RBI panel report may benefit large NBFCs

Shares of NBFCs have been in focus this week after RBI’s panel recommendations suggested that it would be easier for NBFC’s to apply for a banking licence.

What is the RBI panel’s recommendation with regard to NBFCs?

• A panel set up by the RBI has recommended that well-run large non-banking finance companies (NBFCs), with an asset size of Rs 50,000 crore and above, may be considered for conversion into banks, including those which are owned by a corporate house.   
• This is subject to the completion of 10 years of operations and meeting due diligence criteria. The table below shows NBFCs with asset size greater than ₹50,000 crore.

• Notably, NBFCs were always allowed to apply for on-tap bank licences. However,  since some of the NBFCs who wanted a licence were part of conglomerates, they couldn’t apply for the licence until now.

NBFCs versus banks

• Banks have access to low-cost Current/ Account and Savings account deposits from the public. NBFCs are not allowed to take demand deposits from the public. 
• By their very nature, the operations of a NBFC is riskier. As a result, they have to offer higher interest rates on their fixed deposits to compensate for the additional risk.
• A Bank fixed deposit is insured, while NBFC fixed deposits are not insured. In fact, if there is a default of Rs 5 lakh and less the Deposit Insurance and Credit Guarantee Corporation of India pays the insurance amount on a bank deposit.
• As far as lending is concerned banks tend to target corporates as well as retailers. On the other hand NBFCs are more geared towards the retail sector. For example, this could be in vehicle finance, consumer loans etc.
• NBFCs cater to those segments which are not covered by the banks. MSMEs, infra companies and retail individuals uncovered by banks, reach out to these NBFCs.
• Turning into a bank from an NBFC would mean additional compliance cost. As NBFCs don’t work with public money, they don’t have to maintain any CRR or SLR, or comply with other stringent RBI regulations. This is one of the reasons why even eligible NBFCs have not applied for a banking licence. It would be difficult for an NBFC  to maintain 20% SLR and 3% CRR from day one. 
• The RBI panel’s recommendations have sought to tighten the norms for existing NBFCs sponsored by a bank. The proposal that a bank and its existing subsidiaries or associates (or joint ventures) should not be allowed to engage in similar activity that a bank is permitted to undertake departmentally, could see some of the housing finance companies like PNB Housing, Can Fin Homes and ICICI Home Finance — the home loan arms of Punjab National Bank, Canara Bank and ICICI Bank respectively — be merged with the bank.

INDmoney Analysis

While these changes make it easier for NBFCs to apply for a banking licence, the ultimate power of fit and proper criteria and due diligence rests with RBI. RBI would be the final deciding authority. Earlier, even Larsen & Toubro was not granted a banking licence by RBI.

Brokerage firm Macquarie has pointed out that the experience of allowing corporate houses to run banks has been pretty bad for RBI (eg: Times Bank, Bank of Rajasthan, etc). Thus, getting a licence could still be difficult for the NBFCs. 

However, the fact is that India needs more banks as the size of the country and economy is growing. Each of these NBFCs will have to take a call about the future course, depending upon the current expertise they have, the infrastructure that they have built, the management bandwidth and also the ability to cater to a wide range of services which banking as an industry provides. Further, the compliance requirements of becoming a bank could be a deterrent.

• Please find your exposure to shares of listed NBFCs that have an asset size of more than ₹50,000 crore: Bajaj Finance, Shriram Transport, Indiabulls Housing Finance, M&M Financial Services, Cholamandalam Financial Holdings, Muthoot Finance and Edelweiss Financial Servies.