CHENNAI, May 10: Non-banking finance companies (NBFCs) are nervously awaiting a shake-out in this segment. While costs of funds have generally come down, this sector has been hit hard by the slowdown in industrial growth, which in turn has led to a large reduction in sales of vehicles, commercial and passenger.

To add to their woes, NBFCs have also been forced to slash the interest rates on the loans they extend.

Industry leaders feel that in the coming months NBFCs will be in the same condition that troubled the banking industry last year. Banks were then hard put to cope with the drastic fall in credit offtake.

The industry fears that the impact is going to be quite hard even on companies which have been rated. And, it should be noted that of the over 40,000 NBFCs, the Reserve Bank of India (RBI) has certified only around 85. Credit ratings and prudential norms are necessary for RBI certification. Apart from hopes of NBFCs rushing in for RBI certification being belied, the significance of a rating will no longer be the same. ``I am afraid a rating signifying adequate safety will no longer have the same meaning,'' said the chairman of a financial services company.

The impact has already begun to make itself felt on even the creamy layer of NBFCs, those with a triple A rating (indicating highest safety in payment of principle and interest).

The more conservative of companies have refused to look beyond their regular business areas. Leaders like Sundaram Finance, ALF, etc, have firmly stated that they would not move away from truck financing, which forms their bread and butter business.

The shortage of lendable propositions had induced Sundaram Finance to increase its focus on car financing during the year ended March 1997. But it is precisely this conservative attitude that is attracting more and more investors, despite these companies slashing their interest rates on FDs. With the capital market continuing to remain sluggish, most of the household savings are pouring into various FD programmes. ITI is reporting a daily net accretion of around Rs 15 lakh.

ALF had reported that during last month the company witnessed an inflow of over Rs 1 crore into its FD schemes.

One of the main reasons for this state of affairs is the dramatic turnaround in the demand/supply position. Growth in M3 (broad money) has been well over 15 % while cash reserve requirements have gone down substantially. This has led to abundant liquidity in the system.

Another major factor is the mindset of investors in Tamil Nadu. It is a well-established fact that investors in FD programmes here change companies for as little as a half percentage point differential.

Thus NBFCs have gained much in accessing funds. But they have been forced to acknowledge that their business is going down. Leasing has never really taken off, the housing industry is in the doldrums and vehicle sales are down. Even where vehicles are bought through hire purchase, the interest earned has taken a beating.

The alarming drop in the number of sound business propositions has only been matched by a diametrically opposing increase in funds inflow. While ALF derives enormous benefits from its association with Ashok Leyland, other companies do not have such luxuries of choice. ``We have no such aids and are thus forced to increase our exposure to areas like inter-corporate lending, bills discounting, working capital margins, etc, where there is no collateral,'' said the managing director of a double `A' rated company. And herein lies the problem.

When NBFCs are forced to lend without the security of a collateral, they are jeopardising their funds.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.