NBFCs eyeing bank licences are betting on their rural reach, ready client base
Hemant Kanoria, Chairman of Srei Infrastructure, wants to become a banker.
He is hoping to use the infrastructure created by his company under an e-governance programme to roll out banking services in rural areas.
The project called Srei Sahaj reaches across six states providing e-governance, e-commerce and e-learning services.
Some of these centres also act as banking correspondents.
“There is a large market in the rural areas. We already have a strong infrastructure in rural and semi-urban areas through nearly 26,000 common service centres under Srei Sahaj. We will leverage this infrastructure for our banking foray,” says Kanoria.
Like Kanoria, a number of other Non-banking Finance Companies (NBFCs) and micro lending institutions are relying heavily on their rural reach to get banking licences from the Reserve Bank of India.
The allure is access to funds at a lower cost and cross-selling of banking products to their existing client base, which includes farmers, petty traders and rural entrepreneurs.
But the journey will be fraught with challenges of manpower availability and connecting the last mile.
Under the RBI mandate, new banks will have to open a fourth of their branches in unbanked rural centres (population of less than 10,000).
Magma Fincorp, an NBFC, has 280 branches, 80 per cent of which are in semi-urban and rural areas.
“Over 70 per cent of our customers are from these remote places. Becoming a bank will expand our inclusive financial services,” says Magma’s Managing Director, Sanjay Chamria.
The RBI guidelines also mention that the priority sector lending target of 40 per cent needs to be achieved right from the time the licence is granted.
(The priority sector includes agriculture, micro and small enterprises, education, housing, export credit and weaker sections, and the RBI requires banks to lend 40 per cent of their loans to these sectors.)
READY CLIENT BASE
NBFC Shriram group is banking on its subsidiaries Shriram Transport (Rs 55,000 crore worth assets under management) and Shriram City Union, which manages around Rs 15,000 crore.
A banking licence will allow the group to tap its existing customer base of SMEs and truck operators. “We can give them a working capital facility, and they pay interest only on the amount they draw. Today, we necessarily have to give them term loans, which they draw in full and end up paying interest,” says an official.
The group has four million clients across its businesses, which include chits, truck financing and small-business financing.
While meeting the eligibility criteria is just one part, sustaining operations in rural areas could throw up some challenges.
Trained manpower is essential to ensure wide rural reach.
Besides, the cost of operations is high in these areas. Even existing banks with larger penetration are facing difficulties in agriculture lending due to the high default rates.
The other issue is adhering to cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements from inception.
Mahindra and Mahindra Financial Services opted out of the race to apply for a banking licence as it found that the revised guidelines do not provide any flexibility for NBFCs and banks to co-exist for a reasonable period.
“The regulations provide that CRR and SLR will be applicable from inception, even though building of CASA (current account, savings accounts) will take some time for a newly converted bank,” the company had said in a statement.
“The CRR and SLR requirements for existing NBFCs proposing to convert into banks could have a significant impact on applicants,” says Rashesh Shah, Chairman and CEO, Edelweiss Financial Services.
The company will re-organise its existing businesses and Edelweiss Financial Services will invest Rs 1,300 crore over three years in the equity of the proposed bank.
Gagan Banga, CEO, Indiabulls Housing Finance Ltd (IBFHL), added that setting up a viable number of branches and addressing logistical issues would be challenging.
Further, meeting RBI guidelines on financial inclusion could also be onerous for applicants focused on commercial business and with already-large balance sheets.
“In those cases, transformation to the banking model may be challenging,” says Radhakrishnan V.S., MD and CEO, Janalakshmi Financial Services.
(With inputs from K.R. Srivats in Delhi, Ram Kumar and Satyanarayan Iyer in Mumbai, M. Ramesh in Chennai, Shobha Roy in Kolkata and Anil Urs in Bangalore)