RBI panel proposes converting large NBFCs into banks; will Bajaj Finance, M&M Financial apply?

Bajaj Finance, Mahindra & Mahindra Financial and Shriram Transport Finance are likely to become front-line banks if the Reserve Bank of India (RBI) accepts the inputs of its internal working group. In order to allow them to run full-fledged operations, the apex bank may make norms tighter as proposed by deputy governor M Rajeshwar Rao recently.

However, none of the top non banking finance players have shown interest in acquiring the "on-tap licence" opportunity that has been available since 2016.

NBFCs can apply for a banking licence if the promoters meet the fit and proper criteria.

The banking licence candidate should have a 10-year track record of successful operations. However, there is a restricting clause which says that non-financial business of the promoter group should not exceed 40 per cent of the group's total assets/total income.

The RBI working group has now built a case for easing the first-level entry filter and encouraging large NBFCs to become a bank with an aim to "reduce chances of regulatory arbitrage".

The group has proposed that NBFC s should be given a glide path for compliance with norms as applicable to banks.

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"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.

Experts opine that large NBFCs, with good track record, should be encouraged to convert into a bank which will result in better regulations of these entities, reported the Economic Times.

Some experts told the financial daily that for corporate-promoted large NBFCs that may apply for banking licences, either the corporates should cut 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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