It was in 1997 when I saw C. R. Bhansali and group taking many lives without violence. They just defaulted on fixed deposits (FDs) that they had raised from public when the instruments matured. The question that troubled me then was, why NBFCs for FDs? Well, the answer was simple. After Harshad Mehta was arrested, the stock market was in a mess and investors were looking for a place to park their money. On the other hand, with RBI cautioning banks against lending to NBFCs (1995), they were hunting for sources to fund their operations. And as it happened, NBFCs started attracting investors with their high interest rate bearing FD schemes (some even promised a return as high as 26%). As the money started flowing in, to serve these high-cost deposits, NBFCs started venturing into all possible sectors, in most cases, without substantial experiences. Result; they not only suffered on asset quality, but ultimately failed to pay back the investors.
Cut to the present scenario, if you observe a little more carefully, retail investors are again slipping into a similar situation and the only difference is that FDs are now replaced by NCDs (Non-convertible debentures). Over the past few months, while few NBFCs like L&T Finance and Shriram Transport Finance have already raised sums in excess of Rs.5 billion, a number of others have lined up retail NCD issues at attractive rates. As per estimations, the next six months will see retail NCD issuance of around Rs.50 billion at an interest offering between 9% and 12%. And considering that the market is already heading south, this is one bait that most investors will get trapped by.
However, NCDs are not the problem, it’s the usage of the money raised. NBFCs are again gung ho on expansion and realty estate is their prime target. While they funded Rs.30 billion to 20 developers last year, it is set to grow high this year (more for the banks’ disinterest in lending to commercial real estate sector, which already owes Rs.1.10 trillion to them). But this funding means a disaster for the NBFCs. As Liases Foras Real Estate Rating & Research Pvt suggests that over the next two years, prices (in Mumbai) will go down by as much as 35%. In that scenario, it will be tough for NBFCs to generate the return desired to redeem the NCDs at the offered interest rates. But the question remains, if there is a bubble in making, why are investors still lurching to jump off the cliff? Well, perhaps the market regulators can answer this better. According to the existing policy framework, there are number of gray areas (allowing the scope for different interpretations), which allow NBFCs to operate at their will without any transparency. For example, there are no guidelines for private placement of NCD. This allows players to issue securities to public at large under the cover of private placement. Also, Listed NBFCs are under no compulsion to disclose their secured and unsecured loans in the quarterly results under clause 41 of SEBI listing agreement. At the same time, NBFCs just need one certificate from a single bank to prove the quality of their assets. If these are not the killer, read this; there are no remedies available to an investor in the Companies Act in the event of default by a company to redeem the debenture on maturity. That means, when the bubble bursts, investors go bankrupt and the bosses of the NBFCs go scot free only to return to action later to suck the life out of a few more investors.
In view of the above facts, this is actually the time when regulators need to act... and act fast. If not anything else, then at least they must come up with a notification that treats all NCD issues for more than a limited amount, say Rs.1 billion, as public issue and forces NBFCs to comply to all disclosure and other norms accordingly. This is the time when regulators must prove that they also learn from past mistakes, else we will soon hear some investor dying of heart attack and CBI chasing the big boss of some NBFC.
Cut to the present scenario, if you observe a little more carefully, retail investors are again slipping into a similar situation and the only difference is that FDs are now replaced by NCDs (Non-convertible debentures). Over the past few months, while few NBFCs like L&T Finance and Shriram Transport Finance have already raised sums in excess of Rs.5 billion, a number of others have lined up retail NCD issues at attractive rates. As per estimations, the next six months will see retail NCD issuance of around Rs.50 billion at an interest offering between 9% and 12%. And considering that the market is already heading south, this is one bait that most investors will get trapped by.
However, NCDs are not the problem, it’s the usage of the money raised. NBFCs are again gung ho on expansion and realty estate is their prime target. While they funded Rs.30 billion to 20 developers last year, it is set to grow high this year (more for the banks’ disinterest in lending to commercial real estate sector, which already owes Rs.1.10 trillion to them). But this funding means a disaster for the NBFCs. As Liases Foras Real Estate Rating & Research Pvt suggests that over the next two years, prices (in Mumbai) will go down by as much as 35%. In that scenario, it will be tough for NBFCs to generate the return desired to redeem the NCDs at the offered interest rates. But the question remains, if there is a bubble in making, why are investors still lurching to jump off the cliff? Well, perhaps the market regulators can answer this better. According to the existing policy framework, there are number of gray areas (allowing the scope for different interpretations), which allow NBFCs to operate at their will without any transparency. For example, there are no guidelines for private placement of NCD. This allows players to issue securities to public at large under the cover of private placement. Also, Listed NBFCs are under no compulsion to disclose their secured and unsecured loans in the quarterly results under clause 41 of SEBI listing agreement. At the same time, NBFCs just need one certificate from a single bank to prove the quality of their assets. If these are not the killer, read this; there are no remedies available to an investor in the Companies Act in the event of default by a company to redeem the debenture on maturity. That means, when the bubble bursts, investors go bankrupt and the bosses of the NBFCs go scot free only to return to action later to suck the life out of a few more investors.
In view of the above facts, this is actually the time when regulators need to act... and act fast. If not anything else, then at least they must come up with a notification that treats all NCD issues for more than a limited amount, say Rs.1 billion, as public issue and forces NBFCs to comply to all disclosure and other norms accordingly. This is the time when regulators must prove that they also learn from past mistakes, else we will soon hear some investor dying of heart attack and CBI chasing the big boss of some NBFC.
