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April 16, 1999


NBFCs seek institution for financing, banks' SLR

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Anurag Joshi in Bombay

The non-banking finance companies have indicated their expectations from the Credit and Monetary Policy to be announced by the Reserve Bank of India on April 20.

The NBFCs want an institution for financial support. They also want to measures to facilitate flow of credit from banks for on-lending to various sectors, maintenance of the same level of statutory liquidity ratio for NBFCs, and rediscounting of bills by banks.

''The NBFCs need a separate institution to finance on-lending to various sectors. The proposed institution should, ideally, have a net worth of between Rs 30 billion to Rs 50 billion. The institution should earmark nearly Rs 30 billion annually to finance those areas which depend on the NBFCs for funding requirements like truck operators and machinery manufacturers,'' said Mahesh Thakkar, executive director, the Association of Leasing and Financial Services Companies.

The ALFS, which represents leasing companies and other NBFCs, has dashed off a letter to the RBI governor Dr Bimal Jalan asking the central bank to take measures for setting up such a specialised agency for the purpose of providing financial resources to the asset financing companies.

''The agency will be an expert in appraising the requirement of asset financing companies and accordingly be able to deal with an entire gamut of flow of credit and its delivery to the NBFC sector more effectively and efficiently,'' the ALFS said in the letter.

''Such an institution will be able to lend to NBFCs without any personal bias,'' quipped Thakkar.

The NBFCs are also demanding that the RBI incorporate norms to enable them to avail bank credit at rates, which are competitive and allow them to earn a reasonable spread from on-lending to their clients.

''We have proposed that bank finance be extended to only registered finance companies at a reduced rate. Currently, banks are ready to lend to NBFCs at 16-17 per cent, which makes it unviable for these companies to lend funds further to needy sectors,'' said Thakkar.

According to him, bank finance can be a good proposition for NBFCs on account of severe ceiling restrictions imposed by the RBI on raising public deposits by these companies. Thakkar added that an alternate source of funds for them would help in bridging asset- liability mismatch.

The proposal by the Vasudev Ccommittee on NBFCs to increase the SLR on financial companies from 12.5 per cent to 25 per cent is being opposed by the ALFS on the grounds that NBFCs are making a loss of 4-5 per cent on investment in SLR securities.

Thakkar said that existing leasing and hire-purchase companies would become ''unviable'' due to the burden of loss if the proposal is accepted by the RBI.

The ALFS has asked the RBI to consider removing restrictions in allowing banks to rediscount bills previously discounted by the NBFCs.

According to Thakkar, the restrictions on rediscounting were based on the need to control working capital requirements of each borrower by the consortium of bankers. He feels that on account of considerable liberalisation and abolition of the consortium arrangement, rediscounting should be allowed.

The problem of non-performing assets has plagued the financial sector and the NBFCs are not an exception. Thakkar estimates that the NPA level among corporate clients of the NBFCs is 10-12 per cent, while it is 6-8 per cent at the retail level.

According to him, the ALFS has asked Finance Secretary Vijay Kelkar to set up a recovery tribunal to aid in recovery of bad and doubtful debts.

''The basic reason for NPAs is the recession prevailing in the industry and weakness of the recovery procedures. Also, the legal framework is at a low level, which hampers the process of recovery. There are many cases in the courts, which may take 7-8 years for any conclusive settlement to take place,'' stated Thakkar.


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