NBFCs likely to benefit most from RBI panel proposal to allow conversion to banks: Report

The Reserve Bank of India (RBI) panel’s plan to allow shadow lenders and non-banks with assets over Rs 50,000 crore to convert into banks may benefit non-banking finance companies (NBFCs) the most, according to a Mint report.

The move comes as the RBI looks to reach large swathes of India’s unbanked population and increase regulatory oversight of shadow lenders in the wake of the IL&FS and DHFL debacles, Mint reported.

As per the proposal, put forward by the RBI’s internal working group on November 20, companies with assets over Rs 50,000 crore and with at least 10 years in business, will be eligible for the shift.

Experts, however, told the paper that the benefits provided and certainty of financial stability would determine how many make the move to full-service banks. If granted, these licences would be the first since Bandhan Bank and IDFC First Bank’s in 2014.

Moneycontrol could not independently verify the report.

Not all were optimistic the move would address core systemic issues. One NBFC head told the paper universal bank licences were likely “not the answer to everything” as “regulation alone may not prevent a collapse in the lending business.”

“We do not want entities called NBFCs becoming too large as they are dependent on wholesale liability, and one disaster like DHFL could make people nervous," he said, pointing out to the “highly regulated” Lakshmi Vilas Bank (LVB) which failed despite checks and balances.

“…how does converting NBFCs into banks help? So, I don’t think there are easy fixes. Many NBFCs will want to continue the way they are as most banks are aiming for the same retail liabilities to shore up cheaper capital," he added.

He suggested bringing regulatory requirements on par with banks for NBFCs – especially for the “systemically important ones” as an option. This was also hinted at by RBI deputy governor M Rajeshwar Rao.

Other experts, however, say the RBI’s thought could be to bring stricter regulation while allowing NBFCs to benefit from systems enjoyed by banks such as deposits.