Nearly a month after the Reserve Bank of India (RBI) put out the list of non-banking finance companies to be classified in the upper layer under the scale-based regulations, some of the large NBFCs led by conglomerates have reached out to the regulator seeking clarity on what they should do to simplify their ownership structures. Some of the non-banks which had shown interest in the past to secure a bank license are said to have approached the regulator.

Names doing the rounds are Cholamandalam Financial Holdings, Shriram Group, Mahindra and Mahindra Financial Services and Bajaj Finserv.

“We would not like to comment on speculation. We have always maintained that we will closely look at it when the opportunity arises,” said the company spokesperson of M&M Finance. E-mails sent to other companies remained unanswered till press time. 

Complex shareholding 

Currently, the shareholding structures of these companies are quite complex, especially at their respective holding company levels. “Even if they qualify to become banks as more than 40 per cent of the group revenues are generated by financial services businesses, the complex shareholding may be an impediment for most of them,” said a highly placed source aware of the matter.

Until a year-ago, the prohibitive requirement of setting aside funds towards cash reserve ratio and statutory liquidity ratio were the main deterrents for NBFCs to convert to banks. “Now the industry will closely watch the kind of exemption and grandfathering that RBI will allow for the merger of HDFC Limited and HDFC Bank,” said another source. If the relaxations granted by the regulator are reasonable, it may pave way for more NBFCs to explore converting to a banking entity. 

An old idea 

In 2016, the option to scale up from NBFCs to bank was made available on-tap, though not many had expressed interest. In November 2020, the internal working group of the RBI made a pitch for NBFCs to become banks and allow business houses in the banking sector. A year later, when the RBI okayed 21 out of 33 recommendations of the IWG, it remained silent on whether business houses can enter the banking business, though it introduced scale-based regulations for NBFCs. Those categorised in the upper layer are required to operate like banks. 

Sources say that at least 2-3 NBFCs categorised in the upper layer are keen to convert to banks. “The RBI is also very keen about it, though it could take 1-2 years to see the outcome,” said an industry expert closely engaged with NBFCs. Meanwhile, in an interview to businessline, Ramesh Iyer, Vice-Chairman and MD, Mahindra & Mahindra Financial Services, said, “large NBFCs like us should never ignore that opportunity and should watch that space very closely because today all regulations are more or less close to that of banks.”