prpri RBI Committee Recommends Conversion of Large NBFCs into Banks & Entry of Corporates RBI Committee Recommends Conversion of Large NBFCs into Banks & Entry of Corporates

In a series of recommended proposals, an internal working group (IWG) of the Indian Central Bank (Reserve bank of India) has suggested increasing the existing cap on stake owned by corporate houses in the bank. This will facilitate the guarded entry of corporates into the banking system. The committee also suggested conversion of giant NBFCs into banks, and a hike in promoters’ stake to twenty-six per cent from fifteen per cent. The cluster additionally planned a hike in minimum capital for fresh banks from Rs five hundred integer to Rs. One thousand crore.

The IWG headed by PK Mohanty said: “large corporates and industrial houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulation Act, 1949.”

What Did Recommendations Say?

“The cap on promoters’ stake within the end of the day — fifteen years — is additionally raised from this level of fifteen per cent to twenty-six per cent of the paid vote equity share capital of the bank,” the cluster plan

This stipulation needs to be uniform for all kinds of promoters and would mean that promoters having already diluted their holdings to below twenty-six per cent are allowed to lift it to twenty-six per cent of the paid vote equity share capital of the bank, it added.

Group also recommended strengthening of the supervisory or regulatory mechanism for large conglomerates including consolidated supervision. The supervisory mechanism is required to prevent the connected lending and exposures between banks and other non-financial/financial entities of the market. 

So far, the RBI was against allowing the large corporates to open their commercial banks or owning large stakes in them. 

“Well-run large non-banking finance corporations (NBFCs), with an asset size of Rs 50,000 crore and above, including those which are owned by a corporate house, may be considered for conversion into banks subject to completion of 10 years of operations and meeting due diligence criteria and compliance with additional conditions specified in this regard,” it said.  The IWG was constituted by RBI to review and examine the regulatory guidelines and extant licensing to ownership and control of banks and other related issues. 

On non-promoter holding, it advised a uniform cap of 15% of the paid-up voting equity share capital of the bank could be prescribed for all kinds of shareholders. The working group also mentioned about payment banks wanting to convert to small finance banks. It said that the payment bank’s track record of the past three years should be considered sufficient to evaluate their eligibility. 

SFBs and payments banks may be listed within six years from the date of reaching net value resembling prevalent capital requirement for entry as a universal bank or 10 years from the date of starting operations. 

The minimum initial capital demand for licensing new banks needs to be increased from Rs. Five hundred crores to Rs. One thousand crores for universal banks and from Rs. Two hundred crores to Rs. Three hundred crores for little finance banks. The initial vote capital needs to be raised from Rs 150 crores to Rs 300 crores in 5 years, it said.

Non-operative financial holding company (NOFHC) must be the favoured structure for all new licenses to be issued for universal banks. However, it needs to be obligated solely in cases where the promoting entities, individual promoters, and changing entities consist of other group entities, the IWG said.

It has proposed that once the NOFHC structure attains a tax neutral status, all the banks must reach NOFHC structure for discretion within five years of the announcement of tax-neutrality of NOHFC. Earlier, banks licensed before NOFHC had the option of reaching to NOFHC structure but now it is becoming mandatory according to the proposal submitted by IWG. 

According to the committee, until the NOFHC structure is made operational, the problems about banks endeavour will be addressed through suitable regulations set by the RBI. 

Is It a Good Time to Start an NBFC in India?

The modern lending practices are mainly based on the partnership model of a funding partner (NBFC) and a fintech company (sourcing partner). Now, the average interest rates in the Indian market are equal to or above 15% P.A. for the NBFC/Microfinancing customers. If we compare these rates with the international market rates with an average lending rate of 3-10%, it becomes clear that it is profitable for the companies to invest in the Indian lending market. The higher interest rates bring more profit and therefore increases the scope of high-end growth for these institutions. 

Here are the main reasons to start a new NBFCs: 

  • More Options for Small Business Owners

The requirement of small businesses differs from that of large corporates. Hence, the loan requirements for different activities also differ for small enterprises. Mostly these enterprises need small loans to meet a temporary shortfall of cash. These could include paying salaries to the employees, executing a large order suddenly, or in research and development. The NBFCs with their assortment of plans can meet the requirement of these small vendors, merchants, and distributors. 

  • Increased Alternative Credit Supply

These big banks have inflexible policies that act as a roadblock to accessing the large part of the Indian population coming from a humble background. The alternative credit supply chain created by the NBFC has led to financial inclusion of the lower class of society.  These lenders have also reduced the loads from banks to cater to every section of society. 

Financial Inclusion of Potentially Risky Borrowers

Banks had a restraining policy towards small businesses as they were termed as potentially the riskier clients. The small business could not come back from any sudden downfall in business and so, were not eligible for loans from most of the banks. The NBFCs have flexible norms to lend loans to small business and offer cheaper interest rates that make paying off the loans easy for these businesses. This could lead to the financial inclusion of the small business who were traditionally kept out of the purview of the organized credit system. 

Empowering Start-ups by Women 

A well-known fact is that empowering women entrepreneurs not only improves the economical prosperity of their family but also adds to the development indicators of the society where the business is established. The NBFCs could provide loans to these start-ups led by a group of women working to make it large through their small businesses. Small loans to such groups have traditionally been denied by banks due to the high risk of default. With the advent of NBFCs, the risks are lower due to low-interest rates and so the net profit margins for these small businesses could also increase. 

  • Serving Small Town and Rural Population

Various reports across the country have indicated that despite having branches of regional rural banks spread across the country and other banks trying to reach the far hinterlands of India, the financial inclusion among small towns and rural areas remains low. The credit deficit in such areas could be easily managed by NBFCs as they can be operated online. The cost required for NBFCs to operate in such areas is also very low compared to banks. 

Procedure to Get New NBFC Licence

Procedure to Start NBFC-ICC in India

Process of NBFC Registration

Now, let’s understand the procedure of starting a new NBFC in a step by step manner. 

  • Register Your NBFC Under the Companies Act, 2013: Start by registering your NBFC as a public or private company with the government. 
  • Raise Authorized Paid-up Capital of Up to Two Crores: The company must raise an authorized and paid-up capital of about 2 crores to meet the required standards of registration.
  • Depositing the Sum in Bank and Getting Certificate: After raising this sum the company is required to open a fixed deposit account in a bank and deposit the money. After this, they must obtain a Certificate of no lien from the bank to move forward with the process of registration. 
  • Getting All the Certified Copies to Complete the Checklist of RBI Registration
  • Fill Online Application: Once you have all the documents ready for registration, fill the online application form for NBFC registration. After filling the form, the company will get an autogenerated Company Application Reference Number or CARN which will be used as a reference number in all further communication with RBI. 
  • Submit the Hard Copy of Application to RBI’s Regional Office: After filling the online application form and getting the CARN for your company, the physical copies of all the necessary and supporting documents must be compiled with the application form and should be submitted to the regional RBI Office to complete the process of registration. 

Documents Required for Registration as a New NBFC

  • ID Proof (Could be Aadhar Card, Voter ID Card, Passport or Driving License)
  • Copy of PAN Card
  • Passport Size Photos 
  • Address Proof (Bank Statement, Telephone bill, Mobile Bill, and Electricity Bill)
  • Ownership Documents or Rent Agreement for office space
  • Electricity bill
  • Certified Copy of Certificate of Registration
  • A copy of Fixed Deposit receipt and bankers’ certificate of lien indicating balances in support of Net Owned Funds.
  • Bankers Report for Applicant Company/ group companies
  • Certified copy of an extract of the main object clause in the MOA (Memorandum of Association) relating to the financial business.
  • Certified Copy of the Board resolution
  • No Objection Certificate from the owner for rented property
  • CIBIL records of all shareholder (more than 10% share in Company) and directors
  • Education & Experience proof of promotors
  • Net worth certificate of directors and shareholders

Some of the documents required may change depending upon the nature of the business of your new company. You can contact us on the details mentioned at the end of the article to understand the process specific to your business.

Why Taking Legal Help Is Necessary?

Any new company trying to enter the business of financing in India must start by registering itself as an NBFC with the Reserve bank of India. The process for the same is outlined in the above sections. However, this process could become cumbersome and time-consuming for founders of the new NBFCs and therefore, taking assistance from a reputed legal firm becomes necessary. It can help them in saving time and the hassle of the registration process. Also, there are too many small points that a company needs to take care of in their application for NBFC license. The application needs to perfect for hassle-free clearance from RBI. Therefore, the role of a legal firm that specializes in company law and registration becomes important. This also becomes necessary as registering in different categories of NBFC may require a different approach so consulting a firm specializing in the registration of businesses is a good idea. 

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August 2021