A ruthless remedy of downsizing is being administered.

By Avijit Ghosal

For the 61-year-old Sushim Mukul Datta, it is an ironical reversal of roles. As the former chairman of the Rs 6,600-crore Hindustan Lever, Datta's strategy was to grow through acquisitions. Today, as a director on the board of the 65-year-old Peerless General Finance & Investment Company's (Peerless) board--which has a deposit base of Rs 6,600 crore--he has to prune the company's size, selling off its various subsidiaries and associate companies.

Indeed, desperate situations require desperate measures. And there's no doubt that Peerless is in a financial mess. Saddled with huge liabilities of Rs 2,218.86 crore, the company incurred a loss of Rs 30.82 crore in 1996-97, the second successive year of losses. Although the figure was lower than the Rs 42.82 crore it lost in 1995-96, the margins of Residuary Non-Banking Companies (RNBCs) like Peerless continue to be squeezed under the stringent regulations of the Reserve Bank of India (RBI).

This has led to a feeling that Peerless' investments are suspect, which, in turn, has resulted in an erosion in depositor confidence. Admits Dhruva Narayan Ghosh, 68, chairman, Peerless: "We are trying to be transparent and conservative in our investment policies. Our primary responsibility is to the depositors, and we have to fulfil it." The desperate restructuring remedy, prescribed by Ghosh and Datta, consists of three strong doses.

First, the company has initiated steps to recover its Rs 426.20-crore non-performing assets (NPAs) which form a large part of its liabilities. In some cases, Peerless has taken the legal route to recover loans. Although it was able to recover just Rs 23.67 crore last year, an analysis of the portfolio of these assets reveals that the task of recovery will be an uphill one.

The NPAs, as revealed by the company's auditors Lodha & Co. in the 1996-97 annual report, include a sum of Rs 253.73 crore advanced to undisclosed parties, and another Rs 70.53 crore extended to loss-making companies that have been referred to the Board for Industrial & Financial Reconstruction (BIFR).

Second, the Peerless board has decided to sell off most of its 28 subsidiaries and associate companies. Datta, who has been entrusted with this job, says negotiations are on, but refuses to divulge who the buyers are. Most of these companies, which include shops selling typewriters and calculators, are worthless and have already been closed down. Even Datta admits that while the sale of "five of these companies will be profitable", the remaining may be disposed of at book value, or less. "We have to make such adjustments," he concedes.

What is significant is that the management seems to have little idea about the operations of these subsidiaries and associates. For instance, it is ignorant about the total exposure of Peerless in these companies. Datta says they have yet to calculate the figure, and to trace the records of some of these companies. But the observations made by the RBI's department of supervision in late 1995 concluded: "Loans and advances to the company's subsidiaries, erstwhile subsidiaries, and associate companies stood at Rs 129.06 crore." And, of these, 99.88 per cent turned into NPAs. Given this situation, it is impossible to gauge the amount that the company will receive from the sale.

The two subsidiaries that Peerless does want to retain are the Rs 11.47-crore Peerless Hotels and the Rs 13.80-crore Peerless Hospitex Hospital & Research Centre. The former, in which Peerless has a 99 per cent stake, earned Rs 95 lakh last year and owns a four-star hotel, Peerless Inn, at Chowringhee in central Calcutta. And although Peerless Hospitex incurred a loss of Rs 4.52-crore in 1996-97, the company maintains that the hospital, located in east Calcutta, has good medical facilities--especially for cardiac patients, with an intensive care unit (ICU) and an operation theatre--and can be turned around with a little management effort.

Third, Peerless is trying to cut costs, and has already rationalised its multistructured, 18-tier network of agents. Under pressure from the rbi, the network is now a slim five-tier one that has enabled the company to reduce the amount of commission payable by 39.52 per cent within a year. While the outgo on this account was Rs 92.35 crore in 1995-96, it came down to Rs 55.85 crore last year.

But this rationalisation is likely to have an adverse impact on Peerless' deposit mobilisation. The company has traditionally grown by collecting deposits from semi-urban and rural areas through its large chain of agents. Now that their commissions have been slashed, the agents are far less keen on selling the various deposit schemes in those areas.

According to Ghosh, there is no other option but to cut expenses if Peerless has to survive in its existing business. Especially in an era where margins and spreads are getting thinner due to the drop in interest rates and the restrictions imposed on investments by the rbi. An rbi directive, issued in January, 1997, states that RNBCs have to invest at least 10 per cent of their total investments in rbi-approved securities and fixed deposits or certificates of deposit of scheduled banks; a maximum of 10 per cent in the Unit Trust of India's schemes and in private sector debentures with a minimum credit rating of aa+; and the rest in public sector bonds.

This, obviously, puts a cap on Peerless' earning potential through investments, leaving the company with no discretionary powers to invest in shares or other better-paying options. In 1996-97, Peerless invested Rs 1,142.27 crore in categories that were considered discretionary, amounting to 23 per cent of total investments, down from 33.73 per cent (or Rs 1,399.30 crore) in 1995-96.

At the same time, a drop in interest rates has reduced the company's potential revenues from loans and advances. Couple this with the fact that the rbi does not allow Peerless to drop its deposit rate below 10 per cent, and the squeeze on margins becomes palpable. In comparison, the average cost of deposits for the banking industry is just 7.29 per cent. Admits Ghosh: "We are confronting a situation where the company faces a squeeze on net interest margins."

Unfortunately for Peerless, its restructuring, even if executed swiftly, will not lead to profitability in the short run. For, the company has huge liabilities, apart from NPAs, which were not accounted for in the Profit & Loss account. For instance, a payment of Rs 650.83 crore to its depositors has been deferred. Similarly, the company is faced with income-tax liabilities, totalling Rs 924.64 crore for the assessment years 1982-83 to 1994-95. Moreover, the current slackness in the stockmarkets has led to a drop in the market prices of its various investments by another Rs 208.71 crore.

It is obvious that Peerless has to phase out, and provide for, these liabilities over the next few years. Only then will the company come out of the red. Ghosh, with the experience in banking, and Datta, who is market-savvy, are the right people to change things at the company. Their efforts--if successful--could well prove to be peerless.