The Shriram Finance playbook: How a steady focus on the semi-urban and rural areas is fuelling its AUM boom

YEARS BACK, in a meeting with Shriram Group founder Ramamurthy Thyagarajan, Y.S. Chakravarti, then a rising star, said his business was growing rapidly and would double in a year. Thyagarajan, who had stepped down from an active role, dampened Chakravarti’s enthusiasm: “Anything that grows too quickly is often considered a weed, not plant.”

Since then, Chakravarti, 61, who was later appointed MD and CEO of Shriram Finance Ltd. (SFL), the flagship created following the merger of Shriram City Union Finance and Shriram Capital with Shriram Transport Finance in December 2022, has never chased abnormal growth. He has a modest target — a 15% annual growth in AUM (assets under management) that will double the AUM to ₹5.12 lakh crore over the next five years.

Chakravarti says, “We are not pursuing aggressive growth rates of 30-40%. The focus is on sustainable and manageable expansion.”

Umesh Revankar, vice chairman, says SFL has outperformed the guidance it issued on all parameters. For one, against a 15% AUM growth guidance after the merger, it delivered 20% in the first two years.

“We gave a net interest margin target of 8.5%. We are at 8.8% now. We gave a guidance of 2.5% on credit cost but achieved a moderate 2%,” says Revankar.

SFL’s consolidated profit jumped nearly 30% to ₹7,398.89 crore in FY24 following the merger. The profit of the first three quarters of FY25 added up to ₹7,432.55 crore, more than the full FY24’s figure.

The merger allowed SFL to distribute the products that were sold separately earlier. Before the merger, gold and SME loans were offered only in the 500-600 branches of Shriram City Union Finance. Now, all the 1,000-plus branches, including those in transport lending, offer gold and SME loans.

“We are adding 200 branches in this financial year. There will be 700 added in three years. We are converting the 750 rural centres into branches,” says Revankar.

In December 2024, SFL had an AUM of ₹2.54 lakh crore, 3,196 branches and 79,405 employees who service 94.36 lakh customers.

Most mergers lead to job cuts. But Shriram needs more employees: It added 23,000 in the last two years.

S. Sunder, joint managing director, says SCUF and STFC had about 57,000 employees when they merged. “Given the hiring momentum of 700-800 employees per month, we are now close to 80,000,” he says. The recruitments are largely for the new businesses.

What Shriram will do…

In the Shriram Group, what must and must not be done begins and ends with interpretations of Thyagarajan, 88. The man who turned a chit fund into a thriving group with assets worth ₹2.5 lakh crore leads a simple life, commuting at least once a week in his trusted Maruti Swift from his middle-class house in T. Nagar to his office in Burkit.

“An enterprise is born out of a societal need, and profits should only be an indicator of operational efficiency and not be its prime objective,” says Thyagarajan. He owns no stake in group companies: He handed over control to the Shriram Ownership Trust, a perpetual trust that senior officials control.

SFL’s main customers are truck drivers and small entrepreneurs, categories ignored by banks and non-banking finance companies (NBFCs), and 68% of SFL’s business comes from semi-urban and rural areas. It has branches in urban markets but sees demand and growth in underserved areas.

As of December 31, 2024, the group, which includes several insurance companies and a mutual fund, had over 32.37 million customers, 1,70,500 people in marketing, and 1,16,000 employees across 4,650 branches.

The Shriram Group has an AUM of ₹3,21,040 crore. Bajaj Finance, the leader in consumer finance, reported an AUM of ₹3,98,043 crore (which includes that of its housing subsidiary) on December 31, 2024. Mahindra Finance, which lends to SMEs and for the purchase of vehicles, reported an AUM of ₹82,770 crore.

SFL, part of the Nifty 50 index, finances commercial and passenger vehicles, tractors and farm equipment and lends to small and medium companies. It also offers gold, personal and working capital loans.

Commercial vehicle finance accounts for 60.3% of its lending. Passenger vehicles come in second with 17%; SME (11.5%), two-wheeler (5.5%), and gold (2.6%) are emerging segments.

The group has a mutual fund business run by Shriram Asset Management Company Ltd. (SAMC), once a dormant business privately owned by the promoters. It also has general and life insurance companies in joint venture with South African insurance major Sanlam Ltd.

Shriram Life Insurance has over 13 lakh in-force policyholders and has been profitable since its formation. Shriram General Insurance manages assets worth ₹13,003 crore with over 62 lakh live policies. It is among the general insurers with the highest solvency, returning around 10 times the capital invested as dividends.

After the merger, SFL is cross-selling products, especially insurance, mutual funds, and SME loans, to vehicle loan borrowers. “We see significant potential in cross-selling because of a large deposit base that crossed ₹50,000 crore. Many of our depositors are likely investing in other financial products as well. Financially stable customers allocate 15–25% of their investments to fixed deposits, while the rest is distributed across mutual funds, equities, or physical assets like gold,” says Revankar.

Going deep into the segments in which it operates is another strategy. Whenever Revankar travels to branches, he meets field officers and customers to understand the trends. Revankar says the portfolio of working capital loans was built from these insights. SFL offers working capital loans for tyre replacement, toll/tax payments, vehicle repair, and fuel payments.

“When a vehicle is damaged, customers often have to invest their money and take loans to cover repair costs. Another area we identified was tyre replacement. Tyres are expensive, costing around ₹40,000–45,000 a pair. So, we introduced a line of credit that allows them to spread the cost over 6–9 months,” he says.

SFL does the same with insurance premiums. It helps SMEs with supply chain financing based on their inventory. “Whatever goods are in transit, we can provide funding until the stock is cleared and the customer pays,” says Revankar. SFL wants to grow the SME business by around 20%.

Its branches are installing strong rooms to support gold loans. “Gold is something you need to be near to your home. I feel there is enough business to get from the unorganised market. So there is nothing that you need to compete with standalone gold financing companies like Muthoot or Manappuram,” Revankar says.

Motilal Oswal analysts say SFL offers a well-diversified product suite and is a strong player across all its product segments. “It has demonstrated strong execution capabilities and asset quality resilience while navigating multiple credit and economic cycles,” according to the brokerage.

…What it does not want to do

About six months into the job, in 1991, Chakravarti got blindsided. A customer in Nellore took an SME loan of ₹2 lakh, which was quite a large amount back then. He was running a medical shop and a restaurant. Chakravarti visited him, saw that both businesses were doing well, and approved the chit. But within three months, the customer defaulted and vanished.

Chakravarti’s boss came from Hyderabad for a review and pointed out that he should have done a better background check. “I had overlooked the customer’s liabilities. He had borrowed from multiple sources,” he says. The advice from his boss was for greater scrutiny in the future.

Chakravarti says the group allows its employees to make mistakes. “It is the cost of learning. However, it is their responsibility to ensure that the mistake does not become too expensive,” he says.

SFL runs a people-centric business that depends on a growing network of branches, staff and collection agents, so it has no plan to go fully digital. “We cannot operate solely as a digital company without physical interaction. Startups can afford to function that way,” Revankar says.

SFL has the Shriram One app that offers all its products, but its customers are largely truck drivers and small business owners from rural India who would rather meet a person than click on an app.

SFL finds gold loans promising because of the much smaller ticket size and short tenure, mostly three to six months.

The asset categories it added after the merger, such as two-wheeler loans, follow a similar pattern. The tenure is around one and a half years. The lending rates for these loans are higher than those for small commercial vehicle loans. Similarly, SME loans involve small ticket sizes, with a tenor of only three to five years, just like commercial vehicle financing.

SFL steers away from products with a large ticket size and long tenure (Sometimes, this is unavoidable in commercial vehicles, particularly heavy commercial vehicles). SFL is comfortable with a lower ticket size and generally avoids anything over ₹20 lakh, at which a new heavy commercial vehicle (HCV) starts.

Parag Sharma, MD & CFO, says the group shed its housing loans business primarily because of the ticket size and long tenure. “We needed capital. The company was growing very fast, and in the housing business, loan tenures are typically very long — 15 to 20 years. However, liability sources for such long tenures are limited,” says Sharma.

The Shriram Group infused fresh capital into the housing finance company almost every year, but investors expected quick returns. In May 2024, Shriram sold the subsidiary to Warburg Pincus for ₹4,630 crore.

Nor is SFL keen to lend to the affluent: it prefers small families in rural and semi-urban areas.

Sundar says expanding in rural areas is economical. “We assign a field executive to a location, ask them to take residence, and operate from a small setup. We will establish a full-fledged branch once we see viability and adequate customer demand,” says Sunder.

SFL has around 650 rural centres, which will be converted into branches as the volume of business increases.

The group exited consumer durables financing early on, leaving the field to Bajaj Finance. Revankar has no qualms about accepting that Bajaj did a great job. “We have to appreciate them. They understood the challenges involved in the consumer durables business,” he says.

Becoming a bank is not SFL’s priority: a bank’s cost of operations is much higher than that of an NBFC. A senior manager says, “As an NBFC, we can reach customers and lend faster. I can do so many things now that I could not do as a bank. Until and unless the demand comes from the regulator, we will continue similarly.”

A merger that’s working

The Shriram Group tried out multiple mergers before unifying the business under SFL. The idea back then was to have four NBFCs operating in four metro cities — Shriram Investment in Chennai, Shriram Transport Finance in Mumbai, Shriram Overseas Finance in Delhi, and Shriram City Finance in Kolkata. All four were in vehicle financing.

Private equity investors ChrysCapital and TPG suggested consolidating the NBFCs. So Shriram Investments and Shriram Overseas Finance merged into STFC in 2006 and relocated the headquarters of SCUF from Kolkata to Chennai. STFC focused on vehicle financing, and SCUF did two-wheeler and gold loans and sold other retail financial products. The structure remained the same for the next 15-16 years.

Billionaire Ajay Piramal’s Piramal Enterprises began investing in Shriram in May 2013 by acquiring about 9.96% STFC from the open market. In April 2014, Piramal bought stakes in Shriram Capital, the holding entity for all Shriram Group companies and SCUF. Piramal intended to merge Shriram’s holding company with Piramal Enterprises to create a financial services powerhouse.

The planned merger fell through, and Piramal sold its 10% stake in STFC for around ₹2,300 crore in 2023.

“They partnered with all the entities in the Shriram Group. However, there was a cultural mismatch,” says Sunder. Though it exited SFL, Piramal still holds small stakes in Shriram Life Insurance and Shriram General Insurance.

A merger of Shriram Capital and IDFC Bank Ltd was proposed in July 2017 to create a $10 billion financial services enterprise, but it fell through as the two entities could not agree on the swap ratio.

One of the key factors behind the latest merger was that it would help diversify assets, which could give it a rating upgrade. The merger is still a work in progress. “If we get a rating upgrade, cost will come down by at least 50 basis points,” he says.

SFL has since secured funding from many development institutions, such as the US International Development Finance Corporation. Retail deposits account for a quarter of its total liabilities, and offshore borrowing only 19%. It has raised funds through masala bonds, loans, and regular bonds.

SFL can be hurt by interest rate volatility. It faced such situations during the global financial crisis in 2008, the 2018 collapse of IL&FS, then a major NBFC, and the Covid-19 lockdown in 2020.

SFL’s total liabilities amount to more than ₹2 lakh crore. “We maintain excess liquidity of around ₹18,000 crore to meet three months’ liabilities,” says the CFO.

However, since it borrows at 9% and invests at 6.5-7 %, it incurs a 2-2.5 percentage points loss for keeping the hard cash. But then, the excess liquidity helps absorb sudden shocks.

The bets seem to be paying off for Shriram, at least for now.