Money & Banking

Mixed reactions to RBI panel proposal for conversion of large NBFCs to banks

Surabhi Mumbai | Updated on November 24, 2020 Published on November 24, 2020

The recommendation by the internal working group of the RBI to allow large well-run NBFCs to convert to banks has evoked mixed reactions with many welcoming the move, while others have said they would await more clarity in the form of final guidelines.

“It is a very company-to-company-specific approach, and each company will have to take a call. Even now on tap licensing is available and any interested non-banking finance company can still apply for a bank licence,” said an industry expert, adding that only a handful of NBFCs would be impacted by the recommendationif it is accepted.

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‘A progressive step’

Umesh Revankar, Managing Director and CEO, Shiram Transport Finance, noted that opening up candidature for large corporate and industrial houses and well-run large NBFCs for converting to a private sector bank is a progressive step indeed.

“Shriram Transport Finance has built pan-India reach with strong last-mile connectivity, all while delivering a focussed product portfolio backed by speed and quality to mostly the underbanked and unbanked customers. In contrast, a bank has to provide a very wide range of services, maintain SLR and CRR requirements, and operates at a much higher cost structure compared to NBFCs,” he pointed out.

He further added that an NBFC will have to weigh the pros and cons after final guidelinesand understand the impact for stakeholders (shareholders, employees, customers) before considering conversion to a bank.

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The report of the internal working group set up by the RBI has recommended that well-run large NBFCs with an asset size of ₹50,000 crore and above, including those owned by a corporate house, may be considered for conversion into banks, subject to completion of 10 years of operations.

Conversion to a bank could help many NBFCs in terms of sustainability and growth, but would also mean that they would have to follow more regulatory and compliance norms, experts noted.

Only10 NBFCs, including HDFC, Bajaj Finance, L&T Finance Holdings, Shriram Transport Finance, Tata Capital and Mahindra Finance, had asset size of over ₹50,000 crore in the first half of the fiscal year, according to a report by Motilal Oswal.

“We believe certain NBFCs (including those promoted by industrial houses) have created niche capabilities, increased credit penetration in the system, and done a great job on the asset side. Even regulations for large-sized NBFCs are coming on par with banks now. Banking licenses may resolve the issues on the liability side,” it said.

In the past, too, many NBFCs such as Edelweiss Financial Services and Mahindra Finance have eyed a banking licence.

No non‐financial institution was able to float a bank under the 2013 licensing guidelines and no NBFC has successfully converted into a bank under the extant 2016 ‘on‐tap’ licensing guidelines.

“While large NBFCs aspiring for banking licences will face near‐term challenges, conversion into a bank should be viewed as a desirable long‐term strategy, in our opinion,” said a note by HDFC Securities.

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Published on November 24, 2020
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