The Reserve Bank of India's (RBI) decision to defer action on corporate banking and to allow major non-bank financial companies (NBFCs) to transform into banks may have disappointed some, but it was not
wholly unexpected.
Rather, some of the larger NBFCs are hopeful that scale-based regulation, which gradually brings major para-banking units up to par with banks, will be the first step toward allowing them to become full-fledged
commercial banks.
The RBI ignored two important recommendations made by an internal working group led by P.K. Mohanty, director of the RBI's central board, in its ownership standards and corporate structure for private banks, which were announced on Friday.
The central bank accepted 21 of the working group's 33 recommendations, the most crucial of which was enabling promoters to own a 26% interest in the bank they floated. The RBI's guidelines make no mention of corporate or NBFC problems.
This could also mean that providing digital banking licences to such organisations is unlikely, according to the duo. This will be detrimental to companies like ONE97 and PayTM that want to obtain a banking licence.
Experts are also coming to the conclusion that large and systemically important NBFCs will be brought up to speed with banking in terms of regulations before being allowed to enter the banking system.
Giving NBFCs banking licences is not a bad idea as long as they are well-diversified, publicly traded, and the promoter corporate group has minimal voting rights to influence lending decisions. The RBI may consider reducing voting rights in the future, while allowing a higher shareholding to enable skin-in-the-game," said a top policy expert who requested anonymity.
In general, the scale-based regulation would ensure that NBFCs' lighter touch regulations would give way to much stricter norms in terms of capital adequacy and liquidity ratios, bad debt recognition, compliance, and disclosure, putting them on par, or nearly on par, with banks in the eyes of the RBI.
While the RBI has not yet adopted the internal working group's suggestions regarding NBFCs, Anil Gupta, vice president, financial sector ratings, ICRA, believes that tighter restrictions will eventually allow them to enter banking.
"First and foremost, the RBI is attempting to bring them up to speed with banks in terms of legislation. Before deciding whether or not to allow corporates into the industry, the RBI may strengthen its regulatory powers, according to Gupta.