Conversion challenge before NBFCs

Non-banking finance companies (NBFCs) are seen as key contenders to receive the regulator's green signal to foray in the banking space.

However, some of the likely applicants face a challenge in meeting the criteria to convert themselves into a bank.

In its final guidelines, the central bank has clearly said such NBFCs will not be permitted any activity a bank cannot do. If an NBFC converts, any activity a bank is not allowed to undertake should be divested, the Reserve Bank has said. The minimum net worth for an NBFC converting to a bank is Rs 500 crore.

The south-based Shriram Group, among the top contenders for a banking foray, has two NBFCs in its fold. “The guidelines don’t seem different from the draft ones. We will have to discuss it with RBI,” said G S Sundararajan, group director. “We need to understand the implications in greater detail and then take a call.”

There are certain challenges before NBFCs convert. Most have a strong geographical presence or one in an asset class.

The challenge for Shriram would be converting a sizable asset base in one sector (commercial vehicles). While NBFCs don’t have a sectoral lending cap, banks do.

Analysts seconded the view. “For some NBFCs, going for banking might not be a wise idea. It depends on the business model of individual NBFCs,” said Shinjini Kumar, director, PricewaterhouseCoopers. “There are some upsides as well as downsides in becoming a bank.”

RBI’s draft guidelines had said groups having 10 per cent or more in total income from broking or real estate activities would not be allowed to promote a new bank.

However, it did away with these conditions in the final guidelines. Therefore, a group such as Religare Enterprises has also shown interest in applying for a banking licence. It had 12 per cent income from broking activities as of December 2012.

“We welcome the final guidelines. Banking is a logical extension of Religare’s diverse India financial services platform and we will certainly apply for a licence,” said Sunil Godhwani, chairman and managing director.

Kolkata-based SREI Infrastructure Finance, an NBFC mainly into core sector lending, also said it would apply for a licence.

RBI also cleared the deck for industrial houses to apply. Reliance (ADAG), Tata Group and Aditya Birla Group already have an NBFC within their groups and are likely to apply.

“Reliance Capital will be interested in applying,” said Sam Ghosh, chief executive.

“The Aditya Birla Group remains committed to meeting all the financial needs of its target customer and aligning with this strategy, banking will play a key role. Therefore, we intend to apply,” said Ajay Srinivasan, chief executive, financial services.