Chennai: Founder chairman of the Shriram GroupR. Thyagarajan has, in three decades, seen the group emerging a leader in the chit fund and pre-owned commercial vehicle financing businesses. The group now manages more than Rs13,500 crore in assets and has forayed into other businesses such as insurance and real estate.
Calling himself a “communist”, Thyagarajan said it is the “small” man (the small entrepreneur) who innovates and claimed that the banking system has failed to provide credit to such people. In an interview with Mint, he called for setting up of a development authority on the lines of Insurance Regulatory and Development Authority for the finance industry to help it reach out to small enterprises. Edited excerpts:
Given that interest rates have increased, are you looking at going back to public deposits as a viable option?
We have never reduced our focus on retail money. In our 27 years of existence, the emphasis on retail finance has always been there. The money from banks comes with conditionality on usage, which gives a lower rate of return. Whereas (in) the money from retail market, the conditionality is not there except that it has to be repaid properly. We can use the money in segments where it is properly utilized, leading to better yields. This will more or less offset the higher cost associated with retail money.
Balanced combination: A file photo of Shriram Group chairman R. Thyagarajan
Retail money for us includes public deposits and secured debentures, which are administered by debenture trustees. The trustees are only taking care of securities, but not the end usage of funds. Retail investors feel comfortable with secured debentures as against public deposits.
What is the current level of retail money in your group?
It is around Rs3,000 crore and around 98% of it is secured debentures. Retail money grew at 15% last year and we hope to maintain the same.
Is there any other source of funding, other than bank and retail funding, that the Shriram Group is looking at?
We want to start a dialogue with the government and the regulator to ensure that in the next few years we have access to a well-developed bond market. After all, a debenture is something like a bond. In India, bonds are not well built for retail investors. In order to give a boost to the financial system, the finance companies should have access to a well-developed bond market so that the intermediation could be avoided. Our dependence on the banking system will be less. Retail investors will also have a choice.
It could be an option to reduce your cost of funds, right?
It’s not only an option, but necessary to develop the finance industry in this country. Today, there is an assumption that banks can take care of credit needs of the economy. Also there is awareness, in a compartmentalized manner, among the banking circles, regulators and government officials, that bank credit has not reached all (people). There are many businessmen who do not have access to equitable credit. Banks are finding it difficult to do it. Therefore, there needs to be an institutional correction to fulfil this need. In the last 30 or 40 years, despite the best efforts of all concerned, they were not able to do it. Then, you have to come to a conclusion that there needs to be a different kind of organizational set-up.
Given that only very few like companies have expressed their intention to be in the non-banking finance industry, what could be the benefit (of having this kind of organization focused on small entrepreneurs) to the finance industry?
You can call them small banks or NBFCs (non-banking finance companies). They will not have an all-India presence, (but) may have a regional focus. But the economy and the community need more and more such small banks. They will not come into existence and then flourish. First, you need an environment in which they can flourish. Today, the environment is such that no one wants to get into the finance industry. By any chance if they get into the industry, they don’t have a chance to flourish. Today’s Reserve Bank of India (RBI) regulations are not designed to promote the growth of the finance industry.
Today, the small bank cannot compete. If you exclude the small banks in India, you are excluding an overwhelming majority of the people. More than the unfairness, it will not lead to wealth creation. Ultimately, innovation, enterprise and risk taking—all these things come from the small man. It will not come from the big groups; they are interested in protecting their wealth and not risk taking. Whereas the small guys have nothing to lose and are risk taking. Innovation comes out of this.
Wealth creation on a continuous basis can be ensured only when the small man is empowered, by the availability of credit even at a high cost. Only entrepreneurs can realize (the importance) of timeliness of a loan. Apart from what he can create, (the fact) that credit is available motivates the entrepreneur.
The finance industry’s importance in creating wealth has not been understood and perceived.
But current regulations are a result of what has happened in the finance industry in the past, especially the late 1990s collapse in the NBFC industry.
This is a wrong diagnosis. These are all post facto justifications. There is no reason whatsoever for RBI to have interfered in the system in 1998. The reactions of RBI were not justified.
So, what is the ideal environment for the finance industry to thrive?
Whatever suggestion one gives, the existing regulatory authority has no time to either examine or take action. They have much bigger tasks on their hands. For RBI to initiate measures to impact long-term growth of the economy, they don’t have the time nor the inclination to do. An RBI governor’s tenure lasts only for five years, but we are talking of a 10-year time frame.
One way to go about is to create a separate regulatory and development authority for the finance industry similar (to that of) insurance and now sought for pension funds. The tasks should be one of development first, then regulation. Create rules and regulation for the development and regulatory authority, so that it is focused on growth and development, not on regulation. Regulation should be part of growth. First, we need to create the business. Then the regulator will understand how to regulate the business.
Without a well-developed finance industry, which can reach out to a wider community in the next 10 years, economic growth cannot be achieved. It (growth) cannot be a short-term thing. The development authority should spell out its goal, that the industry they want to regulate would touch a certain business level and reach out to the neglected community. They should not start with an attitude that they will regulate whatever business comes.
Today, the community’s savings is Rs25 lakh crore and it is with the banks. What we are saying is that the regulatory body should set a target that at least 5% of community savings should be channelized to the new finance entities over the next 10 years.
Then it will be like another government mandate on the banks to channelize their funds.
Already, we are mandating that 40% of money should go to the small-scale sector and the agricultural sector. This has not worked because of inefficiency. What is happening is that you are revising the definition upwards. If you find that you can’t find a guy to finance Rs5 lakh, you revise the definition to Rs5 crore. The way in which the definition of the small and medium enterprise has been changing, it is an acknowledgement of the banking system that it is not able to take care of the needs of the small man. You define a big man as a small man.
How is it in other countries? Do the big banks support the smaller ones?
There has been such mandate. Even in a well-developed country like the US, there are pressures on local banks to look after small banks. A (policy that a) particular percentage of public money will have to be given to small banks is there in the richest countries. The priority sector concept is there in the US, where non-banks or small banks control between 20% and 25% of total deposits.
Who could be the targets for the small banks or NBFCs?
Small entrepreneurs and businessmen. The current banking system discourages them from coming to them (the banks). It is not able to give credit to small entrepreneurs on a timely basis.