Mumbai: India’s largest financier of trucks Shriram Transport Finance Co. Ltd is changing lanes to start funding for all types of commercial and passenger vehicles, as it looks to expand operations and ride out a slowdown in the sector.
Managing director R. Sridhar says the decline in vehicle sales began two years ago and the company is well prepared for it. A chartered accountant by training, he joined the company in 1985 as a field officer and became its MD 15 years later. In the meantime, Shriram Transport Finance graduated to financing about 400,000 truck buyers a year.
But it’s a cyclical industry, notes Sridhar, as he details the firm’s plans to tackle challenges posed by product makers who are aggressively tracking vehicle finance and operators who are deferring plans to buy lorries. Edited excerpts:
Practical view: Sridhar says that sales of commercial vehicles are more than what’s required and this has led to capacity build-up.
Truck makers have sold fewer vehicles this year. As a truck financier, how do you view this slowdown?
The slowdown started two years ago. It’s a cyclical industry. When sales go up, vehicle makers know it will be followed by a lull, primarily arising out of the demand and supply situation in the freight market. Sales of commercial vehicles are more than what’s required by the market, and this has led to capacity build-up and affected demand and supply.
In the year ended March, sales of medium and heavy commercial vehicles fell 10% year-on-year when it should have increased by 10%. Sales may go down further following the slowdown in the economy and the rise in interest rates. In 2004-05, interest rates were around 10-11% and bankers are now lending at 14-15%. This is unlikely to reverse in the short to medium term.
How is Shriram Transport Finance going to tackle this slowdown?
In our portfolio, 25% of the loans are for new trucks and the remaining for used trucks, which has been our core area for three decades. We have Rs2,000 crore of our funds in capital and reserves, and have borrowed Rs18,000 crore. We borrow only for three-five years, depending on the asset-liability match.
Of the Rs20,000 crore we manage, Rs2,000 crore is collected from retail deposits, non-convertible debentures and fixed deposits. We have securitized Rs4,000 crore of receivables, and borrowed another Rs4,000 crore from mutual funds. The remainder, we borrow from banks and financial institutions.
As you said, customers would tend to postpone purchases of trucks in this market. What is your strategy in that case? You will also face competition from many product makers and banks. How will you respond?
Our culture and methodology will be the same. But we will also finance all vehicles used for commercial purposes, do freight bill discounting, as well as tyre and engine replacement loans. We will continue to convert non-bankable customers into bankable borrowers. The used-vehicles business will not be affected soon. But if the recession continues for three-four years, it will affect us. Road transport has no alternative. Even now 70% of freight is carried by road, though bulk goods such as coal and steel have moved to railways.
Considering that there are more delinquencies in used-truck financing and indiscipline in the loan recovery mechanism, how do you manage the business?
Banks and financial institutions have long neglected small truckers for lack of any collateral security and poor banking habits. Further, these trucks were always on the move and there was no mechanism to track them in case of default. Hence, truck owners had to borrow from moneylenders at interest rates as high as 30%. Our belief was that people paying high interest rates are not risky. We built credibility for these customers and grew on this credibility.
How do you de-risk the lending to these customers?
In truck financing, due diligence is not possible. The customer is just a driver with dreams of owning a truck. This business is built on relationships rather than due diligence.
For loan recovery, we rely on relationship management. We devise a loan repayment plan to suit our customers’ portfolios. We do not take post-dated cheques, but have 4,000 field officers managing 150-200 customers each. Our monthly receivables are as high as Rs750 crore from six lakh customers in 430 locations. Of this, 60% is collected as cash. Our benchmark internal rate of return is 20% and we devise the repayment schedules to suit that target. The key to this business is valuation of assets, as used trucks don’t come with an invoice.
What’s the repayment ratio of your customers?
About 60-70% of our customers pay on time and the balance take six more months than their schedule. In case of default, we take the asset and sell it.
Our track record is that we have lost 2% of the loans disbursed to our customers.