On-tap bank licencing 'credit positive' for NBFCs: Moody's

It also cautioned that more bank licences would be 'credit negative' for existing banks

Non-banking finance companies will benefit from the Reserve Bank of India's (RBI's) decision to herald 'on tap' universal banking licence regime, Moody's Investors Service said on Monday.

It cautioned, however, that more bank licences will be "credit negative for existing banks" as it would increase competition.

The RBI said last week that it will permanently keep open the window for applying for universal bank licences, ending its practice of allowing licence applications only during specific periods.

"This is credit positive for non-bank finance companies (NBFCs) because it makes it easier for them to meet the requirements for a banking licence," Moody's said in a statement.

India's banking system is already highly fragmented; with the exception of State Bank of India, which has a 20 per cent market share. The remaining banks had market shares of less than 6 per cent as of March 2016.

"More bank licences would be credit negative for existing banks in India because it would increase competition," it said.

RBI excluded large industrial houses from the purview, and allowed them to invest up to 10 per cent in new banks.

"A key benefit that the bank licence provides is the access to deposit funding. Indian NBFCs' dependence on wholesale funding has been a structural weakness, so being able to convert into banks will address this weakness in their funding profiles," Moody's said.

The revised guidelines will allow NBFCs greater manoeuvrability in deciding the operating structure that is best suited for them.

"They can either adopt a holding company structure, with the holding company holding the bank, or directly convert the existing NBFC into a bank," Moody's said, adding, "Additionally, they can choose to run select financial services businesses outside the bank, although these would have to come under the holding company structure."

NBFCs were previously required to set up banks under holding companies.