Nbfcs Run For Cover From Rbi
Within the next 355 days, Tata Finance will have to pay back Rs 435 crore out of its total deposit base of Rs 905 crore. Madras-based ICDS will have to cough up Rs 257 crore out of Rs 299 crore; and Lloyds Finance, Rs 178 crore out of its collection of Rs 689 crore. If the Reserve Bank of India (RBI) remains unsympathetic to their cause, non-banking finance companies (NBFCs) will have to return Rs 14,000 crore to their depositors before the year is out. Thats quite a sum when you consider that all the NBFCs together control just over Rs 22,000 crore.
The Indian finance sector has never seen anything like this and it is determined to fight the RBI tooth and nail. Asks Mahesh Thakkar, executive director, Association of Leasing and Financial Services Companies (ALFS): Can the economy withstand the strain of Rs 10-15,000 crore flowing out from a single sector? In the last two days, ALFS, the Equipment Leasing Association, and individual NBFCs have made several representations to the RBI, hoping that it would soften the blow it has delivered them.
Those who are not negotiating with the RBI are attacking it. A senior executive of a Delhi-based finance company bristles at the suggestion that the new prudential norms announced by the RBI will help in regulating the financial sector: What is the point in regulating the NBFCs when the fixed deposit market itself is unregulated? It is like trying to drive a Mercedes on a road full of potholes. Adds another: What about regulating manufacturing companies which have defaulted on FD repayments? The RBI has done this only so that it can claim that after the CRB scam, it has taken steps to protect the public. Says a source in Sundaram Finance: Regimentation of NBFCs is desirable but not at the cost of throttling the industry. Rohit Prasad of R R Financial Consultants agrees: It is now only a matter of time before most NBFCs fold up.
By the year-end, over 30,000 out of the 40,000-odd NBFCs will have only two options increase their networth or wind up. That is because RBI guidelines say that companies with paid up capital of less than Rs 25 lakh cannot mobilise public deposits. Only 8,500 NBFCs meet this requirement. These companies, which would cease to be NBFCs once the new guidelines are enforced, currently control Rs 5,000 crore worth of public deposits.
Companies which have a paid up capital in excess of Rs 25 lakh too could be on the verge of closure . According to the guidelines, if you have a credit rating below A, you may not accept fixed deposits. The total deposits with these companies today is around Rs 5,000 crore. Others are allowed to mobilise deposits, but within strict limits: NBFCs which have a credit rating of A can raise deposits exactly equal to their net owned funds (NOF); for those with AA and AAA ratings the multiplier is two and three times resepctively. This is clearly a setback till now, NBFCs could raise public deposits twelve times their NOF. The current public deposit profile of companies reveals that Rs 4,000 crore would now have to be returned.
NBFCs have only till December 31, 1998, to fall in line with the new norms. Industry analysts believe this will be the last straw. Shivaji Dam, executive director, Kotak Mahindra, predicts, There will be large-scale default on FD repayments, basically because of asset liability mismatches. A company accepts deposits and deploys these funds in assets, which are not necessarily of matching tenures, because they assume that fresh deposits will come in the next year. But with no new deposits, it will not be possible to roll over the liability and companies will be forced to close shop. Prasad of R R Finance agrees: Most NBFCs extend long-term loans to their borrowers and it will not be easy to liquidate these loans.
But many NBFCs believe that there is still a glimmer of hope for the sector and they are going to try every trick in the accounting book to stay afloat. As an analyst points out: NBFCs will be on the look out for methods to increase their networth. For instance, Tata Finance is believed to be planning a preferential issue, which makes sense at a time when capital markets are in recession.
NBFCs may be able to fund their deposit redemption programmes through private placement of non-convertible debentures (NCDs) with banks. Says an NBFC employee, This has already been happening for the last one year. An executive of Escorts Finance offers another solution: NBFCs will have to show some cleverness. They could go in for greater securitisation of assets. For instance, Lloyds Finance redeemed deposits of Rs 228 crore last year, of which about Rs 74 crore was done through securitisation. Asset securitisation involves clubbing all the good assets in the books of NBFCs and selling it to a third party for immediate cash at a discount. There is, however, a catch. As Prasad points out: NBFCs costs of borrowing are so high that nobody wants to securitise their assets.
But before the NBFCs start finding ways of getting around the new guidelines, they are trying to get the RBI to reconsider the norms. They want the central bank to extend the deadline for returning deposits by at least a year and to allow companies with BBB rating and a paid up capital of less than Rs 25 lakh to mobilise deposits. An executive at a leading NBFC challenges the very basis of the new guidelines: The RBI is making a mistake by attaching so much significance to credit ratings. After all, can a depositor understand the intrinsic worth of the company simply by looking at three letters?
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