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Why Shriram Transport Finance attracts PE firms

Chryscapital, CitiGroup and FMO-Netherlands have invested into this Chennai-based listed truck financing firm. Why?

Businessworld explains in a recent article:
The Shriram group has three truck finance companies - Shriram Investments, Shriram Transport Finance and Shriram Overseas Finance. Together, they have a combined equity of Rs 117 crore. Their combined net worth is Rs 360 crore. But the group has managed to raise and lend Rs 6,000 crore. (That's a debt-equity ratio of 1: 17). How?

Neither Thyagarajan nor his three companies fully own the Rs 6,000 crore they have lent out to the trucking sector. Half the funds belong to several others including Citicorp, UTI Bank, ICICI Bank and ABN Amro. The Shriram group merely manages the money. To be precise, it manages Rs 3,000 crore on behalf of eight banks. It lends this money to truckers, collects the interest and principals every month and passes it back to the banks. "This is outsourcing. The Shriram group has been practising it much before the word became popular," says R. Seshasayee, managing director, Ashok Leyland...

...Move down to the lending level and the story gets more interesting. "Every truck that we lend to is a partnership of three parties," declares R. Sridhar, managing director, Shriram Transport Finance. "It comprises Citicorp (or UTI Bank or any other bank), Shriram, and the truck operator." Citicorp puts in 85 per cent, Shriram 5 per cent and the operator brings 10 per cent of the cost of the truck. The modus operandi is simple. Citicorp or UTI Bank would provide the funds. Shriram would identify the truck owners and lend to them. The assets would be booked directly in Citicorp or UTI Bank's books. When the instalment comes in, Shriram takes its share, passing the rest to the respective bank. But Citicorp or UTI Bank still controls the lending decision.

Shriram is also responsible for the collection. In return for its services, Shriram earns a 2-3 per cent fee-based income. This is in addition to the spread it earns on its 5 per cent share in the partnership. The fee may seem small. But it makes sense when the volumes are high. "More importantly, it is higher than the 1.5 per cent to 2 per cent spread that the lender may be earning," says Sridhar. But then, Shriram also bears most of the risk. Shriram follows the concept of 'first loss'. In case of defaults, the first 10 per cent of the loss is borne by Shriram and the balance by Citicorp or UTI Bank. "So far losses have rarely crossed 10 per cent," explains Sridhar.


ChrysCapital’s Ravi Bahl
believes Shriram’s
business model
is unique.









Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

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