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Business News/ Industry / Banking/  NBFCs have an edge in banking licence race
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NBFCs have an edge in banking licence race

RBI may be looking to bring large NBFCs under stricter regulation

The proposals, if accepted, will pave the way for India’s first full-service banks since IDFC First Bank and Bandhan Bank were granted licences in 2014.Premium
The proposals, if accepted, will pave the way for India’s first full-service banks since IDFC First Bank and Bandhan Bank were granted licences in 2014.

Large non-bank lenders stand to gain the most from the Reserve Bank of India (RBI) panel’s proposal to allow large companies and shadow lenders into banking services, experts said.

According to the recommendations of an internal working group of RBI released on 20 November, non-bank lenders with asset sizes of more than 50,000 crore should be allowed to convert into banks, provided they have completed 10 years of operation.

Graphic: Mint
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Graphic: Mint


The proposals, if accepted, will pave the way for India’s first full-service banks since IDFC First Bank and Bandhan Bank were granted licences in 2014.

The move would be in line with the regulator’s aim to widen the availability of banking services in the country, which has one of the largest unbanked populations in the world. More importantly, it would allow RBI to increase regulatory oversight over some of the large shadow lenders, particularly after the collapse of Infrastructure Leasing & Financial Services Ltd (IL&FS) and Dewan Housing Finance Corp. Ltd (DHFL). A failure in a systemically important lender may trigger another crisis in India’s banking system.

The willingness to convert into a full-service bank will depend on the benefits the move may bring, and whether this will address the risks around financial stability, the experts said.

“I don’t see universal bank licences as the answer to everything. We don’t want entities called NBFCs becoming too large because from a liability perspective, they are dependent on wholesale liability, and one disaster like DHFL could make people nervous," said the head of a non-bank lender who declined to be identified.

Regulation alone may not prevent a collapse in the lending business, he said.

“My argument is that if you can still have a failure like a Lakshmi Vilas Bank (LVB), a highly regulated entity, despite all the necessary checks and balances, how does converting NBFCs into banks help? So, I don’t think there are easy fixes," said the head of the NBFC. “There will be many NBFCs who will want to continue the way they are as most banks are aiming for the same retail liabilities to shore up cheaper capital," he added.

Experts point out that the other option before RBI is to bring systemically important NBFCs on par with banks in terms of regulations. Earlier this month, RBI deputy governor M. Rajeshwar Rao hinted that NBFCs with high systemic risks should be subject to tighter regulation and the spillover risks from these NBFCs should be dealt in a proportionate manner. “One can also argue that the design of the prudential regulatory framework for such NBFCs can be comparable with banks so that beyond a point of criticality to systemic risks, such NBFCs should have incentives to convert into a commercial bank or scale down their network externalities within the financial system," he said.

Industry experts said RBI may be looking at bringing large NBFCs under stricter regulation while allowing them to access deposits and other benefits enjoyed by banks.

“It is very important that while regulation of large NBFCs is brought on par with banks, some benefits that banks currently enjoy and NBFCs don’t are also given, and this should be an automatic process. As a system, such parity must be a holistic process and not piecemeal," said Raman Agarwal, co-chairman of Finance Industry Development Council.

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ABOUT THE AUTHOR
Gopika Gopakumar
Gopika Gopakumar has worked for over 15 years as a banking journalist across print and television media. Her expertise lies in breaking big corporate stories and producing news based TV shows. She was part of the 2013 IMF Journalism Fellowship Program where she covered the Annual & Spring meetings of the International Monetary Fund in Washington D.C. She started her career with CNBC-TV18, where she also produced a news feature show called Indianomics and an award winning show on business stories from South India called Up South. She joined Mint in 2016.
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Published: 23 Nov 2020, 05:38 AM IST
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