Nbfcs Set To Cut Deposit, Lending Rates

Non-banking finance companies (NBFCs) have begun working on measures to reduce both their deposit and lending rates following the Reserve Bank of Indias decision to cut one-year deposit rates from 9 to 8 per cent.

A few of the stronger NBFCs are considering a reduction of deposit rates by 150 basis points. For instance, Escorts Finance, which is currently offering 17 per cent on one-year deposits, plans to reduce it to 15.5 per cent from July 1.

Financial circles said that a few of the strong NBFCs which have already brought down rates on one-year deposits to 15 per cent might further lower it to 14 per cent. Consequently, lending rates on car and truck finance are expected to come down to 20-21 per cent.

 

But not all NBFCs can afford to lower deposit rates at this stage. This is mainly because banks are extremely wary of lending to NBFCs after the CRB episode. Besides, the debt-equity ratios of a large section of NBFCs has increased to such an extent that it has eroded their ability to access bank funds.

NBFCs facing redemption pressure on old deposits, plan to stick to the current rates of 16-17 per cent for some more time. Now that the gap between bank rates and our rates has increased, it will hopefully dissuade some of the depositors from withdrawing their funds, the chief of a Delhi-based finance company said.

But he agreed that this will only be a temporary measure lasting two or three weeks in order to bring down the redemption pressure and build up cash flows to satisfy those depositors who insist on a refund. We cannot survive for long by accessing funds at high costs, he explained.

Heavy deposit-taking has bloated the debt-equity ratios of finance companies, including those in the top ten bracket, and thus eroded their capability to access bank loans. The resultant effect on the health of NBFCs can be dangerous because a large section of depositors are shying away from them after the CRB Caps scam.

Besides, the financial sector is agog with speculation that at least two or three major finance companies will go down under in the weeks to come. This is because a large section of the industry, including some of the top ten players, are finding themselves caught in a cash flow trap.

The debt-equity ratios of five of the top NBFCs had either come close to 5:1 or crossed the level by March, 1996. These companies are Sunderam Finance with a ratio of 4.99, Tata Finance with 6.02, Anagram Finance with 5.08, Gujarat Leasing and Finance with 4.76 and Lloyds Finance with 3.97.

Only two companies, Reliance Capital and VLS Finance, had managed to keep their debt-equity ratio at levels as low as .41 per cent and .42 per cent, respectively.