Realty, broking ops may pose hurdles for large NBFCs

Wednesday, August 31st, 2011

Non-banking finance companies (NBFCs) may find it tough to float a bank. The Reserve Bank of India (RBI), in the draft guidelines for new licences released on Monday, said companies with real estate and broking contributing to over 10 per cent of their income would not be allowed to float a bank.

This means large NBFCs from the capital market and real estate segments like Indiabulls and Edelweiss Capital may not fit the bill. It is still not clear whether housing finance companies like LIC Housing Finance, which have real estate exposure, would be eligible to apply for a licence.

Religare Enterprises said the company fits the bill, as its income from broking was less than 10 per cent and the group was not involved in real estate development. “With respect to these guidelines and Religare’ s interest in banking services, on a summary review of the draft guidelines, we believe the promoter group (the Singh family) fulfills all the criteria set out for applying for a new banking licence,” the company said in a statement.

Officials at LIC Housing Finance are also hopeful. “We are yet to go through the guidelines properly. Having said that, we do lend to real estate firms and projects but income from real estate is less than 10 per cent of the total income. So, we should be eligible to apply for a banking licence,” said an official. LIC Housing Finance is promoted by the largest life insurer in the country, Life Insurance Corporation of India.

However, other NBFCs promoted by big companies like Tata Capital, Mahindra and Mahindra Finance and L&T Finance are eligible to apply for banking licences, experts said.

RBI has specified an NBFC would be allowed to convert itself into a bank if all its activities fell under the purview of banking business. “NBFCs can promote a new bank if some or all the activities undertaken by it are not permitted to be undertaken by banks departmentally. In such cases, the activities undertaken by the NBFC, which banks are allowed to undertake departmentally, would have to be transferred to a new bank,” RBI said. In both the cases, the promoters would have to first set up a non-operating holding company.

“The recommendations are all positive for the sector. They give options, both as a group and as a standalone company, to apply for banking licences. We would analyse them and discuss them internally before taking any call,” said R Sridhar, managing director of Shriram Transport Finance Company.

The banking regulator also added existing NBFC branches in Tier-II to Tier-VI centres would be allowed to convert into bank branches directly. “Existing branches of NBFCs in Tier-I and II cities may be allowed to convert into bank branches, with RBI’s prior approval, subject to existing rules and the methodology applicable for domestic banks and also to minimum requirement of maintaining 25 per cent of its branches in unbanked areas,” RBI said. Sam Ghosh, Group chief executive, Reliance Capital, said the company would look forward to the final guidelines. “The draft guidelines contain a strong focus on greater financial inclusion, efficient corporate governance, adequate controls on exposure to group companies and time-bound milestones for listing.

We now look forward to the release of the final guidelines over the next few months,” he said.

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