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Merger moves

THE RECENT MOVE by four NBFCs -- Apple Credit, Apple Finance, Alpic Finance and Srei International Finance -- to ``explore the possibilities of a merger'' may give the impression that an era of mergers and acquisitions is upon the sector. The parties say they intend to consolidate because of the declining margins.

It has been a difficult period for NBFCs ever since the regulatory crackdown of January 1998, following the CRB Capital Markets scam. The difficulty has since been compounded by the industrial slowdown, especially in the automobile sector (the sector's b read and butter business), and squeezed bottomlines over the past two years. The negative image of the NBFCs, after quite a few went bust, made resource-raising that much more difficult for them. Naturally, some NBFCs want to exit from this business and put themselves on the block, while others wanting to continue are examining various survival measures. The merger plan announced by the four must be seen in this context.

NBFCs are under pressure to cut costs. They can no longer get away with the lending rates they once charged for truck and car finance. Their traditional bastion has been invaded by financial institutions and banks, themselves under pressure to improve ma rgins. Apart from the competitive pressure induced by the new entrants, the strained margins of the trucking industry imposed a cap on the interest rates the market can bear. It is, thus, entirely natural for NBFCs to examine ways to cut overheads to mai ntain reasonable margins. The elimination of duplication and a managed competitive environment that a merger would inevitably bring about would go some way in achieving their goal of profitable functioning. Theoretically, then, this seems to be right sur vival strategy. Yet, if the M & A trends in other sectors are anything to go by, most do not succeed -- often the result of the weak coming together rather than the strong. Problems of integration and disputes on who brings what to the alliance have ren dered many such proposals bootless. It must be realised that NBFCs are heterogenous entities with variable work practices and flexible ethics. Marrying four companies with different strengths/weaknesses and cultures may not necessarily produce a strong u nified whole. A due diligence exercise remains to be done and how the partners reconcile the outcome of such an exercise with their plans remains to be seen. One gets the impression that there is perhaps a bit more to this ``getting together'' than meets the eye.

The RBI is known to be examining suggestions that large well-run NBFCs be converted into banks. Perhaps, these four nurture hopes of earning the greater respectability, the prestige and the implicit RBI support associated with a bank. This might have bee n the trigger for this ``meeting of minds''. Besides, size carries a premium in the financial services industry. Even for an insurance foray, NBFCs need to have a networth of Rs. 500 crores and a stiff capital adequacy ratio of 15 per cent and a non-per forming assets ratio lower than 5 per cent. The merger, when it is consummated, is more likely to be an isolated event, driven as it is by the expediency of the parties concerned. After the shake-out following the regulatory tightening, few large NBFCs r emain. These are filling the vacuum created by the exit of many. It may take a while before they are driven to consolidate further.