Banking On Non-Bankable Companies?

Mr Mumbaikar is a troubled man these days. He is told that his neighbourhood non-banking finance company (NBFC) is no longer safe. Shake out, impending disaster, new regulations...make little sense to him. All he knows is that he is heading for trouble.

Thanks to the CRB Capital fiasco, a large number of small NBFCs are facing the investor run, even as the top few have already started cutting down their interest rates. Another investment avenue fades out. What next?

Poor investors. They never had it so bad: deposit rates in nationalised banks keep dipping with every Budget. Private banks offer no relief either. And the stock market, well, should one dwell on the familiar theme of revival again.

 

The root: It all started with RBIs decision to allow select companies to determine their interest rates. Suddenly, you had companies offering as much as 21 per cent on deposits. Sure, such rates were reserved for deposits of a longer period, say, three years. However, even one-year deposits they form 60 per cent of the total deposit in NBFCs started fetching an average of 16 per cent, a good 100 per cent jump from your safest deposit with public sector banks.

But triple A rated companies were crying hoarse that the unbridled resource mop up would bring peril to the sector. Not surprisingly, small companies got into trouble often. They offer very high rates to attract deposits, says Mahesh Thakkar, executive director, Association of Leasing and Finance Companies. The top companies were turning cautious. Sundaram Finance, for one, had dismissed its deposit raising programme. Some also cut down their rates.

Are NBFCs safe today? Well, investing in them does involve some risk. If you can afford to take the risk, they are still safe. Even in nationalised banks, deposits over Rs 10,000 carry higher risk. So, the key is not to aim too high. Look into all aspects of a scrip before putting your money in it.

Obviously, the present scenario is fluid. And with the theory of an imminent shake out doing the rounds, investors are even more unnerved. The CRBs fly-by-night attitude has shown that even the better known among the 45,000-odd companies are not infallible. The investor should know the moment he comes across an extremely high rate of interest rate that the company is not safe, says the head of a top NBFC.

There is no denying that there is some element of risk in parking your money with NBFCs. Naturally, for the more returns NBFCs promise, narrower are their own margins. If it goes on for too long a period, well, that is when your company starts floundering. Sometimes there could be a serious asset and liability mismatch too. That is when the company decides to down its shutters. The usual cacophony follows: regulatory bodies, filing charges, etc. And then begins your endless wait for your money.

Action plan: Mumbaikars lessons in investment theory are over. Time now for some action. What can he do? The investor should find a safe company to deal with, says Rajesh Mokashi, general manager, Care, a rating agency party to the CRB drama.

That is rather tricky there are around 45,000 NBFCs in the country. Despite the rules and regulations mandatory registration with RBI, for instance some of them may be operating in your neighbourhood unobtrusively. Until they go bust, that is.

But is selecting a company that easy? What can Mumbaikar do to protect himself from future shocks? (See Mumbaikars game plan) Investment experts ask you to accord maximum weightage to the company and its track record. Mokashi feels that investors should learn to read the balance sheet of a company and clarify all doubts before investing his money.

For instance, the potential investor could try and find out the debt component in a balance sheet. This could provide some much-needed insight into the affairs of the company. Remember, big companies are at liberty to raise as much money as they want. If your NBFC is flush with funds which it cant deploy efficiently, that could spell trouble for you. Also, look at the capital adequacy ratio. Though Basle norms fix it conservatively at 8 per cent, some of the companies have higher ratios. This will come in handy in case of an investor run on the company.

Also consider the quality of service and the strength of the network. Spare some thought for the promoter too but dont take his credibility as an insurance cover for your deposit. Some of them float companies to serve their own ends.

Dont forget to check the ratings. Says Thakkar, A higher rated company with a lower interest rate will be much safer than a low rated one offering higher interest rates. But, how reliable is the rating? The CRB issue clearly brings out the helplessness of rating agencies. Confesses a top official in a rating agency, We are by no means conducting an audit. If the company cooks up a balance sheet with the help of its auditor, chances are that they would corner a higher rate.

The bottom line is that for the lay investor, rating serves as an ideal indicator. Also bear in mind that the rating could change any time. So a triple A rated company would not spell disaster for you even if it slips a few notches below.

Forget the rationale behind all the downgrading that has been happening of late. But bear in mind that rating is a subjective, relative assessment, based on the facts provided by the company. True, the outcome depends a lot on the expertise of the agency too.

As for the future, get a list of companies registered with RBI and see if they meet all the norms prescribed. Hopefully, you will have double rating as well as an insurance for your deposit. Good luck.

MUMBAIKARS game plan:

DOs AND DONTS for selecting an NBFC

Bet on triple A rated companies only for maximum security

Look for safety, liquidity and service in the company

Look for any personal stake of the promoter in an NBFC

Judge the risk involved in the companys business

Check for their registration with the RBI, fulfilment of norms

Keep track of the rating especially if it is downgraded

Note the growth rate of the company for the last few years

Keep a track record of the managements performance

Look for a strong network of the NBFC across the country

Only go for deals that are completely transparent

Dont invest all your money in a single NBFC

Dont placecomplete faith in a brokers words

Avoid going for companies offering higher interest plus incentives

Dont opt for companies changing their accounting policies frequently