)
Don't want to miss the best from Business Standard?
Following the recent issue of draft norms on licensing of small and payment banks, NBFCs were not sure if opening of such an entity would mean they'd have to give up their existing business.
“We are sticking to our stance that an NBFC which is a subsidiary of a bank will not be permitted to undertake activities which the bank itself can do,” a top central bank official told Business Standard.
The large NBFCs are involved in lending activity. RBI had said it will only allow a bank to have an NBFC as a subsidiary if it undertakes certain activities like credit cards, factoring or primary dealership.
"Existing NBFCs, micro finance institutions and local area banks (LABs) can also opt for conversion into small banks after complying with all legal and regulatory requirements from various authorities if they conform to these guidelines," the draft norms for small banks said.
In the guidelines on new licences for universal banks, issued last year, the regulator had clearly said a bank could not undertake any activity through an NBFC which could be done from within the bank. This was a major hurdle for NBFCs such as Mahindra Finance or Shriram Capital, which sought relaxation from RBI on this issue. While Shriram had applied for a bank licence, Mahindra Finance decided not to, due to the restriction.
NBFCs do not have to be meet regulatory norms like the cash reserve ratio or statutory liquidity ratio, unlike banks. Banks are also subjected to stricter regulatory supervision.
Since the draft guidelines on small banks restrict the area of operation, NBFCs are not enthusiastic about converting their existing business into a bank. The guidelines suggested small banks will operate in a few contiguous districts of a state or Union Territory, so that the bank has a local feel and culture. Since the large NBFCs have operations across several states, such a restriction would have them scale down their operations, if converted into a bank. RBI had, however, said that after the initial stabilisation period of five years, the scope of activities could be liberalised.
LABs, on the other hand, were looking at the option of converting into small banks. But they wanted the entity to be included in the second schedule of RBI, so that they become scheduled banks, a status that comes with certain benefits like small loans covered by credit guarantee schemes, refinance facility from Nabard and availing farm loan subsidy of both state and central governments.
According to RBI sources, the central bank is open to the idea of giving LABs a scheduled status, provided they meet certain criteria.
Some of the parameters prescribed by RBI, at the time of inviting urban cooperative banks to become scheduled bank, were Rs 750 crore of net demand and time liabilities, 12 per cent capital adequacy ratio, gross non-performing assets less than five per cent of the total and three consecutive years of profit. In case a bank slips on any of the parameters after been granted the scheduled status, such a status is generally not withdrawn by the regulator.
Apart from public sector, private and foreign lenders, regional rural banks, state and urban co-operative banks have been given the scheduled status.
YOU CAN’T DO THAT
- RBI says will only allow a bank to operate an NBFC as a subsidiary if it undertakes activities such as credit card, factoring or primary dealership
- Since the guidelines on small banks restrict the area of operations, NBFCs are not enthusiastic about converting their existing business into a bank
- The guidelines suggested small banks would operate in few contiguous districts
- According to RBI sources, the central bank was open to the idea of giving LABs scheduled status, provided they met certain criteria
