NBFCs now ask: Is becoming a bank worth it?

KOLKATA: Initial euphoria about non-banking finance companies (NBFCs) converting into banks is slowly giving way to questions whether it would be worth their while when it is still a struggle for many existing banks to mobilise low cost deposits.The cost of conversion would also likely offset the benefit they get from low cost deposits, captains of the industry said. NBFCs enjoy the regulation-light structure and can undertake activities that are not permitted for banks.A predominant view among NBFC leaders is that they may be better off if they continue as it is.Conversion into a bank would come with challenges like making investment in technology and IT infrastructure, and building branch networks. NBFCs willing to take up the challenge would also have to bear additional costs in terms of meeting pre-emptive compliances. Banks need to maintain an 18% statutory liquidity ratio and 3% cash reserve ratio.“A bank has to provide a very wide range of services, maintain SLR & CRR requirements and operates at a much higher cost structure compared to NBFCs. So a NBFC will have to weigh the pros and cons after final guidelines, and understand the impact for stakeholders (shareholders, employees, customers) before considering conversion to a bank,” said Umesh Revankar, managing director at Shiram Transport Finance, predominantly a vehicle financier.A Reserve Bank of India working group, set up for reviewing private bank ownership, said that well run large NBFCs with minimum asset size of Rs 50,000 crore, including those which are owned by a corporate house, may be considered for conversion into banks, as they believe the differences in the level of regulation of the banks and NBFCs creates room for regulatory arbitrage, putting the financial system into risk.“Given a choice, we would continue to be an NBFC. The cost associated with setting up a bank outweighs the benefit,” Manappuram Finance managing director VP Nandakumar said.Bajaj Finserve, one of the largest non-bank lenders, said they are still evaluating the proposals.RBI deputy governor M Rajeshwar Rao earlier suggested that large NBFCs beyond a certain size need to be regulated like banks and should be encouraged to convert into a bank so that these can be regulated better.While banking licenses give access to savings and current deposits, which typically comes cheaper for bigger and established banks, it has not been a cakewalk for new entrants. High-street banks such as Kotak Mahindra had to offer a 6% rate on savings bank accounts in the past to lure depositors. YES Bank still offers 6% on savings over Rs 10 lakh while savings rate at State Bank of India is just about 2.7%Small finance banks that came into existence since 2016 had initially faced resistance from retail depositors. Utkarsh Small Finance Bank or ESAF still offer high rates on incremental amounts over the minimum threshold.

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