Moody’s said non-bank finance companies also can now convert all of their branches into bank branches. Photo: Bloomberg
New Delhi: Non-banking finance companies (NBFCs) will benefit from Reserve Bank of India’s (RBI) decision to herald ‘on tap’ universal banking licence regime, Moody’s Investors Service said on Monday. It cautioned however that more bank licences will be “credit negative for existing banks” as it would increase competition. The RBI said last week that it will permanently keep open the window for applying for universal bank licences, ending its practice of allowing licence applications only during specific periods. “This is credit positive for non-bank finance companies (NBFCs) because it makes it easier for them to meet the requirements for a banking licence,” Moody’s said in a statement.
India’s banking system is already highly fragmented: with the exception of State Bank of India (SBI), which has a 20% market share, the remaining banks had market shares of less than 6% as of March 2016. “More bank licences would be credit negative for existing banks in India because it would increase competition,” it said. RBI excluded large industrial houses from the purview, and allowed them to invest up to 10% in new banks. “A key benefit that the bank licence provides is the access to deposit funding.
Indian NBFCs’ dependence on wholesale funding has been a structural weakness, so being able to convert into banks will address this weakness in their funding profiles,” Moody’s said. The revised guidelines will allow NBFCs greater manoeuvrability in deciding the operating structure that is best suited for them. “They can either adopt a holding company structure, with the holding company holding the bank, or directly convert the existing NBFC into a bank.
“Additionally, they can choose to run select financial services businesses outside the bank, although these would have to come under the holding company structure,” Moody’s said. NBFCs were previously required to set up banks under holding companies.
RBI has also relaxed requirements pertaining to how NBFCs set up shareholding structures, with promoters now having the option to retain a higher stake for a longer period. For the first five years, promoters must have a minimum stake of 40%, lower it to 30% in 10 years and further to 15% in 15 years. Under the previous guidelines, promoters had to reduce their stakes to 40% in five years, 20% in 10 years and 15% in 12 years.
Moody’s said NBFCs also can now convert all of their branches into bank branches. Previously, only branches in less populated cities were allowed to be converted. Now, new banks can thus optimise their network reach from the beginning. Moody’s said it is too early to determine whether the revised guidelines will result in a significant increase in the number of banks in India.
Historically, the number of new universal bank licenses issued has been relatively low. In the previous round of licensing in 2014, just two of 25 applications received approval. The same number was granted 13 years ago. As such, the effect of the revised guidelines will be determined by RBI’s willingness to issue licences, Moody’s added.
[“Source-Livemint”]
