NBFCs are in the news again. The industry is likely to witness the formation of a giant - by the merger of four leading NBFCs - the Mumbai-based Apple Finance Ltd, the Chennai-based Apple Credit Corporation, the Calcutta-based Srei International Finance and Alpic Finance. The new company will have an asset base of Rs.2200 crores, a network of 130 branches and a good reach of over one million investors across India. The decision was taken as a step to face the challenges and competition from banks and financial institutions, which the NBFC industry has been facing for the last few years. The step is also to overcome the stringent laws imposed on the industry after the CRB Scam.

The most obvious advantage of the merger is the reduction in the costs of servicing and costs of funding. Moreover, even if the company reduces its margins, it will still be in a strong position. In towns where more than one of these four companies has an office, post-merger, only one office will suffice. This will enable considerable reduction in the cost of operations, which is expected to be around 75 percent. Presently, each of these companies is lending at least 4-5 points more than the PLR of banks. Once the alliance is formed, this spread over the PLR could be drastically reduced.

The combined entity will also be able to cater to many more areas of finance, considering the expertise each of these companies has in its area of operation. The new company will also be in a better position to bargain while attracting funds, both domestic and international, as well as in attracting investors. However, it may take months before the entire deal is finalized. Approval of the Reserve Bank of India is required. The companies also need to approach the high court and convene a meeting to get approval of shareholders and creditors.

While the alliance will do good to each of the companies, where will it leave the competitors is the question. Today, the NBFCs industry is dominated by Sundaram Finance, Tata Finance, Reliance Capital and Kotak Mahindra. Sundaram Finance is the largest Auto Finance company. In the fixed deposits segment, the company has the largest retail base of deposits. Sundaram has more than 6.64 lakh depositors with total deposits aggregating over Rs.700 crore.

Kotak Mahindra has an asset base of over Rs.1200 crores and is into trade finance, asset finance, collateral funding, structured finance and funds syndication. In the consumer services group, the company is into consumer finance, office equipment finance, fixed deposits and commercial vehicles finance. In the fixed deposits business, the company has a retail deposit base of more than Rs.190 crores spread over 1,32,000 investors. In the commercial vehicle finance business, Kotak has over 4000 customers.

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