Financials stocks, including, banks, non-banking finance companies (NBFCs), and microfinance institutions (MFIs) were trading near multi-year highs on Monday as the Reserve Bank of India's (RBI's) internal working group, which reviewed ownership guidelines, proposed sweeping changes in the corporate structure of Indian private sector banks.
Banking and non-banking shares rose up to 20% in the early morning trade on BSE after RBI's IWG recommended guarded entry of corporate into banking space, and a proposal to once again allow promoters of banks to hold up to 26% stake or non-promoter investors to take up to 15% stake.
As per IWG's recommendations, non-bank lenders with asset sizes of more than Rs 50,000 crore should be allowed to convert into banks, provided they have completed 10 years of operation.
Among the individual stocks, Cholamandalam Financial Holdings, Equitas Holdings, Ujjivan Small Finance Bank, J&K Bank, and IDFC were locked in the 20% upper circuit on the BSE, while Ujjivan Financial Services was up 16%. IndusInd Bank share was the top gainer on both bourses BSE and NSE, rising 8% intraday.
IDFC First Bank stock and Shriram City Union Finance share price were up 9%, followed by an 8% rise in Bajaj Holdings & Investments. Cholamandalam Investment, IDFC First Bank, and AAVAS Financiers gained over 3%.
Meanwhile, Nifty Bank and Nifty Financial Sector indices pared gains later.
"If allowed, they would give strong competition to incumbents and may come up with innovative solutions with no legacy baggage. We may see greater damage on the CASA / retail liability front, especially at inefficient banks, as these entities have a strong ecosystem and enjoy high levels of trust among people", said Brokerage firm Motilal Oswal in a recent report.
It added," Over the last five years, private sector banks have rapidly gained market share to around 30 percent (2020) from around 18 percent (2015), and we see this trend accelerating at a faster pace now". MOFL further said it sees IDFC Ltd, Bajaj Finance, L&TFH, Equitas, and Ujjivan to be key beneficiaries.
"Corporate ownership of banks raises the risk of intergroup lending, diversion of funds, and reputational exposure. Also, the risk of contagion from corporate defaults to the financial sector increases significantly," the global rating agency S&P Global said in its report.
Jaikishan Parmar- Sr. Equity Research Analyst, Angel Broking said," RBI also gave clear direction for restructuring book with the timeline, the disciplined rule will give a more precise picture which removes opaqueness of asset quality that investor was fearing that actual asset issue will be difficult to identify.
He added," The cap on promoters' stake in the long run (15 years) may be raised from the current level of 15% to 26% of the paid-up voting equity share capital of the bank. This is beneficial for IndusInd bank as Hinduja group has shown interest in increasing stake in the bank, and Kotak bank is also beneficial as promoter already hold 26%. However, large NBFC would not be in hurry to convert into the bank as it converting from NBFC to Bank is a costly affair. regulatory cost of CRR, SLR, etc. Would be the key aspect for applying and granting banking licenses."
"We expect restructuring scheme tenure extension and EMI affordability (lower interest rate) will enhance retail and SME borrower paying ability and intention. Hence, looking at Q2FY21 numbers, sufficient non-specific provision and lower expected restructure book will support large private bank's stock prices. We have a positive view on the large private bank due to better earnings and asset-quality visibility. We have a Buy rating on Cholamandalam Investment and IDFC First Bank."
On the RBI Internal Committee report, JM Financial said that it is strongly positive for IndusInd, IDFC Ltd, Equitas Holding, Ujjivan Financial, Equitas SFB, Ujjivan SFB, and mildly positive for RBL, DCB, Kotak, ICICI Bank, while Neutral for HDFC Bank and Bandhan.
It added," We calculate potential upside to IDFC limited (>100%), Equitas Holding (>90%) and Ujjivan Financial Services (~60%). While the Universal banking license is now 'On Tap', the report recommends that well-run NBFCs above Rs 500 bn assets may be permitted to convert to banks. This would include those NBFC which are owned by Corporate House also."