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NBFCs open to both organic and inorganic route to set up banks

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With the passing the Banking Laws (Amendment) Bill, paving the way for the Reserve Bank of India (RBI) for issuing final guidelines and inviting applications to set up new banks, non-banking financial companies (NBFCs) are considering entry to the sector through the inorganic route by mergers and acquisitions (M&As).

L&T Finance Holdings, seriously contemplating a foray in the sector, said it was open to the inorganic route if there was a ‘likeminded partner’.

N Sivaraman, president and wholetime director of L&T Finance Holdings, said, “The banking licence has the potential to enable us to provide all products and services. Currently, we are a lender with some other services but with deposits and other banking services, we shall get to interact with all customers on all grounds.” He, however, added that the company will take a call only after issued the final guidelines, he said.

The Shriram Group, another NBFC, is also keen to set up a bank. It, however, said it would prefer organic growth to inorganic growth. “If we are able to supplement our retail and SME (small and medium enterprises) growth in four-five years, and there are some avenues available like investment banking, then we might consider (the inorganic route). But to start with, we will be on our own,” said G S Sundararajan, group director.

Brokerage houses also said the guidelines could facilitate M&As in the financial services space and old private sector banks could be possible targets.

M&M Group, Shriram Group, Bajaj Group and L&T Finance Holdings are the likely ones to get bank licences because all of them have a good book size, Motilal Oswal Financial Services said in a note.

In its draft guidelines, the banking regulator has proposed initial capital requirement of Rs 500 crore and foreign share holding is capped at 25 per cent for the first five years.

Another prospective entrant, Religare Enterprises, also said its first preference is to grow organically.

“Ninety five per cent of our revenue comes from financial services business, which we have built organically. Therefore, we would like to continue to grow organically and if there is an opportunity, we would consider it,” said Shachindra Nath, group CEO of Religare Enterprises.

If permitted by the RBI, the are likely to consider banks at the holding company level and may not convert the NBFC into a bank, according to brokerages.

“If they were to convert to an NBFC, they may need to contend with issues relating to concentration risk (for NBFCs doing specialised lending), the impact of statutory liquidity ratio and cash reserve ratio on their existing borrowings. Hence, from an investors’ perspective, we believe the upside (from a bank licence) may be through the SOTP (sum of the parts) route, assuming the holding company were to hold both the bank and an NBFC and is listed,” Bank of America Merrill Lynch (BofAML) said in a report.

Shares of NBFCs like Shriram Transport Finance rose on hopes diversifying into banking would improve their earnings potential.

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