In an effort to slow down the growth in personal loans in line with regulatory guidance and focus on the MSME segment, Shriram Finance is working towards converting personal loans to small business loans.
A majority of the NBFC’s personal loan customers are existing two-wheeler customers, who in turn are small businessmen or self-employed professionals such as plumbers and electricians. The company is trying to establish the purpose the funds are being borrowed for, and whether the borrower is a business owner and whether the business is registered.
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“If it’s not, we are trying to get them registered under UDYAM and then classify them as small-ticket business loans, which again will be a PSL (priority sector lending) asset. It will help us make money more comfortably, so we are working on this,” MD and CEO Y.S. Chakravarti told Mint.
The Udyam Registration Portal (URP), operated by the ministry of micro, small and medium enterprises, facilitates online registration for MSMEs and generation of unique registration number for lenders and other ecosystem players to identify small businesses by.
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Chakravarti expects the pace of growth for small business loans to be faster than personal loans in another 2-4 quarters.
The caution on growth in personal loans has stemmed from the regulatory warnings around unprecedented growth in certain segments of unsecured loans.
Personal loans for the NBFC grew 12.7% year-on-year but fell 0.6% sequentially to ₹8,925 crore in the three months through June. MSME loans rose 43.7% y-o-y and 9.8% sequentially to ₹28,802 crore as of June 30, accounting for 12.3% of total loans.
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“So we wanted a relook at our entire portfolio. Though 90% of my personal loans are to existing customers, we still wanted to have a look. We have actually tightened the approval process, which has reduced the acceptance levels,” he said.
Shriram Finance has an internal target to maintain unsecured loans below 5% of assets under management (AUM). Currently, unsecured loans account for 3.7-3.8% of the total portfolio. The move to revisit the portfolio was also to show “intent” to the regulator, discuss it with them and then grow the book.
“But the growth also looks high because the base is very small. So we will definitely grow this portfolio. I’m not going to leave this segment because it’s a good high-yielding product which I’m lending largely to my existing customers,” Chakravarti said, adding that the segment should grow around 15-20% in FY25 whereas gold loans are likely to grow at 25-30%.
Vehicle finance
On the vehicle loans side, Chakravarti said that while lending for medium commercial vehicles (MCVs) has picked up because of the rise in infrastructure projects, that for light commercial vehicles (LCVs) remains “lukewarm” but is likely to gain pace in another two quarters.
On the other hand, there is demand for used vehicles but stock is low because of the rise in prices of new vehicles. This is being reflected in longer replacement and upgrade cycles and a significant drop in repossessions by banks and NBFCs.
“In fact, auction companies are losing money because there is no stock for them to auction,” Chakravarti said, adding that Shriram Finance has a slight advantage because of its large dealer and customer network.
“Instead of going to an organised group, when a buyer wants to do a transaction they come to us. Both could be my customers, but typically what happens is that the buyers bring the sellers to our branches,” he said.
Margin guidance
While funding pressure persists due to elevated deposit rates and high competition from banks, Chakravarti expects the impact on cost of funds in the coming quarters to not be more than 10-15 basis points (bps) due to a steady mix of deposit accretion and market borrowing.
One basis point is 0.01%.
