Shriram founder fights for a paradigm shift in business

by MMC
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BOMBAI :The Shriram Group will have to shift away from its core lending business to insurance amid tighter regulation and growing competition from banks, said R. Thyagarajan, who founded the financial conglomerate as a mutual fund he almost half a century ago.

The Shriram Group will have to shift from its core lending business to insurance amid tighter regulation and growing competition from banks, said R. Thyagarajan, who founded the financial conglomerate as a charitable fund ago almost half a century.

Thyagarajan’s prognosis, however, is not uniformly shared within the group. While Umesh Revankar, vice-president of Shriram Financesaid lending and insurance businesses will have to co-exist, Shriram Ownership Trust (SOT) member S. Natarajan said the group’s views might be different from those of the founder.

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Thyagarajan’s prognosis, however, is not uniformly shared within the group. While Umesh Revankar, vice-president of Shriram Financesaid lending and insurance businesses will have to co-exist, Shriram Ownership Trust (SOT) member S. Natarajan said the group’s views might be different from those of the founder.

While the flagship of the Shriram Finance group had a loan portfolio of 2.02 trillion at the end of the second quarter, its two insurance businesses had cumulative assets under management of just 21,756 billion.

“(If) I consider a 10-year scenario, diversification into other financial services (is imperative). Over the next 10 years, more bank financing will come into the commercial vehicle (CV) financing segment and the CV business of NBFCs will decline. Banks will provide 80% of the sector’s credit requirements, and NBFCs will be reduced to 20%. In the next 15 years, this rate will drop further to 5%. We should focus on diversified businesses because they will become important for us,” Thyagarajan, 86, said in an interview.

For a long time, India’s non-bank lenders thrived under light regulation, offering cheaper loans thanks to their lower costs. As many of them have become systemically important, the rules governing them have also tightened. After the collapse of Infrastructure Leasing & Financial Services Ltd (IL&FS) in 2018, the Reserve Bank of India directed NBFCs to set aside higher capital, thereby narrowing their regulatory gap with full-fledged banks. In September 2022, it appointed 16 NBFCs, including Shriram Finance, as Upper Layer NBFCs (NBFC-UL), which must adhere to stricter regulations.

Non-bank lenders, including Shriram, are now looking for ways to expand their operations, either by becoming a leading NBFC or taking a chance on becoming a universal bank.

“The financial resources of the banking sector are enormous and those of the non-banking sector are tiny. Non-bank establishments therefore operate in segments where banks were not active. As banks enter this space, non-banks must restrict their operations. As more bank funds are channeled into CV financing, non-banks will have to play a lesser role,” Thyagarajan said.

Financing small businesses and individuals carries risks, but regulators view bad loans with disdain, and the current regulatory environment does not encourage entrepreneurship, Thyagarajan said. Lending businesses should be run with a social purpose, argued Thyagarajan, known for his austere lifestyle and lending to some of the most unbanked sections of the population.

“Credit is necessary to create businesses. It is also necessary for their survival during the start-up phases. In their absence, the mortality rate of businesses will be high. If the credit provider focuses on profits, the mortality rate will increase and the growth of the economy will be affected,” Thyagarajan said.

The founder, who currently holds no formal role in the group, said he expressed his views on a group roadmap at a meeting of the Shriram Ownership Trust, where he is a permanent guest. The employees’ trust owns 2.09% of Shriram Finance, while Shriram Capital owns 17.89%. The trust was established in 2006 when Thyagarajan transferred all his stakes in Shriram companies to his employees. Shriram Finance does not have any individual promoter holding a significant stake.

Credit is currently the mainstay of the Shriram Group, led by the group’s flagship Shriram Finance. The company was formed last year through a three-way merger of Shriram Capital, Shriram Transport Finance Co.. And Finances of Shriram Town Union. Of these, Shriram Capital was the holding company, Shriram Transport financed trucks and Shriram City Union lent for housing, consumer goods and motorcycles. Shriram Finance is currently India’s second largest NBFC, with a net profit of 1,751 crore in the second quarter.

But according to Thyagarajan, the future of the group lies elsewhere.

“Life insurance is a security instrument and not the best savings instrument. Non-wealthy households are in dire need of life insurance. When it is marketed as an ideal savings instrument, as it has been for all these years, it loses its usefulness. As the focus is on sales volumes, large premiums come from the rich and the poor make do with very poor security,” he said.

Shriram Life Insurance, with assets under management (AUM) of 10,146 crores, made a profit of 70.1 crore in the first half of the current financial year, while Shriram General Insurance with assets of 11,610 crores reported a net profit of 217 million. Shriram General Insurance was established in 2012 as a joint venture between Shriram Capital and South African company Sanlam Ltd. KKR & Co. bought a 9.9% stake operationally last year.

Umesh Revankar, vice-chairman of Shriram Finance, however, has a slightly different view of the group’s future. While acknowledging that Shriram will focus on insurance, which is expected to grow much faster than lending, Revankar believes that the two businesses “will have to co-exist”.

“Insurance penetration in India is very low. The scope and growth opportunities for insurance will be much greater over the next 20 years. NBFC business will witness double-digit growth. But to grow the insurance business, you need a lending business because it gives you a customer base and a physical network,” Revankar said.

The insurance sector is best run by a bank or an NBFC, said Suresh Ganapathy, managing director of Macquarie Capital. “Insurance has a longer gestation period than NBFCs. Initially, it consumes a lot of capital and also requires distribution. RBI makes regulations stricter for NBFCs while IRDAI has relaxed its insurance guidelines. Upper layer NBFCs will have to convert to banking after crossing a threshold,” Ganapathy said.

Revankar admitted that more of the group’s wealth creation will come from insurance. Currently, the estimated value of Shriram Group insurance companies stands at approximately 24,000 crore, compared to Shriram Finance’s market value of 72,000 billion. “Over the next five years, we expect the market capitalization of insurance companies to grow much faster than that of NBFC due to higher growth and profitability in the insurance sector. insurance ; On top of that, we would be able to serve and contribute to the community in a more meaningful way,” he said.

Another member of the Trust, S. Natarajan, disagreed with Thyagarajan’s view.

“Thyagarajan’s views do not necessarily have to be those of the group. He has the freedom to express his point of view and the company has the freedom not to accept it. Only what is feasible can be accepted,” Natarajan said. “We need to expand the lending and insurance business at the same time. All insurance companies need a captive customer base. This way, expenses can be controlled,” he added.

Separately, Thyagarajan confirmed that Shriram was looking to exit the real estate business by selling his remaining stake in Properties of Shriram to the current Director General, Mr. Murali, over the coming months.

Shriram Group holds 27.78% in Shriram Properties, a residential real estate development company focused on mid-rise and affordable housing categories. The Shriram Executive Welfare Trust Group holds a 0.14% stake in the company, while Murali holds 0.08%.

“Real estate is a risky business. We realized that we could not do this job. However, we let Murali continue with the Shriram name for some more time after taking over the company,” Thyagarajan said.

With the separation of real estate holdings and consolidation of credit activities, the group seems fit to apply for a banking license, but Thyagarajan does not seem enthusiastic about the move. A proposed merger between the Shriram group and IDFC could not be realized about five years ago, due to differences in evaluation.

Revankar believes that obtaining a banking license will depend on the regulator.

“Banks are moving away from risk-taking and thus reaching the last mile. The RBI and the government understand the need for NBFCs in India. Banks will have to partner with NBFCs through a co-lending model, so that their resources are continuous,” Revankar added.

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