NBFCs8217; loss, manufacturing cos8217; gain

The RBI move to rein in NBFCs living on public funds could result in an outflow of thousands of crores of rupees from such companies to comply with the latest guidelines or shore up their net owned funds. A sample of 13 top companies mostly with ratings higher than AA reveals a possible repayment of about Rs 1,560 crore see IE dated Jan 4. At the same time, manufacturing companies need not take a credit rating for FD mobilisation while NBFCs can collect money only on the basis of rating.

As like NBFCs, manufacturing companies also defaulted in repayment of debt instruments and interest. The major default of recent times was by the Modern group of companies. Investors took the Modern group to the Company Law Board as the group was unable to repay FDs to investors. Credit rating agencies had downgraded the debt instruments of PAL-Peugeot to the lowest category, indicating the possibility of default. Other manufacturing companies downgraded by the rating agencies included heavyweights like ACC, Ballarpur Industries, Lupin Laboratories, Videocon International, Lloyds Steel and Ashok Leyland.

The need to monitor FD mobilisation by manufacturing companies assumes significance as 63 per cent of deposits held by non-banking companies is accounted by non-financial companies. According to the RBI, as at the end of March 1996, the aggregate deposits of non-banking companies stood at Rs 2,95,344.5 crore. Of this, deposits of 2,336 non-financial companies accounted for 63.2 per cent Rs 1,86,909 crore, RBI says. 8220;It is necessary to make credit rating mandatory for manufacturing companies also. Like NBFCs, they also pay a similar interest rate. The mode of collection is also similar. Why should there be different standards for companies. There should be a level playing field,8221; said a senior partner of an auditing firm. As of now, while NBNFCs are under the purview of the Department of Company Affairs DCA, NBFCs are regulated by the RBI.

Industry pundits now expect a massive shakeout in the NBFC sector as a result of restrictions on mobilising deposits. Many NBFCs are likely to be closed down and others are likely to return FDs to the investors in view of the new guidelines which specifies that deposit mobilisation should be linked to net owned funds of NBFCs. A major chunk of this money is likely to be diverted to manufacturing companies.

There are grey areas on the asset-liability side as well. In the case of NBFCs, RBI can inspect the asset side depolyment of funds and liabilities side deposits raised from public. This is not applicable in the case of other non-financial companies. Not much details are known about their depolyment programmes.

For investors, the latest developments are not favourable. As interest rates are going down, companies are in a position to dictate the terms of interest rate. This means investor who was facing hardships following the withdrawal of at par cheque clearance facility wil have to be satisfied with whatever the company offers.