NBFCs planning to seek CRR, SLR breather on net demand, time liabilities

Feedback on banking licence terms may be given to RBI in a fortnight

Leading non-banking financial companies (NBFCs) have got cracking on their banking pursuits a week after the Reserve Bank’s internal working group suggested that those with an asset size of Rs 50,000 crore or more may consider the option. 

Four large groups with shadow banks in their fold have held internal consultations and are set to make a formal representation to the banking regulator (which, sources said, may well be within a fortnight), seeking the grandfathering of reserve norms — the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) in December on their net demand and time liabilities (NDTL).

According to highly-placed sources, these NBFCs are planning to seek exemption on the CRR and SLR on their existing NDTL, and that these may be mandated on the fresh liabilities that would accrue upon conversion into a bank. 

If permitted, the move will benefit some large NBFCs such as HDFC, Bajaj Finance (held through Bajaj Finserv), Tata Capital, Shriram Capital (holding company of Shriram Transport Finance and Shriram City Union Finance), and Mahindra & Mahindra Financial Services (subsidiary of auto major Mahindra).

While Keki Mistry, vice-chairman and chief executive of HDFC, denied any plan to make any such representation to the RBI, other NBFCs did not wish to comment on the subject.

Banks are required to maintain 3 per cent of their NDTL as CRR and 18.5 per cent as SLR. The plea of the NBFCs is that they will get a huge relief on conversion to banks if there is to be a breather on this. There are precedents of the RBI allowing some flexibility and also not entertaining such requests.

The RBI was accommodative in the reverse mergers of ICICI-ICICI Bank (2002) and IDBI-IDBI Bank (2005). But a senior banker said the external liabilities in these instances were largely quasi-sovereign. “When IDFC carved out its banking operations or Bandhan converted itself into a bank, they got no differential treatment,” the banker said. The voluntary conversions came after recommendations by the Narasimham Committee (1998), followed by the S H Khan Committee.

And the instances when the RBI held firm were when NBFC-MFIs and AU Financier India converted themselves into small finance banks in 2016 and 2017. They had to maintain the CRR and SLR on their existing liabilities from the beginning. This held true in IndusInd Bank’s acquisition of Bharat Financial and the merger of IDFC Bank-Capital First in 2017 and 2018, respectively. Another senior banker said these were cases of “voluntary conversions or mergers”.

What’s brewing
 

* Large NBFCs have held consultations and are war-gaming their banking strategy
 

* Feedback to RBI expected to be swifter than the deadline of January 15, 2021
 

* Cost of regulatory capital is a key issue on conversion to banks by NBFCs
 

* Breather on the maintenance of CRR and SLR will help big time

Reading the RBI: the past as pointer

Accommodative:  Reverse mergers of ICICI Ltd-ICICI Bank and IDBI Ltd–IDBI Bank

Reason: In the case of the erstwhile development finance institutions, conversion into banks had been mooted by the Narasimham Committee Report (1998), which was followed by the S H Khan Committee in the same year

And no-go:  Merger of IDFC Bank-Capital First; IndusInd Bank’s acquisition of Bharat Financial Inclusion; NBFC-MFIs and AU Financier conversion to small finance banks

Reason: The triggers were business-driven, less regulatory; and were cases of voluntary conversion or merger into a bank