The Hindu Business Line : Interest rate risk stares in the face of NBFCs

Will interest rates rise or fall? The answer to this question is crucial for the NBFCs, because most of them raise funds on floating rates of interest, while lend them at fixed rates.

Interest rates depend on inflation and inflation is one economic measure that is most variedly estimated. Some (JP Morgan, Merrill Lynch) estimate that inflation would come down to 1-2 per cent by March 2009. Others project 10 per cent.

Thus, the question facing NBFCs is what rate to charge customers? “Interest rate risk is staring at our faces. We are confused about interest rates,” says Mr R. Sridhar, Managing Director, Shriram Transport Finance Company.

Mr Sridhar made this point on Saturday, while speaking at a meeting on Global Financial Crisis — India Impact, organised here by the South India Hire Purchase Association. He said that interest rates uncertainty coupled with the challenges of raising resources (liquidity risk).

(Mr T.T. Srinivasa Raghavan, Managing Director, Sundaram Finance, expresses a slightly different view. According to him, those companies that are predominantly dependent upon bank funding — which is at floating rates of interest — only will face this problem. Others, who raise funds from multiple sources such as public deposits and securitisation, are not likely to face interest rate risk, he told Business Line. But others in the industry note that today there is practically no source of funding other than public sector banks.)

Re-possess vehicles

Speaking at the meeting, Mr K. Sridharan, Chief Financial Officer, Ashok Leyland, called for making it easier for vehicle finance companies to re-possess vehicles from defaulting borrowers. He also wanted VAT on sale of re-possessed vehicles removed.

Mr Sridharan also wanted the State Government to help the industry in these times of economic slowdown by revisiting various taxes. Specifically, he said that the ‘entry tax’ had no relevance today and called for its abolition.

Positive impact

Mr G. Ramachandran, Financial Analyst, observed that the farm loan waiver was the “healing balm that may have saved India from a full-blown economic crisis”. He said that the stimulus packages of the Government would have a positive impact.

Mr Sri Ramanan, General Manager, Indian Bank, said that while the Reserve Bank had made way for liquidity, banks would need to assess the balance sheets of NBFCs before sanctioning a loan.

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Interest rate risk stares in the face of NBFCs

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