[First published in Business Standard, Money Manager (Expert Options), 5 August, 1997 .]
The non-banking finance companies (NBFCs) are in the news for the past
couple of months - for all the wrong reasons. The recent debacle of one finance
company has triggered a series of events. The depositors are up in arms, the
regulators have started to act tough, and the media have been going to town
with one ‘sensational’ revelation after another. The image of the finance
companies - rarely bright even at the best of times - has taken a beating of
late. Given the fact that the market is passing through a depressed phase, life
is not exactly a bed of roses today for the finance companies.
Unfortunately, life never was easy for the NBFCs. This is one industry
which never got any support from any quarter. But that had never stopped the
NBFCs from carving out their own niche, and contributing in their own way to
expand the market in financial services. Leasing as an industry (and as an attractive
financing option) was actually introduced and made popular by the finance
companies since the early eighties. The finance companies fought relentless
battles to help shape regulations and tax laws in order to promote leasing in India
Or consider, for example, vehicle finance. Admit it or not, had it not
for the aggressive approach by the finance companies, life may have been much for
difficult for the car manufacturers than it is today. Except for a lone foreign
bank or two, credit must go fully to the NBFCs for promoting retail vehicle
finance in a big way, expanding the market, helping to generate higher sales,
and introducing the hire purchase culture in our country. Even today the
finance companies remain in the forefront in this segment - not the commercial banks or any other
financing agency.
Over the years the NBFCs have been subjected to constraints in terms of
availability of financial resources, business focus or regulatory framework.
Inspite of all the roadblocks, the very fact that the financial services
industry has not only survived, but thrived, and has worked to make no small
contribution to the capital formation of the country speaks volumes for the
entrepreneurial ability and the relevance of the NBFCs.
Unfortunately, a single episode like that of a CRB was enough to bring
out all the wrong emotions and reactions - to the extent that all the industry
players were painted with the same black brush. In sharp contrast, a banking
debacle like that of Indian Bank moved the government to step in with Rs.1,600
crores to support it. UCO bank is offered Rs.300 crores for its revival. For
the scores of banks which had red splashed all over their balance sheets when
capital adequacy and provisioning norms were introduced, those days are now
forgotten. Inspite of the fact that banks are one of the most regulated, scams
have continued to occur with monotonous regularity. Vast amount of public money
with the banks have gone down the drain. But then, a ‘bank’ did not become a four-letter word. Banking losses do not
raise all the hackles that a debacle in the NBFC sector does. The government
does not turn its back on the banking industry at the first sign of trouble, or
abandon a bank to its fate if a scam blows up in its face.
Contrast that with how the financial services industry is treated if
something (or anything) goes wrong there. Apart from pushing everyone to the
wall through sudden changes in regulations and knee-jerk reactions, all are
made to suffer for the misdeed of one. The reactions at times of crisis more
often than not fail to address the overall interests of the industry.
Rationality takes a back seat. And all that the industry tried to achieve over
the years is brought to nought.
The NBFCs, of late, been subjected to the very same changes in
regulations that pushed the banking sector into the red some years back. Owing
to changes in the regulatory framework, technology, and the market conditions,
the financial services sector is going through the its own process of
readjustment that the commercial banks went through some years ago. Change is
inevitable for the NBFCs too, and is not always painless.
However, it is high time the Reserve Bank of India
