Coming, more banks to bank on?

Hold on, don’t get too excited! NBFCs and some bank stocks went berserk after the RBI panel put out suggestions for conversion of large NBFCs into banks and allowing large corporates as promoters of banks.

No it’s not. But these are only suggestions. Final guidelines will take a while to come. Also, even if the RBI opts to implement most of the suggestions, there could still be many a slip between the cup and the lip.

Let us start with the proposal to allow large NBFCs (asset size of ₹50,000 crore and above), including those owned by a corporate house, to convert into banks. This is not a novel idea. According to the on-tap banking licensing guidelines of 2016, NBFCs are permitted to convert into a universal bank if they meet certain criteria. The RBI panel has made a few tweaks to these conditions; importantly it has proposed to allow corporate-run NBFCs to upgrade, now. So on-tap banking licence for NBFCs is already available. But reluctance on the part of NBFCs and, of course, the RBI’s own cautious stance have not seen a mass conversion of NBFCs into banks.

By converting into banks, NBFCs gain mainly in two ways. One, they get access to low-cost deposits. Two, it helps bring in scale in operations as well as diversification of asset (loan) book. Of course, the ‘bank’ tag is incentive enough for many to join the bandwagon.

But a bank licence comes with several strings attached. One, NBFCs will have to comply with the regulatory requirement of cash reserve ratio (CRR) and statutory liquidity ratio (SLR) — which are applicable to banks (and not NBFCs). CRR is a portion of deposits (3 per cent) that banks have to maintain as cash with the RBI and SLR (18 per cent) is the portion that has to be held in the form of highly liquid securities. Deploying funds for reserve requirements (that fetch negligible returns), rather than for lending, will impact profitability sharply for NBFCs once they convert into banks.

Also, the low-cost deposit incentive may not be good enough for many NBFCs, already having easy access to funds. Even for existing banks, raising deposits has become a challenge and hence NBFCs cannot count on this alone to convert into a bank. Hence, while Bajaj Finance, L&T Finance, Mahindra Finance, Aditya Birla Capital, Shriram Transport, Cholamandalam, etc., are touted as possible candidates to convert into banks, it is not a done deal yet.

More so! In 2013, the RBI had permitted industrial and business houses to set up banks with certain conditions. While large corporates applied for licence, only IDFC Bank and Bandhan Bank were allowed to set up banks.

The 2014 SFB licensing conditions had barred large corporate/industrial houses from promoting banks. Hence the RBI has been always wary of allowing corporate houses into the banking arena.

Even the RBI panel indicates that large corporates setting up banks is contingent on necessary amendments to the Banking Regulations Act, 1949 to deal with connected lending and exposures. Even after the rules are put in black and white, the final authority rests with the RBI, which may exercise extreme caution.

Then there is already a lot of opposition to this move. Former RBI Governor Raghuram Rajan, along with other former Deputy Governors and S&P Global Ratings, has already cautioned that such a move could create concentration of economic (and political) power in certain business houses.

As always! While the RBI suggestions will go a long way in bringing in a uniform approach towards banking structure in India, most of the suggestions would take a long while to implement, with various caveats and limitations.

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