Shriram City Union - Bet on MSME Financing

Note: This is a work in progress and I have yet to conclude whether its worth investing or not.

Shriram City Union [M. Cap 9,000 crs] is a NBFC engaged in lending to SME, 2W finance, gold finance and Auto finance. I am analysing Intec Capital, Shriram Transport and Shriram City Union as a basket case on growth in SME financing mainly lead by increase of penetration of organised sector. Still more than 90% of MSME financing is by unorganised sector. I think if these companies can get their act together they can easily grow by 5-10x or more over next 5-10 years. But one can also incur losses more than 50%, if they foolishly lend loans. My criteria is to look for history as a guide. I have not come across any instance of aggressive lending or acts grossly against minority interest. I have also not come across any instance of capital misallocation. All the three companies continue to focus on their core activities.

You can download the mindmap summary from here:

You can read reasons to buy, business model, segments etc in Mindmap summary.

some of the major concerns which I have are

  1. In the past the growth is mainly lead by banking on Shriram chit fund ecosystem. They are mostly concentrated in Tamilnadu and Andhra Pradesh. How much more growth can happen within these two states lead by introduction of SME products in all branches [currently SME product is offered only in 50% of branches]

  2. In the past NPAs were low, because Shriram had access to customers credit history via Shriram chits. This played a very crucial role in keeping the credit costs low. What would happen to credit costs for branches in non-chit states.

  3. SME finance was started only in 2006 and major expansion in loan book happen post 2007-08 crisis. So the business model is not really tested in a slowdown.

4)off-latein conference call company guidance remainsaggressivebut their actual result below guidance. During June-12 quarter results company guided for growth in AuM of more than 25% but actual growth was only 16%. In Dec-13 managementguided 30-35% growth for MSME and 20-25% overall growth for 2014 [interview to CNBC]. Gold loans & Auto loans [which together contribute 30% to AuM] are declining in high double digit for last 2-3 quarters and growth in SME loans has declined steeply from high double digits [around 18-20% during Dec-11 to Dec-12] to low single digit [5-8% during Mar-13 to Sept -13]

Views invited. Focus mainly on what can go wrong…

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Shriram & Sundaram gorup companies usually have impeccable corporate governance. The challenge with NBFC’s is there access and cost of funds. So, how does Shriram City Union get funds for advance growth?

I agree with Abhishek. Governance should not be an issue and its like what REPCO & GRUH in small ticket housing. It lends small ticket money to MSME players, they are in this business for long so they understand how to manage the lending/recovery well. Banks do not lend the money in this segement hence risk mgmt is what a key diffrentiator for SCUF.Mgmt usually takes due steps like recently they reduced Gold loan as % of AUM due to volatility. So far if you look at past decade they did really well be it in terms of NPA or AUM/NP growth, its is consistant and stable.

This stock is 4th [1.PAGE 2.BOSCH 3.INFY] is the 20 sound stock list of Morgan Stanly after their deep research.Morgan Stanlyrecommends to buy it if its price drops as compared to last 3 month low value basis. Morgan Stanly feels such SIP willnot be risky for theirsuch well researched stocks.

Disc - I am invested.

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HDFC Research also has a BUY rating with target of 1200/-.

Expect to grow lending business by 30-35% in 2014: GS Sundararajan, Shriram City Union Finance

ET NowDec 24, 2013, 03.44PM IST

In an interview with ET Now, GS Sundararajan, Chairman of Board of Directors of Shriram City Union Finance, speaks about the company’s credit outlook, performance and plans going ahead. Excerpts:

ET Now: In the last two or three months, how has the demand been for credit so far in the SME, two wheeler or the auto loan growth segment? Do you see that traction continuing or improving in the next six months?

GS Sundararajan:We are largely into the MSME space and more of the first M rather than the second M. We are in the micro and small business space as far as the MSME segments are concerned. There we are really dealing with customers who are credit starved by the institutional sector. Demands which are catering to the local markets around these MS, micro businesses, are something which we have been able to manage. We do see significant growth especially in some of the states. While overall two wheelers’ sales have come down, we have been to grow. We were earlier marginal players with very low market shares and having learnt to do that business extremely well and profitably, we are seeing significant growth.

ET Now: Can you put some numbers to this significant growth that you are speaking about?

**GS Sundararajan:**If you look at the verticals of MSME and two wheeler, at least as far as we are concerned, we expect to grow at about 30% to 35% in 2014 vis-a-vis what we have done in 2013.

ET Now: What does that do to your overall loan growth because that forms a large chunk of your business yes, but keeping in mind that you also have a gold loan book, how do you expect the overall consolidated numbers to look like?

**GS Sundararajan:**Our gold book has significantly come down in the last year. At one stage in a similar period last year, about 42% of our book was gold. While we know that gold is a good business, we did not want to be as high as 42%. So we had actually consciously brought it down. Today, it is about 23%. We would like to retain that as 23-25% of our total book. We actually came down by about Rs 3000 crore. Despite that because of the growth in the other two segments, our book will definitely see about 20-25% growth in the overall asset book. Next year we will again see a similar growth on the asset book also.

ET Now: Which are the sectors that are going to remain under stress because last quarter if we look at your gross NPAs, you stood at 3% and the net NPAs was at 0.65%, if I am not mistaken. What kind of a range can we anticipate for that and where exactly are we going to see the stress points?

**GS Sundararajan:**We should be able to retain the same level of NPAs because our gold book has stabilised. Gold was one book where the NPAs are very low and to that extent when we brought it down from 42% of our book to 23-24% of our book, there was a little bit of spurt in the NPAs, but that is more related to the gold book itself contributing to 40% versus 23%. With the stable gold book at this point in time and we not wanting to grow it beyond that 23-25% stage, we will be able to stick to the same NPA numbers which we have as of now.

From a stress level stand point, I do think that there are going to be delays on the MSME book, but they will not translate into delinquencies or losses primarily because we know that they are secured book. We know the customers who we are dealing with and because of our community lending kind of an approach, we do not see that becoming much larger. Whereas in two wheelers, we have to wait and watch because it is a growing book for us and that is something which many players have burnt their fingers while we have a model which is working extremely well. That is one area where we would like to be cautious and trade cautiously so that the NPAs do not go up significantly.

ET Now: Two months ago you said that the margins might just come down slightly going forward. Given the current interest rate environment, are you sticking to that? When can we see your margin stabilising?

**GS Sundararajan:**The margins as a composite portfolio did go up a bit because gold was one book where the margins were the lowest for us. With gold book coming down, the margin shot up from an overall composite figure of 10.3 to almost 10.9%. We do believe that as long as we focus on two wheelers and MSME with the kind of interest stability which is likely to come in, we will be able to retain that kind of margin at about 10.5% for next year also.

ET Now: Shriram Capital had applied for a bank licence, although Shriram City Union assets will be transferred to the bank unit, they have requested an exemption from Shriram Transport assets being transferred to the bank. Can you just tell us if there has been any response or any revert from the RBI on this?

**GS Sundararajan:**We are one of the applicants for the banking licence. It has been applied from Shriram Capital from a group standpoint. We have had a lot of enquires more on the application we have submitted in terms of additional data and information. Beyond that, we have not heard anything. We are waiting for RBI to invite us for a presentation at which point in time we will discuss what challenges we have.

ET Now: What happens if the RBI denies an exception? Would the promoter still want to go at with the bank licence?

**G****S Sundararajan:**We are quite clear that we would like to ensure that we get a new banking licence and because we are focussed on retail and MSME as an area of expertise as far as the group is concerned we would definitely like to get a licence which is not necessarily forcing us to convert large monoliners like the transport finance business we have or the perceived high risk profile which Shriram City has. We would definitely like to use this expertise to get into banking, but if this exception is not granted, we may have to approach RBI and try and justify why we are asking what we are asking.

ET Now: In the eventuality that the RBI does deny despite your clarifications, you are saying that you rather not go for the bank licence then?

**GS Sundararajan:**Exactly. That is what we have always been maintaining. We have said that we do believe that we can contribute to the financial inclusion agenda with a bank, but we do not want to have a bank at any cost because ultimately our customers who are serviced by these two large entities – Shriram Transport and Shriram City – will be deprived of this facility if we get into banking by merging all of these. Because there is a huge liability side which is largely funded by banks and that is the reason why we have said that we would like to have a new banking licence.

Aug 05, 2013, 06.25 PM IST Shriram City Union to see 35 bps rise in cost of funds Chennai-based Shriram City Union (SCU) is likely to see an increase of 35-40 basis points in its cost of funds due to change in fund raising guidelines by the Reserve Bank of India (RBI), which mandated some restrictions on fund raising through privately held debentures.

According to G S Sundararajan, managing director of the non-banking finance company (NBFC), it has a borrowing book of around Rs 11,500 crore as of June 30, 2013; of which the company raised around Rs 2,500 crore via privately placed non-convertible debentures. This share of the debt book will come down. Also read: Godrej Properties adds its 3rd residential project in NCR "Our cost of funds may go up by 35-40 bps depending on fixed cost borrowings. However, such impact can be nullified as we will negotiate with banks to take loans at lower rates.

The NBFC meets majority of its funds requirement through bank loans, which forms 53 percent to Rs 6,041 crore. Public issuances of non-convertible debentures constitute 10 percent of the book at Rs 1,184 crore while the company arranges 28 percent of the borrowings at Rs 3,243 crore. City Union pays interest at a fixed rate of interest on 51 percent of the book while the rest 49 percent is on floating basis.

For a private placed debenture issue sized between Rs 500-600 crore the company generally pays an interest rate of around 9.5 percent on an average. Those securities are of 1-5 years tenure. During the April-June quarter, SCU reported 14 percent rise in its net profit at Rs 117 crore. However, provisions and write offs increased 15 percent y-o-y to Rs 101 crore. Total assets under management rose at a muted pace of just about 3 percent y-o-y to Rs 15, 393 crore.

“We have consciously brought down the share of gold loans. We have created our own subsidiary company to offer specialized home loans with an average ticket size of 10-15 lakh. Through this subsidiary, we get financial benefits that the National Housing Bank, the regulator for housing finance companies, offers for priority sector lending,” Sundararajan concluded. The company is engaged in the two-wheeler finance, auto finance, loan for small and medium enterprises (SMEs) and others.

One key advantage of SCUF over other single sector/product Asset Financiers is the diversified asset class and bouquet of product offering, hence it is like a cluster of companies rolled into one. Hence a large allocation to SCUF will be akin to a basket approach in dedicated sectoral asset financiers.

YoY muted AUM growth has more to do with lowering of Gold loan which is more of a mix shift (from ~42% to ~25%) thereby showing higher NPAs and higher net interest margins on the consolidated book (Gold loans having lowest NPAs and lowest margins).

While the opportunity is huge, the growth ahead rests upon two things

)- Execution: With a diversified portfolio with customers on different kind of credits and tenure with varying collateral (even none in some cases) managing collections and restricting NPAs

)- Maintaining the right mix of liabilities in financing the asset side both in terms of tenure and cost.

ET Bureau | 22 Jan, 2014, 03.52AM IST

Shriram Group, which started as a chit fund company, is now aspiring to be a bank after building successful consumer finance and truck-funding businesses.

GS Sundararajan, group director at Shriram, says that it won’t pursue its aspiration at the cost of its existing business. In an interview with ET, he talks about the road ahead. Edited excerpts.

Since you have applied for a banking licence, the talk of differential bank licences is gaining currency. Does that prompt a change in your thinking?

The new draft on differential banking and continuous authorisation is very good. Compared to a universal bank, all norms can be different for a niche bank â capital adequacy, provisioning norms. If RBI asks us to do 30-40 per cent of corporate banking, we will not be able to do. We want to be SME and retail bank, largely dealing with financial inclusion. There are a lot of changes we see in the banking regulation, which will enable people like us to become banks. We may not be first in the list, but whenever we get, we will get with those regulations changed.

What about the one for which the process is on, where you have to bring all lending businesses under one roof?

Hypothetically, if they ask us to convert, we will not become a bank. But I think RBI will understand that if 2-2.5 million customers will be affected because of some regulations, then they are doing lip service to financial inclusion. RBI will give one or two licences and keep the dialogue open till the time one of us gets convinced. I do believe that a lot will happen, which will be growth oriented.

With financial inclusion becoming the mantra at RBI, what is the model that’s best suited to achieve it?

Mybelief is that today banks are not able to do it on the ground primarily because there is a paranoia about the risks that banks can take, which is understandable because banks deal with customer deposit and RBI does not want to see any bank which can remotely contribute to erosion of net worth. Theoretically, it is understandable. If you look at NBFCs, our 75 per cent funding comes from banks, which is again public deposits. We are a lot more agile and can take a lot more risk.

What should be done to increase financial inclusion on ground?

If banks have to get into financial inclusion, it can happen only if two things happen. First, RBI facilitate that there is 20 per cent of your portfolio, which can be higher risk, and therefore you go ahead and lend to these customers. Second, they should also allow different kinds of income recognition, loss recognition, provisioning norms. Reason why many NBFCs are against advancing the provisioning norms is because the profile of customer is very different.

How are they different?

If we also get into 90 days, we will start doing what banks are doing. So, whatever little financial inclusion is happening, will not happen. Our customers are last in the value chain. We keep telling RBI and finance ministry to not have norms based on banks or NBFCs, but to have them based on customer segment. If it is Hindustan Levers or Reliance, 60 days should be the provisioning norms. Ninety days for large fleet operator and 180 days to 365 days for a person at lower end of the value chain is needed. A poor person will not find excuses to not pay, but a well to do, who has battery of lawyers, will.

Does that mean the current rules to obtain bank licence militate against the very idea of inclusion?

Today, I have a feeling that RBI is slowly recognising the fact that NBFCs are complementing banks. Unlike three-four years back when because of some NBFCs, everybody got stigmatised. Our banking licence is under the premise that it is very difficult to convert our NBFCs. We have taken Rs 70,000 crore of funding from banks. All my customers will be starved till I build my deposit base. Building Rs70,000 crore deposit base will take me 7-8 years. The fastest any bank has built is Kotak. They have buildRs 20,000 crore deposit base in five years. Because of our understanding of small business, we believe we can significantly contribute to financial inclusion. We will not go on become a bank just to become a bank, but if RBI is willing to support and facilitate us to lend to these segments appropriately.

Will that not expose you to risk to one sector?

That is true in theory. If you look at MSME, it is one of the most diverse segment. Each medium, small and micro business is in different industry. You will have 30-40 industries if you look at categorisation of MSME. That is large diversification rather than lending Rs 200 crore to Vijay Mallya, if you have lent to 20 MSME. There is a lot of demand in rural and semi urban areas. Today mid corporate and corporate are not seeing growth, but micro and small businesses in Tier II and Tier III are definitely seeing growth. That is why we have 4.5-5 per cent GDP growth.

Key trends and analysis (will be updated over time).

The current asset spread as of Sep-2013 is as follows :

Asset Spread

Small Enterprises )- 49%

Gold Loan - Individual )- 9%

Gold Loan - SME Collateral )- 13%

Consumer Durables Loan )- 0.5%

Two wheelers )- 15%

Auto Loans )- 10%

Personal Loans )- 4%

It is necessary to ascertain the competitive landscape and opportunity of growth in each bucket. Let’s deep dive and collate our findings here.

MSME sector: Good overview

NBFC as a sector I have only started looking at over last month or so. Some companies like Shriram City Union Finance, M&M Financial Services, and good old Shriram Transport Finance look solid to me.

To get everyone on the same page quickly here’s our SCUF Stock Story.

Hope to have enriching discussions and delve deeper into the company/sector with your help.


PS: I am away at a remote location whole of Saturday & Sunday but will rejoin discussions on Monday, surely:)

Hi Anil/Donald

Extracts from stock story

MSMEs have a total finance demand of Rs. 32.5 trillion, of which only 36% is widely considered as addressable byfinancial institutions. The remaining 64%, ordinarily considered unviable because of inadequate/poor credit profiles, preferencefor debt from informal sources, reliance on self-financing etc. presents a rich potential for NBFCs if adequate safeguardscan be built in to protect asset quality.

Have some questions

1). Are we talking about Rs.20.8 trillion unmet demand from MSMEs and 15-20 % growth with 4-5 % GDP growth

2). And can we expect SCUF to maintain 30 % market share in MSMEs ? Presently its 42 %.

( If yes, what will be the reasons according to veterans)

Regarding Barriers to entry, Donald have some queries…

Have seen many small people run chits informally but successfully…( May be its illegal, not sure)…

1.When chit business doesn’t have a moat, don’t think we can bank on Chit customer base…( Or have i misunderstood…)

2). If we can’t bank on chit customer base, then future growth must be from outside. Can SCUF grow at the present rate.

3). And as Anil has mentioned — [SME finance was started only in 2006 and major expansion in loan book happen post 2007-08 crisis. So the business model is not really tested in a slowdown"]

What will keep SCUF growing in case of a slowdown ?

4). Or are veterans seeing opportunity in MSMEs from only Chit customer base since only 9% have been penetrated from ~4Mn chit customers.



Hi Mallikarjuan

Good questions, let me try to address

Regarding market opportunity, lets ignore the market share for the time being. Lets understand that market size is HUGE and there is scope for lots of other players.

Chit business runs on TRUST, which itself is biggest moat or entry barriers. We all are aware of how many chit companies have disappeared overnight. So SCUF have access to millions of customers CREDIT HISTORY. They can decide whom to lend. In addition to this, they can have lien over chits as security. As only 9% of the customers are mined, even if we ASSUME that only 30% are viable customers, company can still grow 3x. IN addition to that only around 50% of branches do SME business. So opportunity is huge.

In the conference calls, management maintain that over next 5 years major growth will continue to come from Chit states [AP & Tamilnadu]

Rs. 32.5 trillion,

during a sustained slow down,like whats happening now the first ones to go down under are the small and medium enterprises supplying components/items to the bigger ones and if they dont have a moat/specialized application their payments for services rendered gets delayed,thus effecting the repayment.just had a look at their site for loan requirements,although interest rates were not mentioned,just tried to compare it with a private bank-most private banks ask for atleast three years of existence,it returns and they look for positive cash seems to ask for 2 years .I suppose psu banks are more liberal in lending to sme’s.

more than anything informal/community background checks must be helping them to decide credit worthiness.i do know private banks do quite a bit of investigative work before dispersing loans to reach a conclusion on integrity/honesty of customer.The site also has requirement for collateral pledging so i assume there is no business loan without a collateral.So the ones that are dangerous are the two wheeler and personal loans.I think economy doing well is a requirement for the sector to do well,as iam sure all the credit worthy customers must be borrowing at low rates from the PSU banks.

Hi Anil,

SCUF seems to be a promising story, couple of questions I have

1). Why is cost of funds so high 12.6% especially when group company Shriram Transport have cost of funds as 9.8%, that’s almost 3% difference.

2). How must gross income is generated from chit fund business and if its significant, how much is the NPA (not sure if NPA is the right term for chit business).



Hi Anil/Donald

Extracts from stock story

MSMEs have a total finance demand of Rs. 32.5 trillion, of which only 36% is widely

I am not very used to reading annual reports but one thing I noticed in 2013 SCUF annual report regarding NPA that apart from the chart showing change in gross and net NPA there was no mention of NPA, even in Management Discussion and Analysis section.

Is this normal for any NBFC annual report?



Hi Anil,

Hadn’t gone through the link which Rudra Shankar had shared… After going through it, have tempered my expectations regarding growth…

Anil , still have doubts about high entry barriers in chit business. Trust is essential but will not translate into barrier i guess…

Many people and fringe players run chits and collections are from the customers place with spot billing machines… Some people even double as moneylenders…

Hmmm may be they can grow 2x-3x as you have mentioned…

( According to the link shared by Rudra Shankar, the cost of funds from registered chit funds is 0.5-3.5 % per month. That works out to 6 - 42 % p.a :-(… Our banks charge much less… Then how can we expect this model to sustain or it can sustain till banks sleep walk…)

Bank of Maharashtra charges approximately 10.75 % for loans upto 25lakhs… Can we say banks on an average charge 12-15 % p.a ?

How much does SCUF charge… Tried their site couldn’t get the info…



i think the cheapest business loan from banks would be 12.5-13%,however if it has got a connection to agriculture or something related to agri like cotton ginning i think psb’s can lend upto 9% also.


Regarding interest rates I GUESS it has more to do with the credit rating of the company and Banks perception of risk involved in the core business of NBFC. STFC is a well established business with NPA far lower than SCUF [for true NPA of SCUF, exclude the gold loan part].

Chit business: SCUF is not into chit business, but their promoter company is. SCUF only gets benefitted from their parent company chit network.

Mallikarjun, here the question is not whether there are entry barriers in chit business or not [Though for scalability I still believe trust and management is very imp]. How many chit companies has ventured into MSME lending. SCUF will benefit from availability of credit history of 9m customers with their promoter company. Worst case assume that Chit business will not grow, but we do not have any reason to believe it will collapse or start deteriorating. SCUF growth does not depend on chits further growth [though that will help], ofcourse if parent company goof up big time in chit business, it will have NEGATIVE impact. But Shriram management is quite reputed and known for its honesty.


Majority of SCUF branches are their in underbanked areas [ie where banks are already present] and not in UNBANKED AREAS. Despite that they have reported superb growth in the past. The reason is if credit worthy guys like you and me go to bank, who can submit our salary slips and bank statements, we will get loans.

SCUF lends to people who do not have any proper documentation to show to prove their income. You know in India how many people correctly file their tax returns. These people cannot satisfy banks stringent credit requirements. More over, very few banks and NBFC can deal with average loan of 7-8 lakhs. OPEX simply will be too high

Regarding Chit business model, I do not have very clear idea. But this model is very unique to India and its saving cum borrowings scheme. Its also an investment product. Indian chits act, lays down maximum cut at the time of chit auction. They collect monthly from INR 500 to higher amounts, they collect weekly and monthly from customer locations. If chits are surviving, despite all the negative news and scams, there must be some benefit to common person…Again here do not forget the integrity of Shriram Group…

company. help],But

)— Thanku Anil…Hmmm SCUF will benefit from the hardwork of the parent group…

Wanted to know how much SCUF charges on loans for MSMEs…