Shriram Finance's NCD Repurchase Strategy: A Masterstroke in Liquidity Management and Growth

Shriram Finance Limited, the product of the 2022 merger of Shriram Transport Finance Company (STFC), Shriram City Union Finance (SCUF), and Shriram Capital, has emerged as India's largest retail finance non-banking financial company (NBFC). With assets under management exceeding ₹1.5 lakh crore and a customer base of over 2.0 crore, the company now stands at a pivotal juncture in its post-merger evolution. Central to its strategy is the repurchase of non-convertible debentures (NCDs) within regulatory limits—a move that underscores its disciplined approach to capital structure optimization and liquidity management. This article explores how this strategy positions Shriram Finance to thrive in a rising rate environment while fueling growth in India's rural and urban financing sectors.

The Post-Merger Capital Structure: A Foundation for Growth

The merger of STFC and SCUF in 2022 created a diversified lending powerhouse, consolidating commercial vehicle (CV) finance, two-wheeler loans, gold loans, and MSME financing under one entity. This integration has reshaped Shriram Finance's capital structure, reducing reliance on cyclical CV loans (now 45% of the portfolio) and expanding into higher-growth segments like MSME (14%) and two-wheelers (6%). As of March 2025, the company's standalone net worth stood at ₹56,281 crore, with a gearing ratio of 4.2x—a level that balances growth ambitions with prudent leverage.

The funding mix reflects strategic diversification:
- Public deposits now account for 23.95% of total borrowings, offering a stable, low-cost source.
- External commercial borrowings (ECBs) represent 21%, with recent issuances totaling over USD 1.2 billion in 2024 alone.
- Term loans and NCDs make up 37.4% of borrowings, highlighting reliance on institutional debt markets.

The Strategic Imperative of NCD Repurchases

In a rising rate environment, Shriram Finance's decision to repurchase NCDs within specified limits is a shrewd tactical move. By targeting high-cost debt, the company can:
1. Reduce Interest Costs: NCDs issued during periods of higher rates can be repurchased at a discount, lowering the overall cost of funds. With the cost of borrowings at ~8.9% in Q4 FY25, even a marginal reduction in interest expenses can materially boost net interest margins (NIM).
2. Improve Liquidity Efficiency: The company holds excess liquidity of ₹3,100 crore (as of March 2025), much of which is parked in low-yielding cash or liquid instruments. Repurchasing NCDs allows it to redeploy these funds into higher-return assets, aligning with its goal of raising NIM to 8.7–8.8% by FY26.
3. Signal Financial Strength: Publicly repurchasing debt demonstrates confidence in the company's ability to manage liquidity and leverage. This is critical for maintaining investor trust, especially in an NBFC sector that has faced periodic liquidity crunches.

Growth Potential in Rural and Urban Sectors

The NCD repurchase strategy is not an end in itself but a means to fuel growth in high-potential segments:
- Rural MSME Financing: Shriram Finance's network of 3,500 branches provides unparalleled reach in underserved rural areas. By refinancing high-cost debt, the company can lower borrowing rates for small businesses, driving loan book growth.
- Two-Wheelers and Gold Loans: These segments, with annual growth rates of 25% and 40% respectively, benefit from lower cost of funds, enabling competitive pricing.
- Green Finance: The USD 750 million social bond issuance in 2024 funds EV financing and rural electrification projects, aligning with ESG trends and unlocking new revenue streams.

Risks and Mitigation

While the strategy is compelling, risks remain:
- Interest Rate Volatility: Rapid rate hikes could erode the benefits of NCD repurchases if new borrowings carry higher rates. However, Shriram Finance's LCR of 286.7% provides a buffer against short-term shocks.
- Asset Quality: Rising Stage 2 loans in rural MSME and passenger vehicle segments require close monitoring. The company's provision coverage, though dipping to 43%, is still sufficient to absorb moderate slippages.

Investment Implications

Shriram Finance's NCD repurchase strategy sends a clear signal: the company is in control of its destiny. With a robust liquidity position, diversified funding mix, and focus on high-growth segments, it is well-positioned to outperform peers in FY26. Investors should note:
- Stock Performance: The stock has delivered a 12% return YTD 2025, outpacing the BSE NBFC index by 5 percentage points.
- Valuation: Trading at 1.5x book value (vs. industry average of 1.2x), the stock is fairly priced but offers upside if NIM targets are met.

Conclusion

Shriram Finance's strategic repurchase of NCDs is more than a balance sheet tweak—it is a testament to its maturity as a post-merger entity. By optimizing its capital structure, the company is primed to capitalize on India's growing financing needs, particularly in rural and sustainable sectors. For investors, this signals a buy-and-hold opportunity in a sector leader with a resilient business model and a clear path to margin expansion. In a landscape where liquidity is king, Shriram Finance has already crowned itself.