Shifting To The Periphery
It hardly comes as a surprise, then, that the bigger players like Lloyds, Kotak, CEAT and others who enjoy most of these attributes, are certain that the advent of the big boys of the business like GE Caps, Ford Finance and IBM Credit is going to irrevocably and fundamentally change the nature of the NBFC business.
The critical thing to understand, says the CEO of an NBFC, is that when they come, they come to stay. They take a long time to decide whether or not to enter. But once the decision is taken, they come for the long haul.
Others agree, saying that this attitude brings with it a willingness to absorb initial losses of magnitudes that would be impossible for all but a handful of Indian firms.
Our idea, says the representative of a large US firm that has been operating in India for around four years now, is to first establish a presence that is accompanied by a reputation for service, reliability and innovation. Sometimes it can take anything between five to ten years of solid effort to do so. But we can be patient. During this initial period these international giants (GE Caps had earnings of $ 2.4 billion last year and achieved a 22 per cent return on equity) can easily afford to allocate a few hundred million dollars annually as the price of market entry, learning and settling in.
Their deep pockets are what will give us a run for our money. In the end, like the brokers of the BSE, the small Indian NBFC will have to vacate the metros and move to the less-sophisticated, semi-urban and rural markets, says the CEO of a small NBFC specialising in the auto hire-purchase segment.
He says he is seriously worried by the entry of Ford. Their cost of funds is around half of ours. How far can we go in competing? Not very, it seems, because it isnt just the low cost of funds that the foreign NBFCs enjoy. They also have better technology, which means better tracking systems and better financial products. Which is why the larger Indian NBFCs are tying up with the foreign ones. If you cant beat them, join them, seems to be the key element of the survival strategy.
But, says an analyst, this can be an unduly pessimistic view. I dont think the foreigners can match the networks of the Indian firms. It would cost them too much to build these up from scratch.
That could be one reason the foreign firms are looking at securitisation of debts. This consists of bunching up the retail debt of the NBFCs. Typically, for example, it could consist of a foreign firm offering immediate cash at a 15 per cent discount for the debt on 1,000 autos. The NBFC gets immediate cash, of which it is short anyway. The foreigner gets a portfolio for very little cost. Everyone is happy.
This market is very small as of now, but in the next five years as Indian firms move out of the wholesale end of the business and begin to focus on the retail end, it will grow by leaps and bounds, says Vikram Narayan, CEO of Apple Industries.
Why should Indian firms move out of the wholesale business? Because you guessed it that requires lots of capital, highly-sophisticated financial products and an ability to weather business cycles. Most Indian firms are simply too small to do that. Far better instead, to stick to smaller risks and even then, reduce them by sharing it with a bigger firm through securitisation.
The foreign firms, meanwhile, are delighted with the way things are going. They find the Indian market for financial services so crude and underdeveloped that they are licking their lips in anticipation.
Our real problem is the RBI and its obsession with micro-regulation, says the head of a foreign NBFC. You cant treat me like a bloody chit fund with a capital of Rs 10,000.
Although it is slowly changing, the RBI is still not very convinced. For it, nationalised banks remain the main responsibility. Until these have shaped up, foreign NBFCs are going to have to champ at their bits.
Ironically, this protection offered to their competitors is what is helping the Indian NBFCs as well. But the writing is on the wall for them.