R Thyagarajan is possibly one of the most unique financiers globally, largely due to his multibillion-dollar business ventures.
He established wealth by offering loans to people with low incomes, a group often overlooked by traditional banks. He compensated his employees with wages lower than the market average, even though he believed they were still being paid excessively. He distributed nearly all his riches among a few staff members, finding satisfaction in his modest home and a $5,000 car.
R Thyagarajan is possibly one of the most distinct financiers globally, largely due to his multibillion-dollar business, the Shriram Group. This business has not only survived but also flourished in an industry where many others have stumbled worldwide.
A trailblazer in offering loans to India’s underserved population for vehicles like trucks and tractors, Thyagarajan transformed Shriram into a conglomerate that provides employment to 108,000 individuals across various sectors including insurance and stockbroking. The primary firm within the group witnessed a surge in its stock value, hitting a historic peak in July. The increase of over 35% this year outpaced India’s benchmark stock index by a factor of four.
At the age of 86 and now settled into an advisory capacity, Thyagarajan shared in a rare interview with Bloomberg News that he ventured into this field to demonstrate that lending to individuals lacking credit histories or stable incomes isn’t as precarious as perceived. He asserts that his business approach and his decision to gift a stake in Shriram, presently valued at over $750 million, are not unconventional.
“I lean toward leftist ideals,” RT, a moniker by which he is recognized, expressed in Chennai, the southern Indian city where he established the group in 1974. He clarified, “I never had an eagerness to enhance the lives of those who are already well-off.” Rather, he emphasized, “I aimed to alleviate the hardships faced by individuals grappling with challenges.”
Thyagarajan’s journey underscores unexplored possibilities in the world’s most populous nation, as a larger portion of its 1.4 billion inhabitants aspire to transition into an expanding middle class. Despite the endeavors of Prime Minister Narendra Modi’s administration to widen accessibility to India’s financial services, approximately one-fourth of the nation still lacks access to the formal financial framework. Additionally, about a third of those holding bank accounts seldom put them to use, as reported by the World Bank.
According to Thyagarajan, providing loans to the economically disadvantaged embodies a form of socialism. However, by presenting a more economical alternative compared to the punitive rates endured by the unbanked, he aimed to illustrate the viability of a secure and lucrative business model. Through this endeavor, he has influenced other enterprises to reduce borrowing expenses.
Today, this sector has grown significantly. India is host to roughly 9,400 “shadow banks,” primarily offering financial services to individuals overlooked by traditional lenders.
Srinivas Balasubramanian, senior partner and head of corporate finance at KPMG India, described “RT as an exception.” He added, “Only a few individuals have managed to maintain and thrive for such an extensive period.”
Building An Empire
Without a doubt, Thyagarajan emerges as a standout figure within an industry riddled with ethical dilemmas and susceptible to cycles of prosperity and downturns—occasionally leading to crises that jeopardize the financial system. A prominent example is the subprime mortgage crisis that unfolded in the United States. More recently, the downfall of a non-bank lender in Mexico last year resulted in substantial losses for investors.
Forming a lending enterprise inspired by socialist principles might appear to be an unconventional career path for an individual who grew up amidst domestic help in an affluent agricultural family in Tamil Nadu state. However, Thyagarajan asserted that he has always possessed an analytical mindset driven by a commitment to equality.
He pursued studies in mathematics, first at the undergraduate and later at the master’s level in Chennai. This was followed by a three-year stint at the esteemed Indian Statistical Institute in Kolkata.
In 1961, he became a part of New India Assurance Co., one of India’s prominent insurers, initiating a two-decade-long chapter in the finance sector as an employee of the company. During this period, he engaged with Vysya Bank, a regional financial institution, and JB Boda & Co., a reinsurance brokerage.
On his journey, individuals from Chennai approached him seeking funds to purchase second-hand trucks, and he extended loans to them using his inheritance. Gradually, this side endeavor transformed into the principal focus of his life. At the age of 37, he, along with friends and relatives, established Shriram Chits.
Individuals without access to formal banking often rely on “chit funds,” a collective savings scheme where each participant contributes a fixed sum every month. The accumulated amount is distributed to a different investor each month until everyone has received a share. These funds are utilized for purposes such as agricultural equipment, school fees, or significant purchases.
As time passed, Thyagarajan went on to establish additional companies, leading Shriram to evolve into a conglomerate comprising over 30 entities.
In the realm of truck financing, Thyagarajan observed people encountering exorbitant interest rates, sometimes as high as 80%, due to banks refusing to engage with them. He arrived at the conclusion that the prevailing perception was misguided.
“People used to believe that high interest rates equated to high lending risks,” he remarked. “I came to realize that the risk was minimal.”
This revelation would shape his life’s course. He made the decision to provide loans at rates that, while still considerably high on a global scale, were more affordable than other alternatives. “Interest rates dropped from 30% to 35% down to 17% to 18%,” he explained.
Thyagarajan clarified that his approach wasn’t driven by charitable motives; instead, it was infused with two fundamental capitalist principles. Firstly, he valued the significance of private-sector entrepreneurship, and secondly, he had confidence in market principles.
This philosophy has yielded positive outcomes: Shriram’s records reveal that over 98% of dues are collected promptly. The local unit of S&P Ratings notes that their lending decisions are sound.
On a broader scale, entities such as Shriram play a crucial role in supporting India’s recently banked population. They underwrite loans and other financial products that often necessitate skill sets not commonly found within banks, as per Bindu Ananth, co-founder of Dvara Holdings, an organization supporting companies that drive financial inclusion.
“Facilitating the inclusion of India’s disadvantaged and marginalized individuals within the formal financial system is vital for fostering sustainable economic growth,” Ananth stated.
At present, the Shriram Group caters to approximately 23 million clients.
Shriram Finance Ltd., the group’s primary entity, holds a market valuation of around $8.5 billion and generated roughly $200 million in earnings during the quarter concluding in June. Out of the 34 analysts following the stock, only one suggests considering selling it.
A Different Approach
Lending to those with limited financial resources can be a complex matter. High interest rates frequently propel vulnerable borrowers further into debt. In India, loan sharks sometimes resort to aggressive debt collection tactics. Notably, consumer protection standards in the microfinance sector remain deficient, despite its focus on aiding the economically disadvantaged.
When queried about the distinctiveness of Shriram’s approach, Thyagarajan explained that the group doesn’t consider credit scores, as many clients aren’t integrated into the formal financial framework. Instead, the team relies on recommendations from existing customers.
Internally, the company adopts an exceptional compensation strategy. Thyagarajan has consistently believed that employees receive excessive payment, despite receiving wages lower than market norms. Junior staff members often earn approximately 30% less than their counterparts, while senior executives face discounts of up to 50%.
“We provide them with an amount that ensures their reasonable satisfaction, not excessive elation,” Thyagarajan explained. “It’s crucial not to foster a habit of comparing oneself to others in their surroundings, which often leads to unhappiness.”
He strongly emphasizes that employees are, for the most part, content with this arrangement. Despite receiving lower compensation, staff members mentioned in interviews that their roles offer more flexibility compared to similar companies.
“I highly value the tranquility, stability, and comfort that this job affords,” stated Amol Bowlekar, a branch manager at Shriram Finance in Mumbai. He further noted that he declined several higher-paying job offers due to the appealing aspects of his current role. “The group’s ethos is more compassionate. There isn’t an excessive burden of performance pressure.”
A significant aspect of what employees deem equitable about Shriram’s approach is Thyagarajan’s personal willingness to reside amongst the general population. For an extended period, he drove a Hyundai hatchback. Furthermore, he chooses not to possess a mobile phone, as he views it as a source of distraction.
The magnate distributed all his stock holdings in Shriram enterprises to a group of employees, transferring them to the Shriram Ownership Trust, which was established in 2006. This perpetual trust has 44 group executives as beneficiaries, with departing executives taking substantial sums of money upon retirement.
Insiders familiar with the matter revealed that the collective worth of the trust’s holdings has surged, surpassing $750 million, and this value has multiplied considerably in recent times. The sources requested anonymity due to the confidential nature of the information.
During a three-hour conversation with Bloomberg, Thyagarajan expressed that he did not require the money at that time, nor does he now. He notably gravitates towards simple pursuits, dedicating his time to listening to classical music for hours and immersing himself in reading Western business publications.
In December, Shriram Transport Finance Co. integrated Shriram Capital Ltd. and Shriram City Union Finance Ltd. through an exchange of shares. Shriram Transport specializes in financing trucks, while Shriram City Union provides funds for the acquisition of consumer goods and motorcycles.
Thyagarajan points out that this strategy had been in the works for several years, although he wasn’t directly involved in the intricacies. Although he no longer holds a formal role within the company, senior managers brief him and seek his advice every two weeks.
“I possess the demeanor of a consultant,” Thyagarajan explains. “I tend to view things slightly differently. It doesn’t bother me if individuals don’t embrace my perspective and opt for their own outlook. Furthermore, in instances where it transpires that I was correct and they weren’t, which tends to be the case most of the time, I can engage with them later and humorously say ‘I told you so.'”
According to Kranthi Bathini, an equity strategist at WealthMills Securities Pvt. in Mumbai, Shriram’s strength also functions as its vulnerability. A significant portion of their customers fall into the non-prime category, which implies that there’s potential for asset quality and profitability to decline at any juncture.
Bathini also highlights the risk associated with key individuals, suggesting that in the presence of “cultish” founders like Thyagarajan, it can be challenging for anyone else to assume a leadership role.
Lastly, Bathini indicates that adopting a left-wing mindset may not always be conducive to shareholder returns, even though they have fared well thus far.
Nevertheless, Thyagarajan’s proven track record is difficult to dispute. However, he downplays the notion that his lifestyle is characterized by frugality, mentioning that he occasionally indulges in trips to tiger sanctuaries with his family.
Interestingly, his sole regret doesn’t pertain to his decision to give away his wealth, but rather how he executed it. Had he foreseen the impressive profitability that Shriram would achieve and the substantial surge in stock value, he would have distributed the gains more widely.
“I hadn’t anticipated that such a substantial amount of money would be distributed to only a few individuals,” he reflects. “I’m not particularly pleased about this aspect. Nonetheless, it’s acceptable. I’m not excessively disheartened either.”
News Source: NDTV