Transition path for NBFCs to become universal banks may be in the offing

The issue figured in Thursday’s meeting held at the Department of Financial Services (DFS) on shadow banks where their future as potential banks was taken up.

“Just like you have a transition path for small finance banks (SFBs) to universal banks, it was felt the similar approach for NBFCs may be needed,” said a source. The Reserve Bank of India (RBI) is expected to be tasked with this.

The DFS is to meet again on the NBFC sector next week. This meeting is to be chaired by finance secretary M Nagaraju.

“Today’s meeting was more like a curtain-raiser ahead of the meeting slated for next week,” said the source.

What may be on the anvil is like the RBI’s circular of April 26, 2024. The central bank’s 2024 framework, building on the 2019 “on tap” licensing guidelines, provides clearer, more structured eligibility criteria for SFBs to transition into Universal Banks.

These were as follows: They should have a satisfactory track record of performance for a minimum period of five years. The shares of the SFB should have been listed on the bourses. The SFB should have a minimum net worth of ₹1,000 crore at the end of the previous quarter (audited), and it should meet the prescribed capital adequacy norms. The SFB is to have a net profit in the preceding two financial years; have a gross and net non-performing asset (GNPA and NNPA) ratio of less than or equal to 3 per cent and 1 per cent, respectively (in the preceding two financial years).

The key changes in the April 26, 2024 circular were the net-worth requirement increase to ₹1,000 crore from ₹500 crore; the net profit stipulation; and the norms on GNPA and NNPA.

In the case of NBFCs, there is no detailed glidepath; it is based on the RBI’s assessment of their suitability to become universal banks. The Internal Working Group (IWG) to “Review extant ownership guidelines and corporate structure for Indian private sector banks” (November 20, 2020) had made a case for large corporate and industrial houses as promoters of banks. It said large NBFCs (with an asset size of ₹50,000 crore and above, including those owned by corporate houses) are to be considered for conversion into banks. While the RBI has a four-tiered scale-based regulatory (SBR) approach for NBFCs, this is not indicative of a transition path.