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NBFCs : Merge to SurviveNBFCs : Merge to Survive

By

Ishwara & Kranti

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IntroductionIntroduction

Opening of the Financial Sector to foreignplayersOpening of the Financial Sector to foreignplayers

Financial institutions givenpermission to become universalFinancial institutions givenpermission to become universal

banksbanks Regulation for flyRegulation for fly--byby--night operators did not existnight operators did not exist

Strict regulatory framework by the RBIStrict regulatory framework by the RBI

Excessive number of NFBCs but no roomExcessive number of NFBCs but no room

Opening of insurance sectorOpening of insurance sector

consolidationconsolidation-- the only way for NFBCs to survivethe only way for NFBCs to survive

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MergerMerger of 4 NBFCsof 4 NBFCs

44 active players of Leasing and Hire Purchase haveactive players of Leasing and Hire Purchase have

announced plans to mergeannounced plans to merge

Merger expects to reduce cost of operation byMerger expects to reduce cost of operation by7575%%

It will help to get a better credit rating, reducing the costIt will help to get a better credit rating, reducing the cost

of fundsof funds Merged entity expected to concentrate onleasing toMerged entity expected to concentrate onleasing to

become aleader in the niche segmentbecome aleader in the niche segment

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Key FinancialsKey Financials

Parameters AppleFinance

AlpicFinance

Srei Int. AppleCredit

Total(Rs Cr)

Equity Capital 55 12 53 15 135

NetWorth 310 180 150 108 748

Secured Loan 422 193 351 334 1300

Unsecured

Loan

60 63 15 68 206

Current

Liabilities

73 137 102 90 402

Gross Assets 870 580 590 510 2550

Lease Assets 450 480 450 470 1830

Bran

ch

es 4

0 94

22 12 16

8

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Role of RBIRole of RBI

Amendment of RBIAct in March 1997Amendment of RBIAct in March 1997

Mandatory NOF level of Rs. 25 Lakhs within 3 years to be eligible for certificate of registration.Mandatory NOF level of Rs. 25 Lakhs within 3 years to be eligible for certificate of registration.

As onApril 1As onApril 1stst, 2000, the RBI had received 2651 applications for extension of time , these NBFCs could create, 2000, the RBI had received 2651 applications for extension of time , these NBFCs could createa wave of consolidation.a wave of consolidation.

RBIannounced the norms for entry of NBFCs into insurance sector in the recent past.RBIannounced the norms for entry of NBFCs into insurance sector in the recent past.

Net worth of Rs.5 bnNet worth of Rs.5 bn

Net owned fund of Rs. 500 mnNet owned fund of Rs. 500 mn

CAR of 15% for those engaged inloanand investment and others 12%CAR of 15% for those engaged inloanand investment and others 12%

Level ofnonperforming assets to max 5% of the total outstanding lease/hire purchase assets and advancesLevel ofnonperforming assets to max 5% of the total outstanding lease/hire purchase assets and advancestogethertogether

Making profit for threepreceding years.Making profit for threepreceding years.

Manyare struggling to maintain CAR between 10 t0 12%Manyare struggling to maintain CAR between 10 t0 12%

Many raising public deposits do not have anet worth of Rs. 500 mnMany raising public deposits do not have anet worth of Rs. 500 mn

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Relaxing norms for foreign NBFCsRelaxing norms for foreign NBFCs

Foreign financial sector players were required to rope inalocalpartnerForeign financial sector players were required to rope inalocalpartnerwhen they wanted to invest inIndiawhen they wanted to invest inIndia MorganStanley was their first exceptionMorgan Stanley was their first exception

Since then several 100% subsidiaries operated inIndiaSince then several 100% subsidiaries operated inIndia

Another requirement : the holding company canbe whollyowned butAnother requirement : the holding company canbe whollyowned butthese companies can operate inIndian financial sector only through athese companies can operate inIndian financial sector only through asubsidiary, where a minimum 25% of the $5 mn capital has to besubsidiary, where a minimum 25% of the $5 mn capital has to bebrought by the Indianpartner.brought by the Indianpartner.

FIPB notified that the minimum domestic capital requirement couldFIPB notified that the minimum domestic capital requirement couldbe met by the foreign NBFC divesting in favor ofIndianpublic withinbe met by the foreign NBFC divesting in favor ofIndianpublic withinthree years of operating in the country.three years of operating in the country.

NBFCs freed from this arrangementNBFCs freed from this arrangement

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Why size mattersWhy size matters

To realize minimum economies of scaleTo realize minimum economies of scale

NBFCs initiating moves to become financial supermarketsNBFCs initiating moves to become financial supermarkets

NBFCs increase line of business to defend againstNBFCs increase line of business to defend againstresourceresource-- rich banks and FIsrich banks and FIs

To minimize downside riskTo minimize downside risk

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Large CompetitorsLarge Competitors

Banks and FIs have moved into retail financingBanks and FIs have moved into retail financing

ICICI has become a universalbankICICI has become a universalbank

SBI is setting upSBI is setting up100100 branches for retail clientsbranches for retail clients

Banks have access to resourcesat lower cost compared to FIsBanks have access to resourcesat lower cost compared to FIs

NBFCs access to reach is limitedNBFCs access to reach is limited

Foreignplayers have takenalargeportion of the business of NBFCsForeignplayers have takenalargeportion of the business of NBFCs

Large intermediaries raise funds at PLRLarge intermediaries raise funds at PLR

NBFCs raise funds atNBFCs raise funds at 33--44%above PLR%above PLR

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SurvivalKitSurvivalKit

Competition between banks and NBFCs is increasing.Competition between banks and NBFCs is increasing. Banks into areas like auto and consumer durable financeBanks into areas like auto and consumer durable finance

Consolidation in one of the following ways:Consolidation in one of the following ways: Weaker players die naturaldeathWeaker players die naturaldeath

Merge to surviveMerge to survive

Merge to survive and grow organicallyMerge to survive and grow organically

Merger is just the beginningMerger is just the beginning

Merged entity should undertake rational cost cutting for aMerged entity should undertake rational cost cutting for abetter credit rating to reduce cost of funds.better credit rating to reduce cost of funds.

Smaller players must aim at aparticular niche segment in whichSmaller players must aim at aparticular niche segment in whichthey should aim to become leadersthey should aim to become leaders