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RBI panel suggested that large NBFCs can convert into banks (MINT_PRINT)
RBI panel suggested that large NBFCs can convert into banks (MINT_PRINT)

RBI working group suggests permitting large NBFCs to convert into bank

  • RBI had constituted an internal working group on 12 June to review extant ownership guidelines and corporate structure for Indian private sector banks

The internal working group of Reserve Bank of India (RBI) suggested that large Non-Banking Financial Company (NBFCs) can convert into banks if they fulfill certain criteria. "Well run large NBFCs, with an asset size of 50,000 crore and above, including those which are owned by a corporate house, may be considered for conversion into banks subject to completion of 10 years of operations and meeting due diligence criteria and compliance with additional conditions specified in this regard," the central bank panel recommended.

RBI had constituted an internal working group on 12 June to review extant ownership guidelines and corporate structure for Indian private sector banks.

India has 9,601 shadow banks, of which the top 50 account for 80% of market share by loans. Between 31 March 2009 and 31 March 2019, the total assets of NBFCs grew at a compounded annual growth rate of 18.6%, while the balance sheets of scheduled commercial banks grew at a rate of 10.7%. The aggregate balance sheet size of NBFCs increased from 9.3% to 18.6% of the aggregate balance sheet size of scheduled commercial banks during the corresponding period. In absolute terms, the asset size of the NBFC sector (including housing finance companies), as on 31 March, 2020, is 51 lakh crore. The banking regulator has increased its vigilance over the NBFC segment following high growth in the last decade.

"This is a long pending and welcome move from the RBI. In fact we believe that the RBI working group shouldn't just be focussed on large NBFCs but look at all the NBFCs especially those with a strong technology backbone so that the conversion to banks will fuel the expansion of the banking services to previously under-served and unserved customer segments," said Anil Pinapala, CEO, Vivifi finace India private limited.

Divakar Vijayasarathy, founder and managing partner, DVS Advisors LLP, said, "Though the RBI committee recommended for conversion of NBFCs into banks, there have been reports in the past that the Board of Financial Supervision of RBI has in principal decided not to issue fresh licenses for next couple of years. Further, in the past as well, NBFCs which got converted into banks faced issues in terms of higher provisioning for legacy NPAs,"

"Considering the current economic scenario and fear of tighter regulations, NBFCs may not be too eager to convert into bank unless there is a substantial incentive in doing so," he added.

Payments banks with three years of experience can be eligible for conversion into a small finance bank, the Reserve Bank of India's panel suggested.

"Small finance banks and payments banks may be listed within ‘6 years from the date of reaching net worth equivalent to prevalent entry capital requirement prescribed for universal banks’ or ‘10 years from the date of commencement of operations’, whichever is earlier," the internal working group said.

Sandeep Wirkhare, MD & CEO, ISFC said, "Given the under penetration of credit and diversity of segments that we have in India there is a huge opportunity to even look at segment specific small finance banks. Education, healthcare and agriculture are the segments that need specialised approach to the lending so that credit reaches to the most deserved and creates an impact in these segments."

The minimum initial capital requirement for licensing new banks should be enhanced from 500 crore to 1000 crore for universal banks. For small finance banks, it should be increased from 200 crore to 300 crore.

The group also suggested giving banking licences to large corporate or industrial houses after necessary amendments to the Banking Regulation Act, 1949. "The cap on promoters’ stake in the long run may be raised from the current level of 15% to 26% of the paid-up voting equity share capital of the bank," RBI panel said.


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