When Mr R. Duruvasan took over on June 1 as the Managing Director of Shriram City Union Finance Ltd, the consumer lending arm of the Chennai-based Shriram group, he inherited a company with veritably sound fundamentals. In 2011-12, SCUF had ‘assets under management’ of Rs 13,400 crore and had made a net profit of Rs 342 crore, which was 42 per cent higher than in the previous year. Importantly, when the entire financial industry in the country was facing mounting non-performing assets, SCUF’s gross NPAs were only 1.8 per cent, slightly lower than in the previous year.
The challenge facing the new Managing Director is clearly how to build on this legacy. But in the financial industry problems come only in scaling up.
You have done very well in the recent years, particularly last year. Could you tell us how you will address challenges arising in two areas — (a) economic downturn and (b) scaling up. The first is a short-term concern and the second is a long-term concern.
The economic downturn might actually help us grow, because if more lenders shy away from increasing their exposure, the opportunity can only get larger for SCUF. We have never financed luxury products or given out ‘fashionable loans’. Our loan products touch the common man and we do not see any reduced requirement of funding needs in the coming times.
On the liabilities side, SCUF enjoys the highest ratings from the three prestigious rating agencies. We do not see much difficulty in accessing finance either.
Coming to problems of scaling up, for sure we cannot scale up overnight. Our model is not opening branches and starting business at breakneck speed. We first get the right kind of people and only then does the search for the branch begin, and not the other way around. This year, we expect more than 10,000 employees who have been trained in Shriram Chit companies, to move to SCUF.
We will also gradually ramp up our business outside South India too. We are already in more than 17 States. However, it is a fact that the majority of our business comes from South India. This is mainly on account of higher branch density and the existing infrastructure, including the existence of a strong marketing channel, customer goodwill and a large employee force. In branches outside of South India, we currently offer only one or two products.
The strategy is to start small, get people on board, learn the local dynamics and slowly and gradually introduce each of the products one by one, thereby ensuring growth is not achieved at the cost of poor quality lending.
We understand that lending, unlike the sale of FMCG or any other commodity, is a long drawn process and a good or bad sale is known only at the end of the loan period. Therefore, it is important for each of the products to finish at least one cycle before we launch the other products. This also gives employees sufficient time to be trained and processes to be established. Once this is done, growth can be fast as all matured locations can scale up simultaneously. At present around 50 per cent of branches outside South India are at this stage of readiness and we expect increased performance from these locations this year.
As such, we do not see any challenge in scaling up in the future.
Your strength has been in leveraging the Shriram Chit customer base (estimated to be between 1.2 million and 1.5 million.) In your view, how much more room is available for growth from this customer base. In other words, what is your current exposure to Shriram Chit customers and how much more do you think you can lend to them.
I would like to clarify that Shriram Chit customers are approached only for two products — small enterprise finance and personal loans. For other products such as two-wheeler loans and pre-owned car loans, the target is all retail consumers. In case of small enterprise finance, a large portion of our customer base comes from Shriram Chit business, though not entirely. The number of loans in this segment is not more than 5,000 per month. There is huge scope for the future in this target segment.
Is the assessment that your success of 2011-12 rode on gold loans correct? If it is, is this repeatable in the current year/next few years?
Though it is a fact that the gold loan business had grown the highest, the profitability and balance sheet volume has been mainly on account of the small enterprise finance business which also has seen high growth during this period. As mentioned earlier, we have not even touched the tip of the iceberg in terms of financing small entrepreneurs and, therefore, expect to continue to grow in this segment during the coming years also. Therefore, repeating the previous year’s performance is eminently doable, but it also depends on other factors such as the cost of borrowing and regulatory changes in the coming months.
Could you comment on how you managed to keep NPAs low. There again, can you keep delinquencies reigned in even as you scale up?
Regular follow-up is the surest way to keep NPAs low. Repayments are made through post-dated cheques, but if a cheque bounces, it does not mean that the customer is a defaulter and is to be punished immediately. On the contrary, small enterprise finance customers are entrepreneurs who need support and guidance at every stage. Our executives provide this support. Thus, regular follow-up, with appropriate guidance when the borrower is in difficulty, is how we have been able to keep NPAs low.
On the scalability of such an approach, we will ensure each of the branches is adequately manned to support the lending activity and obviously all of this is being priced in.
What is your vision for SCUF?
To make Shriram City the most efficient retail finance company in the country, though not necessarily the largest or the most profitable. These two indicators are not necessarily important for long-term success. What we would like to bring in is efficiency in all our endeavours. By this, we would like to ensure all stakeholders are benefited, most importantly our customers, investors and employees.
What are your expectations of Shriram Housing Finance? What is your USP in that business?
We expect to provide one more product to our valuable customers. This one was probably much expected from the Shriram Group for a long time. Like each of the other products, we expect to address the credit needs of the self-employed who have been aspiring to own a house for long. This will be one more product offered through our branches which are predominately in tier-2 and tier-3 towns.