Officials hope tough regulations could eventually let NBFCs into banking

The Reserve Bank of India’s (RBI) decision to stay away from taking an immediate call on corporate entry into banking, and letting large non-bank financial companies (NBFC) convert into banks may have disappointed some, but was not entirely unexpected.

Rather, some of the large NBFCs are hoping that the scale-based regulation on NBFCs, which brings large para-banking units at par with banks gradually, would be the first step towards letting them graduate into full-scale commercial banks.

In its ownership guidelines and corporate structure for private banks, released on Friday, the RBI kept silent on two critical recommendations of an internal working group headed by P.K. Mohanty, director, central board of the RBI.

The central bank accepted 21 of the 33 recommendations of the working group, the most important being allowing promoters to hold a 26 per cent stake in the bank they floated. RBI did not mention corporate and NBFC issues in its guidelines.

“Since RBI has remained largely silent on these two recommendations, we interpret it as a reluctance of the regulator to issue bank licenses in a liberal way,” wrote Macquarie analysts Suresh Ganapathy and Param Subramanian in a note, adding that they expected RBI to “continue exercise caution on granting bank licenses.”

This may also imply that the probability of issuing digital banking licenses to such firms also remain low, the duo said. This is going to be negative for companies such as ONE97 or PayTM who have aspirations for a banking license.

Consensus is also emerging among experts that the large and systemically important NBFCs will be first brought at par with banking in terms of regulations, before letting them have an entry into banking.

“There is no harm in giving banking license to NBFCs provided they are well diversified, listed, and the promoter corporate group has minimum voting rights to influence the lending decision. The RBI can also look at capping the voting rights in future even as the shareholding could be let a bit higher to enable skin-in-the-game,” said a senior policy expert, requesting anonymity.

Large NBFCs, who have shown their aspirations for banking in the past, did not want to comment on RBI’s decision, but officials from two such firms spoke under the condition of anonymity.

“Perhaps the RBI might be thinking if all the large NBFCs convert into banks, who will be left in the space,” said one senior official of one such NBFC who had applied for a banking license in the past.

“At the end of the day, the NBFCs are an important part of the lending ecosystem. It's not the large NBFCs who have issues, generally, it is the smaller ones. Secondly, the RBI has come with scale based regulations for the sector. So, perhaps, they will watch the space closely with these new guidelines and then take a call,” said the person, requesting anonymity.

The scale-based regulation would ensure that lighter touch regulations for NBFCs, in general, would give way to much stricter norms in terms of capital adequacy and liquidity ratios, bad debt recognition, compliance and disclosure norms, which will make them at par, or almost at par with banks in the eyes of the RBI.

Another senior person of a diversified NBFC, which also had applied for a banking license in the past said the larger NBFCs “do have the desire to convert into banks but that cannot happen overnight. A lot of other factors come into play in that.”

According to Anil Gupta, vice president, financial sector ratings, ICRA, while the RBI has not immediately accepted the internal working group’s recommendations regarding NBFCs, the tighter regulations about them will perhaps in the long run allow them an entry into banking.

“The RBI is first trying to bring them at par with banks on regulations. RBI may also enhance its supervisory powers before taking a call on allowing entry of corporates in the sector,” Gupta said.

“The RBI amendments take into consideration the spirit of the change in the NBFC regime, especially for large NBFCs,” said Veena Sivaramakrishnan, partner at Shardul Amarchand Mangaldas.

• RBI has kept in abeyance a proposal to allow industrial houses into banking
• It has also kept on hold proposal to allow large NBFCs to convert into banks
• Experts say, RBI is tightening regulations around NBFCs
• RBI aims to bring NBFCs at par with banks on the regulations front
• This may eventually lead to NBFCs converting into banks, experts say