FDs offer largest source of funds for NBFCs

Pradip Kumar Dey, FE Research Bureau

The Reserve Bank of India has recently issued a guideline allowing the NBFCs to convert themselves into private banks. And new and exciting avenues like insurance and the allowance of 100% foreign investment are improving the outlook. These measures were taken by the market regulators for strengthening the systems and improving the functioning of the NBFCs.

Most of the NBFCs rely on borrowings as can be seen from their share in the total capital employed. Borrowings formed more than 72 per cent of the total capital employed for 25 major NBFCs during 2000-01. Companies closing their accounts between April 2000 and March 2001 are considered for the study.

Total borrowings by NBFCs amounted to Rs 35,046 crore at the end of 2000-01 or 72.7 per cent of the total capital employed.

Banks, financial institutions, debentures (including bonds) and fixed deposits account for the bulk of external resources to the tune of 92 per cent of the total borrowings. Among external sources, fixed deposits were the single largest source of finance with Rs 10,608 crore or 30.3 per cent of the total borrowings, banks were the second largest source of loans, accounting for Rs 10,451 crore or 29.8 per cent of total borrowings. The share of debentures in the total borrowings amounted to 18.6 per cent, while the financial institutions contributed 13.2 per cent.

Accordingly, the top five in respect of borrowings as a percentage of capital employed in 2000-01 are Nagarjuna Finance (86.12 per cent), LIC Housing Finance (85.84 per cent), GIC Housing Finance (85.09 per cent), Gruh Finance (84.50 per cent) and Dewan Housing Finance (80.85 per cent).

As many as twelve NBFCs have showed an increase in the ratio of borrowings to capital employed in 2000-01 as against previous year’s
figures.

The most significant occurrence during the year was the declining trend in the share of all borrowings except banks and financial institutions. Money taken from banks increased by Rs 1,713 crore from Rs 8,738 crore in 1999-00 to Rs 10,451 crore in 2000-01. This pushed their share in total borrowings from 28.6 per cent to 29.8 per cent.

Money sourced from financial institutions increased by only Rs 500 crore from Rs 4,138 crore in 1999-00 to Rs 4,638 crore in 2000-01, thus lowering their share in total borrowings from 13.6 per cent to 13.2 per cent.

Debentures has provided Rs 1,432 crore during the year and its share in total borrowings increased from 16.7 per cent to 18.6 per cent.
The share of fixed deposits in total borrowings declined from 32.0 per cent in 1999-00 to 30.9 per cent in 2000-01. In actual terms, the amount collected through fixed deposits increased from 9,751 crore in 1999-00 to about Rs 10,608 crore in 2000-01.

A significant rise in the ratio of borrowings as percentage of capital employed during 2000-01 was seen in the case of Escorts Finance.
During the year under study, the total public deposits have grown up from Rs 159 crore to Rs 194 crore registering a growth of 22 per cent as on 31st March 2001. Of the total borrowings by the company, fixed deposits accounted for 71.4 per cent, followed by banks (18.0 per cent) and debentures (7.3 per cent) and the rest from other sources.

A significant decline in the ratio was seen in the case of Reliance Capital. Reliance Capital redeemed non-convertible debentures (NCDs) and discount bonds to the tune of Rs 206 crore during the study period. Of the total borrowings by the company, debentures accounted for 62.5 per cent, followed by banks (2.2 per cent) and fixed deposits (0.4 per cent) and the rest from other sources.
Nagarjuna Finance enjoys the highest ratio of borrowing to capital employed during 2000-01. Its total borrowing stood at Rs 201 crore in 2000-01 against Rs 255 crore in 1999-00. Fixed deposits accounted for bulk of its borrowings during current year.

However, the share of fixed deposits to total borrowings increased marginally to 60.9 per cent from 60.5 per cent in 1999-00. As far as debentures were concerned, it rose from 1.9 per cent to 2.5 per cent, that of banks, the share declined from 22.1 per cent to 20.7 per cent. The share of financial institutions has declined from 1.2 per cent to 1.0 per cent.

From the above analysis, it is clear that the main sources of borrowings by NBFCs were the fixed deposits. But recently, the RBI is trying to open other sources of borrowings for NBFCs.