NBFC to Bank Conversion in India

NBFC is a financial company that is quite similar to a bank in the sense that it provides loans and other financial services to customers. However, it does not operate like a traditional bank as it cannot accept demand deposits or offer full banking services. Sometimes, individuals set up an NBFC but with time as their business grows, they realize that their business has greater potential and can function as a full-fledged bank. Therefore, they decide to seek RBI approval so they can convert their NBFC into a bank and expand their operations legally. 

The first NBFC that converted into a bank in India was Kotak Mahindra Finance Ltd. This NBFC converted into a bank after receiving approval from the RBI and was renamed Kotak Mahindra Bank Limited in 2003. After that, many other NBFCs also converted into banks. In this blog post, we shall explain to our readers the NBFC to bank conversion process in India.

Reserve Bank of India: Concerned Authority for Approving NBFC to Bank Conversion

The Reserve Bank of India, also known as the Central Bank, is the concerned authority when it comes to registering and regulating NBFCs as well as the banks (universal banks, small finance banks, payment banks, etc.) in India. Without the approval of RBI, no entity can operate as an NBFC or a bank. 

The RBI regulates NBFCs under the RBI Act of 1934. It grants approval to NBFCs in the form of a Certificate of Registration, also known as NBFC license. Similarly, it grants approval to banks in the form of a banking license under the Banking Regulation Act, 1949.

It is possible to convert an NBFC into a full-fledged bank. However, this can only be done with prior approval of the RBI. To obtain such approval, the prescribed eligibility conditions as well as the regulatory process must be properly followed.

Eligibility Criteria for Converting an NBFC into a Bank

An NBFC can only be converted into a bank if it fulfills the following eligibility requirements:

• In order to convert an NBFC into a bank, the minimum paid up capital requirement must be fulfilled. A small finance bank requires Rs. 200 as the minimum paid up capital. 

• There must be some contribution on the part of company promoters. 

• The NBFC should have a consistent track record of strong financial stability and profitability.

• It must ensure adherence to all the corporate governance norms.

• Additionally, the NBFC must align with all the statutory and regulatory requirements pertaining to auditing, reporting and operational transparency before considering conversion into a bank.

• The key promoters and directors of the NBFC must meet the fit and proper criteria set forth by RBI.

• In addition to the above requirements, the entity must meet all other mandatory requirements set forth by the central bank for an NBFC to bank conversion.

Documents Required for Converting NBFC into a Bank

The following documents are necessary for conversion of an NBFC to a bank;

• Certificate of Registration of the Company;

• Copy of Memorandum of Association;

• Copy of Articles of Association;

• Information related to maintaining liquidity;

• KYC documents of members and directors;

• Board Resolution regarding conversion of an NBFC to a bank;

• Auditor Report;

• Authorization letter issued by RBI;

• Any other relevant documentation needed by RBI.

Procedure for Conversion of NBFC into Bank

The NBFC into bank conversion process is provided below:

• The entity must prepare and provide a report related to the feasibility study to the authority in the prescribed format. In the report, the entity must also mention the type of products offered by the bank, the technology utilised by the bank and other services provided by the bank.

• Thereafter, the entity must provide all the required information pertaining to members, directors and other key management executives involved in operational management of the bank. In case of foreign contribution, the relevant details regarding the same must be mentioned.

• Once the RBI receives the application for conversion, it will take into account all the factors affecting the conversion procedure. Then, the application will be forwarded to the advisory committee.

• The advisory committee will examine applications on a case by case basis to assess whether the requirements for converting an NBFC into a bank are met or not. After carefully reviewing the application, the committee will then make the decision regarding conversion approval/rejection.

• If the application gets approval from the committee, the bank must begin business operations within a period of one year. If operations do not commence within this required time period, then the approval will become invalid for the entity.

• In case the application requires any modifications or additional requirements after approval has been granted for conversion, the RBI will consider these changes and then it may or may not grant approval for the same. The Central Bank will impose certain conditions that must be fulfilled by the bank. Compliance is essential as failure to comply with the imposed conditions may result in the revocation of the approval.

Conclusion

The NBFC can be converted into a universal bank or a small finance bank after receiving prior approval from the Reserve Bank of India. For approval, an application must be submitted with the central bank in the prescribed format. 

Need assistance in starting an NBFC in India or in ensuring post-incorporation compliance requirements? Get in touch with our NBFC registration consultants at Registrationwala. 

Frequently Asked Questions (FAQs)

Q1. Can an NBFC be converted into a full fledged bank?

A. Yes, an NBFC can be converted into a full fledged bank with the prior approval of RBI.

Q2. Which government authority approves NBFC to Universal Bank conversion?

A. The Reserve Bank of India is the concerned government authority for seeking approval of NBFC to Universal Bank conversion.

Disclaimer: While we have made every effort to provide accurate and latest information in this article, we do not guarantee the 100% completeness or accuracy of the information. This content is for informational purposes only and should not be treated as business, legal or financial advice.

Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.