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Center-Center-DelhiOn December 19, Umesh Revankar, executive vice-chairman of Shriram Finance, along with the founders of the Chennai-based Shriram Group, has set a record by bringing in the largest foreign direct investment into the domestic financial services sector by selling 20% stake, by way of preferential allotment of fresh equities, to the leading Japanese banking group Mitsubishi UFJ Financial Group (MUFG) for a whopping $4.4 billion or `39,618 crore. Revankar tells Benn Kochuveedan that the entry of MUFG Bank will significantly strengthen Shriram Finance’s capital base, improve its balance sheet resilience and provide long-term growth capital to support business expansion across all lending segments. Excerpts:
How will the partnership with Mitsubishi UFJ Bank change the working of the company? Hope you will continue to lead the company.
We will have a long-term vision because large capital is coming in, and they being a very good partner, you can think for the long-term. That's how I view it. Yes, of course, I will continue to lead the company. They have no demand for a change in leadership or something like that.
With this transaction, what will be the incremental core capital coming into the company? How much can it be used to leverage for fresh lending or business expansion?
We are getting $4.4 billion (Rs 39,618 crore) and you can leverage three times of that easily. That means I can lend more at much cheaper cost because the growth capital is coming at a much cheaper cost, and our balance-sheet is getting strengthened.
The core capital will increase from the present 20% to 31% with this capital infusion.
How much do you expect the cost of funds to come down by?
We expect the cost of funds to come down by around 50-60 bps in the first year and by 100 bps from the second year onwards.
Does that mean you can cut your lending rates a bit?
Of course. We will definitely pass on some benefit to our borrowers as our cost of funds come down. At the same time our margins will keep going up because of cheaper cost of funds. Even by lending at a marginally lower rate, there will not be any negative impact on the margin.
What is your current margin, and what is the margin you are looking at with the new capital?
Our net interest margin is around 8.3% now and it go up to around 9.5%.
You said you will pass on some of the benefits of cheaper funds to your customers by lowering the lending rate. If so, where do you see your loan book growing?
About 20%. We’ve revised our guidance by an additional 5 percentage points to 20% from the earlier guidance of 15% loan growth, with the incremental growth capital coming in.
Why do you think the Japanese, apart from the basic reasons like negative or no growth at all in the home market coupled with the still prevailing negative interest rates there and contrasting that with the fast-growing market here, come in hordes with bundles and bundles of cash to snap up our assets?
Capital is one thing that will go or move to a place where there is a better return. Ten years ago, everyone was going to China. Though MUFG Bank is already present in other Asian countries like Indonesia, Vietnam, Thailand and the Philippines, they have for long been looking at India. You may be aware that they have also been looking at other assets here. In fact, they have been scouting for an opportunity here for the past two-three years. Maybe, we matched their requirements.
More than that, culturally we feel that we are closer with them.
Will the Sriram group continue to be the promoters or are they cashing out?
No, no. They are not cashing out at all; it is only a preferential allotment of fresh shares. They are not selling their stakes at all. They remain the promoters?
And your role will continue to be the same?
Yes. No change, no such demands for leadership change. They have not sought any changes in the key management. They allow the management to run the business on its own because they believe that what we are doing is good.