Shares of NBFCs surge after RBI allows them as banking correspondents

Mumbai: Shares of some of the non-banking finance companies (NBFCs) surged on Wednesday morning after the Reserve Bank of India (RBI) allowed such entities to work as banking correspondents (BCs) of commercial banks, to offer basic banking services in areas where the parent bank does not have branches.

At 9.53am, SKS Microfinance Ltd was trading up 5.25% at ₹ 284.90, Manappuram Finance Ltd was up 3% at ₹ 24, Magma Fincorp Ltd was up 4.5% at ₹ 96.65, Shriram Transport Finance Co. Ltd was up 0.1% at ₹ 850, Reliance Capital Ltd was up 0.8% at ₹ 646.70 and L&T Finance Holdings Ltd was up 0.9% at ₹ 73.70.

On Tuesday, RBI permitted banks to appoint non-deposit taking NBFCs as their BCs, in a move which could help extend banking services to remote areas.

The move is significant for NBFCs, as they can now expand their product offerings to customers, besides enabling them to earn additional revenue in the form of commission for transactions.

NBFCs have been seeking permission to be BCs for long, claiming they are well-positioned for the task.

But RBI had so far been wary of possible conflicts of interest between the NBFC and the bank.

As of now, banks appoint individuals, small grocery stores and private enterprises as BCs.

Early this year, an RBI committee headed by Nachiket Mor had recommended that the scope of BCs be expanded and suggested the possible inclusion of new entities as BCs.

As per the new rules, even microfinance institutions operating as NBFCs (NBFC-MFIs) can operate as BCs. The central bank also issued rules for appointing non-deposit taking NBFCs (NBFC-ND) as BCs.

Banks and NBFCs operating as their agents should ensure that “there is no co-mingling of bank funds and those of the NBFC-ND appointed as BC”, RBI said.

Also, there should be a specific contractual arrangement between the bank and the NBFC-ND to ensure that all possible conflicts of interest are adequately taken care of, RBI added.

Banks should also ensure that the NBFC-ND does not adopt any restrictive practice such as offering savings or remittance functions only to its own customers and forced bundling of services offered by the NBFC-ND and the bank does not take place, RBI said.

The apex bank also scrapped an existing distance criterion applied to BCs.