WHITHER
Dr Ranjan Das
Professor of Strategic & International Management, IIM Calcutta Consulting Editor, Strategic Marketing
Raveendra C.
Doctoral Research Scholar, IIM Calcutta

REVIVAL SIGNS
However, the health of the NBFCs, especially RNBCs, started to show a distinct improvement in recent years facilitated by prudential nurturing. Most of the reporting NBFCs recorded a CRAR of at least the stipulated minimum of 12 per cent, with almost three-fourth reporting a CRAR of above 30 per cent. Similarly, the non-performing assets of NBFCs, in both gross and net terms, as a percentage of credit exposure, have been declining in recent years. The overall sector, excluding RNBCs, however, is still recording losses.
What are the factors behind the revival of NBFCs? Is the recovery sustainable? What, if any, are the strategic options available for NBFCs to survive and grow?

Competitive Cost of Funds
An average NBFC suffers from a higher cost of funds compared to banks. However, an NBFC with a good credit rating of AA and above is able to raise funds at competitive rates. This has been made possible due to increase in variety of resources available and a strategic shift towards lower cost resource mix. Significant decline in the overall interest rates in the last three years has further diluted the cost advantage of banks.
Improving credit quality of good NBFCs and declining C-D ratios have prompted more banks to lend to NBFCs at competitive rates. Mutual funds with rapidly growing corpuses of fixed income schemes emerged as a competitive funding source. Securitisation too is emerging as an attractive and sizeable source of funds. The following Chart shows the changing resource mix of NBFCs4.
Improving Interest Yields
While increased competition from banks had an adverse impact on the interest yields of NBFCs initially, yields have started improving in the last few years. On the whole, NBFCs enjoy better interest yield compared to banks because,

The distribution reach of some NBFCs is much superior to many banks.

NBFCs have significant strengths in niche areas and enjoy very good customer relationships in specific segments. They also have high brand equity in specific geographical areas. For example, Sundaram Finance and Cholamandalam Finance have a very strong presence in South India and continue to enjoy leadership position in commercial vehicle finance segment due to their strong rapport with their customer base.

NBFCs, with their lean and mean structure, are more innovative and offer better flexibility. Due to this they are able to attract a premium. For example, they have pioneered financing of second-hand vehicles and built a strong presence in that segment. This sector also offers a higher net IRR compared to new vehicle segment provided the company has prudent risk management practices in place.

Consolidation in the sector
There was consolidation in the primary retail financing segments and many smaller NBFCs have lost share to larger players. Some of the smaller players have become direct selling agents and concentrated on originating portfolios for the larger players.

Lower overheads
NBFCs always enjoyed a lean and mean structure and when the sector came under pressure, good players have maintained strict control over their overheads. This coupled with a marginal increase in fee income has helped improve their profitability.

STRATEGIC OPTIONS FOR NBFCs
The following are some of the strategic positioning options for NBFCs.
Positioning based on Products and Services
NBFCs have an edge over other players in products and services that require strong customer relationships and service such as personal loans, commercial vehicle finance, syndication services, inter-corporate deposits etc. In fact, technological developments such as ATM networks, internet banking etc. have made banks more impersonal which increased the advantage of NBFCs. Hence, it is possible for NBFCs to achieve a unique position by focusing on certain category of products and services. Take the example of GE Capital Services India (GECSI). It is primarily engaged in corporate asset funding through large ticket term lending, hire purchase, leasing and bill discounting. Its foray into retail lending is done through two separate subsidiaries. By focusing on large ticket corporate assets based on its parenting advantage it has positioned itself away from most NBFCs and carved out a niche for itself.

Positioning based on Customer Needs
NBFCs can also position themselves differently based on the differing needs of groups of customers. This can be done successfully if a company has unique strengths to service a set of customer needs better than others.
The best example is Sundaram Finance (See Box). At a time when the focus was on financing large truck operators, Sundaram Finance started off by showing its commitment to and passion for the small truck operators. Gradually it built strong relationships with truck operators and emerged as a leading financier of the transport sector. Devoting its services to the growth of the road transport industry, Sundaram Finance is today synonymous with automotive financing in the country.

Positioning based on Access
SUNDARAM FINANCE - LEADING BY EXAM
Sundaram Finance Limited (SFL) was founded in 1954 by T.S. Santhanam, a member of the T.V. Sundaram Iyengar family, which owns the TVS Group, one of India’s largest business houses with substantial interests in the automobile sector. SFL has traditionally been involved in providing financing for small road transportation operators in semi urban and rural areas. Over the years it has evolved into a financial services group catering to retail customers through subsidiaries in housing finance, asset management, and general insurance.
For the year 2003-04, Company’s disbursements in hire purchase and hypothecation loans crossed the 20 Billion mark and reached Rs.21.0 Billion as against Rs.15.3 Billion in the previous year, thereby registering a growth of more than 37 per cent. SFL maintained a healthy market share in the commercial vehicle financing segment, despite intense competition from banks, in particular. The CRAR of SFL stood at 15.84 per cent as on 31st March 2004, well above the minimum of 12 per cent. The gross and net non-performing assets stood at 2.44 per cent and 0.83 per cent of the total business assets as against 3.38 per cent and 1.45 per cent respectively in the previous year. The prudent practices followed by the Company such as strong credit appraisal skills, effective receivables management, and well-defined documentation and procedures have become industry benchmarks. The Company has an Asset Liability Management Committee, which formulates and reviews the risk management policies of the Company and reports to the Audit Committee.
SFL has a nationwide network supported by a dedicated team of service-oriented personnel, who ensure personalized customer service. SFL’s adherence to values is leg
NBFCs have the option of positioning themselves based on access, which is typically a function of customer geography or customer scale.
This was done successfully by many NBFCs, which have concentrated on a particular geographical region and built strong brand equity for themselves in that region. Some examples are Sundaram Finance and Cholamandalam Finance in South India, and SREI International Finance and Peerless in the East.
The right strategic choice for NBFCs, however, is not a matter of positioning choice alone. It is the configuration of the entire value chain of the company through a different set of activities to deliver unique value to customers. The set of activities cover all upstream and downstream activities, from the selection of the product mix, the way the products are priced, promoted, the type of distribution mechanism used, the way customers are serviced and so on. If an NBFC is able to deliver superior value to customers through unique positioning and value chain configuration, then it can attain a sustainable competitive advantage against other players in its chosen product market segment.

CONCLUSION
From the above, it is clear that NBFCs have a unique role to play in the financial services industry. NBFCs are characterised by their ability to provide niche services. Because of their low overheads, quick response and organisational flexibility, they can provide custom-made services relatively faster and deliver better value than other players such as banks and financial institutions. For their survival and growth, NBFCs should realize their

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