Can Shriram become India's Wells Fargo?

Last Updated: Thu, Jan 03, 2013 07:12 hrs

As the group prepares to enter the banking sector, it wants to model itself after the low-key American bank and focus on the bottom of the pyramid, instead of being a corporate or an investment bank

A month ago, all the heads of the various businesses of the city-based Shriram group - commercial vehicle finance, life and general insurance, consumer and enterprise finance, financial product distribution, chit funds, wealth advisory and retail stock broking - moved to a four-storey building in T Nagar. The idea was to achieve better coordination between the various arms of the Rs 60,000-crore group which has 10 million customers. Observers were quick to conclude that this could be the 38-year-old group's first step towards running a bank, now that the Reserve Bank of India, or RBI, looks all set to issue new licences after a gap of over a decade.

While the group has said that it wants to be the Wells Fargo of India, it has made it amply clear that the banking foray will not be at the cost of the existing businesses. If the two conflict, the group will drop its plans to run a bank.

G S Sundararajan, managing director of Shriram Capital, who been identified by the group to lead the banking initiative, says it was tough convincing the group's founder and chairman, R Thyagarajan, about banking.

Thyagarajan, in the past, had said he was not very keen on starting a bank - a sentiment echoed by some senior members of his core management team. "They had a valid reason to say that," says Sundararajan who sits on the third floor of this new office, one level below Thyagarajan: the foray, it was feared, will interfere with the group's focus on the bottom of the pyramid. Sundararajan's assurance to his boss was that "in no way the banking foray will be a distraction; and if it is going to be, then we will not take it up. If we need to shrink our existing businesses in order to make the bank grow, then we as well say no to the bank". Thyagarajan's fears were assuaged.

Policy roadblocks
The banking venture plans may remain stillborn if the government doesn't permit an NBFC and a bank under the same owner. (The group's two NBFCs, Shriram Transport Finance Corporation and Shriram City Union Finance, have assets under management of around Rs 50,000 crore and Rs 15,000 crore, respectively.) The only possibility then left for the group is to merge its retail and transport finance companies.

Since this merged entity will cater mainly to commercial vehicles, RBI may not be comfortable with it due to the high exposure to a single segment.

K Ramakrishnan, executive director and head of investment banking, Spark Capital, who has been monitoring the Shriram group for over 16 years now and was involved in some of its deals, says the group's unique strength is its extensive reach at the grassroots, which will be a huge advantage over other banks on the asset as well as liability side.

While it could help the proposed bank raise low-cost money through current and savings accounts, it could also give it a wide base of borrowers. Sundararajan discloses that 20 per cent of the group's 10 million customers, that's 2 million people, are eligible for banking products. That's a huge advantage. "We can rope them into the system in less than two years from the day we start operations," he says.

As most of the group's customers are self-employed people and SMEs, the banking products - current accounts, cash credit, term loans etc - will be tailored for their needs, Sundararajan adds. "We will be a retail and SME bank; we don't really want to be a corporate and investment bank. Though it will contribute to some extent, but it will not be our bread and butter." The model, of course, is Wells Fargo.

After the 2008 financial meltdown, several large banks in the United States had to shut down but Wells Fargo managed to keep its head above water because of its unique strategy. Its branches are not located in high streets where Bank of America, Citibank or other retail banks are located; in fact, all its branches are functional (low cost) offices with a very high appetite for risk. "These branches operate on a touch and feel model", says Sundararajan.

Reaping Advantages
Thus far, the Shriram group has never believed in growing rapidly; it has been cautious. But, feels Sundararajan, this could change once it gets a banking licence. "Given the synergies with our customers and the target market, we will be able to grow faster than anybody else," says he. Ramakrishnan adds that the group has been conservative, which is a virtue in banking and cannot be called a handicap. The group has 2,000 touch points and a strong presence in the southern and western markets. These should come in handy in the banking foray.

Analysts agree. For instance, Crisil has said that Shriram City Union Finance's customers are in rural and semi-urban locations and don't have easy access to credit. That's because these people are unable to comply with the stringent documentation that is required, want faster disbursement of loans, and, to a large extent, don't have access to the banking channels. Another analyst notes that banks are not able to grow in urban areas and the real opportunities are in small towns and villages - the areas where the Shriram group already has a strong presence. The group has been offering high-risk retail loans, but it has been able to maintain a healthy asset quality as it has a strong understanding of the customers, according to CRISIL. The loans are mostly given to existing customers who have a good track record or have a relationship with its chit fund business.

Commenting on the challenges, both the management and analysts say the group could be hampered by its smaller presence in the lucrative northern market. Sundararajan, on his part, says the group's two NBFCs cover those parts of the country that contribute 90 per cent of its gross domestic product. The other big challenge will be capital. The banking business is capital intensive and the group should be prepared to invest heavily in the first three to five years. Sundararajan says access to money is not a constraint in either debt or equity. The group has a large number of private equity investors. Shriram City Union Finance, for example, counts amongst its investors Norwest Venture Partners, ChrysCapital, Bessemer Venture Partners Trust, Asiabridge Fund, Acacia Partners and IDBI. Soon, TPG will get around 20 per cent stake. "Private equity funds are excited about our foray and they are ready to support us as well," says Sundararajan, who also wants RBI to allow the company to have a technical partner.

The last, but not the least, challenge is manpower - the management bandwidth to run a bank. Ramakrishnan says that the profiles of the top three people itself should make RBI give up all reservations: Arun Duggal, Sundararajan and R Sridhar. Duggal is the chairman of the board of directors of Shriram Capital, under which the group is planning to start the bank. He worked for 26 years with Bank of America, mostly in the US, Hong Kong and Japan, and was a senior advisor of TPG Capital, a large private equity fund. Sundararajan was the CEO and managing director of Fullerton India Credit Company. He was an integral part of Temasek's vision for India in the banking and financial services space. Under him Fullerton went on to become the fastest growing and largest networked finance company in the country. He was also nominated to the boards of two financial services investments of Temasek in China. He had an exceptional stint in Citibank where he built the SME business of the bank across the country. Currently he is the managing director of Shriram City Union Finance. Sridhar grew Shriram Transport Finance Corporation from an asset base of Rs 5,000 crore, net profit of Rs 50 crore and market capitalisation of Rs 500 crore in 2005 to a market capitalisation of Rs 17,262 crore (as on Jan 2, 2013) and a net profit of Rs 1,275 crore in 2011-12.

In spite of all the inherent strengths, Sundararajan knows it won't be easy. "We need a long gestation period to grow. Doing financial inclusion alone will not be profitable," he says.

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