Following the multi-crore CRB fiasco of May 1997, Reserve Bank of India (RBI) imposed strict regulations for these firms that had earned a dubious repute after many fly-by-night operators made off with investors' hard-earned money.

Besides harsh pre-conditions, strict regulatory as well as provisioning norms were introduced, whereby registration of companies with a net worth of more than Rs 25 lakh was made mandatory.

In view of the tighter norms, the only recourse left for these NBFCs was to go in for specialisation in one or the other of a whole range of services being offerred by them. Another viable option was that big strong players with financial muscle take over small companies having a good asset base or simply buy out these assets.

The merger and takeover spree thatemerged in 1997 did not continue during 1998 which saw only one takeover when Anagram Finance from the stable of Ahmedabad-based Lalbhai group was acquired by one of the leading financial institution ICICI, which had also taken over ITC Classic Finance in 1997.

However, other players like GE Capital, L&T Finance, Ashok Leyland Finance preferred to simply buy the assets of smaller NBFCs.

To check the increasing default rate in the industry, RBI decided to link the fund-raising capacity of an NBFC with its net worth and the credit rating assigned to it by a reputed rating agency.

This not only restricted the amount of funds that an NBFC could raise but also made it mandatory for these units to return the excess funds raised if at any point of time its net worth fell or it faced a credit downgrade.

A company now has to repay or regularise the "excess public deposits" as on January 1, 1998, by December 31, 2000, subject to the condition that one third of the excess is repaid by December end everyyear.

This meant that every NBFC with excess deposits would have to return them in three equal instalments every December. NBFCs also continued to face downgrades by credit rating agencies, which put theim in a piquant position wherein their deposit raising capacity declined on the one hand while on the other their assets got locked up in long-term investments.

This, in effect, meant that recovery became slower but the pace at which they had to pay investors funds virtually remained the same.

The Vasudev Panel, set up by RBI to recommend measures to control the industry, suggested tighter liquidity requirements and capital adequacy norms for NBFCs.

It suggested that NBFCs maintain liquidity standards that match that of the banks, without accompanying advantages. This meant that their margins would be further eroded, leaving very little funds with them to engage in normal business.

Company Law Board (CLB) also became aggresive following empowerment by RBI to take action by against defaulting NBFCs.During the year well-known companies like DCM Finance and Onida Finance were directed by the board to repay the money to depositors.

Redress schemes for repayment of investors funds were formulated by the CLB in tandem with the respective companies during the year. These schemes envisaged the repayment in instalments over a specific period.

At the beginning of 1998, there was no record available on the total number of NBFCs, as lack of control led to their mushrooming all round the country indulging in activities like leasing and hire-purchase to merchant banking.

Subsequently more than 40,000 companies applied to RBI for registeration and as per the latest reports available out of the total applications processed, a large number were found to be unsatisfactory and not conforming to the set standards.

RBI has already rejected a large number of applications implying the closure of these units. Now in the changed scenario some of the stronger players have gone in for specialisation in a particularproduct or service.

Players like Tata Finance, Sundaram Finance and Ashok Leyland Finance could maintain their volumes because of their concentration in the area of vehicle financing. However, their profit margins were affected in view of the overall economic recessionary.

Some of the players like Escorts Finance have gone for a restructuring exercise while L&T Finance has concentrated on infrastructure finance.

GE Finance is one of the few players who have been going in for large-scale securitisation with strong backing from its promoters the GE group of United States.

During the year, two companies Hoffland Finance and JVG Finance went bust with the Delhi high court appointing a liquidator to pay off the liabilites to creditors in the case of the latter.

The chairmen of Hoffland and JVG group were arrested by the police for cheating the investors.