It's unfair to banks

NBFCs get that extra advantage while lending to the capital market

In spite of the runaway bull run, banks' advances to the stock market are capped by the Reserve Bank at 5 per cent of total advances. Now that there's substantial retail interest in IPOs, some of the private sector banks are chafing at the bit.

While they do not question the ceiling, their complaint is against what they say is not a level playing field. Non-banking finance companies, they point out, are busy financing stockbrokers and have been able to exploit the bull run to the hilt.

Not only do NBFCs have no ceiling on their exposure to the capital market, but they also have no restrictions about margins.

Banks, on the other hand, had to maintain a margin of 40 per cent on advances against shares, and this has now been raised to 50 per cent. Kaushik Bagchi, senior product officer at IDBI Bank, points out that since NBFCs are free to undercut banks on margins, they manage to walk away with the cream of the high net worth retail business.

But it's not only the lack of a level playing field that is the problem.

After all, many banks have set up their own NBFCs, and all they have to do is route the business through their NBFC arm rather than do it in the bank.

The problem is more of a regulatory nature, and shows up the loopholes in the RBI's rules limiting banks' capital market exposure to 5 per cent.

Banks can finance NBFCs, and in fact, bank advances to NBFCs rose by Rs 4399 crore in 2002-03, compared to a rise of Rs 1843 crore in the previous year. (To get an idea of the magnitude of that increase, consider that bank advances to small scale industry rose by only Rs 3287 crore in 2002-03. Now banks finance NBFCs on the strength of their balance sheets.

If the NBFC was in turn to finance advances against stocks, would that not indirectly mean a higher limit of bank exposure to the stock market?

The other loophole is in personal loans, where too loans may indirectly go to the stockmarket.

Are these concerns warranted? NBFCs pooh-pooh the issue, claiming that advances against shares, if managed properly, are far more secure than other loans.

But if that is true, why doesn't the RBI raise its limit for bank exposure to the stock market?

Exports growth plunges at Bharat Forge

Bharat Forge's December quarter performance was quite different from the trend seen in the previous two quarters. Gross sales grew just 27.8 per cent, considerably lower than the 40.4 per cent growth in sales in the first half of the year.

Growth in domestic sales, at 37.8 per cent, was pretty much in line with 40.3 per cent increase seen in the first half. But growth in exports fell drastically from 40.5 per cent in the first half to just 13.6 per cent last quarter.

In terms of incremental sales, exports contributed to only 20 per cent of the growth last quarter, compared to a contribution of almost 40 per cent in the first half of the year.

One of the reasons for the lower growth in exports is that the company's capacity is now being almost fully utilised. In fact, Bharat Forge had to ramp up production in order to ensure that domestic customer's requirements were fully met. Domestic sales accounted for 63.2 per cent of sales last quarter, compared to 58.6 per cent a year ago.

What's important is that operating margins improved 240 basis points to 31.44 per cent, despite a 200 basis points jump in raw material cost. Actually, input costs have been steadily increasing and had led to a drop in operating margin in the first half period.

Last quarter, however, the company more than made up thanks to a cut in all other expenditure heads. This, coupled with a drop in interest cost, led to a 54.5 per cent jump in net profit.

The company is setting up two additional press lines, including one fully automated transfer press line, and these additions will more than double the passenger car crankshaft forging capacity.

Besides, it is investing in the heavy forging facility and state of the art machining facility, which will help meet the potential increase in demand.

Furthermore, the acquisition of Carl Dan Peddinghaus (CDP) last quarter gives it a wider access to the European market (80 per cent of CDP's revenues) and a product range that caters to the entire forging requirement of the passenger car industry, a segment Bharat Forge has entered only recently.

The acquisition clearly fits well into the company's plans, but it's still not clear how much it cost the company and how long it will be till it recovered its investment.

In the nine months till December 2003, sales have grown 35.6 per cent and net profit has jumped 73.6 per cent. But the drop in exports has not been taken very well by the markets""the stock dropped marginally on a day when the Bombay Stock Exchange Sensex jumped almost 120 points.

With contributions from Mobis Philipose and Amriteshwar Mathur.