‘emmen — Indian Institute of Management Bangalore Sundaram Finance Ltd. By Prof. Rishikesha T. Krishnan Corporate Strategy & Policy Area ‘This case hasbeen written by Prof. Rishikesha T. Krishnan with assistance from Dwarakaprasad Chakravarty, PGP, Class of 1999 based on publicly available information, with financial assistance from the Centre for Gevelopment of Cases and Teaching Aids, IIM BangaloreSundaram Finance Ltd. Case written by Prof, Rishikesha'T Krishnan, [IM Bangalore (©2001 Indian Institute of Management Bangalore Sundaram Finance Ltd. Despite being the largest non-banking finance company (NBFC) in India (in terms of asset base), Sundaram Finance Ltd. (SFL) was slow to take any new initiatives in the “liberalised” economic environment of India in the early 1990s. While recent entrants to the financial services industry had made visible and aggressive forays into a variety of fund-based and non fund-based activities, SFL continued to stick to its conventional hire- purchase business and concentrated mainly on truck finance. By 1995, SFL had made a small beginning in the sccurities business and as a merchant banker through newly created subsidiaries. In 1996, some analysts were concerned about the reported move of SFL to start a mutual fund as the net asset value of most mutual funds was below par. ‘They were worried that entry into the mutual fund business could dilute the image of reliability and safety, which SFL had built up over the preceding 42 years. Other analysts believed that this could be the first major move towards transformation of SFL from a strong niche player to a financial powerhouse. Non Banking Finance Companies (NBFC’s) ‘The Indian financial sector has two broad segments ~ organised and unorganised. The organised segment includes commercial banks, development finance institutions, insurance companies, non-banking finance companies and mutual funds. Non-formal sources of finance existed in India before commercial banks emerged. The moneylender, the chit fund, and mutual credit societies were part of the financial scene long before the modern banks. Most entrepreneurs found it easier to raise funds from non-banks rather than from banks. For instance. the rise of India's film industry would have been impossible but for non-bank finance.' From a mere Rs. 3,161 crores" in 1984, aggregate NBFC deposits stood at somewhere between Rs. 10,000 and 15,000 crores by - 1994. There were over 40,000 NBFC’s in India in 1994, Except for issuing chequebooks and handling small cash transactions, NBFC’s perform similar functions as banks. NBFC’s have progressively been subject to reserve requirements on almost the same lines as banks. The Reserve Bank of India has been authorised to determine the policy and issue directives from time to time to the NBFC’s regarding income recognition, accounting standards, asset classification, provision for non-performing assets and capital adequacy. NBFC’s mobilise funds from depositors just as commercial banks do. As the risk associated with NBFC deposits is greater than with bank deposits, depositors receive higher rates of return on their funds. NBFC’s disperse these funds through: * one erore=ten millionSundaram Finance Ltd. Case written by Prof. Rishikesha T. Krishnan, [IM Bangalore ‘©2001 Indian Institute of Management Bangalore Hire Purchase: These are schemes for financing the acquisition of commercial and private vehicles (generally trucks and cars), as well as plant and machinery. The loans are secured by the purchased asset. Loan Schemes: These schemes finance industrial projects and real estate acquisitions. Investment Schemes: The funds mobilised are used to purchase corporate and government securities and other money market instruments. Equipment Leasing: These schemes finance leases of industrial equipment (plant and machinery) Nidhis and Chit Funds: Here, the mobilised funds are loaned or distributed among the depositors themselves in a variety of ways. Exhibit 1 shows the Category-wise distribution of NBFC schemes with net owned funds over Rs. 5 million (as of September 30, 1995) The TVS Group SFL was promoted by T.S. Santhanam, the son of T.V. Sundaram Iyengar, one of the early industrialists of south India. From lyengar's early ventures in the field of road and bus transport and a dealership for General Motors in the early twentieth century emerged the TVS group as a diversified business family with interests in a whole range of automobile and transport-related businesses. While SFL itself was founded by Santhanam in 1954, the major growth of the group took place in the 1960s. In the 1960s, the TVS group set up a string of automobile parts manufacturing units, largely with foreign collaboration. Among the companies that were promoted were Lucas-TVS (auto-electric systems), Brakes India (brakes), Sundaram Clayton (brake- linings), Sundaram Fasteners (fasteners), Wheels India (wheels) and Sundaram Abex (brake linings). These companies were founded by Santhanam and his three brothers, T.S. Krishna, T.S. Rajam and T.S. Srinivasan. Santhanam is credited with having arranged the finances for these new ventures. By the early 1990s, the companies of the TVS group were being run largely by the third generation of the TVS family. Management control of these companies had been divided among the different branches of the family though ownership remained diffused as most of the companies had been promoted by the group holding company, TVS & Sons Ltd, However, SFL was promoted by Santhanam and his associates, and his branch of the family was in total control of the company. As of 1992, the TVS group companies had a combined sales turnover of approximately Rs. 2,000 crores, making them one of the largest industrial groups in India. However, their growth had not kept pace with some of the other industrial families who were their contemporaries or with new entrants like the Ambanis of Reliance or the Ruias of the