MUMBAI, May 16: The CRB Caps episode is likely to trigger off large-scale withdrawal of fixed deposits on most of the non-banking finance companies (NBFC). If the trend of the past few days were any indication, some of the stand-alone finance companies are already feeling the heat as depositors queue up to withdraw money.

"Panic has gripped the market. No one can escape the backlash," a senior executive of a Mumbai-based finance company said.

As an inevitable fallout, the rating agencies are taking a closer look at the mechanism of rating fixed deposits, the most illiquid, non-tradeable instrument in the money market. "Merely downgrading the instrument will not help investors as there is no secondary market to offload the fixed deposits. The holders have no option unless the instrument matures," a rating agency official said.

Credit Analysis & Research Ltd (CARE) downgraded the rating of CRB Caps and put it under credit-watch after Reserve Bank barred the company from accepting fixed deposits from public.

Describing the CRB Caps episode as `inevitable', Lloyds Finance chief GC Garg said, "At metro centres, depositors may not renew the fixed deposits and shift to banks. We have instructed all our centres to pay up whenever depositors want their money back. We should be prepared for this eventuality."

There has, however, been no run on Lloyds Finance's deposits, he said. "Every day we mop up over Rs 1 crore through fixed deposits. Last month, the total mop-up was Rs 38 crore," Garg said.

According to L&T Finance senior vice-president R Shankar Raman, the pressure on redemption of FDs is bound to happen on stand-alone finance companies.

"There will be backlash on the industry. In a way it's good as the market will be less crowded now. Maybe about 12 to 20 major NBFCs will be able to withstand the pressure, and those which grew at a quicker pace will have to pay the price of overgrowth," he said.

At any rate, a shakeout seems inevitable in the NBFC industry. "We have no business to be in the business of lending. We certainly keep on doing business with leftovers of leftovers in the corporate world," a senior Mumbai-based NBFC official said. Some of the companies are shifting focus from lending to fee-based activity. For instance, Times Guaranty Financials Ltd has stopped lending and started focusing on advisory services, mergers and acquisitions.

"The NBFCs will have to pay the price of unbridled growth. You cannot be in the high-risk, high-return business forever," another NBFC official said. According to him, over the past few years, all non-banking companies met corporates' equity requirements in the form of debt. "They discounted accommodation bills at 26 to 28 per cent and pumped in funds which were never used for any productive purposes. All these funds were made available on a clean-risk basis," one market analyst said.

Times Guaranty chief financial officer G Ramachandran said the NBFCs never funded companies on the basis of their cash flows but on the basis of profits. "They are guilty of not exercising due diligence," he said.

Ramachandran felt the NBFC sector would be worse off now. According to Shankar Raman, those companies which can manage the risk would survive. "The me-too companies will have a torrid time. Maybe around 20 strong NBFCs will survive in the market," he said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.