RBI is pushing for the conversion of large NBFC’s into banks due to IL&FS and DHFL failure.
Why this Conversion is required?
It creates uniform entities in the financial sector.
It helps in greater regulation.
It will lead to a higher share of the private sector in the banking (which accounts for 30 %of deposits and 36% advances).
Even internal working group set up to review the ownership structure in the financial sector has suggested the relaxation of existing ownership norms for the conversion of NBFCs into banks.
Who can apply for a banking licence?
NBFCs with an asset size of 50,000 crore and credible operating experience.
Payments banks can convert into small finance banks provided they have a good track record of three years.
Banks which are currently under a non-operative holding financial company structure can exit, if they don’t have other group entities in their fold.
In order to encourage new entrants, industrial houses are allowed to set up banks, provided the laws and supervision systems prevent transactions between connected entities.
Why conversion to banks is a flawed process?
NBFCs serve the last mile which is ignored by banks and they account for a quarter of non-food credit.
It is futile to expect NBFCs to attract low cost deposits, when the other bank regulations such as CRR and priority sector lending obligations apply.
Despite the new tighter regulation, it is wrong to assume that NBFC’s are away from the supervision.
Even YES Bank, Lakshmi Vilas Bank failed despite laws & audit.
Today some large business houses management are dominated by promoter family.
The regulations should be framed such that only groups with a sound professional and transparent management with strong governance are allowed.
On the whole, Governance is related to the RBI’s supervision capacity, rather than ownership pattern or the promoters’ stake.
