“Safety is most vital,” says R. Jayakumar, 62, who works in the Chennai-based Amalgamations Group. His father started investing in SFL 25 years ago; he has followed suit. “Almost 90% of my family’s fixed deposits are in SFL. The interest rate may be slightly lower, but we get peace of mind,” he provides, as he finishes renewing his deposits right here.
SFL, a non-banking finance firm (NBFC), has 120,000 depositors. More than its AAA score for fastened deposits, the best security score, what works is the belief the corporate has been in a position to construct through the years. At a time when banks are struggling to draw deposits, SFL has registered the largest-ever web accretion in deposits in 2023-24. At ₹5,800 crore, it accounted for 14% of its funding combine. The firm’s executives anticipate a good greater accretion this 12 months. This is regardless of SFL not actively soliciting deposits.
Some debtors have been the corporate’s followers, too. “In 1977, SFL funded the acquisition of my first truck, and I’ve not regarded again since,” says Rajinder Singh, managing director, Janta Roadways. He now has 200 trucks, all car carriers. Nonetheless, he now borrows from banks as they offer cheaper interest rates—1% to 2% cheaper than SFL.“Each truck I buy costs ₹50 lakh or more, and we replace at least 20 trucks a year,” Singh causes. But he additionally runs a fleet of automobiles that function as taxis. They at the moment are financed by SFL.
Despite the belief and goodwill that SFL has earned from its prospects, it’s not among the many largest within the business though it is without doubt one of the oldest. In its 70thyear of operation, its belongings beneath administration (AUM) totalled simply ₹57,645 crore (together with a housing enterprise) in 2023-24. Its friends, who began off a lot later, have grown sooner and larger. Take the case of Bajaj Finance Ltd. In 37 years, the corporate has built an AUM that is five times SFL’s. Other NBFCs—Shriram Finance Ltd, Cholamandalam Investment and Finance Company Ltd and Mahindra & Mahindra Financial Services Ltd—are far larger, too.
Some accuse SFL of being ‘growth phobic’ even when its disbursement final fiscal 12 months, at ₹26,163 crore, grew by 25%. Analysts monitoring the corporate attribute the slower built-up of AUM to its iron-clad concentrate on its core perception, which is to serve the underserved and conservatism such an method has spawned. Its distinctive enterprise mannequin, which focuses on asset high quality, will not be primed for a quick tempo of progress.
SFL’s asset high quality is among the many greatest within the business with gross non-performing belongings (NPA) of 1.3% and web NPA of 0.6% in 2023-24. Shriram Finance’s gross NPA, as compared, is at 5.4% and web at 2.7%. SFL’s return on belongings (together with housing enterprise), at 2.7%, beats Cholamandalam and Mahindra & Mahindra Financial Services.
But SFL clearly is at a crossroads. An enormous transformation is sweeping the monetary providers sector. Regulations are being tightened for NBFCs. The Reserve Bank of India (RBI), India’s central financial institution, desires giant NBFCs to turn out to be banks. Thus far, SFL has resisted that urge. Second, the character of the borrowing and the profile of debtors are altering. Indians at the moment are borrowing, to not create belongings however to fund consumption. Personal loans are rising sooner than different types of lending. SFL doesn’t lend for consumption but. It is, subsequently, lacking out on progress alternatives.
The massive query: Will the market check the corporate’s resolve, and to what extent?
What Santhanam noticed
When India gained independence, its monetary sector was rudimentary. So was the transport sector, dominated by small gamers–these proudly owning one or two vans. Small truck house owners had been on the mercy of cash lenders who charged usurious charges of curiosity.
T.S. Santhanam, son of TVS group founder T.V. Sundaram Iyengar, was in control of the group’s truck and bus gross sales. He recognized the necessity to fund the highway transport sector and began SFL in 1954.
View Full Image
“SFL began to finance highway transporters at an affordable price and to not maximise income,” says Harsha Viji, government vice chairman and great-grandson of the TVS group founder. Its lending charges are, on common, 200 foundation factors decrease than different NBFCs although the charges are priciercompared to banks.
“While we might have a transparent sense of mission, we aren’t a non-profit group. We have made an affordable revenue from day one,” he provides.
SFL has managed this by maintaining its prices low. Its common price of funds, at 7.5%, is among the many lowest within the business as its deposits and different borrowings are AAA-rated. Its industrial papers are rated P1+. These rankings signify the best creditworthiness and SFL is anticipated to simply meet reimbursement obligations.
“This has been potential because of prudent administration, truthful practices and good asset high quality,” says M. Ramaswamy, the company’s chief financial officer. Its borrowing mix includes debentures, term loans, commercial papers and deposits. Credit costs, which include provisioning and write-offs, are minimal as SFL is considered to have best -in-class asset quality.
“We don’t simply imagine in progress however progress with high quality and profitability,” says Rajiv C. Lochan, managing director, SFL. Its working price can also be among the many lowest within the business—the corporate eschews extravagance, he says.
Three dimensions
For the primary 50 years, SFL targeted solely on the industrial automobile sector. Initially, it financed small gamers who had only one or two vans after which it graduated to small fleet operators. It was solely within the late Nineteen Nineties that the corporate started what it calls a three-dimensional diversification.
“We started increasing to new geographies past the south and outdoors of main transport hubs,” explains Lochan. As of March this year, SFL has 710 branches across India. South India, however, accounts for 54% of the disbursements.
SFL then ventured past industrial automobiles. “We started financing the acquisition of tractors, building gear and passenger automobiles. We additionally ventured into ‘without wheels lending’ in 2015-16 and started funding small entrepreneurs,” he adds. By 2023-24, commercial vehicles accounted for just 47% of the disbursement. Passenger vehicles made up 24% share; construction equipment 11%; tractors 7% and commercial lending 9% of the pie.
The third dimension within the diversification was the foray into different areas of monetary providers. “Royal Sundaram was the primary Indian firm to get a common insurance coverage license in 2000,” adds Lochan. It was a joint venture between SFL and Royal and Sun Alliance Insurance. Apart from insurance, SFL forayed into home finance (Sundaram Home Finance) and asset management (Sundaram Asset Management Company). “We looked at life insurance very seriously but gave up as we found it too capital intensive,” says Lochan.
The clock velocity
Over a 10-year interval, SFL grew at a compounded annual progress price of 10% whereas Cholamandalam Investment and Finance Company, which operates in the identical house as SFL, jumped by 30% in the identical interval.
That is as a result of SFL steadfastly continued to concentrate on small companies and provided solely secured loans.As we talked about earlier, SFL eschewed consumption funding. This meant that it didn’t enter the non-public loans house. Even within the secured asset lending house, it stayed away from gold loans and two-wheeler finance.
SFL’s enterprise mannequin isn’t designed for a quick tempo of progress both. Branch enlargement, as an illustration. It doesn’t begin greenfield branches in a rush. As a rule, it first begins a sub-branch in an space seeing good demand. It is spun off into an unbiased department solely after a number of years. This philosophy implies that the NBFC’s department enlargement technique can’t be fast-tracked. In addition, SFL can also be not current in Uttar Pradesh and Bihar—states with an enormous inhabitants who’re underserved.
The firm’s operational fashions additionally gradual its progress. Unlike giant finance firms, in SFL, the salesperson can also be liable for collections—each the curiosity and principal reimbursement. And each mortgage should essentially have an in-person area investigation on the borrower’s residence by an SFL worker. This course of will not be outsourced.
“Any group has a clock velocity and if it grows sooner than that, issues finish badly. It loses its core focus. Quality and profitability endure,” says Lochan. “Our business model is not designed for a sprint buta marathon.”
Become a financial institution?
The monetary providers sector, which is witnessing a speedy transformation, is testing SFL’s resolve in sticking to its core perception and its conservative method like by no means earlier than. Take regulatory adjustments, as an illustration. Harmonization of regulation between a financial institution and NBFCs has considerably decreased the regulatory arbitrage that the latter loved. Today, whether or not it’s NPA recognition, normal belongings provisioning, capital adequacy ratio and dangerous money owed provision protection, the rules are both the identical or harder than banks. Like banks, NBFCs should additionally appoint compliance and different officers. These adjustments have elevated an NBFC’s price of operation.
View Full Image
Many giant NBFCs now marvel if it is sensible to transform themselves right into a financial institution—that can assure entry to low-cost funds from present accounts that companies open (banks pay no curiosity on such accounts) and financial savings accounts (banks pay a low curiosity). SFL, too, might need to take a name quickly.
Market-side adjustments are additionally placing SFL in a spot. The nature of borrowing is changing and so is the profile of the debtors. “There is a shift in client mindset. The younger, particularly, are okay with borrowing and spending to enhance their life-style. They have the earnings to again it,” says Ajit Velonie, senior director, Crisil Ratings, a score company.
Unsecured loans by banks and NBFCs, that are predominantly private loans, totalled ₹2 trillion in 2020-21. By 2023-24, it had greater than doubled to ₹5 trillion. Despite RBI clamping down on unsecured loans by rising the chance weightage, it grew by 35% final fiscal 12 months. Gold loans, in the meantime, grew 20%.
How lengthy can SFL ignore these segments?
The younger are okay with borrowing and spending to enhance their life-style. They have the earnings to again it.
—Ajit Velonie
Lost alternatives aside, SFL’s buyer base is shrinking. As Rajinder Singh talked about, many individuals at the moment are shifting their loyalties to banks whose rates of interest are 1% to 2% cheaper than SFL.“As companies acquire scale and get formalized, banks have a greater deal with to lend to them than NBFCs,” says Sanjay Agarwal, senior director at CareEdge Ratings, another rating agency. “New medium and heavy commercial vehicle purchase, for example, is now mostly handled by banks.”
Kipchoge’s lesson
SFL officers emphasise that they don’t seem to be in opposition to change. A.N. Raju, deputy managing director, factors out that aside from the variations within the late Nineteen Nineties, SFL had began many companies like infotech, enterprise course of outsourcing, registrar and switch agent (offered to Kaarvy) and various asset enterprise.
The firm is now exploring alternatives in funding used automobiles, electrical automobiles and the dairy provide chain.
What about gold loans? SFL did consider the enterprise prior to now however was not snug dealing with the asset due to operational complexities. Similarly, the NBFC periodically explores the financial institution choice.“Our return on belongings is healthier than most banks. As a financial institution, we are going to lose concentrate on funding the underserved,” Harsha says. The promoters, he provides, are usually not eager on diluting their stake—an eventuality if SFL turns into a financial institution contemplating that the utmost stake a promoter can maintain in a financial institution is 26%. The promoter group stake in SFL is at 38% as we speak.
Our return on belongings is healthier than most banks. As a financial institution, we are going to lose concentrate on funding the underserved.
—Harsha Viji
Nonetheless, some indicators of change are already seen. SFL is exploring a presence within the private mortgage phase. “We imagine we needs to be available in the market at a reasonable stage,” says Harsha.But the corporate will take it slowly as private loans have turned very dangerous and RBI has recently increased the risk weight for it.
The vice chairman additionally sees the corporate’s tempo of progress accelerating, going forward. He has realized the necessity for velocity to maintain up with friends. An enormous fan of Eliud Kipchoge, he takes classes from the Kenyan long-distance runner’s achievements. “Kipchoge accomplished 42 kilometres in beneath two hours. This means a marathon runner needn’t run slowly. Time has come for SFL to extend its velocity,” he says.
