MUMBAI: Around half of the finance companies with assets of over Rs 50,000 crore that meet the RBI’s size criteria to get a bank licence are part of corporate groups, while two are already part of banking groups. Not many standalone non-banking financial companies (NBFCs) are likely to qualify for the bank licence norms.
The RBI’s internal working group in its report had said that well-run NBFCs, with an asset size of above Rs 50,000 crore, including those which are owned by a corporate house, may be considered for conversion into banks.
Among the top 10 finance companies in terms of assets under management, Aditya Birla Capital, Bajaj Finance, L&T Finance Holdings, Mahindra Finance, Piramal, and Tata Capital are part of a corporate group. Of the remaining NBFCs, HDFC is already a promoter of a bank, while the Life Insurance Corporation, promoter of LIC Housing Finance, owns IDBI Bank NSE -0.13 %. PNB Housing Finance, another large NBFC, is owned by Punjab National Bank. The RBI has said that companies have to wait till laws are changed to give the central bank powers to supervise corporate groups before giving them a bank licence.
However, it has left the door open for NBFCs that are owned by corporates if they have been around for 10 years.
The other standalone NBFCs that have a balance sheet size of over Rs 50,000 crore are Shriram Group finance companies, Indiabulls Housing, Cholamandalam Finance, Muthoot Finance, and Edelweiss Finance. IIFL and Sundaram Finance, although large established lenders, are likely to fall short of the target.
For Shriram Transport Finance, transferring its vehicle finance business into a bank would reduce efficiency. “A bank has to provide a very wide range of services, maintain SLR (statutory liquidity ratio) & CRR (cash reserve ratio) requirements and operates at a much higher cost structure compared to NBFCs. So, an NBFC will have to weigh the pros and cons after the final guidelines, and understand the impact for stakeholders (shareholders, employees, customers) before considering conversion into a bank,” said Shriram Transport Finance MD & CEO Umesh Revankar.
Another disincentive for Shriram is that the RBI has said that, upon conversion into a bank, any lending activity that can be undertaken within a bank has to be transferred to the bank. However, many lenders have NBFC arms. Indiabulls had made unsuccessful attempts to acquire a bank licence earlier. The last time was when it proposed to merge with Lakshmi Vilas Bank, which was rejected by the RBI. The group is likely to try again.
A big challenge for the NBFCs to convert into banks will be the cost of investment in technology and setting up a retail branch network. They will also have to face additional costs in complying with the SLR of 18% and the CRR of 4% and not all NBFCs can meet this cost of compliance.