Shriram Finance taps money lenders

Enrolls 74 money lenders as franchisees in south.

It's a strategy to free small second-hand truck owners from the clutches of money lenders, but not exactly by discarding the centuries-old financiers.

The informal credit suppliers are being re-deployed by a formal lender, Shriram Transport Finance Company, to serve the same set of borrowers, considered "sub-prime" by mainstream lenders.

Money lenders account for almost 75 per cent of the financing for purchase of second-hand trucks that happens in India.

Shriram Transport has over 20 per cent share and the balance is held by local players. About Rs 27,000 crore of loans have been provided for purchase of second-hand commercial vehicles.

Shriram has, thus far, enrolled 74 money lenders as franchisees in southern states to expand its reach to small-truck owners, who still are dependent on informal sources for funding.

The money lender-turned-franchisees source as well as serve customers but loan assets are on the books of the niche non-banking finance company, promoted by the Chennai-based Shriram group.

The commitment from these franchisees comes in the form of 5-10 per cent contribution to the loan amount. Shriram Transport plans to have a total of about 300 money lenders as its franchisees. Most of the new money lenders to be enlisted are expected to be across the country.

Shriram's gain is enhanced business. The money lenders' advantage is also a much bigger business profile "" growing from dealing in loan assets in lakhs to crores of rupees. They also get 50 per cent share in profits from every loan account, despite taking only up to 10 per cent credit exposure.

"Our strategy is to build a franchisee model with money lenders to enhance market share. The money lenders gain by the scale of business," said R Sridhar, managing director, of the transport finance company.

For the small borrowers, this model provides freedom from outrageous interest rates and brings them into the fold of formal financial sector. Shriram Transport charges interest rates in the range of 18-24 per cent.

Shriram finances only small truck owners for whom the commercial vehicles represent the only means of livelihood, but rarely possess documents to prove their liquidity and credibility.

In India, more than 80 per cent of the 45 lakh trucks are owned by individuals. Almost 77 per cent of Shriram's borrowers own less than five trucks and only three per cent own between 16 to 20 trucks.

The NBFC declines finance to owners of bigger fleets, even if the customer has grown from being its customer for years.Shriram has Rs 7,500 crore of loan assets.

Nearly 70 per cent of these are for purchase of second-hand trucks and the rest for new vehicles. Shriram's niche business model of funding small truck owners had already attracted a slew of foreign investors.

Chrys Capital invested Rs 100 crore for 20 per cent stake in Sriram in February last year. Subsequently, Newbridge put in Rs 450 crore for 20 per cent stake in February 2006. Citicorp has 6.22 per cent stake in Shriram Transport, which was bought for Rs 77 crore in 2002.

Shriram is the only organised lender which does not collect post-dated cheques from its borrowers. The loans are recovered in cash every month by its field officers.