Sunday, December 01, 2019

Is NBFC a Four-letter Word?


[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. Yet, there is still no comprehensive law to streamline the leasing business, factoring, or hire purchase transactions.
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, the banking sector, and the government agencies made up their mind about what role they expect the NBFCs to play. Setting up of a SRO, regular interaction with the industry, proper understanding of the problems faced by it today, better appreciation of the contribution of the intermediaries, and sensitivity while tackling issues as they arise-should go a long way in restoring the crisis of confidence, and work towards ensuring a healthy and systematic growth of this vital sector of the financial services industry.

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