Shriram Transport Finance Company (STFC), a non-banking financial company (NBFC) in the niche pre-owned and new truck and commercial vehicle (CV) financing space, has seen its stock dip 17 per cent in the last three months. Investor concern is that the removal of the priority sector tag by the Reserve Bank of India (RBI) for bank loans through NBFCs in these sectors would push up funding costs. The classification of portfolios acquired by banks from these NBFCs is another concern as STFC sold 45 per cent of total assets in financial year 2010-11. R Sridhar, MD, talks to Sunaina Vasudev about the expected impact of these changes as well as outlook for the year ahead. Edited excerpts:
What is the impact of the changes in the priority sector classification norms and securitisation by the RBI?
The government has classified priority sectors due to the lack of credit flow. The objective is to channelise bank credit to such credit-starved segments. Earlier, if a bank gave loan, either directly or indirectly through NBFC to small truck operators, it was classified as priority sector lending (PSL). For NBFCs like us, who generated almost 100 per cent PSL assets of small road transporters, the policy gave an advantage in raising resources since its introduction.
The impact isn’t much for us because the money that we borrow from banks (which some banks classified as priority lending) is about 15-20 per cent of our total resources. So, even if the interest costs on that move up 100 basis points (bps), the impact is about 15-20 bps, which can be passed on to the customers. As long as the securitisation remains intact there is no problem.
Regarding regulatory changes, the RBI has clarified that a committee will be set up to look into the priority sector. There we will represent that for sectors such as commercial vehicle, small transport operators and second-hand vehicles even bank lending to NBFC on balance sheet should be considered as priority sector.
We know the customer and we have last-mile credit delivery capability and are present where these priority sector customers are. It is difficult for banks to understand the business, customer and credit evaluation. Also, the credit costs will be quite high, which is why they have been using the NBFC route. Ultimately, the cost of the end customer will go up if PSL status is not there.
What is the proportion of securitisation assets to total assets currently?
It was 45 per cent as of March 31, but should reduce to 35 per cent by September 30. Historically, we have been securitising only new vehicle assets. However, in the last two years, as interest rates started moving up, we used securitisation to increase the fixed rate loans. Our intention is to maintain it at one third of total assets.
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How has cost of funds moved this quarter?
The cost of funds has been going up not just because of the regulatory changes, but also because of the rising interest rates. Rates have increased by 150 to 200 bps in the last one year. The withdrawal of priority sector tag for bank lending to NBFC will also push up the costs, and, therefore, the rates will move up. However, we will have to pass it on to the customers gradually.
How will this affect your net interest margins (NIM) and spreads?
We operate between 7-8 per cent NIMs and it should be within that range. We are at nearly eight per cent and expect this to go down by 100 bps in the worst case scenario.
How will higher rates for customers impact growth?
There is this trade-off between growth and NIMs. When the cost of funds goes up, we pass it on to the customer and the customers cost move up. This is why the commercial vehicle industry is at present showing initial signs of a slowdown in sales.
Since the interest costs are moving up, there is a resistance to buying of more new vehicles. Therefore, our growth may be impacted. We anticipate that the commercial vehicle industry growth will be flat to a moderate one during the current financial year.
How do you see the macro environment panning out?
I think there is one more dose of interest rate increase likely in the July policy of about 50 bps, which could be the last. The CV demand normally lags peaking of interest rates by about six months.
How has portfolio quality responded to the interest rate environment?
Interest rate rise hit new vehicle sales in the CV industry, but it doesn’t impact viability or quality. This is because truckers borrow at fixed cost and the one who borrowed a year back at 10 per cent continues to pay that rate.
The uptick in gross NPA ratios last quarter is marginal. Moreover, for a company which is growing fast, there is a possibility of NPLs moving up marginally. We have been maintaining our gross NPLs in the range of 2-2.5 per cent for a very long time. It went up a little bit in 2008 on the back of liquidity crisis and global meltdown. I do not expect it to deteriorate further.