Why Finance Companies Fail In India?

Many retail finance companies have been failing in India with high level of regularity. Very few were saved from 'failings' by converting them into banks.

Many continue to go belly up.
Government through banks and depositors directly, face the brunt.

Many are struggling to stay afloat; they are already talking of converting them into banks, etc. They are in trouble. More  will fail, leaving many banks to hold the hot potatos.

Banking is more closely and strictly regulated in India. NBFCs (Non-Banking Finance Companies) are less regulated. Then, why do finance companies strive to convert them into banks? What attracts? Is it the unlimited money at low cost or the size to cover up?

Why do they fail?

Most companies have 'vested' goals, misplaced priorities, wrong products and wrong leaders in a few cases.

• First, many big finance companies are captive finance companies with a goal to promote, call it "push" - their parent auto /machinery  products. They are expected to take risk in financing dealers, wherever banks have refused financing. They finance 'risky' customers, who have either bad credit history or no credit history, not having a history at all apart. Briefly, it is an unwritten law that they are there for sub-prime lending. They are large in size and it takes some years before the rot is smelled and M & A specialists move in quickly to confuse, sell and/ or cover up.

• Second, these are used as camouflaged financial arms of emerging groups to leverage promoter group's interest, in varying degree, at supersonic speed. They execute their plan preciously and quit the business, as soon as their interest is served. They are deposit focused. They take care not to leave any trace.

• Third, some are promoted as front companies. They cook-up annual results to engineer high speculation in the stock in the market and profiteer. They remain focussed on top line. They choose to close the shop when the environment appears to be unfavorable for long time to come.

• Fourth, a very few companies get aligned intentionally to be a group of a particular religion, caste or sect. Obviously, they build huge nexus and have personal agenda, being highly corrupt apart. One does not need guess where these companies will head for, in the long run.

• Fifth, a few do have stupids heading these companies. They are highly positive sycophants, appearing to be aggressive but perfecting what westerners call apple polishing. They are survivors; they do speak good English. They are generally a class, which may not know the fundamentals of sales, credit or collections and they sure hate losses, delinquency and debt collection. They are generally what are called bean counters; they believe strongly that the profit comes from cost savings only. They churn out each hour a cost saving idea, hardly practical or implementable.  Operation succeeds, patient dies.

• Sixth, wrong policies, processes and/ or people in different combinations become reasons for failure; not having robust credit and collection management, have been the major reasons.

• Seventh, irresponsible lending could lead to huge losses; I know a company where there was a competition between top two managers, heading two different retail finance products, to get the coveted managing director position. Their personal agenda was ahead of business agenda. Obviously, a lot of mistakes were made; losses were huge. Funny thing was that neither of them got the position, but a joker.

A very few finance companies do exist in India, which have less degree of these ailments.

RBI appears looking at NBFCs as a last mile option for credit delivery to the risky and remote prospects. Will they succeed? Are more regulations required? NO. What may be  required is closer oversight, compulsory rating.

Why not have a separate national bank, similar to National Housing Bank, to finance NBFCs and MFIs and more importantly to develop specialised knowledge to oversee closely, for course correction and before it is not tooooooo late.