Turning The Tables

Yet, the biter can also be bitten by rogues who are even more unscrupulous. One scam that has got the auto finance companies scratching their heads in perplexity is simple and typically ingenious.

What you do is this. You buy, say, ten expensive, upmarket cars with finance from some NBFC which is only too glad to help. Then you drive off to a remote garage, strip the cars of all their important parts and sell these parts in the second-hand market. This market is large because original spares can cost the earth.

You sell to the dealer at half-price and he sells it to a customer at whatever he can get. The customer saves money and the other two make it. Spares from one Cielo can fetch as much as Rs 1.5 lakh and can be sold for about Rs 2 lakh. It is a nice and tidy business. says the CEO of a NBFC with large exposure in car finance.

But this is not the end of the story. Three or four payments later, you inform the finance company that you are unable to repay anymore, so would the company please repossess the cars? It does so only to discover that either the cars are mere shells or spurious parts from old cars have been fitted in.

Game, set and match to the tricksters who move on to some other town. To add to their woes, now the Supreme Court has also stepped in, albeit inadvertently. It has recently ruled that if the payer of a post-dated cheque informs the payee before the date the cheque falls due that it should not be deposited, the payee cannot criminally sue the payer for knowingly issuing a cheque that would bounce. He has only a civil remedy.

All fair and square, right? Apparently, except that for NBFCs in the hire-purchase business the only security is the post-dated cheque. The threat of possible criminal action deters people from deliberately issuing cheques which they have no intention of covering.

All that is gone now, bemoans a senior RBI official. We fought long and hard to make the bouncing of cheques a criminal offence and finally won. The law was amended. But this ruling, in the form of an obiter, has set all our efforts at nought. The NBFCs are making repeated representations to the finance and law ministries to amend the law again. But like so much else, this too is going to take time. Until then, the auto financiers will just have to keep their fingers crossed that the practice doesnt become too widespread.

A third way of milking NBFCs is to obtain lease finance from different leasing companies for the same piece of equipment. The lessee then claims depreciation three times, and sometimes defaults on payments. The NBFCs are then left fighting as to who has the first option to repossess and recover what it can of the debt. Many NBFCs have been cheated in this fashion in the last two years.

The Association of Leasing and Financial Services Companies is now in the process of setting up a directory that will enable NBFCs to know if something has already been leased or not. A simple Yes-No answer will be given to queries from NBFCs which subscribe to the directory. The directory is expected to become operational by the end of the year.

Over the next few years, it seems inevitable that Indian NBFCs will face increasing competition from foreign ones. It also seems likely that the foreign NBFCs will concentrate their business in the metros.

As business opportunities for the small and mid-sized Indian NBFCs shrink in the metros, they are likely to turn their attention to the large and small towns, and perhaps even the rural areas.

We have already begun moving in that direction, says the CEO of a mid-sized NBFC in Bombay. The only deterrent is the high cost of rural and small-town operations. In most places, it is still not viable to expand very rapidly. But if costs do come down as scale economies become operational, what would this development mean for the banks which at present have a virtual monopoly? It could become a problem, admits a senior SBI official, but not for a few years yet. Then, as he mulls over the issue, he begins to talk about the Regional Rural Banks (RRBs) that were set up by the nationalised banks each bank sponsored a few in the 1980s.

In the last five years, almost all of these banks have incurred losses and have eaten up their capital. This has been due mainly to the government decision that RRB staff should be paid at the same rate as the employees of the nationalised banks.

Could RRBs with their incumbent advantage become quasi-NBFCs? The SBI official gives it a long, hard thought and reaches the reluctant conclusion that indeed they could. Come to think of it, they really are tailor-made for the job, he says, adding that it will take no more than a few administrative changes to convert RRBs into NBFCs. All you need to do is to get the sponsor bank to sell off 50 per cent of the equity to a private holder and let him run the show. The business is there, so all you need to do is to go out and get it. It would be a low-cost way of converting the RRBs into something commercially useful. Well, then, any takers for the idea?