Recasting India (10 page)

“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.”

With more than 50,000 customers and assets of Rs 1,045 crores under management, Shriram Chits is a small but significant part of the Shriram empire today—like the venerable uncle in the family still capable of giving sagacious advice. One of its key strengths is that it can be held up as a rare clean company in a world bombarded with headlines screaming about chit fund scams. “Why were we never under political pressure? You will find the answer too simplistic but it's the truth—because I never wanted to get rich,” says Thyagarajan. “Usually corruption in this happens when you go to ask for favors for either land or regulations or some diversion that will bring quick money. We have never cared and we have stayed under the radar. So no one bothered us.”

Duggal says, “We would never give anything illegal and we want nothing in return—so I don't think there was ever any point of approaching us. We are just too conservative.”

But that's not what you will hear talking to Shriram customers. Most of them say the reason they do business with the group is because it is not that conservative.

Narendra Salaskar, a 59-year-old trucker from Maharashtra, has bought and sold more than 40 trucks since 1987; each one has been purchased with a Shriram loan. “When I started, the banks didn't trust people like me to give money to buy one truck,” says Salaskar. “Now that I own several trucks, I could today go to a bank where I would get 3 or 4 percent less interest, but it would take a month or 45 days to get the loan. It takes about 48 hours for me to get a loan in Shriram. In our business, the timing of the loan is key. If I don't get the money on time, I am not on the road. And every minute that I am not on the road, I lose money.”

Even Shriram competitor Sundaram Finance has praise for what the company is able to do in vehicle finance. “Mr. Thyagarajan has run a campaign to bring down the time taken to sanction loans and in vehicle insurance claims that has forced everyone to bring down the time,” says Srinivasa Acharya of Sundaram BNP Paribas Home Finance.

“People have been trying to emulate his depth in connecting with the low-income truck drivers to enter his business for a long time, but no one has succeeded in this the way he has,” says Acharya, who worked in the vehicle finance business of Sundaram for 30 years before joining home finance.

Shriram Transport has a vehicle insurance turnaround time of about two weeks, lower by half than the industry average. Salaskar says one of the reasons he has stuck with Shriram is their turnaround time on insurance claims. With a net profit CAGR of more than 22 percent between 2009 and 2013, Shriram Transport is one of the biggest players in commercial vehicle finance and one of the most profitable with net profits of more than Rs 13,000 crores in 2013.

It's all a question of focus, explains Shriram truck finance head Revankar: “Everyone says they also do second-hand truck finance. The key word is ‘also.' For us, it is not an afterthought. That is the core of our business. That is why we pay so much attention on how swiftly we can clear an insurance payout for a client. A second-hand truck breaks down more than a new one and that's why our customers who take loans for second-hand trucks need faster delivery of insurance claims.”

Within the company, Thyagarajan has ensured loyalty in an innovative, simple way—he no longer owns the Shriram Group.

In 2006, Thyagarajan handed control to the Shriram Ownership Trust, where he and 14 other top managers have equal shares—a beneficial interest of 2.5 percent. The Ownership Trust also has 22 senior managers who get beneficial interest of 1 percent.

This is different from any stake or employee stock exchange. What this means is that the top 36 managers—at the level of a managing director or CEO—are entitled to money worth 2.5 percent (or 1 percent) of the value of the Shriram Group if they stay with the company until they are 60 years old, which is when they retire.

At that point, they get 20 percent of the 2.5 percent and the remaining 80 percent in equal sums every year for nine years. The 2.5 percent (or 1 percent) is based on the worth of the group when they hit 60 and does not vary as valuations do year on year.

In 2012, another trust, called the Shriram Enterprise Trust, was created with 25 percent equity transfer from the Ownership Trust to focus and invest in new enterprises. Six of the trustees are shared between the two trusts, and the Enterprise Trust has two additional members.

D. V. Ravi, managing director at Shriram Capital, says he knew that the wealth of the company would be divided equitably from the time he joined as a management trainee in 1992. “It is part of the process of entering Shriram; you get to know that if you work hard, the wealth is as much yours as the founder's. So while the trust creation only happened in 2006, we were all sure that it was going to happen for years. RT never left anyone in any doubt about this. The perpetual trust system is also our way of ensuring a perpetual leadership pipeline and a consensus-driven system.”

How much was R. Thyagarajan worth when he voluntarily gave up control? He won't tell. “In my mind, I was worth nothing and my value went up to 2.5 percent,” he says laughingly. This is not false modesty. Most of my two-hour process of trying to interview him was spent in his insisting roughly every 15 minutes that he didn't want me to write about his life but only about the company and its people. To dissuade me from focusing on him, he even said, “What if I give you wrong information and later on, in another interview, I tell a different story of my life? Who knows, it might happen. Best to avoid talking about me.”

But I learned from Shriram insiders that the group was worth around Rs 20,000 crores in 2006 and the founder owned a one-third share. In one stroke that came down to 2.5 percent, and Thyagarajan became as much an owner of Shriram as many of his employees.

A rule was also created that none of the family members of the Ownership Trust would ever join any of the core financial services businesses. Even Thyagarajan's two sons have been allowed to work only in the nonfinancial arm of the Shriram Group.

Chairman Duggal says it is Thyagarajan's willingness to give up power and money that has built trust for the group. “It is difficult for analysts to figure the value of what RT has done,” says Duggal. “If you look at the top management, any of them can get a job somewhere else and make more money but the sense of ownership is unique in Shriram.” One top manager says at the managing director level, the salary at Shriram may be only around 30 to 40 percent of that paid by competitors, but people feel that this is their own company “for the simple reason that RT has clearly shown that he doesn't want to cling to power or ownership.”