Goldman Sachs, : Few may be eligible for banking license, impact on NBFCs negative

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: Financial Services
Equity Research
Few may be eligible for banking license, impact on NBFCs negative
RBI issues guideline both for NBFCs and banking license
The RBI issued draft guidelines for new banks licenses in the private sector
as well as a report from the working committee on the issues and concerns
in the NBFC sector. These will be finalized post feedback from the industry.
NBFC required to keep higher capital and provisions
The working group has recommended higher Tier I requirement of 12% (vs.
7.5% now) and proposed to bring in line the asset classification and
provisioning requirement with the banks. Currently, NBFCs classify a loan
as NPLs if principal or interest is in default for 180 days vs. 90 days
classification norms for the banks.
Industrial houses can apply, NBFCs may be required to convert
Promoters with diversified ownership, sound credentials and integrity with
a successful track record for at least 10 years could apply for a license. RBI
has excluded businesses such as real estate, brokerages and capital
markets given their riskier nature. NBFCs, it appears, will have to either
convert into a bank or transfer businesses that can be departmentally
operated by the banks in order to be eligible for a license. The ownership
in the bank will have to be reduced from min. of 40% at the time of issuing
the license to 15% in 12 years. Foreign ownership will be restricted to 49%
for the first 5 years. The RBI retains the right to remain selective while
issuing licenses.
Working group’s recommendation negative for NBFCs
The NBFC working group report, if implemented, will be negative in our
view. The higher Tier I, we believe, could impact long term growth for
NBFCs, which may then need to raise capital more frequently and could
also impact profits from higher provisioning norms.
Few may get bank license, NBFC profitability to be impacted
As the RBI has not defined diversified ownership, it is therefore difficult to
assess which industrial houses will be eligible. In the case of NBFCs’
conversion into banks, we see additional burden from statutory liquidity
ratio (SLR), cash reserve ratio (CRR), and priority sector loans, all of which
could impact profitability.