NBFCs' bank licence set to figure at DFS meet on Thursday as reforms loom

The Department of Financial Services (DFS) will hold a meeting of shadow banks on Thursday in which their future as potential banks would be taken up.

 

The DFS communique on the agenda to self-regulatory organisations, which has been seen by Business Standard, listed the following: “Governance reforms to include better leadership rotation and clarity on non-banking financial companies (NBFCs) as potential banks.” 

It also mentions the ‘introduction of a comprehensive reform index for NBFCs.’ 

The meeting will be attended by senior officials from the Finance Industry Development Council, Sa-Dhan and Microfinance Industry Network. 

A query to the Ministry of Finance did not elicit a response till the time of going to press. Other issues which would be taken up at the meeting are streamlining of know-your-customer processes, relaxing branch licensing for gold-loan NBFCs and aligning the risk-weights with banks. They also include reducing prohibitive haircuts on bonds (currently at 50 per cent) and make them graded based on credit ratings and introduction of a digital payments intelligence platform using artificial intelligence (AI) and cybersecurity for detecting and preventing frauds. 

The meeting is seen as a follow through to the Union Budget FY27, which proposed setting up a ‘high-level committee on banking for Viksit Bharat’ to comprehensively review the banking sector. 

Playing in the background is also the Reserve Bank of India (RBI) decision to put the issue of new banking licences on the backburner. 

An Internal Working Group (IWG) to ‘review extant ownership guidelines and corporate structure for Indian private sector banks’ (November 20, 2020) had made a case for large corporate and industrial houses as promoters of banks. 

It said large NBFCs (with an asset size of ₹50,000 crore and above, including those owned by corporate houses) are to be considered for conversion into banks. 

Mint Road, while accepting 21 of IWG’s 31 recommendations, held that “the remaining recommendations are under examination” in its press release of November 26, 2021. 

This was read by banking licence hopefuls that the issue remains open. 

The IWG referred to concerns over connected-lending and exposure between banks, other financial and non-financial group entities and the need for strengthening the supervisory mechanism for large conglomerates, including consolidated supervision. 

The DFS meeting is seen as breathing a fresh lease of life to this aspect. 

On the specific issue of Governance reforms to include better leadership rotation which figures on the agenda for Thursday’s meeting, senior NBFC officials surmised that it may be to align this with banks. This is especially for those in the RBI’s “upper layer” of its four-tiered scale-based regulatory (SBR) framework. 

It may be recalled that in October 2023, Mint Road said that private banks would have at least two whole-time directors, including the managing director and chief executive officer. 

And, this aspect may now be mirrored by NBFCs in the “upper layer” many of which are private bank licence hopefuls.

The RBI’s four-tiered SBR approach was to cut out arbitrage between banks and NBFCs, detrimental to the orderly growth and systemic stability. 

The layers are: “base” (NBFCs with assets ₹1,000 crore and below); “middle” (assets of ₹1,000 crore and above); “upper” (to be specifically identified); and “top” (to be left empty, unless the banking regulator feels an NBFC poses potential systemic risk). The idea behind this architecture is that it enhances transparency and governance while not burdening them with higher-level regulations.

 

On the agenda

• Streamlining KYC processes; relaxing branch licensing for gold-loan NBFCs and aligning risk-weights with banks
• Reducing haircuts on bonds (currently at 50 per cent) and making it graded based on credit ratings
• Introduction of a Digital Payments Intelligence Platform using AI and cybersecurity for detecting and preventing frauds