Shares of India’s Non-Bank Finance Companies (NBFCs), especially those promoted by large trading companies, have received a boost in hopes of entering the banking sector.
The view is that these NBFCs could soon become banks if the Reserve Bank of India (RBI) takes the recommendations of a task force seriously. On Friday, the task force formed in June to examine the new banking licenses came up with big suggestions that included turning large NBFCs into banks.
“This offers changes for larger NBFCs such as Bajaj Finance, Birla, MMFS (Mahindra and Mahindra Financial Services Ltd), LTFH (L&T Finance Holdings Ltd), among others, to seek the license,” wrote analysts at Jefferies India Pvt. Ltd on a Note: Bajaj Finserve and Finance shares were up 3% and 2% respectively in the first hour of trading, while other NBFCs such as Shriram Transport Finance Ltd and Cholamandalam Finance Ltd were not far behind either.
But investors should be cautious, analysts said, as the regulator is known for its reluctance to license in a big way. There have only been three rounds of banking license issuance in India since the banks were nationalized in 1969.
Alpesh Mehta, an analyst at Motilal Oswal Financial Services, believes that obtaining a license would be a long process. “These are only suggestions and we have to await the final guidelines from RBI. We also have to see if the NBFCs would be willing to become banks, “he said.
While access to public deposits is tempting for NBFCs hit by multiple rounds of liquidity crises, there are costs involved in becoming a bank.
Maintaining the cash reserve ratio and the legal limit of the ratio of liquidity on promoters’ participation are some rules that can make it uncomfortable for NBFCs. Furthermore, Indian companies may not be entirely comfortable with the possible increased oversight of their business group activities that the banking regulator may have. More regulation would mean less freedom and flexibility in conducting business.
While it may be easier for the RBI to allow NBFCs to become banks, the fact is that large companies belong to large industrial companies. The central bank has historically been reluctant to allow Indian conglomerates to enter the banking industry. Without a doubt, this is one of the suggestions made by the working group. But analysts are skeptical that the central bank will change its mind.
Meanwhile, financial performance in the coming quarters would determine investor interest in NBFCs. Here, lenders like Bajaj Finance, HDFC and Mahindra and Mahindra Financial Services Ltd can win, given the improved business metrics in the September quarter.
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