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RBI Working Group Suggests Allowing Large NBFCs To Convert Into Banks

RBI Working Group Suggests Allowing Large NBFCs To Convert Into Banks

The internal working group (IWG) was constituted by RBI to review ownership guidelines and corporate structure for Indian private sector banks

The IWG recommended that NBFCs with asset size of INR 50K Cr can consider conversion into banks, subject to 10 years of completion of operations

The IWG also recommended that for Payments Banks intending conversion into Small Finance Banks, three years of operations should be sufficient for consideration

An internal working group (IWG) constituted by the Reserve Bank of India (RBI), on Friday, recommended that non-banking financial companies (NBFCs) with an asset size of INR 50,000 Cr and above, may be considered for conversion into banks, subject to 10 years of completion of operations. 

The IWG was constituted by RBI to review ownership guidelines and corporate structures of private sector banks. Its terms of reference were: a review of the eligibility criteria for individual entities to apply for a banking license; examination of preferred corporate structure for banks and harmonisation of norms; and review of norms for a long-term shareholding in banks by the promoters and other shareholders. 

Earlier this month, M Rajeshwar Rao, deputy governor of RBI had said that NBFCs of a certain size should be converted into banks and be subject to the same regulatory framework.

“NBFCs with significant externalities and which contribute substantially to systemic risks must be identified and subjected to a higher degree of regulation,” said Rao while speaking at a summit on NBFCs organised by the Associated Chambers of Commerce of India (ASSOCHAM). 

NBFCs have been the largest net borrowers of funds from the financial system. RBI feels that considering the risks emanating from the huge financial credit issued to NBFCs, those of a certain size should be treated as banks, subjected to a more stringent regulatory scrutiny to ensure the upkeep of the financial system and prevent bad loans.

NBFCs are financial institutions that offer various banking services but do not have a banking license. Hence, a few factors distinguish NBFCs from traditional banks. NBFCs don’t accept demand deposits; they do not form part of the payment and settlement system and can’t issue cheques drawn on itself; deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

Since the ILF&S crisis in September 2018, the NBFC segment has attracted negative sentiment from the investor side. The sector had to face a slowdown in disbursements, reduced capital market borrowing, and more. 

While it has been gradually recovering from the crisis, the Covid-19 situation turned the screws in again, bringing newer challenges across the asset side and stressing NBFCs even further.

Amid the pandemic, the RBI took several measures to help NBFCs tide over the liquidity crisis. This included relaxation in NPA (non-performing assets) classification and funding through the Small Industries Development Bank of India (SIDBI), National Bank for Agriculture and Rural Development (NABARD) and the National Housing Bank (NHB), among other measures. 

NBFCs remain a crucial source of credit for micro, small and medium enterprises (MSMEs). 

Payments Banks With 3 Years Experience Can Become Small Finance Banks

The IWG, in its report, has made a series of recommendations. It has suggested that for Payments Banks, such as the one operated by Indian fintech unicorn Paytm, intending to convert into Small Finance Banks (SFBs), their track record of three years of experience as a Payments Bank may be considered as sufficient. Presently, Payments Banks are required to demonstrate a healthy track record for at least five years of operations, to earn the SFB license.

A Payments Bank can accept deposits of up to INR 1 Lakh ($1,433), offer remittance services, mobile payments or transfers or purchases and other banking services like ATM/debit cards, net banking and third-party fund transfers but cannot advance loans or issue credit cards.

It is worth noting that in August, Paytm Payments Bank had approached RBI for in-principle approval to become an SFB, which would enable it to extend loans. 

As per IWG’s recommendations, public listing of Payments Banks and SFBs would be allowed within six years from the date of reaching net worth equivalent to the prevalent entry capital prescribed for universal banks, or 10 years from the date of commencing operations, whichever is earlier. 

The IWG also said that the minimum initial capital requirement for licensing new banks should be enhanced from INR 500 Cr to INR 1,000 Cr for universal banks and from INR 200 to INR 300 Cr for SFBs.