Corporate defaults see NBFC NPAs spiral

Almost all the top NBFCs (out of 37,500 NBFCs only less than 500 are active), including leading ones like Kotak Mahindra, 20th Century Finance, Lloyds Finance, Anagram Finance and Alpic Finance, were downgraded by credit rating agencies. On top of this, the RBI has banned several top finance companies like Prudential Capital, Global Finance Corporation, McDowell Krest Finance, DSJ Finance, JVG Finance. In several cases, the central bank has detected lapses on the part of NBFCs like non-payment of interest and principal, violation of SLR requirements, submission of return to the RBI and concentration of investment in group companies.

The mounting NPA level of NBFCs has been mainly due to the large scale borrowing by companies with poor cash flow and huge expansion programs. According to industry sources, the takeover tycoon P Rajarathinam who wanted to build a business empire by taking over a number of companies was borrowing heavily from NBFCs to finance his takeover plans. The MD of a leading NBFC which was facing investors’ wrath for default said Rajarathinam borrowed around Rs 300 crore to Rs 400 crore from various finance companies.

The Chhabarias who are one of the major corporate defaulters with various banks had borrowed heavily (Rs 300 crore). Other large scale borrowing included the Mideast group (Rs 100 crore). Almost all the corporates which had faced severe liquidity crunch like the United Western group of Nandan Gadgil, JVG group, DSJ group, Lok Housing, CRB, Prudential, Parasrampurias, Sanghi Polyester, East-West, Modern group, Rajinder Steel and NEPC borrowed heavily. “Many of these corporate borrowers took money at very high interest rates,” sources said.

Kotak Mahindra Finance, the leading NBFC, has been making huge provisioning for NPAs. It had to make a provision of Rs 25 crore during 1996-97 showing its NPA level. ITC Classic which has been taken over by ICICI has NPAs exceeding Rs 350 crore. “Even though ICICI has taken over ITC Classic, it will be a herculean task to recover the NPAs. If ICICI has to resort to litigations to recover its due from the Parasurampurias, it will have to be prepared for a long and protracted legal battle,” sources said.

Many NBFCs have resorted to using recovery agents to tackle NPAa. “I have appointed a recovery agent to get back some bad loans. But the recovery agent has collected the money and disappeared,” said the MD of a top NBFC.

None of the NBFCs prefer to settle the issue in the court, as the legal process may take years. Another interesting point is the huge borrowings of the NBFCs among themselves. The CRB group which admitted to have borrowings of Rs 500 crore has borrowed Rs 100 crore from its fellow NBFCs.

GTC which has been borrowing from the market has incurred a loss of Rs 114.08 crore. Its total borrowing is Rs 836 crore out of which Rs 117.84 crore is unsecured. Atash Industries has a total borrowing of Rs 71.20 crore — only Rs 56.29 crore is secured. The Sanghi group’s total borrowing is estimated at Rs 735.41 crore. The Bangur group has total borrowing of Rs 414.22 crore. Real Value had borrowings of Rs 179.43 crore. The Mesco group’s total borrowings is Rs 333.86 crore, and the Modern group’s about Rs 954.17 crore.

“Another problem is the unjustifiable level of exposure in group companies or companies promoted by the same directors. Often the high NPA is due to lending to front companies which are controlled by the promoters. Many NBFCs diverted funds to unlisted private companies through interest-free loans. Others sunk money in real estate and burnt their fingers after the fall in prices,” industry sources said.

NBFCs also diverted funds to prop up share prices of promoter companies. Moreover, around Rs 10,000 crore worth of equipment are taken on lease by leasing companies. While the income from these operations comes back only over a period of time, many companies used the money borrowed at the short term end of the market like fixed deposits or short term borrowings on the assumption that the rate of interest will remain at a high level.

Ever since the RBI started taking measures to reduce the interest rate, these companies started facing problems. While fresh deposits are not coming, they have to service the borrowing from the lease income which has just started trickling in. Clearly there is an asset liability mismatch for many companies.

The main source of income has been dividend and lease rental income which started declining due to poor corporate performance. Out of the 10 leading NBFCs classified in terms of networth, seven are facing severe problems.

Incidentally, CRB was the second in the networth list after HDFC. Federal Bank, which has a huge exposure to the NBFC sector, saw its NPA level jump by 140 per cent to Rs 214 crore in just one year. One reason for the increase in the bad debt of banks and institutions is the exposure to finance companies.

While the regulated deposits of NBFCs amount to Rs 45,439 crore, the total deposits (including debentures and debt instruments) of NBFCs come to a whopping Rs 108,434 crore. Thanks to the massive defaults and the general crisis of confidence in the sector, NBFCs will find it difficult to raise funds in future. Their share prices have also taken a beating on stock exchanges. For investors it’s a double blow: the fall in share value and zero return from fixed deposits.

RBI to enforce tough norms

The high risk profile of the NBFC sector has forced the RBI to increase the capital adequacy ratio (CAR) level for the industry from the current 8 per cent to 12 per cent.

According to an RBI report, the CAR is being proposed to be raised in a phased manner to 10 per cent and 12 per cent to be achieved by end March 1998 and 1999 respectively. Due to the recent developments, the central bank has reversed many of its earlier policies with respect to NBFCs.

While the genesis of NBFC business goes back to the A C Shah Committee appointed by RBI to liberalise the sector, RBI officials are retreating from its earlier commitment. Even the last credit policy did not mention the NBFC sector and the previous RBI governor said it is going to come out with more stringent guidelines soon.

Industry analysts are worried about this and feel that the measures may be signal the last nail in the NBFC coffin. Under the compulsory registration system envisaged by the RBI, around 3,7500 NBFCs have applied for registration. Out of this, only 9,000 are having the threshold limit of net owned funds of Rs 25 lakh and above.