MUFG could steer Shriram Finance

Shriram Finance can hope for lower borrowing cost if its rating is upgraded post MUFG investment.

- Manish Joshi

Shriram Finance Ltd stock, already trading at a lifetime high, gained another 3.7% on Friday to ₹902 after it announced MUFG Bank Ltd will buy 471 million shares at ₹840 per share in the company through a preferential allotment. The transaction gives MUFG a 20% stake.

There are good reasons for MUFG to choose Shriram Finance over other banks and non-banking finance companies (NBFCs). Private banks in India are subject to a voting rights cap of 26% for a shareholder, whereas there is no such cap for NBFCs. Moreover, banks also suffer from the handicap of complying with cash reserve ratio, statutory liquidity ratio, and priority sector lending requirements, which pull down their return on assets (ROA). Sure, banks have the advantage of access to low-cost deposits, mainly Casa (current account savings account), but that has not enabled them to beat the RoA of most leading NBFCs.