NBFCs keen to end lending rate wars

By K. T. Jagannathan

CHENNAI, SEPT. 20. Sensing the futility of engaging in a cut- throat competition among themselves, leading non-banking finance companies (NBFCs) have initiated informal parleys to explore the possibility of having some sort of a broad consensus on lending rates.

Top brass of at least half-a-dozen NBFCs from Chennai and Mumbai had held a closed-door session here some time ago to discuss primarily the recent `lending rate cut' phenomenon that appears to have already caused quite an upheaval in the NBFC sector.

The meeting was held against the backdrop of dipping deployment opportunities for the NBFCs. Private NBFCs are understandably upset over the aggressive lending approach of big institutional players such as ICICI and Citicorp. A majority of these deep- pocketed institutions have gone on lending at `ridiculously low' rates, pushing private NBFCs firmly on the back foot in a highly competitive marketplace where too many are vying for too little business.

Relying on the marginal cost principle, these institutions have chosen to bank on volumes to show a healthy bottom line. The net result is that they operate on very limited spread with attendant risks. As a consequence, a few defaults are enough to upset the entire industry.

Faced with this kind of competition, private NBFCs, willy nilly, have followed suit and indulged in a rate war of their own. The competitive lending rates, ipso facto, bear no relation to the cost of funds. This phenomenon has naturally thrown up some worried faces in the NBFC sector which has not been through the best of times for a long while now.

Precisely against this background, the heads of half-a-dozen top companies from Mumbai and Chennai had an informal session in the city some time ago. All of them reportedly agreed that there should be some rational yardsticks while fixing lending rates rather than following their herd instinct approach. All of them are reported to have veered round to the view that lending rates of individual NBFCs should reflect their cost of funds.

In fact, the majority view at the meeting, had favoured adopting banks' approach to fixation of lending rates. They could devise their own prime lending rates (linked to cost of funds, of course). Once a PLR was announced, an NBFC must ensure that it did not lend below this rate.

Notwithstanding the sudden disinterest shown by a top participant, these NBFCs are quite eager to follow up the broad consensus reached at their first meeting and explore the possibility of putting in place an informal institutional mechanism so as to ensure that NBFCs do not throw the cost factor to the winds and indulge in a destructive lending rate war.

Send this article to Friends by E-Mail

Section  : Business
Previous : ICRA revises Telco rating
Next     : Web mail for engineers