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Thursday, March 11, 2010

Banking licence may help cos expand reach

Non-banking Finance Companies (NBFCs) have got the attention of the Street, after the budget announcement relating to possible banking licences to this set of players in the financial sector. Indeed, NBFCs are keen on obtaining a banking licence, as it will help them mobilise low-cost current and savings account deposits. This, in turn, will lend greater stability to their business.

However, some NBFCs have already made it clear that they are not seeking banking licences. For instance, the Infrastructure Development Finance Company (IDFC), which was viewed as a potential candidate for a banking licence, has indicated that it has no plans to foray into banking. There are others who are forthcoming such as R Sridhar, managing director, Shriram Transport Finance who says that his firm is keen to get a banking licence, as and when the guidelines are issued. "However, we will prefer a fresh licence," he says.

What this implies is that the company and its parent - Shriram Group - may not be keen to acquire an existing bank or to convert the NBFC into a bank. Shriram Transport Finance does appear to have a case being granted a banking licence since it provides finance to credit-starved segments of the economy. The company is into financing of used commercial vehicles (CVs), buyers of which belong to low-income groups to whom banks don't provide finance. The company has 482 branches across India, and leveraging on such a network, it has been able to build a share of 20-25% in the used CV market. It is one of the best NBFCs in the country, known for maintaining low non-performing assets or bad loans. For instance, net NPAs formed less than 1% of net advances as of December '09.

Similarly, RR Nair, director & CEO of LIC Housing Finance, says that the option to seek a banking licence is open to his firm, after RBI firms up the norms for issuing fresh bank licences. LIC Housing Finance is the second-largest mortgage player. It also has the benefit of strong parentage, considering that LIC has a stake of over 35% in the company.

Unlike Shriram Transport Finance, LIC Housing Finance is not in the business of providing loans to borrowers at the lower end of the income bracket. Despite that it has worked towards improving access to mortgage finance in the country. Individual home loans constituted over 90% of its book at the end of the September '09 quarter, of which 80% were salaried employees. LIC Housing Finance, too, has been successful in maintaining extremely low bad loans on its books. For instance, net NPAs or bad loans formed a mere 0.8% of advances by the end of December '09. There could be other contenders also among NBFCs for banking licences such as Reliance Capital, Religare, Aditya Birla Financial Services and India Bulls.

More clarity will emerge only after RBI unveils its norms. However, it is expected that NBFCs with a stable business model, a track record of good governance and network, which are keen on catering to the finance needs of individuals and institutions, stand a better chance of emerging as a bank.

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