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RBI feigned helplessness as weak finance companies go under
MUMBAI, December: The scorching sun on May 20 did not deter these people from making a beeline for a posh office in South Mumbai. They did this for many more days. After all, their entire savings were at stake. They gathered again in the first week of June to celebrate Diwali, in broad daylight, thinking the arrest of Chain Roop Bhansali by the CBI would get their money back.Things haven't changed much since October, except for the fact that a few more CRB-like companies were detected by regulators but only after more people lost more. The happenings and the fallouts of the CRB types should provide an opportunity for introspection for everybody -- the non-banking finance companies (NBFCs), the regulators, banks, investigative and credit rating agencies and of course depositors. ``Depositors should not fall prey to hefty incentives and unrealistic interest rates offered by the NBFCs,'' said a leading industry observer. The industry was already handicapped at the beginning of 1997. With no finance coming
from the banks and a slow recovery from corporates, what followed from the CRB fiasco were knee-jerk reactions all around sending the industry into a crisis of confidence, he said. CR Bhansali and the fate of his CRB group sum up the `happenings' for the industry, which seems to be caught in a vicious circle of crisis with no saviour in sight. With no effective regulation and intense competition, sky-rocketing interest rates and incentives on deposits became the norm among the 40,000 and above non-banking finnace companies ultimately leading to a run on deposits and a crisis of confidence. ``Why is the rest of the industry being identified with the CRB companies? that was a case of fraud and not systemic failure,'' said executive director of Association of Leasing and Finance Companies, Mahesh Thakkar. Though a reaction from the depositors was understandable, the way the Reserve Bank, Sebi, finance ministry and the banks reacted was totally unwarranted and that had taken a toll on the industry, he
added. Prior to the amendment of the RBI Act, the central bank could only monitor deposit raising of NBFCs and on the asset side there was virtually no regulation. Also from a regulatory point of view, it was difficult to inspect the books of over 40,000 companies, an RBI official said. If it was not a knee-jerk reaction, why were so many ephemeral decisions taken by the RBI and the commercial banks? "Dividend and interest-warrant facilities were withdrawn and then re-introduced. The damage has been done," Thakker said. That apart, the industry is also facing acute recovery problems from corporates with the slowdown in the economy. Net profits of NBFCs declined by 25 per cent during last financial year despite a 22 per cent increase in incomes, as per results compiled by the Centre for Monitoring Indian Economy (CMIE). From near about one or two per cent, the non-performing assets (NPAs) for the industry would touch five per cent by the end of this fiscal year, Thakker said. The Reserve Bank has
ordered fresh registration of the NBFCs after a one- time audit of the disclosures made by them. It has received over 37,000 applications and according to Thakkar around 8,000 of them were likely to get registration from the central bank. However, the number of companies that could be allowed to raise deposits would be much less. On the prospects for the coming year, he said, the bad patch would continue and a shakeout was inevitable as size would become a norm. "The mantra for the finance companies should now be consolidate and grow," he said. Would this mantra once again charm the depositors? Only time can tell.
Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.
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