THE DECISION OF the Shriram Group to access private equity capital from overseas, coming as it does on top of the earlier decision of Cholamandalam Investment and Finance — the Non-Banking Financial Company of the Murugappa Group — represents a watershed in the evolution of the NBFC industry in the country. The events have the potential to get the industry out of the prolonged spell of self-doubt where survival and modest growth if possible had become the key issues for many. No doubt the industry was hit by a combination of factors it had no control over and each potent enough to cause long-term impact.

There was the public disenchantment with the industry in the late 1990s on account of defaults by a few, which were running Ponzi schemes, pure and simple. This attracted a somewhat harsh regulatory response that severely curbed the business and deposit mobilisation freedom the industry had enjoyed till then. These two factors coincided with a recessionary spell that ended only in 2003. The stock market boom that followed, and which has been sustained since, has perhaps provided the right setting for the better performing NBFCs to explore ways and means to scale up performance through inorganic growth. The foreign direct/portfolio investments that the two players have succeeded in attracting has to be seen in this perspective.

The business environment for the NBFCs has undergone a sea change from the one that prevailed when the industry evolved as a significant financial intermediary. Its initial years were characterised by a general credit crunch and the apathy of commercial banks to satisfy the credit needs of small, marginal borrowers in the informal sector. The enormous potential for growing the business also meant that the NBFCs aggressively scouted for public deposits. Even the offer of extremely attractive rates of interest did not affect the business fundamentals of the hire-purchase and leasing operations of these outfits. But the situation today is vastly different. Banks, big and small, are actively courting borrowers in the retail and small business segments. Indeed, they are aggressively co-opting self-help groups to penetrate this market. The SHGs' involvement is helping banks to overcome constraints imposed by their limited knowledge of small and medium borrowers and the high-cost model of credit delivery they are saddled with.

If there is competition to the NBFCs on the lending side there is, however, relief in the form of better access to overseas capital. Thanks to greater financial integration of India's economy with the rest of the world, the NBFCs can mobilise large funds either as loans or by way of strategic equity infusions by foreign investors. Whether the domestic resource base of commercial banks in alliance with self-help groups will gain market share at the expense of the traditional support that the NBFCs enjoyed within this community of borrowers is something that only time will tell. But not taking any strategic initiative in the face of mounting competitive challenge is perhaps the surest way to extinction for the NBFC industry.

© Copyright 2000 - 2009 The Hindu Business Line