RBI says no to HDFC Bank, IndusInd NBFCs

The Reserve Bank of India (RBI) has rejected the applications of HDFC Bank and IndusInd Bank for setting up non-banking finance companies (NBFCs).

By doing so, the central bank has scuttled any attempt to take advantage of the regulatory arbitrage between banks and bank-promoted NBFCs.

According to banking sources, the banking regulator is not willing to allow commercial banks to increase their exposure to the capital market through this route.

"Given the volatile nature of the market, the RBI is not keen that banks overexpose themselves to the capital market directly or through their NBFC arms," said a banker.

Banking sources pointed out that banks had been trying to leverage on the buoyant capital market by increasing their individual limits or by floating NBFC arms.

HDFC Bank proposed to set up a non-banking finance company to increase its participation in the local equity market.

IndusInd wanted to float a capital market subsidiary for e-brokerage, portfolio management etc which a commercial bank is not allowed to do. BNP Paribas, UTI Bank and Centurion Bank have also been toying with a similar idea.

At present, the equity exposure limit of HDFC Bank is capped at 8 per cent of its loan assets, higher than the industry ceiling of 5 per cent for all banks. Banks are not allowed to lend beyond Rs 20 lakh to an individual for buying stocks from the market.

Such restrictions have led banks to seek alternative avenues like floatation of NBFCs to increase their exposures to the capital market as the NBFCs do not fall under strict regulatory purview. Such NBFCs also help banks offer services like brokerage and discretionary portfolio management services.

Under the Banking Regulation Act, a bank can set up a subsidiary that can be registered as an NBFC. An NBFC needs to maintain a statutory liquidity ratio (SLR) of 15 per cent against a commercial bank's minimum SLR requirement of 25 per cent. Unlike a scheduled commercial bank, an NBFC does not need to maintain any cash reserve ratio (CRR).

An NBFC can offer higher interest rates on deposits as opposed to banks since its SLR is lower and it does not need to maintain any CRR or priority sector lending.

The RBI, in the recent past, has been urging NBFCs to voluntarily exit from public deposit taking activities. Some of the foreign banks use the NBFC route to tide over the restrictions on increasing their branch network.