On Friday, the RBI listed the recommendations accepted from the Internal Working Group (IWG) to review ownership guidelines and corporate structure for private sector banks. Analysts say NBFCs face their own challenges in terms of rising cost of funds and higher capital requirements and bank licenses are not on the horizon for the next few years.
Prakash Agarwal, head of financial institutions at India Ratings and Research, said arbitrage between banks and NBFCs is going to be reduced. “NBFCs now have a lot of parity on rules with banks with the major exception of reserve ratio. If NBFCs are to be converted into banks then it is certainly a major concern,” Agarwal said. “NBFCs need to plan their liability structure upon conversion. The retail deposit profile will build gradually and in the interim there may be a greater reliance on institutional funding and certificates of deposit where the markets are not very deep and also volatile and costly can.”
Banks keep 4% of their deposits as cash reserve ratio with RBI without interest and another 18% deposits have to be invested in government securities as statutory liquidity ratio. These do not apply to NBFCs and that is why they have traditionally avoided banking licences.
“There are pros and cons to NBFCs aspiring to become banks. They will have to change their deposit mix from wholesale to bulk keeping in mind the large revaluations that happen every year. There will also be some regulatory challenges, especially with regard to reserve ratios,” says Karthik Srinivasan , Group Head – Financial Sector Ratings, Icra said. “For now, RBI has not said anything about licensing to corporate groups or NBFCs, so everyone will wait for the dust to settle as they move towards a stricter regime.”
NBFC Officials say the only question to be answered now is whether the regulator wants corporate houses to promote banks.