Converting Large NBFCs To Banks: Is It Warranted?

An internal working group of the RBI recently suggested that large non-banking financial companies (NBFCs) should convert themselves into Banks.

- Shri V.P.Nandakumar

Although reported in the media as a new suggestion, the fact is, conversion of a non-bank to a bank has been allowed since 2016 when RBI announced ‘on-tap’ universal bank licenses. A couple of non-banks did go on to receive the license and became Banks. In effect, the recent discussions do not change the regulatory aspect much for non-banks who are or were willing, to become a bank. However, it may be a precursor to stricter regulation for those large NBFCs who choose not to.

In this context, I am often asked about my stance on this issue, and the consistent answer I give is that given the choice, we would prefer to continue as a non-bank. The rationale is simple. It is the answer to the question, “Should I do something just because I can do that, or should I stick to doing that which I am good at, and which I do best?” There are many reasons why non-banks may find the option of converting into a bank not worth pursuing.

Conversion may not be worthwhile

The first is the high cost of conversion and the need to fulfil extant regulatory requirements from day one. This includes things like maintaining the required investments for SLR (18 per cent) and CRR (3 per cent) which does not apply to NBFCs. As a bank, effectively 21 per cent of the book would earn a return far lower than the average yield on a lending portfolio, in fact, even lower than the borrowing cost. Also, for a gold loan NBFC, meeting the 40 per cent priority sector lending (PSL) norms is a major challenge given that in the current dispensation, gold loans dispensed by NBFCs are specifically excluded from PSL benefits. (Gold loans account for 72 per cent of Manappuram’s total loan portfolio.)