You cannot punish a person already sentenced to death by depositors
S Muralidhar
NBFCs are dead. These measures are only a prelude to the final ritual," was how a finance company official reacted to the Reserve Bank of India's latest regulation. His criticism might sound harsh, but he is not very far from reality. In essence, the RBI's steps make it difficult for NBFCs to raise deposits. Now, is it easy for any finance company to raise money from the public? The defaulters apart, even the strongest of strong NBFCs are not raising deposits today. The reasons are not far to seek: the depositor's confidence has been shattered; most NBFCs don't need money because there is no growth in business; and even if they want to they cannot because only defaulting clients are prepared to borrow at high rates, a suicidal move when interest rates have crashed.You cannot punish a person when he has already been sentenced to death by two courts -- the capital market and depositors. So the question is: should a dying candidate be given oxygen or turn off all supplies of aid? When an NBFC collapses it is
just not the promoters who are out of business, it is the depositor who disappears in thin air. This is true of both equity and debt. The irony is that when anybody and everybody armed with an NBFC registration was raising funds at rates unimaginable, there were hardly any noise made. The funds were flowing freely; interest rates were moving up unhindered and the herd of depositors kept growing. Amidst all these, the 15 per cent ceiling on interest rates was removed as it was found ineffective sometime during mid-June 1996. What was offered under the table to lure depositors started appearing on paper. Now the interest rate ceiling is back. An irony again when interest rates are falling. The RBI has also prescribed a cap on the amount an NBFC can raise through deposits. This is a function of the net owned funds. AAA-rated leasing and hire purchase companies can raise three times their net owned funds, twice the NOF for AA rates companies, so on and so forth. More, the RBI has told NBFCs to ensure a
capital adequacy ratio of 10 per cent by March, 1998 (as against 8 per cent). On the face of it, this appears to be a measure to tighten the screws on the NBFCs. But this will remain on paper when there is no business. There will be no erosion in the capital funds when there is no growth in business. Most NBFCs would have already fulfilled this ratio requirement. Today the focus of business of a majority of NBFCs is two-fold: pursuit of their clients for repayment of dues; and repayment of fixed deposits to those lining up in front of their offices. What NBFCs need today is access to funds to enable them to service their depositors and restore a sense of confidence in them. True the NBFCs had exploited all the three routes to the maximum: equity, debentures and bonds and deposits. Now all the three are closed. It will take at least two or three years for the NBFCs to come back to life. When they do, they will not just crawl, they will be rearing to go. That is when the implementation of these measures
will be useful. But by then these measures would have become part of regulatory history, till they are resurrected by another crisis. The malady is not confined to the finance companies. Manufacturing companies are not insulated either. Every week for the past six months this paper has been flooded with letters from depositors complaining of defaults in manufacturing companies too. There has been a ceiling on the deposit rates that they can pay, but effectively most of them were paying at least five per cent over and above the ceiling in the form of incentives. The RBI has also prescribed the brokerage that can be paid to agents and brokers. There is no regulatory framework for fixed deposit brokers and agents. Brokers and dealers in the equity and money markets come under regulation. They are registered with the Securities and Exchange Board of India and the Reserve Bank of India. They have to follow their norms and they are supervised by these two bodies. In the case of stock market brokers, the stock
exchanges too ensure regulation and step in to arrest defaults. In the fixed deposit market the broker or the agent has no accountability. He is the first to disappear at the earliest sign of trouble. The RBI's measures appear to be very firm. But it has come a bit too late for the depositors to cheer. His immediate concern: will I get back my money?
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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