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Financial firm Prudential fighting against collapse

A Pal in Calcutta

Yet another non-banking financial company is in trouble. In September last, the Reserve Bank of India barred the Calcutta-based Prudential Capital Markets, promoted by Vinod Baid, from receiving new deposits or renewing existing deposits. Investors and many investor bodies, especially those in Bombay, were reportedly withdrawing their deposits.

Prudential has also not been able to repay its investors whose loans have matured. Of the total deposit base of Rs 740 million, only Rs 180 million has been refunded till the beginning of December 1997. leaving the depositors claiming the remaining Rs 560 million extremely impatient.

Vinod Baid, once known as the Big Bull of the Calcutta bourse for his ability to move markets, strongly defended Prudential and refuted charges of investors being turned or their deposits not being refunded. "Prudential is not turning away investors or depositors," he said, "What we've done is adopt a system by which we're paying all depositors by serial number order. So we pay the deposits as and when it comes up."

He agreed that there has been a delay in payments, but insisted that all commitments were being honoured. "We are also paying interest to the depositors, as and when their number comes up," he added.

Baid admitted to facing difficulty in mobilising funds. "Basically, we're facing a liquidity problem due to asset-liability mismatch," he explained, "What happens in the financial services industry is that you raise deposits for a period of one year and investments, which are in the retail financial sector, or auto finance, or hire purchase and leasing, are normally for four to five years. The deposit is raised for a year, assuming the deposit base will grow and be renewed by newer deposits. As it has happened in our case, if you see the balance sheet of Mar'96: 370 million, and in 1997: 740 million, it was growing at a rate of 30 million per month."

So what went wrong was increasing withdrawals and fewer deposits. The Prudential promoter acknowledges having received premature withdrawal requests for Rs 250 million but quickly points out that legally, the firm is not bound to make premature payments. Baid says that unlike other financial concerns, the Prudential group has manufacturing activities like sugar which can absorb the shock. Also the group's early decision to quit financial services has helped stem the losses.

Baid exuded confidence in meeting Prudential's liabilities and in paying off all the depositors. "We have enough funds to pay our depositors. Our receivable are much more than what we have to pay our depositors; that is quite evident from our balance sheet. The point is that the entire depositors have to be paid within a year while the receivables are coming in at the rate of 30 million per month, which we will be collecting for the next four years. So the problem is that we will not be able to pay on maturity, but w shall pay the all the depositors totally with interest," he said.

However, analysts in Calcutta do not share Baid's optimism. Said one, "It's difficult to comment on the quality of assets just from numbers on the balance sheet. Many items have been listed, with large amounts ascribed to these items, but details about these have not given in the balance sheet."

Giving examples, he added, "A lot of money in the ICD (inter-corporate deposit) market, investment in group companies of Rs 360 million, stocks in trade of Rs 670 million, have been listed but details of which have not been provided. So it is difficult to comment from just the balance sheet."

Calcutta-based finance firms seem to have a penchant for window dressing. Using complaint accountants, they are able to inflate their share capital, duping investors to believe that the company is healthier than it actually is. And the irony is that all this is perfectly legal.

Incidentally, there are over 40,000 NBFCs in India, holding more than Rs 500 billion in public deposits. Yet, following a series of failures, especially the CRB Capital Markets fiasco earlier this year, investors have become doubly cautious before investing their hard-earned savings in the NBFCs. Another well-know company, the Calcutta-based ITC Classic Finance, also foundered until it was purchased by ICICI last month.

Is Prudential another CRB in the making? Baid explains what went wrong. "After June 1997, some changes occurred in the financial services industry. Margins in the industry eroded as no niche market was available and financial companies can't raise resources at less than 22 per cent as against banks which raise resources at 8 to 9 per cent, while borrowers are the same. So there's no fresh investable opportunity. Due to this we took a decision on July 1, 1997, to stop accepting fresh deposits," the Prudential chief said.

Given the present market conditions, analysts are warning depositors not be motivated solely by higher returns but to check corporate credentials first. Says a representative of a Calcutta brokerage firm, "I think the first criteria a depositor should be to look at the safety of capital first and foremost, rather than the return on capital, because these are turbulent times and the investor should keep that in mind."

He further warned that it was likely many more NBFCs or even manufacturing companies might wind up and investors should stick with good ones with decent reputations. "People should stay away from upstarts who have grown rapidly in the last five or ten years," the representative added.

Prudential said that post-maturity, the delay to depositors will be at least six months to a year. Baid promises that all outstandings will be repaid, with interest. Yet for investors, already reeling form scams like CRB, the fear of bankruptcy is pervasive and Baid's promises small comfort.

RELATED REPORT:
The sorry state of the non-banking financial companies