NBFCs want public money without rating

ALFS has evenasked the central bank to allow NBFCs which cannot get an investment grade rating from any of the agencies to raise public deposits without being subjected to the credit rating requirement. “For companies upto Rs 5 crore networth, no rating is required. These companies as well as companies with below investment grade rating should be allowed to accept public deposit upto 2 times their networth,” ALFS demanded.

It may be recalled that the mandatory credit rating was introduced after thousands of ordinary investors lost their deposits in NBFCs like JVG Finance, Prudential Capital, CRB Capital Market and Helios Finance. These companies had good rating from agenices. “Think of the situation when such NBFCs are allowed to raise deposits without any rating requirement,” asks an aggrieved investor who lost his money in a fly-by-night operator. The RBI also could not do much to protect the small investors.

“It was the RBI which gave a clean chit in the form of a bank licence to dubious companies like CRB.Now it should not repeat the same mistake,” said an investor. According to one estimate, small investors lost a whopping amount of Rs 15,000 crore in dubious NBFCs. Around 40,000 NBFCs mushroomed during the boom period and many of them have almost disappeared now. “If the authorities bow down before the NBFC lobby, many of the fly-by-night companies will stage a comeback. Many of the companies did not get even licence from the RBI,” said a source.

According to ALFS, there are a number of companies which are predominantly engaged in leasing and hire purchase since long but owing to the size of their small capital base, limited geographic reach in one city or few towns, family managers though experienced but lacking professional qualifications, restricted dealings, they never approached the credit rating agencies for a rating. Besides, even if rated, they will not qualify for minimum investment grade rating.

“The rating agencies do not have transparent parameters. They are unable to spell out thestandards to be achieved by an NBFC engaged in equipment leasing and hire purchase finance company small capital of say Rs 5 to 10 crores for rating A or above,” the ALFS letter said. According to investors, many NBFCs which raised public money during the boom period for leasing and related activities were actually speculating in the stock market using the public money. So when the market crashed, many of them lost heavily and vanished into thin air leaving the investors in the dark. “Now that people have started forgetting about the NBFC debacle, finance companies are lobbying again to take the investors for a free ride,” said another investor.

While the rating mechanism has its own short-comings, there is no other mechanism to protect the small investors from fly-by-night operators. Recently, plantation companies which duped thousands of investors have challenged the Securities and Exchange Board of India (SEBI) to introduce compulsory rating for raising public deposits.

The ALFS letter to the RBIcomplained that the “rating mechanism has not played a social/national or productive role and they do not take any responsibility in case companies rated by them committee default. The rating personnel employed for carrying the exercise do not seem to have previous experience particularly in equipment leasing and hire purchase activities and rating does not take into account the inherent strengths of the company.”

Other negative points about rating include lack of appellate provision against a rating and code of conduct for regularising the rating agencies’ business. “The process of rating is very costly and the small NBFCs cannot afford it, in many cases, the cost will eat away more than 50 per cent of their profits,” it said.

ALFS also wants the Deputy Governor of RBI, S P Talwar, to review linkage of accepting public deposit with compulsory investment grade rating and the formation of what it calls a self-regulatory organisation (SRO)’ for the NBFCs. It may be recalled that the mutual fund andmerchant bankers have their own SROs (Association of Mutual Funds of India and Association of Merchant Bankers of India) which could not do much about investor protection. “Investors know that the mutual fund and merchant banking sector is in such a bad shape due to unethical business practices. Many of the merchant bankers have disappeared from the scene,” added industry sources.

Another demand of the NBFC lobby is to allow more bank finance for the sector. It is worthwhile to remember the amount of public sector bank money blocked in companies like CRB, JVG and other dubious players which pushed up the NPA level of Indian banks.