Low-cost Casa deposits key to profitability for NBFCs

Icra says lending and capital norms can be phased over time

Rating agency Icra today said that building of low cost current account-saving account (Casa) deposits would be the key to profitability for non banking financial companies (NBFCs) converting into the bank.

It also said that a relaxation from Reserve Bank of India (RBI) in priority sector lending (PSL) norms would also be an important factor in profitability of such entities emerging out of existing NBFCs.

RBI has however said that new banks will have to adhere to PSL and other norms like cash reserve ratio (CRR) and statutory liquidity ratio (SLR) from the day one.

K C Chakrabarty, deputy governor, RBI had said that the new banks would have to meet the requirements from day 1 and had advised new banks to first look at agriculture lending and then other businesses.

The issue is also learnt to be figured in clarifications which NBFCs have sought from RBI. Central bank is expected to issue clarifications on the banking license guidelines by May end.

Icra further said that it in initial phases, Return on Equity (RoE) could dip to 5-7% from current average of 16-17%, if no transition period is given to these companies to meet PSL norms. If such transition period is granted then RoE could drop to 13%.

If the NBFC converted into bank manages 20% Casa and if given 50% exemption on PSL norms RoE could still remain at pre conversion levels, rating agency said. once it achieves 30% Casa base its RoE would return at pre conversion levels even while meeting PSL guidelines fully according to Icra.

Therefore agency which is global rating agency Moody’s associate said that if graded regulatory relief on priority sector targets is allowed, gradual build-up of Casa may help the NBFC in sustaining reasonable returns in the transition period as well.

According to Icra, NBFCs already having significant priority sector book would have an edge over others and may report relatively superior returns in the initial phase.

Other key factors which will have an impact on profit and loss account would be CRR and SLR requirements, higher provisioning on standard assets and restructured books and also stricter non performing assets (NPA) recognition norms and lower risk weights and tier- I capital and also necessity of opening 25% branches in rural areas said the agency.

Icra further said, once the transition is complete and critical Casa base is achieved and bank is able to get 0.8-1% fee income, RoE are likely to improve to 24-26% and further resilience of earnings due to better diversity in funding, assets and fee based income may also improve.

However Icra has also commented on deterring factors for NBFCs to apply for the license. According to the agency some factors like, loss of control over the bank in long term as promoter stake in non operative financial holding company (NOFHC) has to be brought down to 15% and other factors like stringent PSL targets, tighter norms and greeter scrutiny could be detrimental factors for NBFCs to apply for the banking license.