R Thyagarajan, 78, founder of the Chennai-based Shriram Group—a financial conglomerate that manages assets worth Rs 90,000 crore—does not believe in mincing words. From a humble beginning three decades ago, Thyagarajan now drives a group that has a strong presence in truck financing (NBFCs), consumer loans, insurance and several other businesses. In a no-holds-barred interview with Forbes India, he explains what’s wrong with financial sector regulation (he calls it ‘strangulation’) and the regulator Reserve Bank of India (RBI). Excerpts:
Q. The RBI is allowing more banks [payment banks and small banks] to operate in the country. Will that ease the pain of credit-starved segments of the economy?
If you look at a bank as a credit-providing enterprise trying to offer credit to that section of society that is credit-starved, the emergence of payment banks or small banks will not even touch the fringes of the problem. Once you create a bank, the first objective of that institution will be to grow and become a big bank. They [the banks] are not starting with the objective of giving credit to people who can benefit from it. Therefore, creating more banks—big or small—is not going to solve the problem [of credit-starved sections]. The solution to the problem is to make credit-providing activity attractive to entrepreneurs. An entrepreneur is a person who is willing to face competition and thrives on it. But by creating a small number of licensed entities in the banking system, you are trying to ensure that the competition becomes benign and therefore, the borrower is at a disadvantage. The lesser the number of financing entities, the scarcer is the credit and lesser the enthusiasm for the purveyor of credit to go and seek customers. Also, entrepreneurship is moving away and out of the financing business.
Q. Are you saying that India’s financial sector is over-regulated?
We don’t need to have a focus on regulation. The focus should be on creating an environment where entrepreneurship in the financing business will grow and thrive. We need hundreds of financing entities to develop in this country. Take the case of the commercial vehicles business. Because of non-banking financial companies (NBFCs) such as Sundaram Finance, Mahindra Finance and Shriram Group coming into the business, private money lenders who were providing credit at 36 or 40 percent interest rate in the road transport sector have vanished. You don’t have to kill them. They die because you have created an alternative mechanism. The government’s, or regulator’s, job is to create this alternative funding mechanism. Regulation is, of course, needed to protect depositors who may lose some money here and there. Develop a mechanism to compensate them and educate them so that they don’t do foolish things as a result of greed. These are positive ways to regulate, without tying down people to inactivity. Regulation that leads to progressive atrophy of active enterprises in the country is strangulation. It should always be designed to improve economic activity in a country and not to stifle it.
Q. Converting Shriram Group’s lending business into a bank would have been a natural evolutionary process...
I don’t see it that way. We are anyway in the business of providing credit. By converting ourselves into a bank, are we in a better position to fund our type of existing customers? The answer is a clear ‘no’ on account of the restrictions that come with the conversion process. Regulations for conversion say we cannot run an NBFC at all. To me, if we were to convert into a bank, it will be a 10-year process, but the norms demand that we stop our NBFC business immediately. What happens to our customers then? We lend as much as Rs 50,000 crore to the truck segment. If the RBI was really interested in the development of the credit institutions in the country, it should have allowed us to start a bank. With the sort of experience and commitment that we have shown to a particular community (commercial vehicles sector), we could have created a bank that was catering to the requirements of a credit-starved segment. I am not saying these things were done deliberately. The RBI is not aware of its role of developing credit-providing institutions. Its role has not been defined in this manner.
Q. You are caught between a rock and a hard place. On one side, the RBI is trying to bring about a convergence of regulation between banks and NBFCs, which will hurt you. And on the other, you are unable to convert into a bank.
Convergence should be facilitated and not forced. You can even have convergence in the regulation of a bank and an NBFC by destroying one category totally. That is also convergence and this is what the government and the RBI are seeking to do. Saying that the regulations that are applicable to banks should also apply to different types of credit-providing activities is an attempt to end the regulatory arbitrage that is available today. I have been arguing that the regulatory arbitrage should be built in the system. NBFCs provide different types of credit and you cannot ask them to follow norms that apply to banks. Commercial vehicles or tractor financing businesses are impacted by seasonalities. You cannot apply the 90-day asset classification norm, call the borrower a defaulter and reposses his truck or tractor, thereby preventing him from doing his business. You cannot have the same set of regulations for entities which are working under different circumstances and dealing with a different class of customers. That is not workable.
Q. What is the way out?
I am telling my colleagues in the finance industry that we should be making a planned exit from the business of providing credit as the environment is such that you are progressively being controlled, harassed and you will not be able to do what you want to do. Sensible people who can do other things should move away from this business. Strangulation approach, rather than a developmental approach, to regulation is in play today. The government must ask the Reserve Bank how much of new credit it has provided to credit-deprived sectors rather than looking at how many Saradha scams it has prevented. Saradhas will always sprout if we do not have good finance entities to satisfy the needs of the people—both to save and borrow. The approach to regulation should be a commitment to grow the credit-providing business. In fact, the regulator should be held responsible for credit starvation.
Q. NBFCs fund as much as 70 percent of the truck sector. You say their future looks uncertain. Will the banks be able to fill the gap that they leave?
Banks will never be able to do that. NBFCs fund as much as Rs 1.30 lakh crore to entrepreneurs who are building a business, be it truckers or tractor owners. This segment is not important for them. They look at the cost of transactions and therefore, ticket size becomes important. Each class of borrower requires a particular kind of credit and needs to be managed in a particular manner. Using the same instrument for everyone is not wise. Even a barber has different types of instruments to do a job as simple as hairdressing.
Q. What is the way forward?
We need a separate authority with responsibility for development of credit for the excluded category. It cannot be the RBI and should not be the RBI because its mindset, its commitment and its objectives are totally different and that has been demonstrated well in the last 60 years. The RBI’s regulation has led to the death of most NBFCs in the country. If you recall, almost all major industrial houses had an NBFC at one point. Almost all of them have been closed. If allowed to continue, the RBI would regulate the sector to extinction.
Q. You serve a very important segment of the economy which is the road transport segment. Are you seeing a revival in demand?
New vehicle demand comes from two factors. One is the economic growth which will create demand for more vehicles. The other demand comes from fleet operators modernising their fleet. Are we providing enough credit for that? We are not. We need three or four times the quantum of funds we have provided to the sector to make it go for more efficient trucks. Demand for new trucks should come from people replacing their fleet. This will happen only if easy credit is made available. The government should draw up an objective that in 10 years, we will have only environment-friendly vehicles all over the country.
Q. Shriram Group has been a darling of private equity (PE) investors. What makes them flock to you?
There is no greed in the organisation. We do not want to make money in a very short time and that is why we have not gone into any speculative businesses. We are seen as dependable and sincerity is guaranteed. As an organisation, we are committed to the enterprises that we create and will do whatever it takes for them to succeed. We feel bad for PE investors if they don’t do as well as they expect. We try to minimise their pain. Also, we would like to learn, go through the pain of building the business and then go to a PE investor as we did in the case of our truck finance business. The right time to bring in PE investors is after demonstrating that we have understood the business (we may not have made profits but are close to making them). We are very sensitive to their prosperity. Having said all this, there are one or two investors who are not happy with us.
Q. Are NBFCs endangered?
They are not endangered as they are already dead. You can only endanger something that is living. Three companies doing some business does not mean they are alive. They are zombies who may appear to be moving but have no life in them. They have no will or enthusiasm. Gradually, they too will be buried. This will get reversed only if, as I said before, a new authority that fosters entrepreneurship in finance business emerges.