NBFCs show fresh interest in on-tap licences, initiate talks with RBI

Pressure on NBFC sector to have stable funding base a major reason

Fresh interest for on-tap banking licences is building up from non-banking financial companies (NBFCs), a fallout of the ongoing crisis in the sector. A few leading NBFCs are in talks with the central bank on regulatory issues surrounding on-tap licences, the terms of which were spelt out in August 2016. 

Senior officials from three NBFCs confirmed they have begun discussions with the Reserve Bank of India (RBI), but did not want to go on record.

On-tap licences did away with the earlier process of issuing banking licences in fits and starts, but the process is in no way lenient. As on date, the only application pending before the RBI is that of Unimoni Financial Services (erstwhile UAE Exchange). 

Most applicants did not pursue their on-tap licensing dream because they could not measure up to the intense scrutiny of the central bank. It also made sense to put these ambitions on the back burner as the NBFC business model was in a sweet spot in the years since the guidelines were announced, until the blowout at the Infrastructure Leasing & Financial Services.

“The RBI’s draft asset-liability management guidelines for NBFCs, released last week, are akin to banks and there is not much to gain by remaining an NBFC once you have reached a certain size,” said an analyst at a local brokerage. There is also a holding company structure for financial conglomerates, which is in the works.

“Both will drive NBFCs to look afresh at their banking ambitions and take a relook at the on-tap route, including those from industrial groups,” he added. A non-operative financial holding company is mandatory in the case of applicants that have other group entities.

“Most players, mainly large- to medium-sized NBFCs and individuals, fear rejection without response and hence, they do not really want to send in an application unless they are sure of acceptance. Of late, we have seen many players open up a dialogue with the RBI to assess if the outcome of their discussions could be positive,” said Abizer Diwanji, head (financial services), EY India.

The lack of a formal feedback mechanism from the RBI on the non-acceptance of applications further affected their ability to apply again. The wheel may have turned a full circle as many large NBFCs will now have to address the issue of a stable resource base. Funding from mutual funds by way of subscription to commercial paper issued by both NBFCs and housing finance companies will be crimped; and banks may not be able to increase exposure to them because of their sectoral caps.

The last universal banking licence recipients were IDFC and Bandhan Bank (April 2, 2014), but that was before the on-tap policy kicked in. Even in the last round, only three were applicants from industrial houses — Aditya Birla Nuvo, Bajaj Finserv, and Reliance Capital — with a licence that had surrendered it. The Tatas and the Mahindra & Mahindra group had shelved their dreams. Since then, the central bank has issued niche licences for 11 payments banks (August 19, 2015) and 10 small finance banks (September 16, 2015).

On-tap to open up

• On-tap licences did away with issuing bank licences in ‘fits and starts’ 

• Most applicants dropped  the ambition, given intense scrutiny of central bank 

• NBFCs assessing likelihood of a positive outcome

• New holding company norms another reason