Top brokerages hail RBI panel's recommendations as pragmatic, positive

Days after the Reserve Bank of India (RBI) released the recommendations of the internal working group (IWG) on private bank ownership and corporate structure, brokerages and analysts hailed them as pragmatic and said these could be the sweeping regulatory changes.

RBI on November 20 released a report on the IWG recommendations on private bank ownership and corporate structure.

Apart from several key recommendations, RBI panel recommended that large non-banking finance companies (NBFCs), with an asset size of Rs 50,000 crore and above, may be considered for conversion into banks subject to completion of 10 years of operations and meeting due diligence criteria and compliance with additional conditions specified in this regard.

Read more: RBI releases panel report on ownership, governance norms of private banks

CLSA - Pragmatic and non-disruptive recommendations

Global brokerage firm CLSA, as per a CNBC-TV18 report, said working group recommendations are pragmatic and non-disruptive.

CLSA is of the view that many changes recommended may bring harmonisation of bank licensing; however, some of the recommendations are not easily operationalised.

Overall, recommendations are positive for smaller banks and SFBs, CLSA said.

For large banks such as ICICI Bank and Kotak Mahindra Bank, the non-operative financial holding company (NOFHC) structure is contingent upon tax neutrality, CLSA said.

The global brokerage firm believes in the long-term, a move from NBFC to the bank is positive.

Jefferies - An open-minded approach

As per CNBC-TV18, Jefferies said the RBI panel's recommendations show the committee took an open-minded approach.

"Recommendations suggest relaxing a slew of norms with safeguards. Opening doors to corporates to become banks; However, safeguards may be tough," said Jefferies.

Jefferies believes large banks may move to the holding companies and the clarity on the dual listing is the key.

NBFC subsidiaries of large banks may be merged, Jefferies believes.

Equitas, Ujjivan, IDFC, Bandhan, Bajaj Fin, M&M Fin, IndusInd, Tatas, Birlas are the beneficiaries, Jefferies said.

"Hike in the cap on promoter holding will be positive for the likes of IndusInd Bank while a hike in non-promoter holding can help IndusInd Bank, RBL and AU Small Finance Bank," Jefferies said.

Jefferies sees an overhang on HDFC Bank, ICICI Bank, Kotak Mahindra Bank and SBI.

Macquarie - Good for existing private banks

Macquarie believes existing private banks such as HDFC Bank and ICICI Bank will be long-term winners.

Raising the cap on promoter stake, in the long run, will be positive for Kotak Mahindra Bank, said Macquarie.

Banks under the NOFHC structure may be allowed to exit which is positive for Ujjivan Financial Services, Macquarie said.

The global brokerage firm is of the view that the possibility of corporate houses and NBFCs being given a bank licence is very remote.

Macquarie said the timing of the report is quite surprising as it is coming amid a spate of bank failures.

"RBI may exercise caution and hence some recommendations may not come to fruition," Macquarie said.

Investec - Sweeping regulatory change

Investec believes these could be the most sweeping regulatory changes and can have far-reaching positive and negative implications.

Investec believes RBI will be cautious in awarding licences to corporates with no experience in financial services.

RBI intends to limit the scalability of the current NBFC model, Investec said.

"RBI is driving consolidation of the banking system which is positive for large banks. It may accelerate the shift of liquidity away from weak banks which is negative for PSU and small private banks," Investec said.

Investec is of the view that large NBFCs will convert to banks or face stringent regulations which are negative for large NBFCs.

"NOFHC structure preferable with banks expected to convert after government enacts tax neutrality. This is positive for select large banks such as Kotak, ICICI, Axis, etc. as it gives ample time. Banks can exit the NOFHC structure if there is no other group company which is positive for IDFC and Bandhan Bank," Investec said.

"The RBI panel has simplified regulations around promoters’ shareholding in private banks which is positive for Equitas and Ujjivan. Payment banks to convert to small finance banks (SFBs) which is negative for SBI Card and RBL Bank," Investec said.

Motilal Oswal Financial Services

Motilal Oswal sees the trend of a market share shift may accelerate (30 percent in 2020 against 18 percent in 2015) at a faster pace if the suggestions are implemented.

"Corporate houses with deep pockets, a large ecosystem, and strong trust among people may give a tough time to incumbents, especially inefficient players. Overall, intermediation cost is expected to reduce and credit penetration to rise at the system level," Motilal Oswal said.

"Players such as PAYTM, FINO, etc. may come up with innovative solutions soon as IWG recommends a shorter period of three years (against five years) to convert into small finance banks (SFBs) from payments banks," Motilal Oswal said.

The brokerage firm is of the view that the overall system is the crossroads where cost efficiency and the ability to generate high retail liabilities and best-in-class services would be the key going forward.

Motilal Oswal sees mergers and acquisitions opportunities to also rise going forward.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.