According to newspaper reports, Birla Global Finance Limited (BGFL) is spinning off its retail finance activities into a separate firm. The company proposes to rope in a strategic partner for the new firm, which will have assets worth Rs 3.5 bn.
BGFL (FY98 Total Income: Rs 945 m) is the financial services flagship of the Aditya Birla Group of companies. It has interests in corporate finance, retail finance and capital markets. The company also holds the Birla Group’‘s 50 per cent stake in three joint ventures in mutual funds, retail broking and retail distribution with Sun Life, Canada.
The company’‘s decision to hive off the retail finance business has probably been influenced by fact that there has been a substantial increase in competition in this line of business. The competition has become even more intense after the domestic financial institutions, such as ICICI, made a foray into this sector. In order to compete successfully, a lot of money needs to be sunk in marketing exercises. This will sooner or later result in thinner margins and put pressure on the company’‘s cash resources. Moreover, with the business growing at a brisk pace, there is a constant shortage of cash resources to fund new business.
The decision to bring in a strategic partner will give the new company access to larger financial resources and the latest technology. This will help it in expanding the business and optimising returns. Moreover, the hive off will generate cash resources for BGFL, which can then be used to expand its corporate finance and capital market activities. Another fallout of the move would be to make the business activities of BGFL more focussed on corporate finance.
However, the hive off will result in a loss of economies that BGFL benefited from by carrying on both the activities as part of the same business. A factor that causes concern is that BGFL has decided to retain the capital markets related business that finances subscriptions to initial public offerings. This implies that BGFL will continue to have a presence in the retail segment.
Moreover, the move seems contrararian in a business environment where there is a rush towards the creation of universal banks that sell all types of financial services under one roof. Universal banks, as is widely believed, benefit from large economies that help them compete effectively.
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