Convert NBFC to Banks

Conversion of NBFCs into banks is what many NBFCs wish for. For this purpose, it has to gather all the requisite documents and file the RBI for its approval. Later one has to operate its banking activities within the prescribed time.

A Non-Banking Financial Company is a company registered under the Companies Act, 1956 or 2013, which acts as a bank but cannot be interchangeably used with Banks. There is a vast difference between the two, with some attached drawbacks of being an NBFC. To overcome such disadvantages, many NBFCs try to convert themselves into banks. Conversion of an NBFC into a bank requires you to follow the proper procedure with prescribed documents.

Who is the leading Regulatory Authority for Conversion of NBFC into a Bank?

The primary regulatory authority for converting NBFC into a Bank is the Reserve Bank of India. However, the NBFC is authorized by the provisions of the RBI and the Ministry of Corporate Affairs.

What are the advantages of the Conversion of NBFC into a Bank?

1. More Reputation
2. Accepting of Deposits
3. High Amount of Liquidity
4. Insurance Based Services
5. Initial Public Offering (IPO)
6. Companies can draw cheques

What are the Eligibility Criteria for Converting NBFC into a Bank?

1. The minimum paid-up capital for a newly established bank is Rs. 200 crores. The initial capital will be increased to Rs. 300 crores within 3 years of the beginning of activities of the bank's business.
2. The total contribution of the promoters must be 40% of the paid-up money of the bank.
3. Private/public placements can take the initial money provided for liquidity.
4. Initially, the capital has to be Rs. 200 crores and after that, it has to increase up to Rs. 300 crores within 3 years of the beginning of the business. But the promoters have to collect extra money, which will amount to 40% of the newly generated money.
5. The capital will be locked for at least five years from the date of capital receipt by the bank.
6. The bank should regularly maintain a minimum Capital Adequacy Ratio (CAR) of 10%.
7. The new bank would be omitted to open 25% of its semi-urban and rural branches.
8. The headquarters of a new bank could be anywhere in India, as the promoters have agreed.
9. The newly established bank should be regulated by the Banking Regulation Act, 1949, RBI Act, 1934, other related laws, and SEBI Regulations on public matters and different strategies regarding the banks listed.
10. The suggested bank should maintain an arm’s length relationship with the promoter's business entity and other branches.
11. The relationship between the promoter business entities and the proposed bank will be like that between two individuals and unconnected entities.
12. The newly established bank would have to experience a priority sector lending target of 40% of net bank credit as relevant to other domestic banks.
13. The establishment of a mutual fund or a subsidiary will not be allowed by the newly established bank for at least three years from the beginning of the company.
14. An industrial firm will not be eligible to be funded by newly established banks. However, in the case of separate companies that are indirectly or directly connected to huge industrial firms in any manner, they are allowed to invest in the equity of a newly established private sector bank but up to a limit of only 10%.

What are the Vital Documents Required for Converting NBFC into a Bank?

1. Certificate of Registration of the Company;
2. Copy of MOA (Memorandum of Association);
3. AOA (Articles of Association);
4. Auditors’ report;
5. Approval letter received from the Reserve Bank of India (RBI);
6. Any information related to maintaining liquidity;
7. KYC (Know Your Customer) documents of members and directors;
8. Board Resolution related to the process of conversion;
9. Any other relevant documentation as required by the RBI.

What is the Process of Conversion of NBFC into a Bank?

Step 1:

A report on the practicality study has to be provided by the company or entity. Once this is done, file with the competent regulatory authorities in the prescribed manner. All applications should accompany a report related to the feasibility study as provided by the bank mentioning the following:

1. The product types that the bank offers, 
2. The technology used by the bank and
3. The bank offers other services.

Step 2:

NBFC has to provide the following relevant details to the RBI:

1. Members, 
2. Directors, 
3. Other management executives indulged in managing the procedures of the bank,
4. Details regarding foreign involvement, if any. 

Step 3:

All applications are then sent to an advisory committee which the RBI establishes. This committee examines the applications properly on whether NBFCs fulfill all the necessities for converting NBFC into a bank. The advisory committee decides to give their approval or refusal after properly scrutinizing the application form.

Step 4:

Suppose the application for the conversion of NBFC into a bank goes through scrutiny and receives approval. In this case, the bank is subject to immediately beginning business activities within the specified time of 1 year or revoking the approval.
If the application for the conversion has some extra necessities or alterations in addition to getting approval from the RBI, then the RBI would consider the same and later grant consent. Often, the RBI puts some conditions that need to be followed by the applicant bank. Otherwise, the RBI has all the power to cancel the approval status.

What are the necessities for Post Compliance for the Conversion of NBFC into a Bank?

1. Maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) : Once the conversion procedure is complete, the bank must ensure that the CRR and SLR are maintained as per the laid provisions of the RBI.
2. Compliance : The bank has the utmost responsibility to make itself aware of all the notifications released by the RBI and other relevant authorities affecting its business.
3. Minimum Net Worth : Initially, a bank must have a net worth of Rs. 200 crores to operate its banking activities. And after 3 years from the bank's operations, its net worth must increase to more than Rs. 300 crores. Such necessities related to net-worth can increase to Rs. 500 crores over a while.

Conclusion

While undergoing the conversion process, one should think of a long-term plan. The business model of NBFCs plays a very crucial role in this. NBFCs undoubtedly get some added benefits on successful conversions. On getting approval, new banks are obligated to follow all the post necessities till the time the approval of the RBI becomes permanent. This article deals with all the essential information on the conversion of NBFCs into banks