shriram Chits base is ~4 Mn customers. Yes 90-95% of MSME customers are referred from Shriram Chits.
How much of this Customer base is already addressed for SCUF product portfolios? How much is still virgin opportunity?
Not more than 20% perhaps. So one can say 70-80% is still available for fresh addressal.
And this is a completely protected base – that is unlikely to go out to seek their financing needs?
Shriram group brand equity is very strong with this customer segment. This segment of customers are very keen on “who’s the lender?” Normally for our target product segments, they are unlikely to go outside to seek financing.
What is the overall growth expected in next 2-3 years? And MSME Loan book proportion expected?
Next 2 years may be tough for the economy. Having said that, we are probably better insulated than most, because of our diversified but niche product bases. We should be able to do 20-25% CAGR over next few years. MSME Loan book proportion could touch ~70% as we have both width (<50% branches currently offer) and depth (penetrate deeper into existing branch customer base) to explore.
What’s the broad mix of SME business which are being financed in terms of %?
We are completely industry agnostic. One can say we are more focused on Traders/Service Industry than Manufacturing industries.
How much of growth will be driven by higher penetration and how much from geographic expansion?
Growth will come from deeper penetration of customer base at existing branches and widening our presence. We have more than 1000 branches today. MSME Loans are currently offered at ~50% of the branches.Gold Loans at 70% of branches and 2Wh Loans – the earliest Loan product is offered from ~80% of the branches. More than 200 branches are shared locations. Incremental growth will also come from shared office space with group companies. We can expand reach at low incremental cost by putting up 2-3 people at shared locations without much capital outlay.
Plans to expand branches outside AP & Tamilnadu over next 3-5 years?
As explained before, we do not have formalised branch expansion targets/plans.
To what extent political disturbance in AP is impacting your growth in MSME loans?
It was only for that period of protests. Now operations are back to normal.
Because of the increasing mix of higher yield and higher tenure MSME Loans (vs Gold), is it likely we will see a higher margin picture in next 2-3 years?
It is possible. But we have to see that the Gold Product had lower NPAs. Net ROA is likely not changing much. Post-tax RoA should remain around ~3%.
8. DIFFERENTIATION/OTHER NBFC MODELS
Do you see any benefit in developing specific industry expertise, relationships with machinery OEMs? And priortising/focusing based on growing industries, leveraging the machinery relationships, funding machinery assets?
As mentioned before, we are completely industry agnostic. We have a dominant position in the MSME Small Loans funding space. We are doing well in 2Wh and Gold Loan space. We see opportunity size before us as huge – we are just scratching the surface.
Any NBFC having such differentiation – how valuable is that expertise in the long term? Would you go so far as to say this is highly valuable and may create niche dominance in SME asset financing?
Definitely there is value for specific industry expertise. However one has to weigh the scalability front. Funding machinery as opposed to funding Individuals – Entrepreneurs. Besides there is lot of merit in product diversification of the kind SCUF has. Any mono-liner (including SHTF) product has to go through stress some time or the other, is inherently more risky.
Which are some of the other NBFC models that you admire?
Mahindra & Mahindra Financial Services. They have done a good job with rural penetration. REPCO Home Finance and GRUH in the Housing Finance space are other commendable success stories.
Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 6 months;
Tirumal Rao: No Holdings in the Company; ;
Davuluri Omprakash: No Holdings in the Company; ;
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