RBI should look favourably to allow NBFCs access deposits: Experts

At the Business Standard BFSI Insight Summit 2023, the chiefs shared their views during a panel discussion on 'Catch-22 - To be or Not To Be A Bank'

Non-banking finance companies (NBFCs) reported high growth in the post-pandemic period. While they continue to work for growth, they are also mindful of challenges like risk from expansion of unsecured loan books. They agree with the Reserve Bank of India (RBI) in maintaining a healthy financial profile and are ready to moderate the pace of growth, but want the regulator to allow them to take deposits from the public, according to the chiefs of leading finance companies.
 

At the Business Standard BFSI Insight Summit 2023, they shared their views during a panel discussion on ‘Catch-22 – To be or not to be a bank’. The participants were Rakesh Singh, MD & CEO, Aditya Birla Finance; Umesh Revankar, executive vice-chairman of Shriram Finance; and Rajiv Sabharwal, MD & CEO, Tata Capital. Edited excerpts:

Should an NBFC become a universal bank? Are there advantages to becoming a bank?
 

Revankar: This question has been increasingly asked, especially after the regulator is trying to reduce the gap we had, arbitrage that NBFCs enjoyed in NPA (non-performing assets) classification or accounting standards. But still there are different accounting standards for banks and NBFCs. It is not the same. It is advantageous to be a bank in the current accounting practices but that is likely to change too. We were designed to become an NBFC and never wanted to be a bank because we started with a certain focus area and niche segment. We were never designed to be a universal lender.
 

It is not that we are dependent on banks. Most larger NBFCs have diversified liability portfolios. Since we (Shriram) are a deposit-taking NBFC, we have certain advantages – retail access. We are happy to remain NBFC but it depends on what the RBI or government think. You definitely need NBFC and microfinance institutions (MFIs) to reach out to customers who otherwise can’t reach out to banks. However, we are comfortable with where we are now.

Sabharwal: I think the way to look at it is – there will be differences. There will be products and services banks can offer but NBFCs can’t. And there are certain services NBFCs can offer but banks find it difficult to.

The Indian credit market is growing at a healthy pace of over 15 per cent and in this market; NBFCs account for 25 per cent of the total. In fact, the whole credit system is divided between public-sector banks, private-sector banks and NBFCs. Each has a sizable share and each one is contributing to the country’s growth. The regulations allow NBFC and banks to co-exist.

Aditya Birla Capital is an upper-layer NBFC. There is no difference in regulation of banks and NBFCs here. Isn’t that a reason why more NBFCs should become banks?
 

Singh: Completely, there is harmonisation of policies and regulations between upper-layer NBFCs and banks. Today, in terms of asset categorisation there is harmonisation and still a difference in capital requirements. The size of NBFCs has become large and some of them are bigger than mid-sized banks. Clearly, the RBI is looking at similar regulation, monitoring and supervision. But whether one wants to become a bank or not becomes a tradeoff in-terms of what one is looking for... sustainability over a longer time and governance and regulatory differences.

Sabharwal: It is not appropriate to club all banks and NBFCs together. NBFCs never faced any challenge, whether it was the IL&FS problem or DHFL. Some large NBFCs have found it easier to raise money than smaller banks. I don’t think it is only bank versus NBFC.

Don’t you think RBI should look at allowing more NBFCs to accept public deposits?

Sabharwal: If you look at the current scenario, there are various sources of raising liabilities. Banks are one of them. Then there are non-convertible debentures issued via public offer and private placement of NCDs.

There are development finance institutions – domestic and international. You can get ratings and raise funds through international bonds. Some NBFC can access public deposits, some don’t. If you create more sources of liabilities, dependence on any one source will reduce, whether you are a bank or NBFC. One has to look at each set of NBFCs differently and allow for more sources of liabilities to be created.

How has been the experience of Shriram, the only deposit-taking NBFC here?

Revankar: It definitely helps; it depends on the brand equity built over time. Deposits have been good support, especially as it is most sticky. We are able to have more long-term deposits. We also expect the RBI to look in a more supportive manner as we raise only term deposits and not demand deposits. 

Singh: It will never be a problem for top 10 NBFCs. I think it is an issue about the industry risk. Today, the NBFC industry is still dependent on the banking system from a liabilities point of view. That is what we need to solve. Bank funds constitute 25 per cent of liabilities.

In deposit-taking, I agree that the RBI should look at it more favourably. .

Is there a concern over asset quality?
 

Revankar: The economy is growing at 8 per cent, so credit growth would be 24-25 per cent. Without credit growth, the gross domestic product will not grow. Now, the concern on the smaller ticket may be unfounded; if the economy is not doing well, it is not just small-ticket borrowers who face difficulty... everyone does. But in a small ticket loan you have enough margin. Cushions are high so that you can manage it. Lending is a risk-reward matter. 

Singh: Interest rate is just one factor. Let me just try to address when things are good. I agree with RBI’s concern that if a certain segment grows beyond the normal. You should plan for the rainy day. The institution should look at the portfolios very closely, monitor, tighten and increase the provision cover. But we have to understand the reason why the small ticket loans have grown in India so much post Covid. First of all, consumer behaviour has changed after Covid. People are ready to transact on-line, take loans on-line.
 

Also, India is an aspirational society. If the economy is doing well, the income levels of people are growing and inching up. That is the reason you will see small ticket requirements come in. Today the incremental cost of on-boarding customers is fairly small. 

Sabharwal: RBI is talking more about the unsecured loan growth. If any bank or NBFC does not have great credit standards or has a high proportion of unsecured and even high proportion of small ticket unsecured then they should be more careful. On an overall basis I do agree with the regulator that anything which sees high growth especially of unsecured loans one should be more careful.