RBI Panel Proposal to Allow Large NBFCs to Convert to Banks is Welcome

Strategic Insights -

India's economic growth has been constrained by a broken banking system, with public sector banks seeing their share in total advances and deposits fall from 74-76% to 60-65% in the last five years. The Centre cannot keep recapitalizing public sector banks, and the solution is to allow more banks to emerge. A Reserve Bank of India (RBI)-appointed internal working group has proposed to allow non-banking financial companies (NBFC) with an asset size of Rs 50,000 crore or more to convert to banks, subject to certain conditions.

Key Takeaways:

  • The RBI panel's proposal to allow large NBFCs to convert to banks is welcome, as it can alleviate the lending capacity constraints of public sector banks.
  • The proposed NBFCs that could qualify for conversion include Bajaj Finserv, Aditya Birla Capital, L&T Finance, M&M Financial Services, and Cholamandalam Investment & Finance, which have lending books bigger than many banks.
  • The RBI panel has adopted a cautious approach by requiring a minimum of 10 years of successful operations and ensuring that the promoters are "fit and proper".
  • The lending books of the proposed NBFCs are already bigger than many banks, indicating their potential to provide greater access to low-cost public deposits and enable more lending.
  • The RBI panel has suggested that bank licences should be issued selectively, with preference given to those with a proven track record in running NBFCs as independent, arm's-length businesses.
  • Recent scams have been more about public sector banks and so-called professional-promoted entities, highlighting the need for better supervision mechanisms.
  • India has no balance of payments problem, nor is it constrained by endemic shortages of food, fuel, and other essential raw materials.
  • Government finances are on the mend, with theGoods and Services Tax (GST) regime stabilizing, and the worst of the COVID lockdown-induced revenue shortfalls over.

Statistics:

  • 74-76%: Public sector banks' share in total advances and deposits in the last five years.
  • 60-65%: Public sector banks' share in total advances and deposits in the current scenario.
  • Rs 50,000 crore: The proposed asset size for NBFCs to convert to banks.
  • 10 years: The minimum successful operations requirement for NBFCs to convert to banks.

Sources:

  • RBI-appointed internal working group
  • Reserve Bank of India (RBI)
  • IE Online Media Services Pvt. Ltd.