Starting a new bank easier than converting an NBFC into one: Umesh Revankar

In a Q&A, the MD of Shriram Transpport Finance, which has an AUM of Rs 1.13 trillion, explains why his company is in no hurry to acquire a banking licence

The Reserve Bank of India’s (RBI) working group on private bank ownership has paved the way for the conversion of large non-banking financial companies (NBFCs) into banks. It has proposed that well-run NBFCs that have operated for a minimum of ten years be allowed to convert if they clear due diligence. Umesh Revankar, MD, Shriram Transport Finance speaks to T E Narasimhan about the challenges in converting a NBFC to a Bank and why his company, with an AUM of over Rs 1.13 trillion, is not in a hurry to become a bank. Edited Excerpts:

How will the RBI's working group recommendation on the conversion of large non-banking financial companies to banks impact NBFCs?

As of now I don't see any big impact. RBI is planning to allow corporates to convert their NBFCs into Banks. This is not the first time RBI is giving the option. In 2016, they introduced a Universal Banking licence and in 2018, the Small Finance Bank concept was introduced. Earlier it was open for financial professionals, now they have opened it up for corporates. This could be because the number of PSU Banks are getting reduced following the merger.

Will you be exploring the option of becoming a Bank?

If at all we had wanted to explore, we would have done it four years back.

Why are you not considering it? What are the challenges?

We are like a big ship or a plane. It is not easy to change the course just like that. Starting a new bank is easier, but it is difficult to convert an NBFC, especially a big one like Shriram Transport Finance, into one. The key challenges are people and cost. We have around 25,000 employees. Converting ourselves into a bank will be difficult because they are not fully equipped and require multi-skilling.  The company's salary structure and bill will also go up substantially.  The cost of running a bank is high. Cost to income in running a bank is 40-50 per cent, (whereas) in well-run NBFCs such as ours it is only 23-24 per cent. CRR & SLR requirementsare  another challenge. We will have to add more services, as obligations levels will go up, without really bringing much additional revenue. Lending rates will be lower. It (banking) is a high risk, lower margin business. It isn't everyone's cup of tea.

So Shriram Transport Finance will not apply for a banking license, is that right?

We are not ruling that out completely. We can get it anytime if we want. If we feel that we can render better service by becoming a bank, then we will apply. Otherwise we are happy with what we are doing now. We want to ask certain questions to RBI--especially what is its view on NBFCs. Does it still feel NBFCs play an important role in the financial system?  If if feels they do, then we would like to continue as NBFCs or if it says you can do whatever you are doing as NBFC, even if you become a bank, then we want certain assurances on the kind of advantages they can give to NBFC.

What kind of NBFCs would take a banking licence then?

It all depends on what you want to become and whom do you want to serve. We have been focused on serving underbanked or unbanked borrowers. We don't have any big ambitions to lend to Tatas or Birlas.  Those who have an ambition to grow big and to lend big corporates, they will explore.

How is the demand recovering?

The festive season is over and it did not put the markets on fire. December is the harvesting period,when agriculture products like sugarcane and rice go to the mills and get converted into final products and you get cash. December and January are always big months for collection and credit demand. The two months are likely to be good.

Some of the major cities are reporting high Covid numbers. How will that impact you?

Nearly 90 per cent of our business comes from semi-urban and rural areas, so it will not affect us. If it spreads from big cities to semi-urban and rural, then we may have some challenges.