Recasting India

by Hindol Sengupta

  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.”

  He also has nothing left to do, says Thyagarajan. “I have no ambition. I never did. I don’t even today. The company will fulfill its own destiny and go where my colleagues take it.” When pushed, he says he wants to start an institute dedicated to mathematics research, another devoted to the music of renowned maestro Lalgudi Jayaraman and a think tank to solve bureaucratic red tape. He is personally writing a simplified version of India’s tax code. “But,” he says, “it will be ridiculous if you write all this. You are really pushing me and that is why I am answering. Otherwise no one wants to know about me.”

  RETICENCE IS A TRAIT THAT LENDER BINDU ANANTH SHARES WITH RT. The 37-year-old also hates wasting time, so she tries to get to airports at the last possible moment to board flights with minimum delay.

  The only place where she is patient, she says, is her IFMR Trust. Six years ago, when she started the private trust (profits don’t go to owners, or in this case, trustees, but are reinvested in the company), she had a novel idea. If Muhammad Yunus, the Nobel laureate microfinance expert, defined his model as “banker to the poor,” Ananth positioned hers as “wealth manager to the poor.”

  Is there a distinction? Ananth thinks so—and on that idea she has gathered 445,000 borrowers across the states of Odisha, Uttarakhand and Tamil Nadu and in 2013 lent Rs 400 crores.

  What differentiates Ananth from other microfinance lenders, many of who are much bigger than IFMR, is her philosophy. The heart of her lending model is intensive dat
a gathering and analysis. The usual lender basically looks at some rough criteria, what Ananth calls “colour of credit cards-style” credit determination, or what your local bank would call KYC (Know Your Customer). The RBI defines KYC as a two-part process—identity and address.

  Ananth says in her version of lending, to some of the poorest people in the country or to some with volatile income, like a farmer whose earnings might be concentrated in one part of the year (with the sale of crops) while there might not be much intake at other times, this kind of data is not quite enough.

  “We seek to know almost everything about the customer. How many people are there in their family? What do those people do? What kind of assets do they have? What kind of lifestyle do they lead? What do they spend their money on? Who spends the most money in the household? At what periodicity is the money spent? The list is exhaustive. This data collection is the core of what we do,” says Ananth. The data sheet also has the age and occupation of family members, a household balance sheet, including all assets (physical and financial) and liabilities (formal and informal), a household income and expenditure statement and goals for the household, including retirement.

  The data is then fed into software that formulates a finance or “wealth” plan for the client. Ananth, an alumna of the Indian Institute of Rural Management and Harvard’s Kennedy School of Government, says her work is about training her field staff to sell a bouquet of services, not just give a loan. The idea is to look for clients who need services rather than for borrowers in a particular geographical area. The basis of most banking is geography. Banks target areas where they can tap into a large number of potential customers who have the ability to pay for their services and don’t worry too much about the minority who cannot.

  Microfinance institutions often do the reverse. Theirs is an access pitch, so to speak. They reach out to customers who are often very poor and live in very remote areas, and they charge high interest rates for this service.

  IFMR’s pitch is entirely different. The idea is to bring a branch to the clients and ensure that a client cannot only be given a loan but also sold insurance and pension schemes—whatever they need. The rate IFMR charges, around 12 percent, is roughly a third or at best half of what traditional microfinance lenders charge in India.

  “The basis of most banking is geography, and we want to break that approach,” says Ananth. “Our customers should feel that they are getting all the services through one representative who is a personification of a bank branch.”

  The finance scholar David Roodman,4 a microfinance expert, has written that in Ananth’s vision, IFMR is not a bank, a mutual fund or an insurance company, but acts as an “agent of all three.” He calls it an “institutional platypus … a taxpaying not-for-profit.”

  Anil Singh Rawat is an IFMR client in a tiny village on the northern hills of Uttarkhand. He runs a roadside restaurant there, what is known as a dhaba. “There are very few banks here,” he says, “and they take too much time to clear a loan. These people [IFMR sales representatives] sit and talk to us for a long time. I feel that they really want to know what I need.”

  In the early part of her career, Ananth worked with the Indian private banking giant ICICI Bank and was in many ways the protégé of Nachiket Mor, a former deputy managing director of the bank and chairman of its Foundation for Inclusive Growth. Mor was also the first chairman of IFMR and was instrumental in ICICI Bank’s being one of the primary early investors in Ananth’s ideas.

  Ananth says sometimes she is accused of not growing fast enough, but that is exactly what she does not want to do—grow too swiftly and give up her core mission. “Banking is most empowering when it is a very specifically targeted service, but more often than not, that is exactly what it is not. It is formulaic and has a one-size-fits-all approach, which I think is the problem.”

  In her world, a client does not just need money; a client needs financial security that could sometimes come with a strategic life insurance or pension investment for recurring income.

  It is a fascinating third approach to the duality of Indian finance—especially after the discrediting of the microfinance industry, including suicides in the state of Andhra Pradesh.

  It is a mindset shift from, as Ananth recently wrote, a “buyer beware” model to a “seller be sure” model.5 In a subtle way, she is shifting the onus onto herself and her organization to deliver the right package that is customized to the needs of her customers.

  What makes Ananth’s work fascinating is that usually such intricate customization, indeed even the term “wealth management,” comes at the higher end of private banking. Bindu Ananth is taking that to the grassroots.

  In their own way, both RT and Ananth are showing that lending to the poor can be a sustainable, socially useful and profitable business. Breaking many myths about the credit worthiness of the poor, their unique models are showing the way for financial inclusion in a country where the state could not, even if it wished to, ever provide monetary support to everyone who needs it.

  CHAPTER 4

  GUJARAT, RIOTS AND ECONOMICS

  There was a time when it was Zafar Sareshwala’s mission in life to get Narendra Modi arrested. Today there is perhaps no one among Indian Muslims who supports the former chief minister of the western state of Gujarat, and now, months after this piece was begun, the fifteenth prime minister of India, more emphatically than this scion of an old Ahmedabad business family. By his own count, he has “appeared hundreds of times in the press, both print and TV, clearing misconceptions about Modi.” A quick Google search throws 10,400 results for Zafar Sareshwala—nearly all of them have him playing this debunking role.1

  “I have always asked—what do you want? A better future or the idea of revenge, hate?” says Sareshwala, 50, owner of Parsoli Motors, the marquee BMW showroom in Ahmedabad, in addition to his family businesses in real estate and finance. “There is more to Modi than the riots.”

  This transformation has been neither simple nor swift (for Sareshwala it was taken a decade). But his change of heart is the biggest example of a slow change in perception driven by economics that was at the heart of Modi’s campaign to become prime minister of India. This change in perception, which was kickstarted by Muslim entrepreneurs in many cases, finally resulted in Modi’s Bharatiya Janata Party (BJP)—which won a historic victory in the 2014 elections—getting double the number of Muslim votes than it did in the 2009 election.2

  Do all Muslim voters or entrepreneurs supporting Modi believe, as Sareshwala does, that Modi cannot be held solely responsible for the 2002 riots in which around 1,000 people—three-quarters Muslims and the rest Hindus—died?3 Not quite. Some believe he could have done more. Some believe that he could have at least made a formal public apology, but they all have one thing in common—they believe that Modi is an agent of change, a man who can deliver growth and prosperity without favor or prejudice, and that his economic ideas will help everyone rise. That’s why, for entrepreneurs, economics has been the most critical bridge between Narendra Modi and Muslims. And as India’s economy slowed in the last few years, dropping to under 5 percent annual growth from a high of 9 percent, it made Modi’s promise of jobs and a better life—literally encapsulated in his campaign slogan acche din aane wale hain (good days are coming)—resonate even among skeptics. Economics and the promise of enterprise won over many Muslims. The Centre of the Study of Developing Societies has noted that in states like Uttar Pradesh and Bihar, where Muslims account for nearly a fifth of the population, the BJP won an unprecedented 93 parliamentary seats out of 120.

  There are many reasons for this—some that explain how Muslims inside Gujarat see Modi, which affects Muslims across the country. In Gujarat, 2013 marked the first decade in which the state’s biggest city, Ahmedabad, had seen no incident of Hindu-Muslim violence. That was a first in a state that has a history of communal bloodletting (1969, 1982, 1986, 1987, 1990, 1992, 1998, 1999, 2002) since independence. That coincided with more
and more Muslims voting for Modi. In 2012, Modi’s hat-trick win in Gujarat saw around 31 percent of Muslims voting for the BJP. Different calculations by separate researchers show that in those elections, in areas where Muslims were either an absolute majority or were most influential, the BJP won 8 of 12 such constituencies according to one assessment, and 11 of 18 according to another; this was in spite of the fact that in 2012, the Congress Party won 61 seats in Gujarat, its highest tally since 1990. In the 2013 civic elections, where the BJP won 47 of 76 municipalities (and the Congress Party won only nine with smaller parties like the BSP [Bahujan Samaj Party] and NCP [Nationalist Congress Party] winning more seats than the Congress Party), the BJP put up 24 Muslim candidates and 3 Hindu ones in Muslim-dominated Salaya in Jamnagar, a town in which 90 percent of the population is Muslim—and all 27 seats were swept by the party. Between 2009 and 2013 the BJP put up 297 Muslim candidates in various elections in Gujarat, of which 142 won.

  How did this come to pass? Not just through the peace dividend, though that was an important factor. Data shows that the average Muslim has done well in Gujarat. According to the Sachar Committee Report (2006), the most definitive report on the state of Muslims in India commissioned by the (then) Congress-ruled central government, monthly per capita income of Muslims in rural Gujarat was Rs 24 higher than that of rural Hindus. The average urban income of Gujarati Muslims beat the all-India average by Rs 71. The literacy rate among Muslims in the state was nearly 9 percent higher than the national average. Muslims account for about 9.1 percent of the population in Gujarat but have bought 18 percent of the two-wheelers (an important marker for development) during the last decade; about 11 percent of the employees of the Gujarat government are Muslim, and 10.6 percent of the state’s police officers are Muslim. In fact, Gujarat has more Muslims in police service compared to the percentage of Muslim population than does any other state. Compare this to states like Kerala, Assam and Bengal, some of the regions with the highest Muslim populations. The Muslim population of Kerala is around 24.7 percent and Muslims account for 11.6 percent of the police force. Around 25.2 percent of Bengalis are Muslims but the number in the police is 8.4 percent, and Assam has a Muslim population of 30.9 percent with the police force being 21.5 Muslim.