HOPING AGAINST HOPE: Investors wait anxiously outside the CRB South Mumbai office even as the premises remained locked for the third day on Friday.

MUMBAI, May 16: Fund mobilisation plans of non-banking finance companies (NBFCs) have been severely affected following the run on CRB Capital Markets and speculation that nearly six more finance companies are facing difficulties in meeting their commitments.

``The developments leading to the closure of CRB offices have changed the minds of retail investors who were attracted by high interest rates offered by finance companies. Gone are the days of heavy fund mobilisation by finance companies. Tough times are ahead for finance companies... many of them may even down their shutters,'' said a senior official of a leading finance company who preferred anonymity. The crisis in CRB Capital has now prompted investors to be cautious while dealing with finance companies.

Seeing the CRB fiasco, deposit holders in other finance companies have started withdrawing money.

Brokers of fixed deposit schemes floated by finance companies blamed the policies of the Reserve Bank of India (RBI) for the current problems.

``Select finance companies were suddenly given freedom to fix interest rates. As a result, others were forced to give unofficial commissions including cash payments,'' said a finance company source.

On top of this, finance companies jacked up the interest rates (even up to 20 % for a five-year deposit period) overnight about six months ago.

However, following several steps taken by the RBI, the interest rates had fallen. The highest interest rate offered now is 18 % (for five years).

Several NBFCs are now in a financial jam as their cost of borrowing was high and they could not deploy the funds effectively in the market. Making matters worse, in the intercorporate deposit market where several finance companies had deployed funds, borrowers of funds have heavily defaulted in paying back the principal.

Companies which offered unofficial incentives were in for trouble as their cost of borrowings even touched around 25-28 %. ``Which business can fetch a matching return of this level in the present business environment. Finance companies were walking into a trap. Sadly they have taken investors also along with them,'' said a market source.

At the same time, the RBI -- which is the regulatory body for financial activities was late in plugging the loopholes. It is once again a typical case of bolting the stable doors after the horses have fled. Although the RBI Act amendment was done earlier this year, thereby making the monitoring of finance companies stricter, the damage has already been done.

As of now, the deposit base of finance companies is around 2.9 % of aggregate bank deposits. Assuming that aggregate bank deposits are Rs 5,08,991 crore, finance companies are holding deposits of around Rs 15,000 crore. However, most of this money is stuck in stock markets, ICD market and bought-out deals. A clear picture of the amount raised by finance companies this year is not known. Market sources estimate that finance companies might have collected around Rs 5000 crore this year.

There are over 40,000 companies (including satellite investment firms belonging to major companies) in India.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.