Shriram Transport Finance has brought credibility to itself and its customers

Image: Bmaximage

Award: Conscious Capitalist for the Year
R Thyagarajan
Co-founder, Shriram Group
Age: 77
Interests outside of work: Thyagarajan loves Carnatic music, especially the music of violin maestro Lalgudi Jayaraman. He has supported the promotion and preservation of classical music. He is interested in mathematics and has helped set up the Chennai Mathematical Institute
Why the company won this award: STFC’s vision was to modernise the truck industry, and it has achieved this by changing the perception of the industry among lenders. It has proved that lending to owners of one or two trucks can be safe and delivers good returns


“Trust begets trust. If you trust a truck operator and lend him money, he will trust you in return,” says Padma Bhushan awardee Ramamurthy Thyagarajan, who has been reaping the rewards of his faith in truck drivers since he founded the Chennai-based Shriram Transport Finance Company (STFC) 35 years ago. Through his non-banking financial company (NBFC), he lends money to commercial vehicle owners, especially those who own only one or two trucks and find it difficult to get loans from banks.

Shriram’s competitors don’t believe in lending on the basis of trust and “it works to my benefit because we are far ahead of all of them,” says Thyagarajan. STFC is a publicly listed company, and is part of the Shriram Group, a financial services conglomerate that Thyagarajan founded with AVS Raja and T Jayarama.

The 77-year-old businessman learnt to put his faith in customers in the 1970s when he was a branch manager with The New India Assurance Co Ltd, a government-owned general insurance company. “Our chief BK Shah [then managing director] believed in trusting people. He strengthened my own natural inclination to do the same,” says Thyagarajan, who started out by selling insurance policies to owners of commercial vehicles.

“In those days, the financiers of commercial vehicles would decide which insurance policy a truck owner should buy, so I started creating finance companies that would give loans to vehicle owners,” he says. This was an effective way to sell policies. Thyagarajan—with the help of his friends and relatives—created four or five small finance companies that loaned money to truck owners.

While the companies were set up to help bring in more business for New India Assurance, Thyagarajan realised he was on the brink of a business opportunity. “Back then, there weren’t too many financial entities (like the ones I had set up) in India,” he says. He quit New India Assurance to launch Shriram Transport Finance in 1979 with a personal investment of Rs 5 lakh. Today, the company has a market cap of Rs 22,000 crore, and owes its success to a unique business model.

Thyagarajan laughs at the mention of ‘business model’. “We just did business. There was a need for things and we met those needs. There wasn’t a model,” he says.

In the 1970s and ’80s, small-scale truck owners had no choice but to borrow from money lenders at interest rates as high as 48 percent because banks were reluctant to cater to them.

When Thyagarajan started STFC, a few companies like Sundaram Finance and Motor & General Finance did exist, but they dealt with operators who ran fleets of trucks. Thyagarajan decided to cater to the bottom of the pyramid, and started lending to people who owned only one or two vehicles. It was a large and untapped market. “But until Shriram became successful, nobody touched this segment,” says R Sridhar, former CEO of the NBFC and now director of Shriram Capital Ltd, part of the Shriram Group.

STFC knew that to make it in this business, it had to bring credibility to itself and to its customers. “I had defined our mission as one that will modernise India’s truck industry. Our objective was to enable the owner of a 20-year-old vehicle to move to a 15-year-old model by giving loans at reasonably low interest rates,” says Thyagarajan.
 
The problem that STFC faced was dealing with truck owners who didn’t know what a balance sheet was. Due diligence practices of banks and financial institutions could not be applied. “That’s because the ownership of the trucks was with people who did not have financial information of the audited kind. They did not have a balance sheet or a profit-and-loss account,” says Thyagarajan.

Image: Bmaximage

STFC has teams of local field officers who build relationships with truck owners

Instead, he relied on his experience of dealing with truck owners to create a model that did not involve balance sheets. The company hired local field officers who spent time with truck owners, understanding their business and building a relationship with them.

“Just like how there are vegetable markets, there are also truck markets. We place our field officers in these hubs, and tell them to meet, interact with and get to know truck owners,” says Sridhar. “There is an informal referral system. If you can get into a truck hub and finance one truck owner, chances are he will bring in more customers.”

STFC has 20 to 30 field officers for every 3,000 trucks. Monthly instalments are collected in cash. When a customer becomes a defaulter, STFC takes charge of the vehicle and finds a new buyer. “There is no aggressive repossession of vehicles. We don’t engage outsiders to intimidate defaulters during this repossession process. The owner will be changed, but we will do it after convincing him that it is the best option available,” says Thyagarajan.

Finding a new owner for a used vehicle is not difficult for STFC, which is a market leader in the financing of used trucks. It has a market share of 20 to 25 percent in the segment of five- to 12-year-old trucks, and about 85 percent of its loan portfolio consists of old vehicles. Thyagarajan says that operating in this market was not a deliberate choice: “The population of old vehicles on the road is about 85 to 90 percent.”

There’s another reason that can be traced back to the 1970s. “In those days, the price of a new vehicle was three times that of used models. When we started out, we didn’t have the financial resources [to fund new vehicles],” he adds.

But financing old vehicles was, and still is, a tricky business. “Our job doesn’t end with assessing a vehicle’s value. We advise and guide truck operators on their business plan as well,” says Umesh Revankar, CEO, STFC. The company asks a new client to bring an existing customer in his/her locality as a guarantor, thereby expanding its customer base. This ensures owners will pay their EMIs on time. “Not only does an owner have a support system, there’s also peer pressure to repay the loan,” says Revankar.
 
It took STFC nearly 30 years to get this model right and convince banks that a tie-up would not be a risky venture. Initially, STFC relied on retail funding. As a deposit-taking NBFC, it offered depositors interest rates between 9 and 13 percent. It then used the money to finance truck operators. (STFC’s current interest rates are at 10 percent.) It wasn’t easy convincing ordinary people to trust their savings with the company. Competitors were offering higher rates of interest and better commissions for intermediaries who brought in new depositors. Thyagarajan knew that he would need big names on STFC’s board. In 1984, it went in for an initial public offering and raised about Rs 20 lakh.

But the first breakthrough came in 1990 when STFC convinced Ashok Leyland and Tata Motors (then Telco) to invest in them. They each bought a 20 percent stake in STFC. “We felt that we could raise more money from the public if we had the brand of Tata and Ashok Leyland with us. We asked them to invest in Shriram Transport and also be on the board,” says Thyagarajan.

He was right. Thyagarajan recalls that STFC’s equity went up three to four times. That helped convince more depositors to put their savings in it for a longer period of time, for about three to four years. “Until 1997 or 1998, our source for finance was mostly deposits from the public,” says Thyagarajan. “In 1998, we had Rs 700 crore from public deposits and only about Rs 30-35 crore from bank loans.” He wanted to rectify that.

In 2002, Citicorp Finance, the non-banking finance arm of Citigroup, bought a 19.9 percent stake in STFC and the group’s Shriram Investment Ltd. It invested Rs 18 crore for an equal stake in both the companies. Two years later, UTI Bank (now Axis Bank) invested Rs 7 crore in STFC.

But though Citi and Axis had partnered with the Shriram Group, the floodgates did not open; there was still reluctance on the part of banks and private equity firms to partner with STFC, at least in the beginning.

In January 2005, when Sridhar became CEO, STFC was a relatively small player, with Rs 3,000-4,000 crore of assets under management and a market cap of Rs 500 crore. Growth was stifled by the lack of institutional funding. Sridhar played a key role in changing the perception about lending to the truck industry. “I met banks and investors and told them that because nobody lends to the truck industry it does not become sub-prime. Instead, it is a niche segment and there is a fortune at the bottom of the pyramid,” he says.

Slowly, a trickle of investors started coming in with private equity firm ChrysCapital investing Rs 100 crore in Shriram Group in 2005. In 2008, the Indian arm of the global PE firm, TPG Capital, invested Rs 600 crore. Piramal Enterprises has also picked up stakes in the group, including just under 10 percent in STFC for Rs 1,636 crore in May 2013. The entry of large names and PE firms cemented Shriram’s place in the financial services business, and STFC reaped the benefits. STFC now works with nearly 500 private financiers; as of March 2014, it had Rs 53,102.11 crore of assets under management.
 
Even at the height of its success, STFC remains loyal to its original bottom-of-the pyramid philosophy though, a few years ago, the company had toyed with the idea of moving up the value chain. “We don’t have the cushion to take on competition from banks [who finance this segment]. Besides, when there is a huge segment of credit-starved people, we want to address them first,” says Revankar.

Over the last six years, STFC has diversified its portfolio to finance car loans and construction equipment. Arun Duggal, non executive chairman of STFC, explains that the diversification meets the needs of small road transport operators. “We give car loans to people who want to buy used cars for transporting goods or to truck drivers who want to purchase a car. Similarly, we have seen that small truck owners are diversifying into construction equipment, so we have started financing that as well,” says Duggal.

While the business has grown in size, more importantly, it has changed the perception about the truck industry. Its focus was never to keep competitors out. On the contrary, STFC—especially in the early years—constantly encouraged other financiers to enter the commercial vehicle market. “We wanted money to come in so that interest rates were reduced. We’ve always talked of commercial vehicles as a safe and profitable business, inviting competitors to come in,” says Thyagarajan.

And interest rates did drop. When it started, STFC was lending money with an interest of 39 percent for old commercial vehicles and 25 percent for new models. Now, the rate has reduced to 20 percent for old trucks and 15 percent for new ones.

Thyagarajan is proud of what his company has achieved. “We wanted to change the face of the trucking industry and we did it,” he says. “You don’t see as many old vehicles in India as you do in Bangladesh. I claim credit for it.”