Firms put NBFC plans on slow track

With high interest rates affecting consumer finance, many players with permission to set up non-banking finance companies (NBFCs) are now going slow on their plans.

The list includes players such as Deutsche Bank, HDFC Bank and India Infoline. Indiabulls and Fullerton are revisiting their strategy and even global majors such as Citi Financial and GE Money are scaling back their activities.

While in the past many companies opted for the NBFC route to overcome the branch-licensing restrictions and also saw it as a way to raise funds more easily, the Reserve Bank of India (RBI) has now made the norms equally stringent for them. “It does not make sense for banks to set up NBFCs for distribution. Nor does it help in raising deposits, since RBI has tightened that as well,” said the country head of a large foreign bank.

“Initially our business plan was to focus on retail. But we want to wait for a while and see how the situation evolves. Maybe, we will look at other avenues like corporate lending,” said an executive of a bank, which has also received the RBI approval to set up a finance company.

“The time has come for a measured approach to the business in the retail sector as the situation calls for better risk management skills,” said Nipun Mehta, executive director and head of private banking, Societe Generale . It has sought permission to set up an NBFC, but Mehta said it has no plans to enter the retail segment at present. The NBFC will deal with private banking.

A source at another company, which had plans for a retail foray using the NBFC route, said everyone is chasing the same customer, who is already over-leveraged. “As a result, the moment interest rates started increasing, delinquencies too have gone up,” he added.

For exisiting NBFCs like Indiabulls Financial Services, higher interest rates have had little effect so far as the company started cutting its exposure to small-ticket loans. Similarly, Fullerton decided to move out of the unsecured loan around six months ago.

Indiabulls has cut its exposure to the segment by around 24 per cent to Rs 331.5 crore at the end of June 2008.