Reserve Bank of India is ready with its draft policy guidelines on NBFCs and they could have interesting and material changes for both NBFCs and for the banking sector, say Bhaskar Ghose, MD of IndusInd Bank and Jayprakash Sinha, head of research and director at Ambit Capital.

According to Bhaskar Ghose, the guidelines will cool down the overheated sectors. Jayprakash Sinha expects these guideline to affect smaller NBFCs more. According to Sinha, most large NBFCs are equipped to embrace the new guidelines. He also states that the guidelines would impact the cost of funds of the NBFC stocks.

CNBC-TV18 shares with domain-b its interviews with Ghose and Sinha:

Just start to put the only listed instance in perspective of Cholamandalam and DBS. What will happen with these new recommendations?
Sinha: You have to understand that they have mentioned that the foreign banks who are looking to enter in this space, have already taken 37.5 per cent. At this point in time, we don't see anything going back on that.

This fairly restricts that wherever you have got automatic approval, you should not embark beyond those 19 activities, which are being allowed to you at this point in time. What our understanding of Chola-DBS is they are fairly restricting within that limit. So it is not going to impact much. But it will impact the refinancing or borrowing from the banks.

If you look at the space, they have almost borrowed around 10% of their entire liabilities from the banking segment. So that will be little costlier at this point in time. So cost of overall funds may increase from the current level.

A lot of people have been saying that this could have many positive rub offs for the banking sector, do you agree?
Ghose: Absolutely. I will talk about a few. First and foremost, since it restricts NBFCs from lending as freely as they have done for a number of reasons, a lot of the credit demand will now move now on to banks and obviously that is good news for banks.

Banks will be able to re-price with the demand remaining roughly the same, the supply being cut down of supply of finance to sectors like capital markets, to sectors like housing, to sectors like automobile financing.

Certainly, it is good news for banks because demand being the same, supply sources being cut down, it simply means that banks can now re-price many of their loans to any bank, which is very heavy into the retail sector. It is good news for us because certainly the yields on our retail loans will go up.

In fact, as a consequence with bank finance moving out of the corporate sector to some extent again, the supply to the corporate sector will come down. Hence I hope that we will be able to re-price some of our corporate loans as well.

The one thing that is likely to be affected though is flow of funds to the capital market especially on the retail side. There are restrictions on how a bank can lend margins of 2:1, banks cannot lend more than Rs20 lakh to a single individual borrower. There is a 40 per cent cap on total bank exposure to the capital market of its net worth.

These were restrictions, which were not applicable to NBFCs, by and large. This will have an impact of restricting flow of funds to the capital markets sector in terms of financing retail players in the capital markets. And again, it is good news for us because it simply means that rate of interest on some of these loans will go up.

Do you expect to see an impact on capital flow? Do you expect NBFCs and their funding cost to go up or get more complicated for them?
Sinha: Yes, it will be more complicated from the current status because you are restricting them on the public deposits side. Also, you are restricting them from taking bank loans, both directly as well as indirectly. So it will create restrictions from the free sourcing of funds at this point in time. To that extent, the cost of overall fund is likely to go up.

Just one word on IndusInd bank, because you have been quite keen to launch PMS services. Will you indeed go ahead and do that now?
Ghose: That is further good news. All this time, as you are aware, we were not allowed to offer PMS (portfolio management services), or even if we did manage to get our hands on NBFCs, it would have been a bank sponsored NBFC. Therefore there would have been restrictions on what we could do with discretionary portfolio management services.

Now the RBI has made it quite clear that for bank sponsored NBFCs, they are prepared to consider requests for discretionary PMS on a case-by-case basis. So this is certainly very good news for us.

It's not so good news for banks, that already have NBFCs, which were using these, in a sense, to get around exposure limits on single borrowers or groups of borrowers spreading it out between themselves and their NBFC's subsidiaries. But for banks such as ourselves, which were not using this route, these recent draft guidelines is excellent news indeed.

Do you think there could be a bit of a problem with the financing of large IPOs, like DLF and Cairn, which are coming up because of what the Reserve Bank is saying right now? Will banks be able to make up the shortfall of the kind of money, which might go through from the NBFC towards such funding?
Ghose: In any case, we see these guidelines as a means that the RBI has used to cool down some of the overheated sectors of the economy. These NBFC guidelines will certainly have that impact.

As far as IPO funding is concerned, that is something that RBI has had its eye on for sometime. And to some extent, yes, banks will step in and fill in the gap left by NBFCs and so on. But as I mentioned, there are restrictions on what a bank can do in respect of individual funding and retail funding.

These were restrictions, which were not applicable to NBFCs. In respect of the Rs20 lakh limit in respect of the extent of margin funding, overall although the banks will take up some of the slack, overall there might be an impact on IPO funding, which for us will translate into probably higher rates of interest on such loans.