“But of course there are many vested interests at play and the chief minister is just one of them. There are many ways for pressure to be created.” Chief Minister Omar Abdullah was not available for comment on Drabu’s statements despite repeated efforts.
There might have been more to Drabu’s story than this. A fervent proponent of Kashmir’s autonomy, he was a fierce critic of RBI intervention in the state’s banking and indeed was seen as one of the main hurdles to the switch in lender-of-last-resort status. In 2013, when the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) of 2002 was due to be applied in Jammu and Kashmir (pending judicial clearance) through a government ordinance, Drabu wrote in protest that this would further erode Kashmir’s financial autonomy.
“I don’t think banks from outside Kashmir really understand what is needed in the state,” Drabu told me. “So this whole thing of them expanding is a little futile. They think in terms of loans on asset collateral. But what is the asset of the master wood carver? It is his hands. It is what is in his head. It requires a different risk-taking ability and analysis depending on social depth to do this kind of banking. So I never believed our autonomy should be given away.”
The current chairman, Ahmad, is more subtle. He echoes Drabu to say that his work happens unfettered: “You might not believe me but there is no day to day interference from the government in the bank. When we grow businesses in Kashmir, of course, it has a political impact too.”
But he adds that the bank needs new horizons. “Of course we will keep growing in the state, but if we don’t also grow outside, it will restrict us in the future. Growth in Kashmir is not infinite,” says Ahmad.
With business has come peace, or maybe it’s the other way around, but one thing is certain—there is an unprecedented entrepreneurial wave in Kashmir. “There is definitely a peace dividend,” says Mushtaq Ahmad, who is preparing to ensure that the bank remains the biggest beneficiary of that dividend.
As this book went to press, Kashmir suffered its worst floods in history, but it was heartening to see that its entrepreneurs led from the front in raising money and material for relief efforts.
CHAPTER 3
THE SOCIALIST MONEYLENDER
Ramamurthy Thyagarajan never really got along with his father. He says this fact helped him build a billion-dollar group.
“There was duty, but not much love and affection. In India, the expectation is obedience, but you see, I have never been an obedient person.”
Disobedience, says the 76-year-old, has helped him create one of India’s largest and most diversified non-banking financial corporations. His Shriram Group manages assets of $14.11 billion and clocked in revenues of $2.5 billion in FY (financial year) 12 with profits of $355 million.
But had RT—as everyone calls him—listened to his father, Ramamurthy, he would have become an officer of the Indian Administrative Service (IAS). “Instead I chose to join the Statistical Institute of India because I always loved mathematics. Then I took a job in New India Insurance. I came from a family which had around 300 acres of land, there was agricultural wealth, and a son becoming an insurance man was not very prestigious. My father was not pleased and till the end he did not trust me with the family money. He thought I would waste it, give it away. In a sense he was right—I am a socialist.”
A moneylender claiming to be socialist would be a laughable oxymoron, except that the Shriram Group has had more than 35 years of successful business in an industry that is plagued with graft in India. Among recent debacles, 60 people committed suicide after a public deposit scam of the Saradha Group1 in Bengal caused a loss of around $4 billion; and the Securities and Exchanges Board of India asked the Sahara Group, one of India’s biggest conglomerates, to refund more than Rs 24,000 crores (around $4 billion) due to illegalities in raising money by issuing bonds.
The nine financial companies in the Shriram Group gave exits to investments from 12 private equity (PE) funds from 2006 to 2013, with profits of $403 million.2 Four of those occurred between September 2012 and May 2013 (a period described as one of the toughest in 20 years of doing business in the country by PE funds), including serial entrepreneur Ajay Piramal’s $304 million purchase of TPG Capital’s 9.9 percent stake in Shriram Transport Finance Company, India’s largest moneylender to truckers. In the last decade, 16 PE funds have poured $675 million into Shriram Group companies, and many have had big-ticket exits. TPG earned seven times its investment, and in 2009 ChrysCapital got back a 12-fold return on investment when it sold its 17.26 percent investment in Shriram Transport Finance for around Rs 1,400 crores. Profits at Shriram Transport, the cash driver of the group, grew six times from Rs 107 crores in 2005 to Rs 612 crores in 2009 and then more than doubled to Rs 1,360 crores by the close of the financial year in March 2013. In fact Shriram Transport is one of the best-performing companies in Indian private equity in the last 15 years, right up there with telecom major Bharti, Axis Bank and biotech giant Biocon.
The group is also favored to win a banking license at some point in the future as India’s banking industry slowly opens to new players. And in April 2013, almost as a bonus, RT was awarded the Padma Bhushan, one of India’s highest civilian prizes.
If you talk to anyone within or outside Shriram who knows the company and the people who run it, the word “culture” pops up regularly. It is this culture that has kept Shriram afloat, unique and prospering.
After all, it was only about a decade ago that Shriram had its worst crisis. After India opened up its economy in 1991, tearing down 40 years of statist controls, there was a boom in non-banking financial companies (NBFCs). By the mid-1990s, India had more than 40,000 NBFCs, and the share of non-bank deposits in household sector savings in financial assets increased from 3.1 percent in 1980–1981 to 10.6 percent in 1995–1996.
By the end of 1996, though, one of the biggest NBFCs, the CRB Group of companies, collapsed. At its peak, the CRB Group had 133 subsidiaries raising money through public deposits, bonds and debentures and had raised Rs 900 crores between 1992 and 1995. By the end of 1996, its promoter Chain Roop Bhansali, the CRB of the group, was in prison. In 1997, a worried RBI issued guidelines for the stringent regulation of NBFCs. The Reserve Bank of India Act 1934 was amended in 1997, giving powers to the RBI to issue directions to companies and to their auditors, prohibit deposit acceptance and alienation of assets by companies and initiate action for the winding up of companies. The amendment also provided for compulsory registration with the RBI of all NBFCs, irrespective of their holding of public deposits, for commencing and carrying on the business of a non-banking financial company; minimum entry-point norms; maintenance of a portion of deposits in liquid assets; and creation of a reserve fund and the annual transfer to the fund of 20 percent of profit after tax but before dividend.
The new regulations shuttered many heavyweights in the industry, including 20th Century Finance, Alpic Finance, JVG Finance and others. For the Chennai-headquartered Shriram, the bombshell came when the RBI issued a press release in May 1998 warning investors against investing in fixed deposits of Shriram Investments, Shriram Transport Company and Shriram City Union Finance since none of the companies were rated by a credit-rating agency—one of the key new guidelines introduced in January that year.
It was a moment the leadership team at Shriram remembers very well. “We had deposits then of around Rs 700 crores. If there had been a run, we could have gotten wiped out,” says Ramchandran Shridhar, managing director and CEO of Shriram Capital, who was then regional head of Shriram Transport Finance in Bombay. (Sridhar resigned a few months after this interview.) “There were people who advised us to shut shop for a few days and wait for things to calm down. But RT was having none of that.”
Instead Thyagarajan asked every office to remain open. “He told us, ‘We have spent 20 years being close to our customers. What do we have to fear? Let us see if people lose faith in us; open every office; return
the money of anyone who asks,’ ” says Shridhar, who spent 28 years in the group. He had been spotted by Thyagarajan when he was working in the accounts department of the Krishna Gana Sabha, one of Chennai’s best-known cultural organizations, which promotes Carnatic music; RT encouraged him to take the chartered accountant examination. “ ‘If people think we are cheating them, they will exit.’ Very few did. Our customers stayed invested with us. Where companies were shutting down, we emerged stronger.”
There is a tinge of an urban legend to this story, and several senior management have their own takeaways from it. Akhila Srinivasan, managing director of the life insurance company, for instance, says it was one of the things that convinced her that the job was for life. “It is difficult to imagine the kind of fear and negativity that was in the market at that time. The panic was spreading. That RT remained firm and calm astonished me. Unless you have the inner strength of truth, you cannot be so calm when everything else around you is collapsing,” says Srinivasan.
Umesh Revankar, head of Shriram Transport Finance, believes Thyagarajan could stand his ground because he knew that the regulator—and the ratings agencies—did not really understand his business.
“Our core business in transport then, and now, is giving loans on second-hand trucks. The people we service cannot afford new trucks and yet getting more to buy a used truck transforms their lives. But they are termed high risk and therefore we could not get good ratings for our business in those years and struggled to raise money from banks,” says Revankar, whose business usually gets an AA or AA+ or stable rating these days. For most of the first 20 years of the Shriram Group’s history, its main source of revenue was public deposits as it struggled to raise money from banks or through equity investments.
“But the flip side of that was that barely anyone was catering to these clients and we had dealt with them successfully for years. RT knew that there was no reason for these people to desert him.”
Thyagarajan says his belief came from the way he had built his business. “If you simply look at my business history, you will see that first I started with truck finance, and I was clear that I was going to help the poorest in that category, so the focus was on used trucks; then came the chit fund [a community-driven savings plan that accepts savings at interest and provides loans for household and other expenses],3 again expanding the product portfolio to the rural poor that we were already serving. The chit fund had thousands of agents and so to maximize their use and provide more products, we started public deposits and then insurance. There has never been any grand vision, all a natural progression.
“We knew the people we serviced, we knew they needed help and we were giving them a service that others were not and we had not cheated anyone. As far as the regulator is concerned—well, sometimes, the regulator wakes up and punishes the good horses that have not bolted the stable since they cannot do anything about the horses that have bolted!”
Shriram’s turning point came soon afterward, in 1999, when in what was then a massive act of faith toward an NBFC, Citicorp, the non-banking finance arm of Citibank, partnered with Shriram to finance its truck-buying clients. A year later, Shriram Transport began securitizing its asset portfolio of old vehicles and sold assets worth Rs 100 crores to Citibank. This was followed by an even bigger shot in the arm when Citicorp picked up 14.9 percent in both Shriram Transport Finance and Shriram Investment (later merged into Shriram Transport Finance) in 2002.
During that period G. S. Sundararajan was managing director of Citibank’s small- and medium-enterprises business. He was poached four years ago by Thyagarajan to become managing director of Shriram Capital. “What is the core idea in raising money? Trust. No one can guarantee that an investment will work, so the entire business is a gamble on trust. What Shriram did not have before the Citi tie-ups was the trust of big investors,” says Sundararajan. “People were skeptical; the model seemed too different, too focused on high-risk clients. What we at Citi figured in those years was to look at it differently—that here was a company that had figured out a niche, a true bottom-of-the-pyramid approach, and had very deep linkages with the community they served.”
Shriram had earned that trust, but often not in the way that is easy for markets to understand. The reason is in part the life of Thyagarajan himself. Until about five years ago, the man who built a Rs 60,000 crore empire lived in a 1,500-square-foot apartment. He has never traveled business or first class and has never owned a car. Even today he rides to his downtown Chennai office on Burkit Road in a Wagon R (one of the cheapest Maruti cars in the market) or with one of his colleagues. His wife recently bought a car for herself with her household savings—it’s a Maruti Swift hatchback, barely a few thousand rupees more expensive than a Wagon R. He says his wife forced him to build a house—two floors, each of 1,500 square feet, one for the elderly couple and another for one of his two sons—because they had never owned a house. “ ‘We were getting old,’ she said,” says Thyagarajan, who has never carried a mobile phone. “ ‘We must have a roof over our heads.’ I was against it. I used to ask her, ‘What do you need a house for? As long as I am there, we are renting, and after me our Shriram people will take care of you.’ But she insisted.”
Most of his colleagues seem apologetic about every perceived extravagance. I met Shriram Capital chairman Arun Duggal, a Bank of America veteran, in his office in the Delhi city center of Connaught Place; it is a clean, functional place in a dusty building where the air conditioning is perhaps the most luxurious thing, but he seemed uncomfortable even with that. “Don’t go by this office,” was the first thing he told me. “This is not what Shriram is. We are far more modest. This I got because of my old habits from my banking days.”
In Chennai, in another understated, though newly built office that looks more like a small, quiet middle-class apartment block than a corporate tower, Akhila Srinivasan echoed Duggal. “You should have come to our old office, very basic. That’s Shriram. We don’t like too much show.”
The best example of this austerity is the Shriram “financial supermarket” in Chennai’s broken-down Sorrento Building. In an office that looks like a sweaty, fly-infested graveyard for government files, regional manager S. Anandha Natarajan clocks business of Rs 15 crores a month, giving personal loans and gold loans, taking public deposits, and operating chit funds with a gaggle of ancient computers, a skeletal staff, and nine grime-encrusted inverters. The only air conditioning is in Natarajan’s room. He explains the Shriram austerity best. “We were taught the moment we joined that the only way we could succeed is if we are close to the people who take money from us and give us money,” says Natarajan, who has been with Shriram Chits since 1997. “But when such a person comes to our office and sees all fancy stuff, air conditioning everywhere, very Westernized, everyone in uniform, they are turned off, and we immediately put a distance, a barrier between them and us. How can we take money from them and yet have a lifestyle so different from them? The founder taught us that in order to truly serve the community, we must live their lives, like them.”
Even the most ostentatious managers of Shriram agree it is a formula that works. Shridhar and a few others are the only top managers in Shriram who own luxury cars. He has a BMW in which he sometimes gives a lift to his founder, and he is looking to buy an Audi. “I like good cars. I like a good life and, to be honest, in my position, to push business I need business-class travel, maybe a club membership to meet the right people. Not everyone can be a socialist. We have to run business and sometimes do what that business needs,” says Shridhar. “But RT’s theory of keeping close to the customer has built this company. If it hadn’t been for RT’s setting an example, a huge part of the trust factor would be missing.”
In my conversation with Thyagarajan, he seemed amused that Shridhar has a BMW and laughed indulgently and said he was not judgmental. “People should do what they like with their money. But as far as the business is concerned, who are we to say that it is all ours? It
is as much the community’s.”
That’s way T. S. Sivaramakrishnan, the secretary of the All India Chit Fund Association, says whenever there is a non-banking financial scam, he holds up Thyagarajan’s example as a response. “Because Shriram Chits is the right example of how a chit fund should be managed and what a chit fund is. In India, any scandal happens—they call it a chit fund scam!” says Sivaramakrishnan, who runs his own chit fund, the Balussery Benefit Chit Fund. “In fact, most of the companies involved are not even chit funds and none of them are registered chit funds. All sorts of crooked Ponzi schemes are run in the name of chit funds.”
A chit fund works with a pool of usually low-income depositors who are often not eligible for bank credit. Each member of the chit pool puts in a fixed sum of money every month for a fixed period of months. Usually the number of members and the number of months of the chit pool are equal. Every month, the members bid for the total pooled amount minus a standard discount. In the auction, the member bidding the lowest gets the amount bid and the remaining sum is distributed equally among the pool. At an average, chit funds that are regulated by state laws give a return of 12 percent to 14 percent.
Most scams in India like the Saradha fraud work not like a chit but like a Ponzi scheme that promises very high returns (Saradha promised 22 percent to 25 percent); the returns are financed by an ever-expanding number of depositors, and the money from new depositors is used to pay back older customers. As soon as the depositor pipeline dries up, the scheme collapses.
At Shriram Chits, usual interest rates vary in the range of 8 to 9 percent and could go up to 14 percent but only for senior citizens participating in chits for 60 months. “We do not offer get-rich-quick schemes,” says Thyagarajan. “That is not our culture, that is not our business. Our business is to provide adequate finance to people in need. We like being conservative.”
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