Once in a blue moon opportunity for NBFCs

Friday’s Budget speech has raised the spirits of non-banking financial companies, which, for most of the time, are given little credit for their contribution to the banking and capital markets sector.

The finance minister Pranab Mukherjee announced that the government is looking at issuing higher number of banking licences in the coming year and that NBFCs that meet the regulatory requirements and criteria as laid down certainly stand a chance to get them.

The stock prices of NBFCs saw an immediate upswing after the announcement reflecting its positive impact.

In the past, a large number of NBFCs have looked at expanding their operations. And one way to do so is to convert into a bank. Alternatively, NBFCs may also look at fresh licence and set up a new entity rather than conversion of its existing presence as an NBFC.

However, at most times NBFCs face regulatory hurdles; they need to approach Reserve Bank of lndia (RBI) which has not been very positive about granting banking licence to them.

The last time RBI had granted approval to convert an NBFC into a bank was in 2002 when Kotak Mahindra Finance Ltd and three finance professionals who were working with Rabo lndia were allowed to set up a commercial bank — Yes Bank. This move will help India which has a large unbanked sector. Further, it will also contribute in bringing about financial inclusion with a larger number of service providers.

Corporate houses such as the A V Birla Group, Reliance and some other NBFCs have already expressed their interest in a banking licence after the finance minister’s announcement.
However, the aspirants will also have to fulfill a host of RBI guidelines. Further, one would need to wait and watch to see how the intent of the apex bank shapes up. Detailed guidelines and regulations in this respect are awaited.

As indicated by the finance minister in his budget speech, in order to reach the benefits of banking services to the ‘aam aadmi’, the RBI had set up a high level committee on the lead bank scheme.

After careful assessment of the recommendations of this committee, and in further consultation with RBI, the government has decided to provide appropriate banking facilities to habitations having population in excess of 2000 by March, 2012. The Union Budget also proposes to extend insurance and other services to the targeted beneficiaries through business correspondent (BC) and other models with appropriate technology back up. This arrangement is proposed to cover 60,000 habitations.

In January 2006, RBI had allowed registered NBFCs not accepting public deposits as one of the eligible entities to act under the BC rnodel.

However, in March 2006, RBI had advised banks to defer selection and use of NBFCs as BCs. The RBI annual report of 2009 also emphasises this intent of the RBI to exclude NBFCs as BCs.

Thus, currently NBFCs cannot act as BC. However, the finance minister, seeking the need to extend the geographic coverage of banks and improve access to banking services, and with RBI considering to give some additional banking licences to private sector, NBFCs may be reconsidered as an eligible entity under the BC model. This will help increase the scope of activities by the NBFCs who have their infrastructure set up in rural areas and develop the banking system of the country.

Though the road blockage in the expansion plans of NBFCs seems to have been cleared however, till the time RBI issues or comes up with specific guidelines etc. NBFCs will have to wait for a greater share in the banking and capital markets.

Lakdawala is manager and Bansa assistant manager at PwC.