Shriram founder bats for a paradigm shift in business

R. Thyagarajan Founder Shriram Group. (Mint)
R. Thyagarajan Founder Shriram Group. (Mint)


  • Thyagarajan’s prognosis isn’t uniformly shared across the group, though.

MUMBAI : The Shriram Group will need to shift its focus from its mainstay lending business to insurance amid tighter regulation and rising competition from banks, said R. Thyagarajan, who founded the financial conglomerate as a chit fund nearly half a century ago.

Thyagarajan’s prognosis isn’t uniformly shared across the group, though. While Umesh Revankar, vice-chairman of Shriram Finance, said lending and insurance businesses will have to co-exist, S. Natarajan, a member of the Shriram Ownership Trust (SOT) said the group’s views may be different from that of the founder.

While group flagship Shriram Finance had a loan book of 2.02 trillion at the end of the second quarter, its two insurance businesses had combined assets under management of only 21,756 crore.


Pranay Bhardwaj/Mint
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Pranay Bhardwaj/Mint

“(If) I’m looking at a 10-year scenario, diversification into other financial services (is imperative). In the next 10 years, more bank funding will come into the commercial vehicle (CV) financing segment and NBFCs’ CV business will come down. Banks will provide 80% of the credit requirement of the industry, and NBFCs will be down to 20%. In the next 15 years, it will further come down to 5%. We should focus on diversified enterprises as they will become important for us," Thyagarajan, 86, said in an interview.

For long, India’s non-bank lenders thrived under light-touch regulation, offering cheaper loans thanks to their lower costs. As many of them turned systemically important, the rules governing them tightened as well. 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, shrinking their regulatory gap with full-fledged banks. In September 2022, it named 16 NBFCs including Shriram Finance as upper layer NBFCs (NBFC-UL), which must adhere to more stringent regulation.

Non-bank lenders including Shriram are now looking at ways to scale up operations, either by graduating to becoming a top-layer NBFC or trying their luck at becoming a universal bank.

“Financial resources of the banking industry are massive and non-banks, minuscule. Therefore, non-banks have been operating in segments where banks were not active. As and when banks move into this space, non-banks have to restrict their operations. As more funds from banks move into CV financing , non-banks will have to play a smaller role," Thyagarajan said.

Financing small businesses and individuals comes with 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 austere living and lending to some of the most unbanked sections of the population.

“Credit is needed for creating enterprises. It is also needed for their survival during the startup stages. In their absence, the mortality rate of enterprises will be high. If the credit provider is focussing on profits, mortality rate will go up and the growth of the economy will be impacted," Thyagarajan said.

The founder, who currently does not hold any formal role in the group, said he stated his views on a group roadmap ina meeting of the Shriram Ownership Trust, where he is a permanent invitee. The employees’ trust owns 2.09% of Shriram Finance, while Shriram Capital owns 17.89%. The trust was formed in 2006 when Thyagarajan gave all his shareholdings in Shriram companies to employees. Shriram Finance has no individual promoter with any sizeable stake.

Lending is currently the pillar of the Shriram group, led by group flagship Shriram Finance. The company was formed last year by the three-way merger of Shriram Capital, Shriram Transport Finance Co. and Shriram City Union Finance. Of these, Shriram Capital was the holding company, Shriram Transport used to finance trucks and Shriram City Union lent for housing, consumer goods and motorcycles. Shriram Finance is currently India’s second largest NBFC, clocking a net profit of 1,751 crore in the second quarter.

However, according to Thyagarajan, the group’s future is elsewhere.

“Life insurance is a security-providing instrument, and not the best of saving instruments. Non-affluent households need life insurance badly. When it is marketed as an ideal saving instrument as it has been done all these years, it loses its usefulness as either. As the focus is on sales volumes, major premiums come from the rich and the poor settle for very poor security," he said.

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

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

“Insurance penetration in India is very low. Scope and opportunity for insurance to grow is much higher over the next 20 years. NBFC business will grow at just about a double-digit level. But for growing the insurance business, you need a lending business, because it gives you the customer base and physical network," said Revankar.

The insurance business is best led by a bank or an NBFC, said Suresh Ganapathy, managing director, Macquarie Capital. “Insurance has a longer gestation period than NBFCs. Initially, it guzzles a lot of capital and also require distribution. RBI is making regulations tougher for NBFCs while IRDAI has relaxed guidelines on insurance. NBFCs in the upper layer will have to convert into a bank after crossing a threshold size," said Ganapathy.

Revankar admitted that a larger portion of the group’s wealth creation will come from insurance. Currently, the estimated value of Shriram Group’s insurance companies stands at around 24,000 crore, compared to Shriram Finance’s market value of 72,000 crore. “Over the next five years, we expect the market cap of insurance companies to grow much faster than that of the NBFC due to higher growth and profitability in Insurance; not only that, we would be able serve and contribute to the community more meaningfully," he said.

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

“Thyagarajan’s views need not be the view of the group. He has the liberty to express his views and the company has the liberty not to accept it. What is feasible only can be accepted," said Natarajan. “We have to grow lending and insurance business at the same time. All insurance companies need a captive customer base. That ways, expenses can be controlled," he added.

Separately, Thyagarajan confirmed that Shriram is looking to exit the real estate business by selling its remaining stake in Shriram Properties to current chief executive M. Murali over the next few months.

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

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

With the real estate being hived off and the lending business consolidated, the group looks fit to apply for a banking licence, but Thyagarajan did not seem enthused about it. A proposed merger between the Shriram group and IDFC failed to go through about five years ago, due to differences over valuation.

Revankar believes that getting a banking licence will depend on the regulator.

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

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