Setting up the NBFC Banking Corporation Part II – The Infracos will find it tough but so will everyone else

The infracos, REC, PFC and even IRFC if you believe the Financial Express have been tempted to start a Banking crporation and the current RBI chief Duvvoori Subbarao has been very clearly discouraging them. making their ask tougher is the new norms for recognising NPAs in a 90 day timeframe though power companies with no exposure to SEBs may not face challenges on that count as much as all of them will be preoccupied with analysts reporting a 5-7% downgrade in earnings according to the new NPA norms. There is also my own limitations of understanding as SCB research mentions that current NBFC ops are a big no no for banking wannabes.

Nothing in the current regulations precludes new banks from maintaining their NBFCs , in fact as the CXOs of these new banks holding companies are likely to canvas with RBI to allow their existing branch networks to become banking branches and that may very much necessitate a couple of public clarifications by the regulator as these are extensive networks in retail and will be the main utilisation of bank funds from low cost deposits of these banks in the first instant necessitating a relook at single party and group exposure norms and making it infeasible for the new NBFC banking corporations to set up new branches rather than refashion existing distribution networks of their NBFCs

The new NPA norms may hit the three Auto finance cos too as NPAs in the NBFC sector will now exceed twice the 2-3% Gross rate in the establshed banks. Also the NPAs are only a tough start as maintaining a 12% adequacy is already causing the new candidate banks a notional loss of nearly a potential INR 80bln or $2 bln in RWA and thus more than $200mln in annual profits compared to existing banks.

Also RBI’s interest in keeping PSUs and infracos away may be due to their existing development charter based on which they can issue tax free infraco paper to retail investors and also raise low cost monies to a higher leverage as discussed last year in IFC norms at this repository

The Risk weighting of Power industry assets is also specially marked down for the registered infracos ahead of the new banking regulations

The task of taking the bank public in two years most nessarily will be an unfinished agenda item unless the bankers want to sell equity while still aloss making concern, esp if they set up new branch infrastructure in which case For 10 new branches only 2-3 need to be in the hinterland and can function with skeletal staffing and a working mobile payments platform. this is much like at their much maligned broker cousins and with investment next to existing HDFC Bank and other players likely to make more sense immediately and in the long run making more ATMs available to the road weary urban traveller across India’s well connected and telecom upgraded highways and rail lines. HDFC Bank manages very well with rural branches next to agri markets from its acquisition of failed banks of 1994 vintage and thru fresh investments it made in rich agri catchment areas in Punjab

That is not necessarily extra burden on existing NBFCs as ong as they understand the importance of safe capital investments than leveraging too fast too soon as the guidelines have indicated for the way forward