NBFC Not A Business For Cowboys, Says Outgoing Sundaram Finance Chief
Ask TT Srinivasaraghavan, outgoing managing director of Sundaram Finance Ltd., what it takes to build a successful finance business and you won’t get an answer littered with financial jargon like RoA, NPA or ALM. The business he ran for a little less than two decades has delivered on all those parameters but, for TTS, as he is called, it is more basic than that.
“The NBFC business is not a business for cowboys,” Srinivasaraghavan tells BloombergQuint in an interview.
“Here, words like prudence and conservativism are really the things that should be valued. Glamourous and glitzy are not words that fit well in this business. The one thing that I keep sharing with my team is that their primary role is that of a custodian of public money,” he says.
Srinivasaraghavan, preparing to step down after 18 years as managing director and 38 years at the firm, has seen India’s financial sector go through many ups and downs, including the recent crises brought on by the collapse of IL&FS, DHFL and now the Covid-19 pandemic.
Over a 10-year period, assets under management have grown at a compounded annual rate of 9% to Rs 30,572 crore now. But it is not only about growth, it’s about ‘GQP’, Srinivasaraghavan says, adding a new moniker to the financial dictionary.
“Growth for growth’s sake is useless, it is only meaningful when it is accompanied by quality and profitability. So that is why chasing top line should never be the sole aim in an NBFC business. Top line [growth] is important but only when it is accompanied by quality and profitability, which is why GQP.”
Sundaraman Finance has maintained a AAA-rating, delivering a relatively steady return-on-assets backed by stable asset quality. Bad loans have remained close to 2%, although they have risen to 2.5% amid the Covid crisis and return on assets has been consistent at near 2%.
“Despite the domestic commercial vehicle segment facing headwinds due to the pandemic among other factors, Sundaram Finance’s return on assets are much higher compared to most of its peers' due to its conservative approach in lending and its consistent focus on asset quality over growth,” said Siji Philip, senior research analyst at Axis Securities.
Down Memory Lane
Srinivasaraghavan has been a Sundaram Finance lifer.
As a 28-year-old banker, while he was toying with the idea of becoming a school teacher, he came across a newspaper advertisement for the job of a marketing manager at Sundaram Finance. He applied and joined the company in 1983, leaving his teaching plans behind.
At the time, Sundaram Finance was a pure commercial vehicle financier. In the early 1980s, it entered the lease financing business. It was the first time that this was happening in India, Srinivasaraghavan says. “So, I came to Sundaram Finance, to join, what could have then be termed as an exciting startup opportunity.”
For his first 11 years at the company, Srinivasaraghavan spent his time building the concept of lease financing and helping expand the Chennai-focused brand to other parts of the country.
“It was around then, in 1998, that I was elevated to the board as the deputy managing director and was given responsibility beyond leasing, to look at the overall lending operations of the company, a large part of which was still commercial vehicle financing,” he says.
Along the way, came the many bumps that India’s NBFC sector has seen.
In 1996, emerged the CR Bhansali scam. CRB Capital Markets collapsed after allegation of embezzlement of nearly Rs 1,000 crore in deposits. This led to tighter regulations from the Reserve Bank of India and increased scrutiny from the Securities and Exchange Board of India.
The crisis prompted Sundaram Finance to look for ways to diversify its operations further. “This was also a time when we realised that our customer’s needs were increasing dramatically. So, we looked at diversification,” says Srinivasaraghavan.
In 1996, the company set up its asset management company, Sundaram Newton Asset Management Company Pvt. In 1999, it entered the housing finance segment. And, in 2000, it launched India’s first private sector general insurance company in partnership with UK-based Royal & Sun Alliance Insurance plc.
On Aug. 11, 2003, as the company celebrated its golden jubilee, Srinivasaraghavan was elevated to the position of the managing director of Sundaram Finance. His focus was to move the company from being a pure-play commercial vehicle financing firm to a full-range vehicle financing company.
As we moved into 2000s, we realised that we cannot just be a truck financing company. So, we first started the process of diversifying our asset portfolio. What in the 1990s was 90% CVs and 10% everything else, has now become close to 50% of CV, and the remaining half is cars, tractors, construction equipment, SME (small and medium enterprises) and lease financing– the whole gamut.TT Srinivasaraghavan, MD, Sundaram Finance
A wider product suite came alongside geographical diversification.
“Till the early 90s, we were predominantly operating only in southern India, because our roots are very much in Chennai and most of our business emanated from southern states,” says Srinivasaraghavan. But now, roughly a third of the business comes from outside the south.
“This is another major change that happened over the last 20 years, our portfolio and geographical spread diversified.”
Never A Dull Moment
Srinivasaraghavan is exiting soon after another tumultuous period for the country’s non-bank lenders.
In 2018, IL&FS, another AAA-rated NBFC, collapsed. Markets turned hostile towards financing non-bank lenders, prompting many to curb growth in thier businesses. Just as things were settling down, the Covid-19 pandemic hit.
During the pandemic, Srinivasaraghavan says, the focus on asset quality over growth has helped the company sail through, without much impact on its asset quality.
“The emphasis was mainly on maintaining our asset quality and identifying customers in severly impacted segments such as bus financing and tourism, to help them restructure their loans. On the liabilities side, thanks to our asset quality and credit ratings, we were fortunate to get abundant liquidity while others struggled,” he said.
The company’s pro forma gross non-performing assets ratio rose to 2.51% of its total advances as of half-year ended Sep. 30, compared to 2.20% in the first half of fiscal year 2020, mainly led by delinquencies in the commercial vehicle segment. Pro forma gross NPA includes loans that turned bad after Aug. 31, 2020 but cannot be declared as such because of an interim order from the Supreme Court.
Ratings agency ICRA in its Sep. 14 note said that the company’s “asset quality profile remains superior to its peers' at present, on the back of its prudent underwriting norms and robust collection and recovery systems.”
In a separate Nov. 13 note, Axis Securities said that Sundaram Finance’s conservative approach in building its loan book during uncertain times helped it in controlling its asset quality stress, even as the company’s overall growth was affected.
“We believe SUF’s (Sundaram Finance’s) well diversified secured loan mix with strong underwriting practices and comfortable capital position (capital adequacy ratio at 19%) will support its performance despite sectoral headwinds,” it said.
As the business is slowly starting to re-build, the focus is very much on protecting the asset quality. Of course, these are difficult times so not everything will be perfect, but we are ensuring we stay best in class.TT Srinivasaraghavan, MD, Sundaram Finance
The New Order
As Srinivasaraghavan steps down on April 1, he hands over charge to Rajiv Lochan, presently director for strategy at the company. Lochan, who takes over on April 1, has long experience in the financial sector including at McKinsey & Co.
K Ramakrishnan, senior managing director – strategic relationships at Chennai-based Spark Capital Advisors (India) Pvt., who has known Sundaram Finance for several decades, does not expect the transition to lead to any material change in the company’s direction.
. “…as a group they may be reluctant to make any drastic diversification beyond the bastion of secured asset backed lending. I believe they would accept growing at a slower pace rather than growing unprofitably,” he says.
“In the future too, I reckon, that they would continue to stick to these principles that have held it in good stead, as focus on stability, quality and stakeholder relationship is what sets Sundaram Finance apart from the other NBFCs in the country,” Ramakrishnan adds.
As he continues on the board of the company, Srinivasaraghavan expects Sundaram Finance to continue playing to its strengths. "There are a number of things we do well, and I think we should try and get better and better at those things. Be the best we can," he says.
Note: This story has been corrected to reflect Rajiv Lochan’s prior experience. The error is regretted.