RBI Working Group Suggests Allowing Large NBFCs To Convert Into Banks

NBFCs that have been operational for 10 years with asset size of Rs 50,000 crore and above are eligible for conversion into banks.

The Reserve Bank of India (RBI) regional headquarters stand in New Delhi, India. (Photographer: T. Narayan/Bloomberg)
The Reserve Bank of India (RBI) regional headquarters stand in New Delhi, India. (Photographer: T. Narayan/Bloomberg)

The Reserve Bank of India may consider allowing large and well-run non-banking financial companies, including those owned by corporate houses, to convert into banks.

NBFCs that have been operational for 10 years and have an asset size of Rs 50,000 crore and above will be eligible for conversion into banks, according to an internal working group of the RBI. But that will be subject to meeting certain due diligence criteria such as ‘fit and proper status’ of promoter directors and diversified ownership of large corporate or industrial houses promoting banks, among others, the panel constituted on June 12 to review extant ownership guidelines and corporate structure for Indian private sector lenders said in a report.

Also, “depending on experience gained after say five years, with conversion of NBFCs into banks, the RBI may review the policies in this regard to either tighten or relax policy”, it said.

This is a step in the right direction, said Dhananjay Sinha, director and head of institutional research at Systematix Group, as several large NBFCs in the country aspire to become banks. “The move creates scope for large retail-oriented NBFCs with sound financial backing to become banks in order to expand their businesses further by taking deposits and increasing their number of branches,” he told BloombergQuint.

For NBFCs owned by large industrial or corporate houses, however, the central bank said “it would be imperative for them to qualify a stricter set of criteria compared to other promoters”.

These criteria include:

  • Operating well with net profit made in the past three years
  • Dilution of the promoter group holding in the NBFC to 49% before application
  • A faster dilution schedule after conversion to a bank as maximum promoters’ holding would need to be brought down to 26% in 10 years.

These are besides the requirement of meeting all regulatory norms such as capital adequacy ratio and maintaining non-performing asset levels below the prescribed threshold.

The idea of allowing large non-bank lenders to convert to banks “sounds like a good one”, according to Pratip Chaudhuri, former chairman at State Bank of India. “While there might be some issues with NBFCs where large corporate entities have ownership, it’s easier to allow them to become banks, since they are already being regulated by the RBI.”

But, according to independent banking analyst Hemindra Hazari, the step “could bring the banking sector back into the brazen arena of crony capitalism.”

The report is an extension of the RBI’s proposal earlier this month that asked large systemically-important NBFCs to either convert themselves into banks or reduce assets in order to protect financial stability, he said. “Some large NBFCs today are owned by corporate houses and allowing them to become banks appears to have found favour from the RBI.”

According to the working group, the central bank has been working to adopt a “graded regulatory framework” for the NBFCs, while identifying those non-bank lenders that are “systemically significant” and can potentially impact financial stability of the country. “Considering conversion of some of these entities into de-facto banks from de jure bank-like entities may be in alignment with the above approach. It may also help address the regulatory arbitrage issues arising out of systemically large NBFCs and address the systemic risk such entities may pose given their sheer size,” it said in the report.