It’s been clear for some time that there is little appetite to start on a clean slate with a universal banking licence. The regulatory norms for the entry of new private banks turned relatively benign under Reserve Bank of India’s (RBI) governor Raghuram Rajan’s tenure, but has seen few takers since. In June 2013, Mahindra & Mahindra Financial Services (M&M Financial), and Shriram group gave vent to their reservations — that regulations did not allow for the existence of an NBFC and a bank within the same group. In the case of Shriram Capital, the central bank was for the merger of Shriram Transport Finance
and Shriram City Union; M&M Financial cited the fact that both cash reserves and statutory liquidity ratios would kick in from day one even though the build-out of the current and savings account franchise would take time for a newly-converted bank. Among the 25 applicants were Aditya Birla Nuvo, Bajaj Finserv, Reliance Capital, LIC Housing Finance and L&T Finance.
The plot ahead
The ongoing liquidity crunch that has made capital expensive for NBFCs, and pricier for weaker franchises may be the tipping point in the narrative; and many who aspired to a banking licence to look anew at their ambitions.
Says Nilesh Shah, managing director at Envision Capital: “The tapering off of easy money days will prompt both banks and NBFCs, to look at managing the liability profile more steadily going forward.” Until IL&FS
hit the roof, the relevance of deposits as a key source of funds took a backseat as banks and non-banks — the latter simply rolled over commercial papers (CP) -- were able to tap the money market at relatively cheap rates. Since then the cost of funds have moved northwards by 40-70 basis points. What Shah implies is that NBFCs
can’t grow their books, as banks will hereon be the price-setters. To the extent that caps on the CP route are on the cards, and that mutual funds will anyway not readily buy into them, it will make the whole-sale funding route tougher for NBFCs.
Given that banks have an edge over NBFCs on the deposit front, this will be a key driver of M&A deals. Smaller and region-focused private banks such as Karnataka Bank, Federal Bank, South Indian Bank, City Union Bank, and Catholic Syrian Bank, which have deep deposit penetration in their respective markets
are seen as attractive merger candidates. A good deal with an NBFC will help these banks grow exponentially; some of the bigger NBFCs anyway have a good feel of the bottom of the pyramid. As to whether banks woo NBFCs or vice-versa is a different matter.
In the mid-1990s, the then term-lender Industrial Credit and Investment Corporation (ICICI) showed the way by strategically picking up NBFCs — the merger of its subsidiary, Shipping Credit and Investment Corporation of India with itself; and then gobbling up ITC Classic and Anagram Finance. It merged with ICICI Bank in 2001. In the mid-2000s, we had IndusInd Bank putting in Ashok Leyland Finance, a Hinduja group concern into its belly, albeit for an entirely different set of reasons.
The hiccups going ahead
While mergers do seem to be a logical step forward in the chase to secure capital and growth, Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services points out, “Valuations may play spoil sport, deals that have now taken place are at multiples lower than earlier transactions.” All the more so as Bindra says: “Few want to explore beyond the tier-2 and tier-3 cities. The bottom of the pyramid is an underserved, wide opportunity. But existing players don’t want to go beyond where the private banks are today. People are chasing the same pie. This is acting as an entry barrier.”
A senior executive of an NBFC who didn’t want to be named adds that the restrictive clause on large business houses will remain a hurdle for M&A deals. As per guidelines for ‘on-tap’ licences for banks, existing NBFCs which are a part of large conglomerates and account for more than 40 per cent or more of the group’s total assets or total income are disqualified from getting universal bank licence. “Large NBFCs which have the capital and operational wherewithal cannot seek a merger with smaller banks due to this clause. Unless this is changed, meaningful consolidation will not take place in the sector,” he adds. What the aforementioned executive is in effect saying is that given the cost of regulatory capital, Mint Road should have to relook at extant norms.
We may well see a revisit of the restrictive clause on large business houses NBFCs to enter into banking, albeit indirectly, for starters. Mint Road is in the process of aligning the asset-liability management norms, is to place curbs on the licensing and businesses of bank-led units; shift to the risk-based supervision (RBS) system, and bring parity in CEO remuneration with that of private banks. Simply put, “platform NBFC”, will be closer to a bank than ever before; that being the case, it makes all the more sense to shake hands.