Crisil8217;s concern over NBFC performance

The uncompetitive size, the difficult business outlook on both the asset and liability side, declining performance and the inability to recapitalise has resulted in large number of weak companies closingdown. 8220;Systemic support has not been extended to these entities due to their relatively small size coupled with their private ownership,8221; it said.

Crisil said the strengths in business will arise predominantly from business origination capabilities and efficient recovery systems. The captive finance companies will enjoy the advantage of manufacturer8217;s brand equity, lower establishment costs, preferred financier status and asset quality support in various forms.

However, there is an increased involvement of foreign entities large international banks and finance companies in the retail business through subsidiaries and joint ventures with domestic partners. 8220;Foreign players have so far concentrated more on car financing and have greatly influenced the decline in the yields in this business,8221; Crisil said.

The foreign firms which expanded their bases in India included GE Capital, Prudential, Merrill Lynch, Morgan Stanley, ABN Amro and JP Morgan. However, some of the foreign entities have also takenpositions in the truck and corporate financing businesses. These players are expected to play a key role in the sector in the medium to long term as they possess the advantages of competitive funding costs, support of international parents and sophisticated mechanisms to monitor and control risks. 8220;Some of these players are seeking to take the route of structural growth through acquisitions,8221; Crisil said.

Although mergers would have been the logical routes for the consolidation to take place, most potential buyers have adopted a cautious approach to mergers because of the apprehension regarding the undisclosed liabilities of the NBFCs. Instead, buying of securitised portfolio of cherry picked assets has been the most common method of acquisition; however, some companies have resorted to complete asset buy offs.

Some of the large players, including domestic financial institutions, are also buying part of the branch network of the smaller regional NBFCs to increase their reach and geographical coverage.As a result of restructuring in the industry, there are only a handful of Indian entities, which have survived the stress, and they are realigning their businesses.

The NBFC sector, which had grown rapidly in the early 1990s but later witnessed many closures, non-performing assets and bankruptcies, has entered a phase of consolidation in the last two years.

8220;In the changed scenario, cost of funds and ability to capitalise at regular intervals are key factors for NBFCs to sustain good asset quality, maintain reasonable return and defend market position. The extent of linkage and support from manufacturers will have a strong impact on business growth and profitability of captive finance companies. However, the impact of diversification of business interests outside manufacturer8217;s businesses will be critical. The emergence of mutual funds as an alternative source of funds augurs well for NBFCs in their efforts to raise funds at competitive costs,8221; Crisil said.