13 had ratios lower than 1:1 in 1995-96, says Pradip Kumar Dey
After the CRB debacle, investors will think twice before putting money in fixed deposit schemes of NBFCs. Before investing any money in company deposits, one should look into the debt-equity ratio of the firm. The debt-equity ratio of select 50 non-banking finance companies was well below three during 1994-95 and 1995-96.
Equity comprises paid-up capital, reserves and surplus. Debt includes all the long-term loans - which include all-term loans, installment credit, long-term borrowings from government agencies and financial institutions, borrowings against debentures, deferred payment liabilities and other transactions.
The debt-equity ratio gives an indication of the safety of the stakes held by the creditors of long-term loans. The operating freedom of every company is conditioned by the relative stake that the creditors have in the business in contrast with that of the owners.
A company with a lower-than-average ratio of debt to net worth, which denotes a strong ownership interest or position, enjoys relative freedom from creditors demanding repayment of funds or attempting to impose their wills on the companys management decisions.
Conversely, if debt-equity ratios are higher than the industry norm, the management must be more apprehensive and may be compelled by creditors to adopt courses of action that rob the company of valuable initiative and innovation.
Among 50 NBFCs in 1994-95, 14(28 per cent) had debt-equity ratios of less than 1:1. That is, their loans were less than their equity.
Another 12 companies (24 per cent) had ratios between 1:1 and 2:1, 14 companies had debt-equity ratios between 2:1 and 5:1 and the remaining 10 had ratios 5:1 and above.
The situation deteriorated in 1995-96 as many as 13 companies (26 per cent) had ratios lower than 1:1. Alternatively, the number of companies with ratios of 1:1 and above increased from 36 (72 per cent) in 1994-95 to 37 (74 per cent) in 1995-96.
Companies which had very low debt-equity ratios in 1994-95 included Shriram Transport Finance (0.09), WH Brady & Co (0.04), Enarai Finance (0.07), SP Capital (0.09), Tata Investment (0.11), Prudential Cap Market (0.14) and Reliance Capital (0.15).
The companies with the lowest debt-equity ratios in 1995-96 were Shriram Transport Finance (0.08), Tata Investment (0.18), KJMC Finance (0.28), WH Brady & Co (0.30) and Prudential Cap Mar (0.31).
During the last two years, Prudential Cap Market was ranked the leading private sector merchant banker in the country in terms of number of public issues lead managed. For 1995-96, the company has again been rated by Praxis Consulting & Information Services Pvt Ltd as numero uno not only amongst private sector but among all merchant bankers of the country.
The companies with high debt-equity ratios in 1994-95 were SBI Home Finance (10.32), Harita Finance (9.25), Nicco-Uco Fin Services (7.64), Anagram Fin (6.35) and Sakthi Fin (6.21). However, the highest debt-equity ratio of SBI Home Finance was due to its low equity base.
SBI Home Finance (9.27), Harita Fin (8.06), DCL Fin (6.74) and Sakthi Fin (6.17) were among the companies with high debt-equity ratios in 1995-96. The higher debt-equity ratio of Harita Fin was due to its larger mobilisation of deposits.
The company mobilised Rs 27.66 crore of fresh deposits during the whole year. The net accretion to deposits was Rs 11.2 crore as compared with Rs 22.22 crore of the previous year. The deposits held by the company as on 31 March, 1996 stood at Rs 86.16 crore as against Rs 74.96 crore on 31 March, 1995.
Although it was not exactly the same in all cases, the debt-equity ratios in the majority of companies declined in the current year. Of the 50 companies, only 22 increased their debt-equity ratios. Significant among them were DCL Fin (4.87 in 1994-95 to 6.74 in 1995-96), Dugar Fin (4.31 to 5.97), Lloyds Fin (1.9 to 4.42), Ceat Fin (2.78 to 3.9), BCL Fin (1.46 to 2.92), Magma Leasing (1.26 to 2.87), Birla Global Fin (0.51 to 1.68), Reliance Capital (0.15 to 0.41), Enarai Fin (0.07 to 0.39), SP Cap Fin (0.09 to 0.35) and WH Brady & Co (0.04 to 0.30).
DCL Finance has achieved a growth of over 94 per cent in public deposits. At the end of 1995-96, the public deposits stood at Rs 87.48 crore as against Rs 45.05 crore at the beginning of the year.
Due to this higher growth in deposits, the debt-equity ratio of the company increased significantly during 1995-96.
With the debt-equity ratio remaining at a conservative 0.41: 1, Reliance Capital is aiming to tap domestic and international debt markets more aggressively.
Meanwhile, the company has received approval from the central government to make private placement of equity shares of $100 million to international investors. Another aspect is that out of 50 NBFCs, the 27 companies which registered decreases in debt-equity ratios also saw their aggregate equity rise at a higher rate than their loan funds.
For SBI Home Finance, these rates were 33.3 per cent and 19.6 per cent respectively; Harita Finance 41.2 per cent and 22.9 per cent; Nicco-Uco Fin Services 113.8 per cent and 46.1 per cent; SRF Fin 98.4 per cent and 21.4 per cent; Srei Intl Fin 200.3 per cent and 62.7 per cent, First Leasing & Co 46.9 per cent and 7.3 per cent; TCI Finance 194.3 per cent and 47 per cent; Integrated Finance 142.8 per cent and 24.8 per cent and Shriram Transport Finance 121.1 per cent and 97.4 per cent.
The aggregate loan funds of the 50 NBFCs increased by 26.1 per cent from Rs 12,628 crore in 1994-95 to Rs 15,928 crore in 1995-96. The combined equity during the same period rose by 41.7 per cent from Rs 4,450 crore in 1994-95 to Rs 6,305 crore in 1995-96.
However, as in the case of the debt-equity ratios, the experience of the different companies varied widely. Thus four of them - Tata Finance (-6.2 per cent), Pal Credit & Cap (-9.9 per cent), Apple Credit Corpn (-15.4 per cent) and Motor & General Fin (-48.8 per cent) reduced their loan funds against increases in equity.
On the other hand, BCL Finance (-8.5 per cent) and WH Brady & Co (-5.5 per cent) showed a decline in equity fund against a rise in loan fund.
Among the 50 NBFCs showing an improvement, which is a decline in debt-equity ratios in 1995-96, was Nicco Uco Fin Ser. The company, which had the third highest ratio in 1994-95, witnessed a sharp decline of about 32 per cent from 7.64 in 1994-95 to 5.22 in 1995-96.
