Mahindra Finance opts out of banking foray plan; Edelweiss, SREI set to apply

Mahindra & Mahindra Financial Services Ltd (Mahindra Finance), the flagship financial services arm of the Mahindra group, has backed out of its proposed entry into banking.

The non-banking finance company (NBFC) said on Monday that guidelines do not address transitional issues adequately.

“Mahindra Finance has decided not to proceed with the application for a banking licence, after reviewing the implications of the present guidelines issued by the Reserve Bank of India (RBI) for such an application, along with the clarification issued by RBI early this month,” said the company.

The company, which reaches out to 2.5 million customers across the country, said it would continue to grow as an independent NBFC.

The central bank's move to issue licences is intended to increase banking penetration in a country where only about half of the population has access to banking services. Hence, NBFCs with majority of borrowers in the rural areas are more likely to be favoured by the central bank.

However, Mahindra Finance said, “The RBI guidelines provide for the conversion of an NBFC into a Bank, but do not provide any flexibility for an NBFC and a bank to co-exist for a reasonable period of time. The regulations provide that cash reserve ratio and statutory liquidity ratio will be applicable from inception, though building of CASA will take some time for the newly converted bank.”

This anomaly, unfortunately, will impose an undue penalty on large, successful NBFCs with pan-India networks that wish to convert into banks, compared with small NBFCs with limited networks, it said.

The NBFC said a time-bound co-existence of a NBFC and a Bank in the same group would help set up a sustainable model and address the concerns of all stake holders, including customers.

“If the guidelines are amended to permit co-existence of an NBFC and a bank in the same group or if the concerns are addressed, the company would be happy to apply for a banking license,” said Mahindra Finance.

In the meantime, two other diversified financial institutions, Edelweiss Financial Services Ltd and SREI Infrastructure Finance Ltd have announced their plans for applying for banking licences after the central bank recently addressed the queries of all aspirants. The two firms said their boards have given the nod for applying to expand their exposure in the business.

The guidelines for licence for new banks in the private sector were issued on February 22, 2013 and the RBI followed it with clarifications on June 03, 2013. The last date to apply for the licence is July 1.

(Edited by Joby Puthuparampil Johnson)

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