A Long Range Missile

from their net owned funds is unlikely to improve flow of funds to this sector in the immediate future.

In the past, finance companies have regularly complained about the Reserve Bank of Indias guidelines linking the borrowing limits of finance companies to their net owned funds (which constitutes capital and reserves minus bad debts). Yet, there is little euphoria over the recent credit policy sop lifting the ceiling on bank finance for select categories of non-banking finance companies.

The beneficiaries RBI-certified equipment leasing and hire purchase companies, and loan and investment companies are now wondering whether the new norms (see box: Before and after) would mean a real increase in bank and institutional finance for them.

 

So much so that non banking finance companies (NBFCs) are trying to anticipate the other hurdles that could limit the volumes of bank finance to the sector.

Crossing the bar

The most crucial of these is banks exposure limits. Says S A Krishnan, president, Ceat Financial Services: "Banks and financial institutions (FIs) have set their own exposure limits to the NBFC sector and would not like to exceed these radically."

Most public sector banks have already exceeded their current exposure limits towards the sector. This puts a limit on bank funding, at least in the short term.

NBFCs, however, are not too pessimistic on this score. State Bank of India is already reportedly working out an increase in its exposure limits to the sector, and other banks could follow suit.

But even if exposure limits were revised, NBFCs could face another challenge: the attitude of bank and FI managements. Some institutions like ICICI and IFCI do lend to NBFCs as a matter of policy; others like IDBI and some commercial banks prefer to keep a safe distance from the sector. "The stigma attached to finance companies has still not gone," says N K Parikh, managing director, Mafatlal Finance.

This could only be part of the problem. G C Garg, managing director, Lloyds Finance, says, "It is surprising how some institutions follow such a rigid mind set whereas the others continue to lend. And its not as though the latter do not take intelligent lending decisions!"

The reluctance of some banks and FIs to lend to NBFCs is partly a function of competitive pressures too. As Garg points out, Not only do the banks consider finance companies competition, few of them really understand the business of NBFCs.

But NBFC chiefs acknowledge that the attitude of banks and Fis could eventually change because this relaxation is considered a positive signal from the central bank towards registered and rated companies that comply with prudential norms. "Finally, the wheat is being removed from the chaff," says Parikh.

In the long run, say some NBFC chiefs, changing bank and Fis attitudes towards the sector could encourage the unorganised segment to aspire for RBI

certification.

Registered NBFCs also hope to benefit from the lowering of prime lending rates by some banks and financial institutions. They hope to get funds at PLR + 3 or 4 per cent. "There should be a lowering of cost of funds by at least one per cent from banks to finance companies, when the flow does begin," says the head of a finance company.

Talking about cost of funds Krishnan says: "Earlier there was a wide gap between the rates at which funds were made available to manufacturing companies and the rates offered to finance companies. The manufacturing companies were earlier favoured by banks but now the gap is

reducing."

Even so, smaller NBFCs are unlikely to feel any major benefit. "In most cases bank finance is given to the larger players. When we go to ask for funds, banks say that they have already overshot their exposure limits to the sector," says R N Bose, president, Mukand Global Finance. Therefore, freeing the borrowing limits may mean little for the smaller players, at least till there is a change in lender mind set.

The Big Brother hangover

The recent credit policy has also removed the requirement of consortium lending, even in cases where the credit limit of the borrower exceeds Rs 50 crore. Banks have now been directed to extend "need-based finance required by the borrowers." With this, NBFCs expect to be able to tap many more banks for finance.

Under the consortium lending system, a borrower wanting to borrow from a bank outside the consortium, would have to take a no objection certificate (NOC) from the lead bank of the consortium. Now, lending will be need- based and depend largely on the relationship that the finance company enjoys with the bank.

But few expect a 1:1 relationship to develop in the immediate future. For some time, at least, many smaller banks are expected to continue to follow the lending pattern of their earlier consortium leaders.