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Three large NBFCs, including Sundaram Finance, Manappuram Finance and Muthoot Pappachan, told Financial Chronicle that they were not considering a move to become banks. The reason was what they called the “restrictive” regulatory framework for the banking sector. This makes banks a not so attractive proposition.
Representatives of the Finance Industry Development Council (FIDC), the apex body for asset finance companies (AFCs) which holds 70 per cent of the country’s NBFC assets, agreed that finance companies might face more shackles if they were to turn into banks. They feel more comfortable with the free play that an NBFC enjoys in relation to banks.
In his budget speech, finance minister Pranab Mukherjee said that the Reserve Bank of India (RBI) was considering grant of fresh bank licences. He specifically mentioned NBFCs as a category that might be given licences to bring about greater competition in the banking sector. RBI is in the process of drafting fresh norms for grant of new bank licences.
Raman Aggarwal, FIDC co-chairman, cited feedback from the industry-segment that he represented to say that not many AFCs were interested in applying for bank licences. “Only a few AFCs such as Shriram Transport Finance are looking at the option. Other than restrictive regulatory issues such as those on directed lending, NBFCs may not find it economical to convert into banks. There are massive expenses in terms of skills and technology needed to offer services such as ATMs, credit cards and anywhere banking,” he said.
According to the economic survey 2009-10, 330-plus AFCs hold 70.3 per cent of the total assets and liabilities of India’s over 12,700 NBFCs in India.
The Chennai-based Sundaram Finance is not looking at the option as “we do not have the ambition (of becoming a bank),” according to its managing director, TT Srinivasaraghavan. “We see no great advantage in becoming a bank,” he said.
He said his company would prefer to consolidate its core businesses. “Our core competency is in areas such as financing of trucks and cars. If we intend to go into other areas such as project financing, trade financing, then it may be a good idea to become a bank. But if you see universal banks like ICICI Bank, SBI and others, what great value an NBFC-turned-bank can offer is not clear,” he said.
VP Nandakumar, group chairman of Manappuram Finance, a big Kerala-based company, said, “One has to look at core strengths. Our core competency is loan against jewellery through our 1,000 branches. Some NBFCs have competency in vehicle finance, some in infrastructure finance, some other in mortgage finance. How an NBFC can leverage its core competency after becoming a bank is not clear,” he said.
He said NBFCs would be wary of the regulatory issues such as compliance with priority sector regulations, CEO appointments and the holding pattern in banks. “How would an NBFC that becomes a bank scale up priority sector lending to 40 per cent of its net credit in a short time is an issue. Also NBFCs have a free hand in appointing top officials such as CEOs. As a bank, it has to get RBI clearance. Besides, the equity holding pattern and voting rights are very restrictive for a bank,” he said.
Thomas George Muthoot, managing director of the Muthoot Pappachan group, another large Kerala-based NBFC, which is into gold loans, consumer finance and auto loans, said that he was not keen on becoming a bank. “There are good opportunities for NBFCs, specially those with strengths in rural areas. We have more flexibility than banks in terms of expanding our branch network and dealing with customers. Most often in lending deals, it is not a question of interest rate but really a case of getting credit at the right time. Good NBFCs are able to offer a better deal in this regard,” he said.
Other than Shriram Transport Finance, NBFCs whose names are doing the rounds as possible aspirants to bank licences are IFCI, Reliance Capital, the Indiabulls group, the Religare group and LIC Housing Finance.
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