(It is a re-print of an old article of 1996 on the beginning of the end of NBFCs)

Year end is the time for introspection, to take stock and to do crystal gazing. To look at the latest balance sheet, arrive at the losses and the gains, and rework one’s strategy for the future. It’s no different for the NBFCs, especially because the whole financial services sector is in the midst of change.

Let us peep into the past and recount for a little while the good old days when the world was a better place for the NBFCs. Bank finance was upto four times its net worth. No bank or financial institution talked about debarring NBFCs from availing of finance. Banks were not allowed to do lease and hire purchase business anyway. And unlike the leading bank of the country or another leading financial institution, NBFCs were not perceived as offering competition to them.

Bill discounting and rediscounting were the mainstay of many a finance company, and the stalwarts of today took to the bill discounting route – and the spread it offered – to grow and prosper. Access to capital market held few restrictions. One needed a moderate capital base for being listed, and virtually no track record for approaching the public for funds.

Merchant banking didn’t call for a whole host of formalities and regulations. Even after SEBI came into the picture, getting registered for merchant banking activities was no big deal. And due diligence, develvement etc. were words confined to the dictionary. Things like insider trading, circular trading or market operations were honed to a fine art form.

The regulators – including the Reserve Bank of India – were either in deep slumber or too busy regulating other intermediaries to spare time to contribute towards the healthy and regulated growth of the NBFCs. No entry barrier, no capital adequacy requirement, no nothing to deter even the most faint-hearted from making hay with public money and trust. Growth, at the cost of credibility, was more the norm than an exception. And everyone looked the other way unless an incident blew up in their faces, or the financial media did an expose.

But, sadly, all good things must one day come to an end. Just the other day an assistant general manager of a leading nationalised bank was telling me that his head office had refused to take up its share of the consortium lending to a triple ‘A’ rated top ranking finance company. What has the RBI told our head office? was his query. I wish I had an answer. Admit it or not, there is a virtual ban on banks’ lending to the finance companies. The fact remains that the NBFCs are being steadily squeezed. The problem assumes multiple proportions when an NBFC grows larger, diversifies, and the stipulation of lease/HP asset and income therefrom constituting 50% or 75% of its portfolio cannot be maintained for the same reason. Today, obtaining two times its net worth by way of bank finance is a very difficult proposition indeed.

The rules of the game have changed in other areas too. Banks have been allowed to enter into leasing, hire purchase and merchant banking business. With the size of the market shrinking, a merchant banker has really not much to look for today by way of business. In view of the recent spate of regulations, expansion in the definition of ‘deposits’, introduction of SLR, capital adequacy norms, entry norms, etc. only the stronger ones are likely to survive. The present day rules and regulations – and even the attitudes of the regulators – do not care to distinguish between a NBFC with good pedigree or a commendable track record, from a weak or fly by night operator. Even those NBFCs who have registered with the RBI, been rated and inspected seem to merit no better treatment or encouragement. All are looked at with the same degree of suspicion, and treatment meted out in the same fashion!

The nature of the business available to the NBFCs have undergone a sea change too in the recent past. Underwriting is no more a lucrative source of income. Issue management has lost its volumes. Re-discounting of bills through banks is banned, as is pre-issue bridge loans. Both the IPO and the secondary market are in the doldrums. Bought out deals have lost their magic. Venture capital business is still a non-starter. The very future of the leasing industry itself is now threatened – with the CBDT proposing to shift the benefit of depreciation from the lessor to the lessee in the cases of finance leases (which constitute 90% of the lease business in India today). Margins in leases had become wafer thin anyway quite some time back. Cost of funds has only been going one way – up. External resource mobilisation has become extremely difficult, if not impossible. The signal from the authorities seem to be loud and clear – the NBFCs are no more wanted in the financial marketplace.

It is indeed time for introspection for the finance companies today. Is the party getting over for them? Where do they go from here? What is going to be the USP of a NBFC anyway? Only quick decisions and efficient delivery system? Should it continue in its traditional line of business? Is it worth it anyway – unless the promoter is committed and has the required capability and staying power? Is it time to change track, take a hard look at the shape of things to come, re-focus and rework strategies for survival and growth? The shakeout has already begun. Fasten your seat belts, folks. It’s time to come down to earth.


[1] First published in the Business Standard (Money Manager), issue dated 7 March, 1996.

Author’s Note:
This article, published in March 1996, was the very first to predict the demise of the financial services companies in their the-then existing form. The subsequent developments are now a matter of record.
This article is re-printed here at special request .

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