NBFCs take lead in banking licence race

With the Reserve Bank of India ( RBI) mulling granting new banking licenses, distinguished non-banking finance firms could fare higher than corporates in profitable a common banking licence, consultants mentioned. On Friday an inner working group of RBI really useful that giant non-bank lenders with asset sizes of greater than Rs 50,000 crore, together with these owned by corporates, must be thought of for conversion into banks, supplied they’ve accomplished 10 years of operation. The proposal is predicated on the committee’s view that these entities will be higher regulated upon conversion right into a financial institution and might due to this fact scale back possibilities of regulatory arbitrage.

While many NBFCs have welcomed the panel’s suggestions, consultants consider that the conversion right into a full service financial institution will depend upon the incentives the transfer could lastly convey and whether or not it will handle the dangers round monetary stability. “I don’t see universal bank licence as the answer to everything. We don’t want entities called NBFC becoming too large because from a liability perspective they are dependent on wholesale liability, and one disaster like DHFL could make people nervous, said Raman Agarwal, co-chairman, Finance Industry Development Council (FIDC).

“My argument is that if you can still have a failure like a Lakshmi Vilas bank ( LVB) a highly regulated entity.despite all the necessary checks and balances how does converting NBFCs into banks help? So I don’t think there are easy fixes,” mentioned the pinnacle of an NBFC. “There will be many NBFCs who will want to continue the way they are because most banks are aiming for the same retail liabilities to shore up cheaper capital” he added.

Experts level out that the opposite possibility earlier than RBI is to convey the massive systematically NBFCs at par with banks with regard to regulatory framework. Earlier this month, RBI deputy Governor M Rajeshwar Rao had additionally hinted that NBFCs with excessive systemic dangers must be topic to tighter regulation and the spillover dangers from these NBFCs must be handled in a proportionate method. He mentioned,” One also can argue that the design of prudential regulatory framework for such NBFCs will be comparable with banks in order that past some extent of criticality to systemic dangers, such NBFC ought to have incentives both to transform right into a business financial institution or scale down their community externalities inside the monetary system.” Industry consultants additionally really feel that if RBI could also be certainly taking a look at bringing giant NBFCs underneath stricter regulation whereas permitting them to permit higher perks like banks do . “It is very important that while regulation of large NBFCs is brought at par with banks, some of the benefits that banks currently enjoy and NBFCs don’t, are also given and this should be an automatic process. As a system, such parity must be a holistic process and not piecemeal,” Agarwal added.

Granting banking licences to corporates in the meantime may pose a vexed drawback for regulation. In its report the Mohanty panel noticed {that a} majority of the members are of the view that giant company/industrial homes shouldn’t be allowed to advertise a financial institution. This may notably be worrisome for almost all of enormous NBFCs that are backed and promoted by corporates. “The main reason being the prevailing corporate governance culture in corporate houses is not up to the international standard and it will be difficult to ring fence the non-financial activities of the promoters with that of the bank. Stress in non-financial activity may spill over to the bank. The corporate houses may either provide undue credit to their own businesses or may favour lending to their close business associates,” the committee mentioned within the report.