Another Fi?

Nabard has to depend entirely on its own funds and in recent years, on contributions made by banks falling short on their priority sector lending targets. The corpus, therefore, is limited which puts a cap on income growth because refinancing is a fixed spread business. Nabard's diversification plans mark the culmination of its growth from a department within the Reserve Bank of India, through an interim phase when it was supposed to be the apex body for routing credit exclusively to agriculture, and now to broadbased lending.

Nevertheless, one question remains: What, another financial institution (FI)? FIs have cut a sorry picture in recent times trying to outdo each other in raising funds from the bond markets. This was in fact the direct outcome of their earlier binge in trying to be the fastest growing institution. No doubt, the increasing levels of business could justify any number of players. But the competition unleashed with each entry will eat further into their profit margins. Late entrants start with a positive disadvantage and perhaps, their entry can only be justified on two counts. One, that they have equally worthwhile plans to protect their margins. Secondly, if they are selling a product which can be differentiated from the products earlier available. Nabard has operated in a protected environment till now, offering a fixed menu of services. The products too were either off-the-shelf or created out of negotiations with the intended beneficiary. But with commercial lending, things are vastly different. Nabard will have to learn a whole new bag of tricks to trap customers and then to build long-term relationships.

 

It has been suggested in some quarters that the whole concept of development financing has been blurred in the last decade with commercial banks taking on term loans and financial institutions delivering short-term credit. Perhaps the drive towards consolidating profits will lead to a further breakdown of Chinese walls, as each institution tries to become a financial supermarket. The only roadblock on this path is the matching of the institution's asset-liability profile at all times. Institutions which are in a position to raise short-term money may as well lend short, and vice versa.

Though Nabards share capital has been doubled in the Budget to Rs 1,000 crore, it has to rely mostly on market borrowings to fund its expansion plans. Thus there is no guarantee either that having entered into commercial banking, it would realise its objectives.