Corporate Front: Strategy, Can Peerless Finance A Sustainable Future?

CORPORATE FRONT: STRATEGY
Can Peerless Finance A Sustainable Future?

With collections falling, NPAs climbing, and efficiency at a low ebb, only a drastic remedy will deliver results.

By Rakhi Mazumdar

D N Ghosh In contrast to the buildings immersed in darkness at Esplanade in central Calcutta, the green neon sign atop the Peerless headquarters glows brightly. How ironical. Operating in an environment beyond its control, the management of Peerless General Finance & Investment Co. (Peerless) is waging a grim battle to put its house in order. However, a little over a year after Peerless put in place a ruthless remedy of downsizing, the Residuary Non-Banking Finance Company (RNBC) continues to fight shy of light at the end of the tunnel.

Sure, Peerless has time on its hands. According to D.N. Ghosh, Peerless' Chairman, it has till March 31, 2003, to redress matters. But even though 51 of the 84-month deadline imposed by the Reserve Bank of India's (RBI) norms are yet to run their course, a 3-pronged restructuring exercise--recovering Non-Performing Assets (NPAs); restructuring some subsidiaries and divesting others; and cutting costs--has yielded little result, none of it tangible. Indeed, the time has come to ask whether Peerless--which has a deposit base of Rs 7,000 crore--will ever stand on its feet again.

Of course, the management is optimistic. Declares Ghosh, 68: "The objective of our housekeeping effort is to augment the net worth of the company and make the operations solvent." However, even if Peerless' operational losses in 1997-98 have come down to Rs 17.80 crore--compared to Rs 42 crore in 1995-96--its net worth is being threatened by its accumulated losses. In 1997-98, the company's net worth of Rs 67.96 crore was not enormously higher than the accumulated losses of Rs 48.31 crore. Even here, reserves and surplus of Rs 34.80 crore have come through revaluation this year. Moreover, the lower net losses of Rs 17.80 crore for the year were arrived at after writing back provisions of Rs 35.08 crore.

There is a silver lining, though, albeit a faint one. There has been a rise in income from investments over the past 3 years. An Investment Committee--headed by D. Basu, the former chairman of the State Bank of India--has got Peerless to raise its investment income by 22 per cent, from Rs 558 crore in 1996-97 to Rs 682 crore in 1997-98. The average yield from investment has improved from 13.20 per cent in the previous year to 13.40 per cent now. There have been no NPAs in this period, either.

But the recovery of earlier NPAs is another story. Of the total NPAs of Rs 211 crore, only Rs 39 crore was recovered in 1997-98. In the first 6 months of the current year, a sum of Rs 20 crore has been recovered. But the company has made no provision for NPAs in its gross profits in 1997-98. Admits Ghosh: "If the total provisions for NPAs had been made, we would have ended up with huge losses."

S K Roy A greater worry is the poor collection of deposits. Simply put, investors have lost faith in Peerless. The total collection up to November, 1998, reached Rs 206.33 crore, against a target of Rs 700 crore for the year. Collections from renewals touched Rs 167 crore against a target of Rs 370 crore for the year. But what is most worrying is the abysmal rate of new collections, which stood at Rs 22 crore till September, 1998, compared to the annual target of Rs 330 crore. Avers Ghosh: "We are overhauling our marketing and distribution strategy. We will deploy staff to raise deposits through small-savings and long-term schemes."

The strategy: increase the number of depositors by launching schemes that target different segments--like the Children's Education Scheme, Growing Interest Scheme, and Daily Deposit Scheme--through the nodal offices, and leverage Peerless' huge manpower resources to push these products through its 140 outlets. A recent survey by ORG-MARG for Peerless has identified 50 livewire branches, which have the maximum potential for collection and renewal. The company is also upgrading its systems and processes by implementing centralised data processing, installing an audit committee on the board, and appointing PricewaterhouseCoopers internal auditors for the company for scrutinising the functioning of 12 branches. The company has also hired UTI Investor Services to gradually dispose of its loss-making investments, whose book value is Rs 389 crore. Adds Indraneil Roy Chowdhury, 34, a Calcutta-based chartered accountant: "RNBCs are facing severe pressure on their margins. At Peerless, in particular, efforts are on to regain investor faith--the biggest asset in the business."

Peerless' problem, however, is that the level of deposits is intrinsically linked to the amount of commission payable to the depositors. And the share of the commission in collections has been brought down from 30 per cent in 1994-95 to 8 per cent in 1997-98. The RBI wants it further brought down to 6 per cent. While that is definitely possible, there are repercussions: as the commission falls, so does the incentive for agents to target new customers.

Peerless has also been hit by falling interest rates. When this is coupled with the restrictions imposed on investments by the RBI in January, 1997--rnbcs have to invest up to 80 per cent of their total investments in public sector bonds--it becomes obvious that Peerless has to attack costs to survive in its existing business. For, after paying certificate-holders and the agents' commissions, Peerless works on an average spread of 1.50 per cent only.

The new 5-tier system for collection and distribution of deposits--which replaces the earlier 18-tier system--not only saves costs, but also brings out the flab into the open. Chairman Ghosh recently said: "Given the present volume of business, we need a staff of only 1,500 to service the 140-odd outlets." Peerless, however, has 4,500 employees on its rolls. The company plans to be ruthless. Says S.K. Roy, 54, CEO, Peerless: "Each branch has been given a target, and within the next 6 months, each will have to be profitable in order to survive. Ours is a financial institution and not a charitable one."

Naturally, this is being opposed by the unions. Asserts Shymal Chakraborty, 55, the former transport minister in the West Bengal Government, who is now the leader of the All India Peerless Union: "The management is yet to make a presentation to us on the new marketing schemes." The unions are gearing up for battle, and have met the West Bengal Chief Minister, Jyoti Basu.

Finally, a major part of Peerless' overall restructuring plan centres around its 6 subsidiaries and 20 associate companies. Points out Lodha & Co. in the Auditor's Report: "Loans and advances to various subsidiaries aggregating to Rs 81.02 crore are presently incurring losses and, in certain cases, have negative net worth" Explains Roy: "We are trying to withdraw from some of our subsidiaries in an organised way, in a manner that we can add value. As for the other companies, some of them are being rehabilitated while others are being sold."

Peerless has decided to retain 4 companies: Peerless Hotels, Peerless Securities, Peerless Finance, and Peerless Hospitex Hospital & Research Center. Proclaims Roy: "The overall decision is to remain in financial services and service business like hospitals, hotels, and housing." Ernst & Young, Peerless' advisors on restructuring, has a tough task ahead. Barring Peerless Hotels, most of Peerless' 26 companies are swimming in accumulated losses. And in the absence of information, it is difficult to guesstimate how much Peerless will receive--apart from book value, if at all--from their sale.

In the long term, there are other worries. There is a deferred payment of Rs 650.80 crore to its depositors, of which only half has been charged to the P&L Account. Similarly, loans and advances of Rs 130.15 crore--as well as Rs 228.87 crore for diminution of investments--have not been provided for in the 1997-98 p&l Account. Peerless also faces income-tax liabilities of Rs 924 crore for the period between 1982-83 and 1994-95. Maintains Ghosh: "We will be able to wipe out total deferred liability by 2003-04."

But this year is crucial for Peerless. It has to go through the painful process of downsizing. However, it does not have the fresh deposits to shoulder its turnaround exercise. With its traditional strategy of tapping the vast and untapped segments of the deposits market no longer sustainable, Peerless is embarking on what looks like Mission Impossible to break with its past. Clearly, as a problem, it could prove to be peerless.

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