Non-banking finance companies (NBFCs) are highly cautious in responding to the recent proposals from an RBI-working group on the conversion of large NBFCs into banks. One of the recommendations of the RBI working group was that well-run large NBFCs, with an asset size of Rs50,000 crore and above, including those which are owned by a corporate house, may be considered for conversion into banks.
This should be subject to completion of 10 years of operations and meeting due diligence criteria and compliance with additional conditions specified in this regard, the working group said. To be sure, these are suggestions. The regulator will take a final call based on the report proposals.
“There are already on-tap licensing norms existing in India,” said George Alexander Muthoot, Managing Director of Gold-loan NBFC, Muthoot Finance.
“The RBI working group is only giving some modifications to the existing guidelines. And these are only suggestions. We will study when the final guidelines come,” said Muthoot.
After giving two licences in 2014 to IDFC and Bandhan (from around 26 applicants), in August 2016, the RBI announced on-tap licensing norms for universal banks. The central bank explained that the idea was to progress from “stop and go” licensing policy to a “continuous authorisation” policy. The regulator believed that such a policy would increase competition and bring in new ideas into the system but on-tap licensing didn’t change the Indian banking industry.
As Emkay Global pointed out in a report, even after the “on-tap” licencing norms, “none have opted for going down the banking route so far”. It is pertinent to note that the final approval will come after “meeting the due diligence” criteria of the RBI and the nod will also be based on the experience of several years, which most NBFCs failed to meet, Emkay said.
Should be an option; not by force
Raman Agarwal, Chair-NBFCs at Centre for International Economic Understanding, said the central bank shouldn’t force NBFCs to convert to banks but it should be given as an option.
While there have been a series of measures to tighten the regulations of NBFCs, NBFCs have not received any benefits in a commensurate manner in terms of access to cheaper funds and taxation issues, Agarwal said.
“Conversion to banks should be an option not compulsion. There are NBFCs that do not want to become banks. They should be allowed to continue as NBFCs with tighter regulation or scale down their operations and continue as NBFCs,” said Agarwal.
Senior executives from two other NBFCs, who spoke on condition of anonymity, said they aren’t keen to convert to banks given an option. “There are immense growth opportunities in the NBFC industry. At this stage, there are no plans to seek a banking licence,” said one of the company executives.
Lack of level playing field
NBFCs have been complaining for long about a lack of level playing field for NBFCs compared with banks. “Whenever there is a crisis happens, there is a talk of tightening NBFC regulation. Today large NBFCs are regulated at par with banks but there are no incentives for them,” said Agarwal.
Unlike banks, NBFCs cannot access public deposits. These entities typically tap money markets or borrow from banks to raise resources. Banks have a total loan outstanding of around Rs 8 lakh crore to NBFCs as at September-end.
Sanjay Agarwal, senior director at CARE rating, said the RBI working group proposals do not mean every corporate or NBFC will get a ‘free pass’ to start banks. “The RBI has always stipulated about fit and proper criteria for banking licence aspirants. It is not going to be a free pass for every candidate,” said Agarwal.
According to HDFC Securities, six large NBFCs—Bajaj Finance, L&T Finance, Muthoot Finance, Cholamandalam, Mahindra and Mahindra Finance and Aditya Birla Capital—are likely to apply for banking permits. Of these, only Bajaj Finance and Cholamandalam Finance are likely to get the licence. According to Emkay, Bajaj Finance would not be keen on transforming into a bank at the cost of growth, at least over the medium term. However, NBFCs such as L&T Finance and AB Capital could be interested.
Since bank nationalisation in 1969, the RBI has issued only three rounds of private bank licences. In the first round in 1993-94, the RBI gave licences to 10 private sector banks, namely Global Trust Bank Ltd, ICICI Bank Ltd, HDFC Bank Ltd, UTI Bank Ltd (renamed Axis Bank Ltd), Bank of Punjab, IndusInd Bank Ltd, Centurion Bank Ltd, IDBI Bank Ltd, Times Bank, and Development Credit Bank Ltd. Some of these banks do not exist now as they were acquired by stronger banks.
In 2003-04, two more banks were given licences—Kotak Mahindra Bank Ltd and Yes Bank Ltd. In 2014 IDFC First Bank and Bandhan Bank were given the licence. Rajan and Acharya listed some of the potential reasons for not letting corporations enter banking.
Banking licences for large businesses
There is a general consensus in the banking industry that entry of large businesses into banking wouldn’t augur well for the sector. On November 23, former RBI governor Raghuram Rajan, in a jointly authored article with former RBI deputy governor Viral Acharya, had said that inviting businesses to start banks is a bad idea.
But Rajan and Acharya said, while the proposals are tempered with many caveats, these raise an important question. “Why now? Have we learnt something that allows us to override all the prior cautions on allowing industrial houses into banking?” the authors asked. In the past, the RBI has been largely hesitant to let large businesses promote banks.