In Crisil's opinion, a rationalisation in the sector is imminent. A majority of NBFCs have extremely small-sized operations with limited business focus for competitive advantage. The difficult business conditions and the high risks undertaken by many NBFCs have resulted in a significant decline in their performance which is expected to result in severe pressure on the weak finance companies to close down, Crisil has said.

Although mergers would have been the logical route for the consolidation to take place, most potential players are adopting a cautious approach to mergers because of the apprehension regarding the undisclosed liabilities of NBFCs, Crisil hasnoted.

Buying of securitised portfolio of cherry-picked assets has been the most common method of consolidation though some companies have resorted to complete asset sell-offs. Some of the large players are also considering buying part of the branch network of the smaller regional players to increase their reach and geographical coverage. "Mergers appear to be the last option," Crisil has said.

Crisil has said that most NBFCs have seen a marked slowdown in the disbursement level due to a combination of sluggish demand for credit, funding constraints and increased competition from international players and banks. "The slowdown in the economy has affected offtake of credit for vehicles as well as financing small- and medium-scale corporates," the rating agency has said in its outlook on NBFC ratings.

The recent Reserve Bank of India guidelines on deposit acceptance have restricted NBFCs' ability to raise deposits. Most NBFCs are in the process of reducing their deposits and balance sheet size rather thanpursuing growth, particularly since alternate sources of funding like equity, bank finance and debentures are not forthcoming easily, Crisil has noted. The profitability of the NBFC sector has been under strain due to declining spreads, higher delinquency levels and stricter provisioning requirements. "The rationalisation of the yields due to competitive pressures has had a depressing effect on spreads," Crisil has said.

The slowdown in disbursements has also affected the profitability of companies with significant proportion of leased assets. The decline in disbursements would result in higher depreciation costs as a proportion of income, which would depress profits significantly, Crisil has noted in its report.

In Crisil rated companies, delinquency levels have increased across business segments necessitating increased provisioning requirements. This, together with the new provisioning norms announced in January, 1998, would adversely affect profitability, according to Crisil. Although the NPAclassification norms have been relaxed, the provisioning norms have been tightened.

The liquidity position of most NBFCs has been impaired by the necessity to reduce deposits to be in line with the recent RBI guidelines, increased delinquency levels and the difficulty in obtaining substitute funding.

Despite the decrease in disbursements, the liquidity position of NBFCs has not improved due to the prevalent asset-liability mismatches and decline in deposit renewal rates.