Arguably one of the world's most idiosyncratic financier, Thyagarajan still doesn't own a mobile phone. Image Credit: Prashanth Vishwanathan/Bloomberg

Mumbai: He built a fortune lending to low-income borrowers shunned by banks. He paid staff below-market wages and thought they still earned too much. He gave away almost all his wealth to a handful of employees, content with his small house and a $5,000 car.

R Thyagarajan is arguably one of the world's most idiosyncratic financiers "- in no small part because his multibillion-dollar business, the Shriram Group, has thrived in an industry that tripped up countless others around the globe.

A pioneer in extending credit to India's poor for trucks, tractors and other vehicles, Thyagarajan built Shriram into a conglomerate that employs 108,000 people in everything from insurance to stockbroking. Shares of the group's flagship firm hit a record in July after jumping more than 35 per cent this year, four times more than India's benchmark stock index.

Now 86, and settled into an advisory role, Thyagarajan said in a rare interview with Bloomberg News that he entered the industry to prove lending to people without credit histories or regular incomes isn't as risky as it's perceived. He insists there's nothing unusual about his approach to business "- or his decision to give away a stake in Shriram now valued at more than $750 million.

"I'm a bit of a leftist," RT, as he's known, said in the south Indian city of Chennai, where he founded the group in 1974. "I was never enthusiastic about making life pleasanter for people who already have a good life." Rather, I "wanted to take away some unpleasantness in the lives of people who are getting into problems."

Thyagarajan's career highlights untapped opportunities in the world's most populous country, as more of its 1.4 billion people strive to enter a growing middle class. Though Prime Minister Narendra Modi's government has pushed to expand access to India's banking services, about a quarter of the nation still doesn't have access to the formal financial system. And roughly a third of those who do have a bank account never use it, according to the World Bank.


Lending to the poor is a form of socialism, Thyagarajan contends. But by offering a cheaper option than the punitive rates available to the unbanked, he has sought to demonstrate that the business can be safe and profitable. And in doing so, he's persuaded other companies to bring down borrowing costs.

Now, the industry is big business. India has about 9,400 so-called shadow banks, which mostly offer financial services to people passed over by conventional lenders.

"RT is an outlier," said Srinivas Balasubramanian, senior partner and head of corporate finance at KPMG India. "Few have sustained and thrived for so long."

Building an empire

Indeed, Thyagarajan stands out in an industry that has been plagued by ethical challenges and is prone to booms and busts "- with blowups sometimes threatening the financial system. The most obvious example is the subprime mortgage crisis in the US. More recently, the collapse of a non-bank lender in Mexico last year wiped out billions for investors.

Forging a socialism-inspired lending firm might seem an unexpected career choice for a man who grew up surrounded by servants in a well-to-do farming family in the state of Tamil Nadu. But Thyagarajan said he's always had an analytical and egalitarian-oriented mind.

He studied mathematics at the undergraduate and master's level in Chennai before spending three years at the prestigious Indian Statistical Institute in Kolkata.

In 1961, he joined New India Assurance Co., one of India's largest insurers, starting a spell in finance as a company employee that lasted two decades. It included stints at Vysya Bank, a regional lender, and JB Boda & Co., a reinsurance broker.

Along the way, people in Chennai came to him seeking money to buy used trucks, and he gave them loans from his inheritance. Gradually, that side venture morphed into his life's main act. At 37, he founded Shriram Chits with friends and relatives.

The unbanked often rely on so-called chit funds, a collective savings scheme where each member deposits a fixed amount every month. The pot is doled out to one investor a month until everyone has received a share. The money is used for farm equipment, school fees or other large purchases.

Over the years, Thyagarajan set up other firms, and Shriram eventually grew into a group of more than 30 companies.

In truck financing, Thyagarajan saw people paying rates as steep as 80% because banks wouldn't deal with them. He concluded that the prevailing thinking was wrong.

"People used to think that because the interest rates were very high, the lending was very risky," he says. "I realized it was not risky at all."

This epiphany would define his life. He decided to lend at rates that were still extremely high by global standards, but lower than other options. "Interest rates went from 30 per cent-35 per cent to 17 per cent-18 per cent," he said.

Thyagarajan says his approach wasn't about charity. It was infused with two key capitalist beliefs. One was the importance of private-sector entrepreneurship; the other, faith in market principles.

That ethos has paid dividends: Shriram collects more than 98 per cent of dues on time, filings show. It gets its lending decisions right, the local unit of S&P Ratings says.

We would give them as much as they need to keep themselves reasonably happy, not euphoric. They shouldn't be encouraged to compare themselves with all people around them. They would have only misery.

- R Thyagarajan, Shriram Group founder

More broadly, non-bank financiers like Shriram are crucial for supporting India's newly banked. They underwrite loans and other products that require skill-sets banks often don't have, according to Bindu Ananth, co-founder of Dvara Holdings, which backs companies driving financial inclusion.

"Ensuring participation of the poor and marginalized in India's formal financial system is key to driving the economic growth in a sustainable manner," Ananth said.

Today, the Shriram Group serves about 23 million customers.

Shriram Finance Ltd., the flagship, has a market value of about $8.5 billion and made about $200 million in profit in the quarter that ended in June. Only one of the 34 analysts tracking the stock recommends selling it.

A different approach

Lending to the poor can be murky. Exorbitant interest rates routinely lead vulnerable borrowers deeper into debt. In India, loan sharks sometimes resort to heavy-handed debt collection. Consumer protection is especially weak in the microfinance industry, despite its emphasis on lifting up the vulnerable.

Asked to explain what Shriram does differently, Thyagarajan said the group doesn't look at credit scores, for instance, because most customers aren't part of the formal financial system. Instead, staff rely on references from existing customers.

Internally, the company also takes a unique approach to compensation. Thyagarajan has long believed staff are paid too much, even though they get less than market rates. Lower-level employees often earn about 30% less than peers. For senior executives, the discount is as much as 50%.

"We would give them as much as they need to keep themselves reasonably happy, not euphoric," Thyagarajan said. "They shouldn't be encouraged to compare themselves with all people around them. They would have only misery."

He insists employees are mostly content with this structure. Though pay is less, staff said in interviews that the job comes with more flexibility than at peer firms.

"I value the peace of mind, stability and comfort that this job offers," said Amol Bowlekar, a branch manager for Shriram Finance in Mumbai, who said he has turned down several higher paying job offers. "The group's culture is more humane. There is no insane pressure to deliver."

Living modestly

Part of what makes Shriram's system fair, staff say, is Thyagarajan's own willingness to live among the masses. For years, he drove a Hyundai hatchback. And he doesn't own a mobile phone, which he considers a distraction.

The tycoon gave away all his shareholdings in Shriram companies to a group of employees, transferring them to the Shriram Ownership Trust, which was set up in 2006. The perpetual trust has 44 group executives as beneficiaries. Executives leave when they retire, taking millions of dollars with them.

I'm OK with people not accepting my perception and doing things based on their perception. And if it turns out that I was right and they were wrong, which happens most of the time, I am able to communicate with them later on and say I told you so.

- R Thyagarajan

The total value of the trust's holding exceeds $750 million and has gone up several-fold in recent years, people familiar with the matter said, asking not to be identified as the information is private.

In his three-hour interview with Bloomberg, Thyagarajan said he didn't need the money then or now "- and he ultimately prefers simple pursuits. These days, he spends hours listening to classical music and reading Western business magazines.

In December, Shriram Transport Finance Co. absorbed Shriram Capital Ltd. and Shriram City Union Finance Ltd. in a share-swap deal. Shriram Transport finances trucks, while Shriram City Union funds purchases of consumer goods and motorcycles.

Thyagarajan says executives planned this for years, but he wasn't involved in the details. He no longer has a formal role at the company, but every fortnight, senior managers brief him and seek his advice.

"I have the personality of a consultant," Thyagarajan says. "I can see things slightly differently. I'm OK with people not accepting my perception and doing things based on their perception. And if it turns out that I was right and they were wrong, which happens most of the time, I am able to communicate with them later on and say I told you so."

Shriram's strength is also its weakness, according to Kranthi Bathini, an equity strategist at WealthMills Securities Pvt. in Mumbai. Most customers are non-prime, which means "asset quality and profitability underperformance could come at any point," he says.

There's also key-person risk, according to Bathini. With "cultish" founders like Thyagarajan, it's tough for anyone else to lead.

Lastly, Bathini says, a left-wing mindset isn't always great for shareholder returns, though they have been fine so far.

Still, Thyagarajan's record of success is hard to argue with. But he plays down talk that his life is frugal, saying he even occasionally splurges on trips with family to tiger sanctuaries.

His one regret isn't that he gave his wealth away, but how he did it. If he'd realized how profitable Shriram would become, and how much the stock would rise, he would have spread the bounty.

"I did not imagine that so much money was going to be distributed to so few," he says. "I'm not very happy about it. But it's OK. I'm not very sad either."