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NBFC's keen to convert into banks

Feb 5, 2000

Leading Non-Banking Finance Companies (NBFCs) are interested in converting their status to banks. They are exploring this possibility and have consulted the Reserve Bank of India for this purpose. While RBI's views on this are not yet finalised some bankers feel that this conversion can be started off by the merger of a strong NBFC and a private bank.

The main reason for NBFCs being so keen on this change is access to low cost funds. Currently NBFCs cost of funds is around 15%, banks due to their float funds, current and savings account have a cost of funds of around 7%-8%. Also banks are part of the payment and settlement system while NBFCs do not have access to this. However this move would require NBFCs to ensure that the interests of the company and the depositors are not hurt in the bargain. Some NBFCs have hired consultants to give them recommendations on this.

In the long term this move will be good for NBFCs as they will have access to cheaper cost of funds. Also as many NBFCs are not very viable this provides an option to merge with stronger banks. For the banks they would benefit from a larger branch network and the strong brand equity of the leading NBFCs in the retail sector. Banks would also benefit from merging with some strong NBFCs who have high localised business presence and the banks will be able to encash on this and build it up further. From the depositors viewpoint they would suffer as they will have to put their deposits into banks which pay lower interest rates. However the stronger regulations for banks will make them safer for depositors.

In a related development the RBI has decided to provide some relief to NBFCs if their net owned funds fall below the below the stipulated Rs 2.5m. They will not face any immediate deregistration and instead will discontinue their NBFC business and try to restore the net owned fund limit within a time frame.

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