Business Standard

Few NBFCs may face challenges in converting into bank

Final guidelines on new bank licence has clearly said NBFCs will not be permitted to do any activity which a bank can do

Krishna Pophale Mumbai
While non-banking financial companies (NBFCs) are seen as one of the key contenders to receive the banking regulator's green signal to foray in the banking space but some of them may face challenge to meet the criteria to convert themselves into a bank.

In its final guidelines on new bank licence the central bank has clearly said NBFCs will not be permitted to do any activity which a bank can do.

The NBFC will only undertake such activities which banks are not allowed to do. In case, a NBFC converts into a bank, then the activities which banks are not allowed to undertake should be divested, RBI said. The minimum networth for NBFC which converted itself into a bank is set at Rs 500 crore.

NBFCs said they will meet Reserve Bank of India (RBI) to understand the implication of conversion of NBFCs into bank and divest the rest of the businesses.
Shriram Group which is among the top contenders for banking foray has two existing NBFCs into its fold.   

“Guidelines don’t seem to be different from the draft guidelines. We will have to discuss it with RBI and then see what route we will take,” said G S Sundararajan, group director, Shriram Group. “We need to understand the implications into a greater detail and then take a call” he added.

There are certain challenges before NBFCs to convert themselves into a bank. Most of the NBFCs either have a strong geographical presence or asset class presence.     

Challenge for Shriram would be converting sizeable asset base in one sector (commercial vehicles). While NBFCs don’t have a sectoral lending cap the banks have one.

Analysts seconded the view. “For some NBFCs going for banking may not be a wise idea because it depends on the business model of individual NBFCs said Shinjini Kumar, director, PriceWaterhouseCoopers. “There are some upsides as well as downsides in becoming the bank so it depends on individual NBFCs which need to be aligned with their long term strategy” she added.

RBI in its draft guidelines had said the groups having 10% or more in total income from broking or real estate activities would not be allowed to promote a new bank. However in final guidelines RBI has done away with the conditions. Therefore groups like Religare have also shown interest in applying for the license. Religare has 12% income from broking activities as of December 2012.  

“We welcome the final guidelines from the RBI, banking is a logical extension of Religare’s diverse India financial services platform and we will certainly apply for a license” said Sunil Godhwani, chairman and managing director, Religare Enterprises. Kolkata-based SREI Infrastructure Finance -- an NBFC mainly into core sector lending -- also said that it will apply for the banking license.   

RBI also cleared the deck for industrial houses and corporates to apply for the banking license. Corporate houses like Reliance (ADAG), Tata Group and Aditya Birla Group already have a NBFC within the group which are likely to apply for the licenses.    

“Reliance Capital will be interested in applying for the banking license” said Sam Ghosh, chief executive, Reliance Capital.       

“The Aditya Birla Group remains committed to meeting all the financial needs of its target customer and aligning with this strategy, banking will play a key role therefore we intend to apply for a banking license said Ajay Srinivasan, chief executive, financial services, Aditya Birla Group.

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First Published: Feb 22 2013 | 9:48 PM IST

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