Not all finance firms want to be banks

By Sarbajeet K Sen Mar 14 2010 , New Delhi

Not many eligible non-banking finance companies (NBFCs)

 seem keen on turning into banks, even

after the budget said new licences could now be given

 for starting banks.

Three large NBFCs, including Sundaram Finance,
 Manappuram Finance and Muthoot Pappachan, told  that
they were not considering a move to become banks.

The reason was what they called the “restrictive” regulatory
framework for the banking sector. This makes banks a not so attractive proposition.

Representatives of the Finance Industry Development Council
(FIDC), the apex body for asset finance companies (AFCs) which
holds 70 per cent of the country’s NBFC assets, agreed that finance
companies might face more shackles if they were to turn into banks.
They feel more comfortable with the free play that an NBFC enjoys in
 relation to banks.

In his budget speech, finance minister Pranab Mukherjee said
that the Reserve Bank of India (RBI) was considering grant of
fresh bank licences. He specifically mentioned NBFCs as a category
that might be given licences to bring about greater competition
in the banking sector. RBI is in the process of drafting fresh norms for
grant of new bank licences.

Raman Aggarwal, FIDC co-chairman, cited feedback from the industry-segment
that he represented to say that not many AFCs were interested in
applying for bank licences. “Only a few AFCs such as Shriram
Transport Finance are looking at the option.
Other than restrictive regulatory issues such
as those on directed lending, NBFCs may not find it
economical to convert into banks. There are massive
expenses in terms of skills and technology needed to
offer services such as ATMs, credit cards and anywhere banking,” he said.


According to the economic survey 2009-10, 330-plus AFCs hold 70.3 per
cent of the total assets and liabilities of India’s over 12,700 NBFCs in India.


The Chennai-based Sundaram Finance is not looking at the option
as “we do not have the ambition (of becoming a bank),”
according to its managing director, TT Srinivasaraghavan.

 “We see no great advantage in becoming a bank,” he said.


He said his company would prefer to consolidate its core
businesses. “Our core competency is in areas such as
financing of trucks and cars. If we intend to go into
other areas such as project financing, trade financing,
 then it may be a good idea to become a bank. But if you
see universal banks like ICICI Bank, SBI and others, what
great value an NBFC-turned-bank can offer is not clear,” he said.


VP Nandakumar, group chairman of Manappuram Finance, a
 big Kerala-based company, said, “One has to look at core
strengths. Our core competency is loan against jewellery
 through our 1,000 branches. Some NBFCs have competency
in vehicle finance, some in infrastructure finance,
some other in mortgage finance. How an NBFC can leverage
 its core competency after becoming a bank is not clear,” he said.

He said NBFCs would be wary of the regulatory issues such
as compliance with priority sector regulations, CEO appointments
and the holding pattern in banks. “How would an NBFC that
 becomes a bank scale up priority sector lending to 40 per cent
of its net credit in a short time is an issue. Also NBFCs have
 a free hand in appointing top officials such as CEOs.


As a bank, it has to get RBI clearance.

Besides, the equity holding pattern and voting
rights are very restrictive for a bank,” he said.


Thomas George Muthoot, managing director of the Muthoot
 Pappachan group, another large Kerala-based NBFC, which
is into gold loans, consumer finance and auto loans, said
 that he was not keen on becoming a bank.

“There are good opportunities for NBFCs, specially
those with strengths in rural areas. We have more
flexibility than banks in terms of expanding our branch
network and dealing with customers. Most often in lending deals,
it is not a question of interest rate but really a case of getting
credit at the right time. Good NBFCs are able to offer a better deal
in this regard,” he said.

Other than Shriram Transport Finance, NBFCs whose
 names are doing the rounds as possible aspirants to
 bank licences are IFCI, Reliance Capital, the Indiabulls
 group, the Religare group and LIC Housing Finance.