RBI panel proposes bank licence for big NBFCs
Share prices of large NBFCs may rise if brokerages rerate them in the wake of an RBI panel proposing their entry into banking.
The proposals of the committee, headed by P.K. Mohanty, RBI central board director, could potentially see Tata Capital, Bajaj Finance, Aditya Birla Capital, the Shriram group, Cholamandalam, L&T Finance or even Mahindra Finance applying for a bank licence.
The panel has suggested “well run large NBFCs”, with an asset size of Rs 50,000 crore and above, including those of a corporate house, can become banks provided they have completed 10 years and meet the due diligence criterion among other conditions.
These include the NBFCs setting up a bank through a wholly owned non-operative financial holding company (NOFHC) structure and a rigorous examination of the fit and proper status of promoters and directors. The corporate or industrial house promoting such a bank must have a diversified ownership structure.
While the panel has also proposed banks by business houses, their suggestions are more suited for conglomerates owning NBFCs, analysts said. Their optimism stems from the fact that the banking regulator may favourably look at proposals put by systematically important NBFCs seeking to convert into a bank.
“At present, of the NBFCs having assets of Rs 50,000 crore or more, more than half are owned by corporate/industrial houses,” analysts at ICICI Securities said in a report.
“We believe many NBFCs namely Bajaj Finance, L&T Finance, Mahindra Finance, Aditya Birla Capital, Tata Finance, Piramal will look at this opportunity but preferences from a regulator may be towards players having a vintage track record, scale, penetration along with meeting the due diligence criteria and conditions specified,” ICICI Securities said.
Among the NBFCs, Bajaj Finance had an asset size of Rs 1,37,090 crore as of September 30, Shriram Transport Finance, Rs 1,13,350 crore and Mahindra Finance over Rs 83,000 crore. Though the latest numbers of Tata Capital are not available, it had an AUM of over Rs 76,000 crore for the year ended March 31, 2020. On the other hand, the Birla group’s NBFC arm had a loan book of almost Rs 58,000 crore.
“Some of the NBFC stocks are likely to be re-rated as expectations builds up over who are likely to bag the banking license,” an analyst with a foreign brokerage said, indicating there could still be some upside left as values of some of the stocks have showed a sharp run-up since their lows during the nationwide lockdown.
The sector has witnessed multiple headwinds that include the IL&FS crisis and the Covid-19 pandemic which hit collections. However, their performance was better than expected during the second quarter ended September 30 as abundant liquidity thanks to the policies of the RBI, improving collection efficiency and even asset quality surprised brokerages on the positive side.
“We are more positive on the sector. There are green shoots of recovery in growth across segments. Auto volumes have seen steady growth for the past 2-3 months. This is likely to sustain going forward too. Housing sales witnessed a rebound in September and October. However, sustenance of this in unclear at present,” Motilal Oswal Institutional Equities said.