'Shriram Finance's lending rate may reduce by up to 100 bps in 18 months'

The board of Shriram Finance on Monday approved a $4.4 billion investment by Japan’s MUFG Bank -- the largest foreign direct investment in India’s financial services sector -- for a 20 per cent stake in the country’s second-largest retail non-banking finance company. Shriram Finance Vice-Chairman Umesh Revankar said regulatory approvals are expected by the end of the current financial year. Speaking in New Delhi with Harsh Kumar and Asit Ranjan Mishra, Revankar outlined the implications of the deal. Edited excerpts:

 

Beyond the $4.4 billion investment, how is the partnership with MUFG Bank expected to benefit Shriram Finance?

 

It is a very big day for us. A large international bank with strong capital partnering with us gives us huge confidence and endorses our business model. The biggest positive is that our incremental borrowing cost should come down, and may be in the next 18 months, we should be able to reprice our borrowings. We also hope this will lead to a credit rating upgrade.

 

Moreover, we will be able to service the customer who would otherwise move to peers or banks because our lending rates are higher. We will now be able to retain them. It will also help us grow more in geographies where we are not very strong at present, such as North, Central and East India.

 

By how much do you expect your lending rate to come down?

 

We expect it to come down by anywhere between 40 basis points and 100 basis points over the next 18 months. Right now our borrowing cost is 8.8 per cent, and the liability book will undergo a change. It could come down by as much as 100 basis points.

 

What is your strategy for diversifying your lending portfolio?

 

If you look at our business model, we lend against earning assets such as vehicles, machinery, tractors and passenger vehicles. Vehicle upgrade has not happened over the past three- four years to the extent it should have. As customers begin to upgrade, that will increase our lending portfolio.

 

When it comes to SMEs (small and medium enterprises), it is a very broad segment covering a wide range of small businesses. There is a significant credit gap in India, estimated at around ₹40 trillion to ₹50 trillion. We should be able to play a significant role in the expansion of our SME portfolio.

 

Commercial vehicles currently account for a larger share of your portfolio than passenger vehicles. Do you see that changing with the new capital infusion?

 

That is already happening. Within passenger vehicles, there are two clear segments -- public transportation and private vehicles. We see a large opportunity in public transportation because government investment is coming down over time, particularly at the state level, which has historically been the largest investor. As more private players enter, that presents an opportunity for us to increase lending further.

 

Given that Shriram Finance is well capitalised, why are you not considering applying for a universal banking licence?

 

We should first understand what you gain by becoming a bank, and which customers you want to address. Our customers are very happy dealing with an NBFC rather than a bank because it offers more flexibility. You can customise the product better. The NBFC structure is much simpler for doing business.

 

We are bringing down the cost of lending by strengthening capital and improving our credit rating. If that serves the purpose, there is no need to become a bank. Right now, we are not even discussing becoming a bank.

 

What is your borrowing plan for the next financial year?

 

First, this transaction has to be completed and the money has to come in. We expect that to happen towards the end of the current financial year. Given that, we may not be aggressively looking at borrowing at the moment. We would like to see this materialise first, and only then redraw our plans accordingly. 

 

MUFG has a significant stake in DMI Finance. Will there be any business synergy with DMI going forward?

 

No, there have been no such discussions at all. I do not know how DMI Finance functions. I understand it is a fintech company, but we have no engagement or understanding of that sort.