Mumbai: Non-banking finance company Shriram Finance Ltd expects its strong growth in the micro and small enterprises to continue due to demand for small ticket loans from entrepreneurs even as its main commercial vehicle business has undergone a change with transporters buying larger vehicles.
Executive vice chairman Umesh Revankar said the company expects an annualised growth of 25% on its MSME portfolio for the next three to four years, cementing it as the third largest business for the company.
“In the microenterprise, our average ticket size is Rs 10 lakh. But we also lend to individual entrepreneurs like shopkeepers, vendors, distributors where ticket size can be as low as Rs 1.5 to 2 lakh which is growing very fast today. These are unsecured loans backed by information on cash flows because these customers have been borrowers before mostly having taken two-wheeler loans and are known to us,” Revankar said.
Latest results at the end of June show that such MSME loans at close to Rs 29,000 crore make up 12% of the loan portfolio and is the fastest growing segment with a 44% year-on-year growth.
Revankar said the company has diversified its MSME book beyond the allied activities of its main vehicle finance business and also expanded beyond the Southern market, giving it new avenues for growth.
“On the higher ticket sizes of Rs 10 lakh on an average we seek a mortgage as a collateral. Both these loans are growing and we expect to continue to clock a 25% year on year growth. The RBI’s own estimation of credit gap is Rs 40 lakh crore, so there is enough demand” Revankar said.
The strong growth in MSME loans has come even as commercial vehicle (CV) finance, the mainstay of the company, has clocked a slower growth 14% year-on-year. Revankar said he expects single digit growth in CV finance this year, after a slow start due to elections and weather-related disruptions, because transporters are opting for bigger vehicles as it is economically more viable.
“Light commercial vehicles sales are flat in last one year and is likely to grow by around 4-5% and heavy vehicles by around 7-8%. Other than three wheelers, the growth will be in single digits. But bigger size units are being sold. Earlier 24 tonner vehicles used to be sold, today we are seeing sales of 36 tonners. So capacity is increasing, but the number of units will be less because bigger tonnage vehicles are in demand,” Revankar said.
He said demand for larger vehicles also indicates stronger economic demand and the company expects to finance less units, but at a higher value.
“Our growth will come because of ticket size increase. If you look at the number of customers we added year-on-year, it will be just 5%, but our value has gone up by 15% CV growth. So, this extra 10% has come because of ticket size increase,” Revankar said. CVs and passenger vehicles together make up 67% of the company’s Rs 2.33 lakh crore portfolio. Revankar expects the share of MSME loans to rise to 15% in the loan book in three to four years.
In a post results note, Shweta Daptardar, analyst at Elara Securities, said Shriram Finance has seen close to a 5% dip in vehicle finance share since the consolidation of its businesses in one entity paving way for high-yielding products – viz., MSME, gold loans and passenger vehicles – to grow. The company merged its consumer lending companies Shriram City Union Finance and Shriram Capital into Shriram Transport Finance effective December 2022.
“Merger benefits, led by favourable asset mix and cross-sell potential, bode well for healthy earnings. MSME and non-South geographic expansion will aid a growth target of 15%+ ahead,” Elara said. The brokerage has raised its growth estimate to 18% from 16% for the company in the next fiscal year.
