What do you mean by Conversion of Non-Banking Financial Company Into Bank?
There is an important role of Non-Banking Financial Company in funding sources in India as said by PN Vasudevan. Bank is like a marriage; Non-Banking Financial Company is like a bachelor’s life; you enjoy it and have a lot of freedom but at the end of the day, that’s not life. Non-Banking Financial Company has to bear less interest on their deposits and improved leverages.
Banking Company is different from NBFC in following ways:-
The Bank and Non-Banking Financial Company function are mostly similar to each other but there are some allowances given only to Banks. i.e only Banks are allowed to perform the following activities:-
- Deposits can be accepted by banks;
- Issuance of cheques drawn can be made by banks for being a part of the payment and settlement system;
- Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation.
Legal norms to be followed for converting Non-Banking Financial Company into Bank:-
Non-banking financial companies (NBFCs) can easily get the green signal for becoming the Banking companies. But some may get it difficult to convert themselves into banks.
For Conversion Of Non-Banking Financial Company into Bank the following conditions must be fulfilled:-
- Paid-up capital for a new bank shall be minimum of INR 200crore but it must be raised up to INR 300 crore within three years of commencement of business.
- The promoters’ contribution shall be minimum 40 percent of the paid-up capital of the banks.
- Public issue or private placement can be made for initials capital, other than promoter’s contribution.
- Promoter’s contribution must be 40% of fund raised for expanding the initials capital to INR 300crore.
- There is lock in period of minimum 5 years from the date of receipt of capital by the bank.
- There are restrictions on sponsorship made by large industrial house. Though, large industrial houses may contribute through their companies connected directly or indirectly in the equity of a new private sector bank up to a maximum of 10 percent but not have controlling interest in the bank.
- There should be arms length relationship with business of Promoter’s group and individual companies investing up to 10 percent.
- The relationship like between two independent and unconnected entities can be made among business entities in the promoter group and the proposed bank.
Conversion of Non-Banking Financial Companies into private sector banks.
Non-Banking Financial Company must fulfill the following criteria wishing to convert into a bank:-
- Net worth of INR 200crore should be reflected in the latest balance sheet of the Non-Banking Financial Company and within three years, it shall increase to INR 300crore.
- Including Local, State or Central Governments the Non-Banking Financial Company should not have been promoted by a large Industrial House or owned/controlled by public authorities.
- A NBFC shall obtain a credit rating which should not be less than AAA (or its equal) in the previous year.
- No default should be reported in repayment of public deposits and so that they can have an impeccable track record in compliance with RBI regulations/directions.
- There must be capital adequacy of not less than 12 percent and net NPAs of not more than 5 percent in order to convert into Bank.
- Requirements such as lending to priority sector, promoters' contribution, lock-in period for promoters' stake, dilution of promoters' stake beyond the minimum, NRI and foreign equity participation, arm's length relationship must be fulfilled Non-Banking Financial Company on conversion to a bank along with Capital Adequacy Ratio and all otheras applicable to banks.
For Conversion Of Non-Banking Financial Company Into Bank other requirement to be followed the banks are:-
- On a continuous basis the bank shall maintain a minimum capital adequacy ratio of 10 percent.
- Like the other domestic banks, new bank will have to witness priority sector lending target of 40 percent of net bank credit
- In rural and semi-urban areas the new bank must open 25 percent of its branches.
- From the date of commencement of business the new banks will not be allowed to set up a subsidiary or mutual fund.
- The promoters may decide the headquarters of the proposed new bank in any location in India
- The rules of the provisions of the Banking Regulation Act, 1949, Reserve Bank of India Act, 1934, other relevant Statutes and the regulations of SEBI regarding public issues and other guidelines applicable to listed banking companies shall be applicable to new banks.
For Conversion Of Non-Banking Financial Company into Bank the procedure to be followed are
- Prescribed form must be used for preparation and submission.
- A project report covering business potential and viability of the proposed bank, the business focus, the product lines, technology capability and other information as may be required must be accompanied with the application.
- The new banks has to furnish detailed information on the background of promoters, their expertise, the track record of business and financial worth, details of promoters’ direct and indirect interests in various companies/industries, details of proposed participation by foreign banks/NRI/OCB.
- Those will be issued Licenses who conform to the requirements stated by RBI and who are likely to conform to the best international and domestic standards of customer service and efficiency.
- To ensure prima facie eligibility of the applicants, the same will be screened by RBI and will be referred to a high-level Advisory Committee to be set up by RBI.
- With the help of procedure set up by them the Committee will screen the applications
- RBI will finalize the decision to issue an in-principle approval for setting up of a bank.
- The validity of in-principle approval issued by RBI is for the period of one year starting from the date of granting in-principle approval and would lapse automatically.
- If any contrary features are noticed regarding the promoters or the companies/firms with which the promoters are related and the group in which they have interest, the Reserve Bank of India may impose additional conditions and if warranted, it may withdraw the in-principle approval after issue of the in-principle approval issued by RBI for setting up of a bank in the private sector.
Information on the discussion paper issued by Finance Minister on Entry of new banks in the private sector.
- An option to enter the banking sector RBI has given Non-Banking Financial Companies who have a good track record and low-NPAs. The discussion paper touches conversion of Non-Banking Financial Companies into Bank.
- Instead of giving recommendations the discussion paper, has discussed the pros and cons of various options out of one option discussed for Non-Banking Financial Companies is their conversion into banks and the second is to allow only standalone Non-Banking Financial Companies (with no industrial house as its promoter) to convert into a bank.
- Along with the few Non-Banking Financial Companies those who have converted into the banks are allowed to take the advantages of lower-cost deposits and improved leverage.
For the conversion there must be consideration of long term strategy. Conversion depends on the business model of individual Non-Banking Financial Companies.
NBFCs are presently not of a scale to dishearten existing banks. The impact will be low, despite the threat of increased competition.
Non-Banking Financial Companies will also enjoy some forego the advantages of operating in an unregulated turf with concentrated exposures. However, the services rendered by the Non-Banking Financial Companies may also be given by Banks.