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The Reserve Bank of India appears to have relaxed its policy on granting licences to foreign banks for setting up non-banking finance companies (NBFCs). For the first time in recent years, the central bank has issued an NBFC licence to a foreign bank — Deutsche Bank.

The last time RBI had issued an NBFC licence was in 2003 when it allowed Standard Chartered Bank to open a fully-owned NBFC. According to industry sources, the bank is said to have received the licence last week. Other foreign banks including HSBC are also awaiting RBI licence for a non-banking finance company. The new NBFC of Deutsche Bank will be a wholly-owned subsidiary of the German major and is likely to do both corporate and consumer finance business. The NBFC will be capitalised by over $50 million. It had applied to RBI for the licence in 2004 and had subsequently received the FIPB (Foreign Investment Promotion Board) approval for the same. The new company Deutsche India Holdings could be the holding and investment company for various existing and future operating subsidiaries of the bank in India. The German bank had kicked off its retail business in the country in the latter half of 2005. It currently offers credit cards, personal loans and home loans.

In the retail segment, the Deutsche group is likely to use NBFC for its consumer finance and mortgage business while on the corporate side it may look at structured finance. RBI has been concerned that foreign banks were using a combination of the banking and NBFC licence to defeat the purpose of branch licensing and was, therefore, going slow on these licences. Earlier, when foreign banks with primary dealership arms sought to merge the primary dealership business with the banking unit, the central bank turned down proposals to convert the primary dealership companies into non-banking finance companies. The central bank had asked these foreign banks, in fact, to surrender their licences for entities which were looking at such conversions.

Unlike banks, where RBI gives not more than two to three branch licences, there are no such restrictions on NBFCs. Also, unlike banks, an NBFC can also do acquisition financing. In most cases, foreign banks have been using their NBFCs for consumer finance business and corporate finance business such as promoter financing and acquisition financing.

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