Shriram Finance may hike its lending rate to mitigate the impact of higher borrowing costs, according to managing director and chief executive officerYS Chakravarti. An increase of 50-100 basis points on the lending rate is not going to adversely affect borrowers since their loans are small in ticket size. If there is another rate (repo) increase, Shriram Finance will probably pass on 25-50 basis points to the borrowers, Chakravarti tells Ajay Ramanathan. Excerpts.
What loan segments will you be focusing on going ahead?
From a market and merger perspective, the focus would be on MSME (micro, small and medium-sized enterprise) segment. Second would be on expanding the reach of our gold loans. Before the merger, we were operating gold loans in only five states. The idea is to take it to other states with the help of Shriram Transport Finance’s branch network. It is similar for the MSME segment. For example, Madhya Pradesh, Chhattisgarh, Uttar Pradesh, Rajasthan, we do not have much of a presence as far as the MSME segment is concerned. We want to focus on MSME loans in those states… The assets under management of MSME portfolio are around `17,000 crore and gold around `5,000 crore. In comparison to other products, MSME will grow faster, at a compound annual growth rate of 20%. Ideally, we would like to grow gold also at the same pace.
How do you see MSME asset quality shaping up?
We have been in the business of lending to MSMEs for the last 30 years in one way or the other and we have seen enough cycles to understand how this works and which segments to lend to. A majority of our MSME lending is to the services and trading sectors. Our exposure to manufacturing is limited. On the restructuring side, hardly 1% of the overall loan portfolio is restructured. Post-Covid, the cash flows of our customers have also come back quite fast because they are either into trading or services, and not much into manufacturing. Going ahead, we would like to focus on these two segments. For us, the most important thing is cash flow and if the customer is over-leveraging, we will not lend.
How are you managing borrowing costs?
If you look at our borrowing profile, we have a mix. We had a large borrowing from overseas bonds, but that is now out of the window, given the costs. That window is closed now with the US treasury talking about stepping on the pedal to increase the interest rate. For foreign currency loans, we are trying to tap into developmental finance institutions. That is a continuous process. There, lending cost and hedging cost will be slightly higher than in the domestic market, but it is still worth it because you are actually diversifying your borrowing base. The other focus is on retail deposits. It is growing very nicely for us and is almost 20% of our borrowings right now. We are also exploring co-lending options where your fee income will be a little higher. On the liability side, we are able to handle that comfortably. As far as increase in borrowing costs are concerned, an increase of 50-100 basis points on the lending rate is not going to adversely affect borrowers since our loans are small in ticket size. We will see if there is another rate increase and we will probably pass on 25-50 basis points to the borrowers. Our incremental borrowings is currently at 8.75%. Around 8% will be ideal. But if we have no other go, we will have to pass on the costs.
How do you see the demand for two-wheelers shaping up?
The demand is kind of skewed. If you look at southern states, sales have come down. Incremental sales are happening in states like Uttar Pradesh, Madhya Pradesh, parts of Maharashtra, Rajasthan, West Bengal. The penetration of two-wheelers is so high in the south that the demand for new vehicles is plateauing. Covid has made a lot of people postpone their replacement decisions. I think these two reasons combined, the south markets are not growing in terms of number of vehicles sold. Value is going up because of inflation and cost of vehicle is going up. But in terms of number of vehicles, Uttar Pradesh is still leading. Uttar Pradesh is growing, Bihar is growing, Madhya Pradesh is growing, Rajasthan is growing. This will compensate for the low growth in the southern markets.