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NBFCs: Best and worst of 2010

Dec 27, 2010

Non-banking finance companies (NBFCs) have come a long way since their inception. They were initially coined as development financial institutions. But after the most illustrious of them e.g. ICICI and IDBI became banks, the others cultivated an advantage in certain niche segments. These included financing of power, infrastructure, automobiles etc.

Now, with a week left for the year 2010 to end, we thought it would be interesting to recap the best and worst of the year for the industry. The year had a lot of interesting moments to choose from, both good and bad.

Some of these included the introduction of a new, highly publicised sector to the stock markets, with the IPO of SKS Microfinance. The regulatory fallout of the entire industry followed subsequently. The loan-for-bribe scandal. Introduction of a new infrastructure financing status to certain NBFCs. The RBI discussion paper which spoke of some NBFCs getting a banking license. This helped fire up the stocks of companies speculated to receive this precious license. The RBI raised key interest rates six times in the year, in an effort to rein in inflation. But judging by the current situation, this effort seems in vain.

As you can see there were a lot of points to choose from. But, we decided to shortlist what we felt were the most defining moments for 2010.

Topping the best list

We believe that the RBI's decision to confer the new status of Infrastructure Financing Company on certain NBFCs could be a game changer going ahead. With this move, the RBI was able to address the issue of insufficient infrastructure funding in our country. These companies, including IDFC, PFC, REC, L&T Finance etc have been given certain privileges which include raising money through tax-free retail bonds, and through cheap overseas borrowings. Banks can also lend to these financers a lot more easily with the reduction in the risks that they bear for such lending.

These companies can also increase their lending exposure to a single borrower or to a group. We feel that these moves will help increase investments into infrastructure in India. After all, to grow at 8-9% ports, power plant, roads, bridges etc are all necessary vehicles. This was one of the best moments for 2010, but what we believe is that the benefits of this new status will be reaped over a long period in the future.

Scamming its way ahead

The recent housing loan scam created headlines and let to a mini-market crash with a number of stocks hitting the lower circuit. The loan-for-bribe scam was definitely a wakeup call for corporate India. It sent shockwaves throughout the industry. Especially since this scandal came close on the heels of the 2G spectrum scam. This scam involved officials at certain NBFCs such as Money Matters and LIC Housing Finance and various PSU banks taking bribes in order to give out housing loans. 21 companies were probed for links to the scandal by the CBI. 8 officials were arrested, sending the stocks of their companies southwards. The government was also brought to an almost standstill. The real estate index crashed, and has since been trading at lower levels. Mid and small cap stocks were also taken to the cleaners. The total loss that the scam created was approximately to the tune of Rs 10 bn.

Even though LIC Housing stated that the loans under CBI contention only comprised 0.6% of its balance sheet, its stock still fell by around 30%. This scam had lessons for all of us. It shows the paramount importance of a good, ethical management for a business. Without that, no matter how relevant a particular sector is to the overall economy, investors shun it.

Well, that was a recap on the best and worst for NBFCs in 2010. We sincerely hope that 2011 has more good than bad in store for the sector. And we hope that most of the companies and regulators have learned from their mistakes, and will adopt better practices.

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