NBFC stocks gain after RBI rolls out new banking proposal to convert large NBFCs into banks

Share price of non-banking financial services (NBFC) companies gained up to 5 percent in the morning session on November 23 after report of RBI constituted Internal Working Group's (IWG) proposal to allow large non-banking financial companies (NBFCs) to convert into banks.

Well-run large NBFCs, with an asset size of Rs 50,000 crore and above, including those which are owned by a corporate house, 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.

This too will help many corporate houses running NBFCs under their fold to become banks if they wish to do so.

Share price of Bajaj Holdings along with Shriram Transport Finance jumped over 4 percent intraday followed by Cholamandalam Investment, Bajaj Finserv, HDFC AMC, M&M Financial Services, Bajaj Finance, REC and PFC which added 1-3 percent each.

The banking licence candidate should have a 10-year track record of successful operations. However, there is a restricting clause which says that non-financial business of the promoter group should not exceed 40 percent of the group's total assets/total income.

The Internal Working Group has proposed that NBFC s should be given a glide path for compliance with norms as applicable to banks.

Global research firm HSBC is of the view that the move is in the right direction. It feels that the timing of reworking guidelines couldn’t have been more apt adding that for large NBFCs, it is not a question of whether to convert, but it is about when, according to a CNBC-TV18 report.

Proposed guidelines could drive consolidation, attract fresh capital and would also provide NBFCs a level playing field. Proposal to raise promoter cap could act as an incentive for existing NBFC promoters, it said.

Research firm CLSA is of the view that the working group recommendations are pragmatic and non-disruptive. Many changes recommended to bring harmonisation of bank licensing and some of the recommendations are not easily operationalised, CLSA said.

The research firm is of the view that the overall recommendations are positive for smaller banks and SFBs. For larger NBFCs (HDFC & Bajaj Finance), size-based tighter supervision is recommended. In the long term, a move from NBFC to Bank is a positive.

Jefferies feels that the RBI Committee has taken an open-minded approach. Its recommendations suggest relaxing slew of norms with safeguards. It is of the view that NBFC subsidiaries of large banks may be merged with the beneficiaries being Equitas Holdings, Ujjivan, IDFC, Bandhan Bank, Bajaj Finance and M&M Financial Services.

Investec believes that this move could be the most sweeping regulatory change. However, the firm feels that RBI will be cautious in awarding licences to corps with no experience in financial services.

The RBI regulator intends to limit scalability of the current NBFC model. It however feels that RBI's rule to large NBFCs of convert to banks or face stringent regulations is a negative for large NBFCs.

Macquarie on the other hand feels that the possibility of corp houses and NBFCs being given bank licence is very remote adding that the ultimate power of fit & proper criteria, due diligence rests with RBI.