Bajaj Finance, M&M Financial may be front runners to become banks if RBI accepts suggestions

KOLKATA: Bajaj Finance, Mahindra & Mahindra Financial, and Shriram Transport Finance may become prime candidates for conversion into high-street banks despite their strong corporate lineage if the Reserve Bank of India (RBI) accepts the suggestions of its internal working group, which called for relaxing the first-level entry barrier.

It would be interesting to see which of these bigger entities blink first. RBI may make regulation for them tighter as proposed by deputy governor M Rajeshwar Rao recently — at par with banks — given their systemic importance.

None of the top non banking finance companies (NBFC) had shown eagerness to grab the “on-tap license” opportunity that is available since 2016, perhaps because they enjoy the regulation-light structure while banking rules are far more stringent.

NBFCs are allowed to apply for a banking licence provided the promoters meet the fit and proper criteria. Those include a 10-year track record of successful operations, but there is a restricting clause saying that non-financial business of the promoter group must not exceed 40 per cent of the group’s total assets/total income.

The RBI working group has now built a case for relaxing the first-level entry filter and encouraging large NBFCs to become a bank with an aim to “reduce chances of regulatory arbitrage”. The group suggested that they be given a glide path for compliance with norms as applicable to banks.

“Well-run large NBFCs, with an asset size of Rs 50,000 crore and above, including those which are owned by a corporate house, may be permitted to convert to banks, provided they have completed 10 years of operations,” the working group proposed.

On the issue of large NBFCs converting into banks, almost all the experts were of the view that large NBFCs, with good track record, should be encouraged to convert into a bank as this will result in better regulations of these entities.

Some of the experts were of the view that for corporate promoted large NBFCs that may be eyeing banking licences, either the corporates should bring down their stake to 10% or the bank should be properly ring fenced with the non-financial activities of the promoter group, through prescription of group exposure limits.

“The concerns relating to direct ownership of banks by large corporate/industrial houses may get mitigated in respect of the NBFC route as increasingly, several elements of the prudential framework for banks have already been extended to some of the large NBFCs in view of their systemic importance,” the group said.

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