NBFCs: Reorganisation on anvil

Suresh Krishnamurthy

GREATER reorganisation activity is on the anvil in the non-banking finance sector.

What began as merger and acquisition activity between beleaguered finance companies may now receive further impetus, given the changes at the policy level. The Reserve Bank of India has now permitted the conversion of non-banking finance companies into banks. Also, a move aimed at allowing 100 per cent foreign direct investment is also under perusal. These moves can result in further consolidation at the micro level.

Initially, the positive impact of such moves may be felt only by companies with a reasonable quality of assets in their balance sheet. As some of the stronger NBFCs not promoted by large industrial houses get converted into banks, other stronger NBFCs may merge with these banks or attract foreign direct investments from overseas investors. The standard assets of specific finance companies could also be acquired.

For non-banking finance companies whose only problem is asset-liability mismatches, and who, thus, defaulted or delayed payment on their fixed deposit obligations, such efforts at consolidation provide opportunities to wriggle out of such problems. In the process, investors in these companies would benefit. And when the consolidation activity distills down to acquisition of assets of weaker NBFCs, investors in such companies would benefit too. However, the only way fixed deposit investors, who were essentially victims of fraud, can see the return of their investments, wholly or partially, is through the Company Law Board or the court route.

More importantly, the beneficial impact for investors would be seen in the expansion of the universe of investment options in the market for fixed income investments. There are now very few investment options in the fixed deposits market. As of now, the uncertainty involved in an investment with a rating below AA in the NBFC sector appears high. Also, the coupon rates offered by even AA rated NBFCs are quite low, rendering an investment quite unattractive.

The competition for funds and business volumes in the NBFC industry is such that even if economic activity improves, the smaller NBFCs are unlikely to revive. But if structural changes can lead to stronger entities in the NBFC industry, it would only imply more investment options. Investors can take advantage of either the direct investing or the mutual fund route.