Vault Matters | Bank or NBFC, the valuation dilemma

For every promoter of a non-banking finance company (NBFC) and senior executive employed, being able to convert into a bank used to be a vanity proposition until a few years back. In fact, when the regulator opened the doors for ‘on-tap’ banking licenses for NBFCs a little less than a decade ago, it was expected that many names such as Shriram Finance (earlier Shriram Transport Finance), Edelweiss Financial, JM Financial, and Muthoot Finance, among others, who were earlier keen to become banks, would flock to the regulator’s door to convert into a bank. Nine years have passed since the relaxation, and there have only been a few failed attempts, but no serious attempts to upgrade into a bank.

Are NBFCs then happy being what they are in their current form?

Perhaps yes, especially in the context of the growing complexity involved in operating as a bank. This is despite a systemic attempt by the regulator to harmonize regulations governing banks and non-banks and ensure that the potential for regulatory arbitrage is almost zero. If anything, compliance and regulations have only doubled for NBFCs in the last 6–7 years and seem to increase further. The hunt for liabilities is yet another ongoing battle for NBFCs, especially mid- and small-sized ones. The fight for funding is vigorously fought month after month, with little or no signs of relief, especially on the cost of funds side. It’s a routine scrounge for funding. The regulator’s supervision of NBFCs has also gone up significantly, particularly after the IL&FS failure in 2018. Despite these difficulties, most NBFCs, including the large ones such as Bajaj Finance and Shriram Finance, prefer to operate as non-banks, even if they are well entrenched in the process of deposit mobilization.