Banking sector was always enjoying a Tier 1 position in the financial ecosystem of the country while NBFCs were at the Tier 2 or 3. But that was then. Scene is changing. At least for the Old Sector Private Banks.
Old Private Sector Banks have not really been doing well either on the financial front or on the stock market front. They seem like as if they are slowly becoming irrelevant especially in front of the New Private Sector Banks. Almost all these banks date to pre independence era.
Earlier, old generation of private sector banks were being taken over by the new generation private sector banks. Examples are:
Lord Krishna Bank was merged with Centurion Bank of Punjab.
Sangli Bank merged with ICICI Bank
Vysya Bank was merged with the MNC ING Bank and became ING Vysya Bank
ING Vysya Bank later merged with Kotak Mahindra Bank
Currently, one new lease of life which is coming by default to these banks as a lease of life is capital rich NBFCs being allowed to merge with these institutions. NBFCs like Capital First migrated toward deposit base by merging with a bank. Other micro finance companies or NBFCs that converted into small finance banks also migrated toward a deposit base
A characteristic feature of these banks is their attractive ‘low cost deposits’ and a strong local presence. However, the bone of contention in all such case is always the huge cost of maintaining SLR and CRR by the emerging, combined entity. Some examples of mergers or potential mergers are:
IDFC Bank’s merger with Capital One.
Lakshmi Vilas Bank’s merger with Indiabulls Housing Finance is awaiting RBI nod
Allowing strong NBFCs to take over weak Old Private Banks will sort out RBI’s headache of looking after possible collapse of these weak banks.
Whenever NBFCs reach a certain size, it becomes imperative for them to acquire a bank or apply for a banking license to keep growing. NBFCs can not raise low cost finance (read CASA). As a matter of fact, NBFCs are not even able to raise Fixed Deposits at competitive rates. Even with Fixed Deposits, which are long term deposits, in their kitty, the asset liability mismatch would be detrimental to build a healthy portfolio. Majority of the NBFCs lend for short term, retail loans.
However, the ILFS crisis has worked against the leverage of NBFCs. The below chart will show the potential buys and the potential buyers. DHFL, another NBFC too, looks under some distress.
As is clear from the above, LVB and KVB have high NPA %age and are finding it difficult to sustain. Two banks not mentioned here are:
Catholic Syrian Bank and Tamilnad Mercantile Bank. These are also potential take over candidates.
One area where NBFCs score much above the Old and New Generation Private Sector Banks as well as the Public Sector Banks is the penetration of the former in the rural, unbanked areas.