The Hindu Business Line : Onlending to small financiers clicks well for STFC

STFC is only replicating a model developed by Citicorp and UTI Bank which have been making funds available to STFC under a deal that specified formulae for risk and reward sharing.

Chennai , March 24

It began as an experiment this year. And the results have been encouraging.

Six months ago, Shriram Transport Finance Company (STFC) gave a proposal to a bunch of small-scale financiers: streamline accounting systems and the company will make funds available for on-lending. Some 30 financiers took the offer, adding about Rs 50 crore to STFC's loan book.

Satisfied with the outcome of the effort, the STFC Managing Director, Mr R. Sridhar, now plans to similarly network 300-odd financiers across the country, through whom he expects additional loan disbursements of Rs 1,500 crore in 2006-07.

STFC is only replicating a model developed by Citicorp and UTI Bank. These institutions had little expertise in lending for second-hand truck purchases - where margins are good and competition sparse - an area that STFC specialised in but was hungry for funds.

Over the last four years, Citicorp and UTI Bank have been making funds available to STFC under an agreement that specified formulae for risk and reward sharing.

Now STFC wants to extend this. There is a large constituency of vehicle purchasers who are funded by `informal financiers'. Typically, these financiers have their own systems of trust-based lending and dealing with delinquencies through community pressure.

However, the financiers are themselves constrained by lack of access to institutional finance. STFC sees an opportunity here. According to Mr Sridhar, given adequate funds these financiers can easily do business of Rs 5 crore a year.

Mr Uttam Kankaria, who runs a firm called Easy Finance, says that his business has more than doubled after a tie-up with STFC. "Normally we used to do about Rs 15 lakh a month, now we are doing Rs 50 lakh," he told Business Line.

"The market is there," added Mr Rekh Dhoka, another Chennai-based financier. "Money is the raw material for us and with more money we can expand faster."

Mr Sridhar also said that under the tie-up the risk of defaults is on the financiers. He envisages interest rates to the borrowers coming down because of greater institutional funds getting into the system.