The Department of Financial Services (DFS) Secretary M Nagaraju recently said India needs new, and larger banks to achieve the goal of ‘Viksit Bharat’ by 2047.

In this regard, he suggested extending banking licence to non-banking financial companies (NBFCs) and/or upgrading small finance banks (SFBs) into universal banks.

“Now, how do we get these new banks. We have two-three means of having them. One is, of course, NBFCs. A large number of NBFCs are currently available; some of them could always be thought of (converting into banks). The other is SFBs, which can also transition to universal banks...” he had said at an event.

But are shadow banks willing to convert into banks?

Not unless forced to, three senior executives at large NBFCs told businessline, requesting anonymity.

Indian NBFCs have different regulatory standards compared to banks, and several leading or large NBFCs are run by big corporates. For instance, Bajaj Finance, Tata Capital, L&T Finance, Aditya Birla Finance, and Piramal Finance are promoted by corporate giants.

Traditionally, the Reserve Bank of India (RBI) refrains from granting bank licence to corporate groups.

No takers

“The RBI’s regulatory and supervisory approach towards NBFCs has changed quite sharply over the last few years. It has come almost on par with banks. What they would be aiming for is to convert upper layer NBFCs into banks. Of course, we need a glide path to lower promoter stake and meet other regulatory requirements of a bank,” a top executive of a large NBFC said.

“However, most of the upper layer NBFCs are run by corporate houses, to whom the regulator does not want to extend banking licence. The regulator does not even allow a majority of NBFCs to accept deposits. If there is a fresh thinking on granting corporate houses bank licences, then Reliance and Tatas would be the first to apply,” he said.

Other than the top tier NBFCs, there are not many entities that would want to convert into a bank, due to their small business operation or capital issues.

Among the large NBFCs, Sundaram Finance may be a candidate, but most NBFCs are content with being non-banks.

However, if the regulator forces large NBFCs to convert into banks, then there would be no option, the official said.

Shareholding norms

Another large NBFC executive said that while his company has built tech and security infrastructure on par with a bank, it would not want to convert due to the RBI guideline mandating promoters to hold a minimum of 40 per cent of the bank’s paid-up voting equity capital, which shall be locked-in for five years from the date of commencement of the bank’s business, to ensure skin in the game.

The promoter group shareholding shall be lowered to 15 per cent within 15 years from the date of commencement of business.

“Why would we want to reduce our stake by converting into a bank? As an NBFC, we are profitable, have a large scale and come with a clean slate,” the executive said.

To be sure, Kotak Finance was the only pure-play NBFC that successfully converted into a bank (Kotak Mahindra Bank). In the process, the bank’s promoter Uday Kotak had his fair share of differences with the regulator on voting rights. The RBI also recently rejected Annapurna Finance’s application to convert into a bank, indicating its unease over granting fresh licences.

All SFBs, except AU SFB and Capital SFB, had a microfinance institution (MFI) background.

Glide path

Even if NBFCs were to convert into banks, they will need a glide path to build a liability base, as most do not accept deposits currently.

“Building liabilities is not an easy task as, historically, NBFCs have not done it. Just because you become a bank, you won’t be able to attract it. And, importantly, what needs to be determined is which NBFCs are present in the retail segment. Retail segment NBFCs will be able to build a liability franchise better. The size of captive customers in the retail segment will determine the success of your liability base, as corporate MSME (micro, small and medium enterprises) deposits are mostly current account,” said Vivek Iyer, partner at Grant Thornton.

Further, the quality of customer service required on the retail liability front is far higher than what is provided on the retail credit side.

“On the retail credit side, it’s about underwriting and collections, and the customer behaviour is different as a borrower. But on the deposit side, it is a loan that a customer provides you and hence their behaviour differs. So the mindset shift would be important,” Iyer said.

On the ownership structure, there needs to be a glide path, Iyer said, or they could consider allowing non-operating holding company structure, which was initially envisaged for MFIs that became SFBs. “That is a template that can be leaned on, should the regulator want NBFCs to transition to a bank,” he said.

Prakash Agarwal, partner at Gefion Capital, said: “With the system becoming stronger, and with stronger supervisory framework and governance standards improving, you might see even the corporate, at some point, (getting bank licence)... the regulator’s rethinking that as well.”

While the RBI’s aversion to granting corporate groups a banking licence endures, if the entity ensures that its promoter plays a strategic investor role with limited voting rights and a tight leash on related-party transactions, then policymakers may have a rethink.

Analysts say that if an NBFC grows beyond a size, it cannot sustain itself. NBFCs do earn higher margins, but cost of funds remains high and they have to generate business growth, provisions, tech, and hiring from the profits. As scale builds, banks are more profitable on account of lower cost of funds.

So, with the NBFC Kotak Finance (which was granted a bank licence in 2003) successfully converting into a bank (Kotak Mahindra Bank), and a host of NBFC-MFIs transitioning into SFBs and giving a good account of themselves over the last 10 years (with one among them — AU SFB — granted ‘in-principle’ approval in August to transition to a universal bank), the NBFC space is ripe with possibilities. A bank licence is a natural progression for some NBFCs.

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Published on November 24, 2025