 "NBFCs perceive several constraints")
Non-banking finance companies are not happy with the restrictions on branch expansion in the draft norms on licensing of small banks released by the Reserve Bank of India (RBI) on Thursday. They will also seek a clarification from the banking regulator whether an NBFC and a small bank can co-exist.
The draft guidelines indicate small banks’ operations will be restricted to contiguous districts of a homogeneous cluster of states or union territories so that the bank has a local feel. Branch expansion for the first three years will also need the banking regulator’s approval.
Most frontline NBFCs operate in several states and this stipulation could restrict their growth. For example, the Shriram group and Sundaram Finance operate in more than 15 states.
“We have to see what we can do and what we can’t. Prima facie, as compared to an universal banking model, it looks more doable. The lower capital requirement is a positive. However, many NBFCs have an all-India footprint. We have to see in how many districts small banks are allowed to operate. Whether it is 4 or 5 or 15 or 20, or even more? A realistic approach regarding footprint is required,” said TT Srinivasaraghavan, managing director, Sundaram Finance.
While allowing NBFCs, micro-finance institutions as well as individuals to open small banks, the RBI said the first two should have a net worth of Rs 100 crore and should have a successful business record for at least 10 years. The primary objective of small banks is to supply credit to small enterprises and agriculture and offer services in under-banked regions. They must have at least 25 per cent of their branches in un-banked rural areas.
“Small banks, given their charter, may have issues over scalability, debt waivers and high interest rates. The vagaries of regional growth can result in volatile earnings,” Kotak Securities said in a note to its clients.
Aspirants are looking to seek clarification from the RBI on the issue of co-existence of their existing business with the banking entity.
In guidelines on new licences for universal banks last year, the RBI had said that a bank could not undertake any activity through an NBFC that could done from within the bank. This was a major hurdle for NBFCs like Mahindra Finance and Shriram Capital, which sought a relaxation from the RBI on this issue. NBFCs do not have to meet bank norms like maintaining cash reserve and statutory liquidity ratios.
On Thursday the RBI said small banks could not set up subsidiaries to undertake non-banking financial services. It added other financial and non-financial activities of the promoter, if any, should not be mingled with the banking business.
Mahindra & Mahindra Financial Services, an NBFC of the diversified conglomerate Mahindra group, did not apply for a new bank licence when applications were invited in 2013. The company had said the guidelines did not provide any flexibility for an NBFC and a bank to co-exist.
“The regulations require that cash reserve ratio (CRR) and statutory liquidity ratio (SLR) norms will be applicable from inception, even though building of current account savings account (CASA) will take some time for newly converted bank... this anomaly will impose an undue penalty on large asset financing NBFCs,” Mahindra Finance had said.
The draft guidelines indicate small banks’ operations will be restricted to contiguous districts of a homogeneous cluster of states or union territories so that the bank has a local feel. Branch expansion for the first three years will also need the banking regulator’s approval.
Most frontline NBFCs operate in several states and this stipulation could restrict their growth. For example, the Shriram group and Sundaram Finance operate in more than 15 states.
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“We have to see what we can do and what we can’t. Prima facie, as compared to an universal banking model, it looks more doable. The lower capital requirement is a positive. However, many NBFCs have an all-India footprint. We have to see in how many districts small banks are allowed to operate. Whether it is 4 or 5 or 15 or 20, or even more? A realistic approach regarding footprint is required,” said TT Srinivasaraghavan, managing director, Sundaram Finance.
While allowing NBFCs, micro-finance institutions as well as individuals to open small banks, the RBI said the first two should have a net worth of Rs 100 crore and should have a successful business record for at least 10 years. The primary objective of small banks is to supply credit to small enterprises and agriculture and offer services in under-banked regions. They must have at least 25 per cent of their branches in un-banked rural areas.
“Small banks, given their charter, may have issues over scalability, debt waivers and high interest rates. The vagaries of regional growth can result in volatile earnings,” Kotak Securities said in a note to its clients.
Aspirants are looking to seek clarification from the RBI on the issue of co-existence of their existing business with the banking entity.
In guidelines on new licences for universal banks last year, the RBI had said that a bank could not undertake any activity through an NBFC that could done from within the bank. This was a major hurdle for NBFCs like Mahindra Finance and Shriram Capital, which sought a relaxation from the RBI on this issue. NBFCs do not have to meet bank norms like maintaining cash reserve and statutory liquidity ratios.
On Thursday the RBI said small banks could not set up subsidiaries to undertake non-banking financial services. It added other financial and non-financial activities of the promoter, if any, should not be mingled with the banking business.
Mahindra & Mahindra Financial Services, an NBFC of the diversified conglomerate Mahindra group, did not apply for a new bank licence when applications were invited in 2013. The company had said the guidelines did not provide any flexibility for an NBFC and a bank to co-exist.
“The regulations require that cash reserve ratio (CRR) and statutory liquidity ratio (SLR) norms will be applicable from inception, even though building of current account savings account (CASA) will take some time for newly converted bank... this anomaly will impose an undue penalty on large asset financing NBFCs,” Mahindra Finance had said.