Why are top-notch NBFCs thinking of converting themselves into banks?
Cost of NBFC borrowings are high. Conversion into banks is one option before NBFCs for reducing the cost of their funds.

If NBFCs convert themselves into banks, that they are sure to lose the advantages they have over banks. Does this strategy make sense?
I can speak about Tata Finance. We are already into priority lending by choice. This is our core expertise. However, NBFCs need to balance the pros and cons in converting themselves into banks. NBFCs are sure to find they do not have many benefits in being an NBFC and thus they will not change their decisions to become banks.

What would happen to the NBFC sector if most top-notch NBFCs end up becoming banks?
Considering the fact that NBFCs have a large basket of assorted financial products, it is irrelevant if a few of them are converting themselves into banks. There will still be room for many in the sector. Moreover, converting into banks will not be easy for NBFCs. There are quite a few issues involved and implementation will be a problem. What about the capital needed by the converted entity? If RBI is going to ask Tata Finance to bring in a capital of Rs 200 crore, we might not be able to bring in that amount.

Shakeouts and consolidation have begun to happen in the NBFC sector. Is this affecting the assistance-needy sectors that are served by those NBFCs which were taken over or closed down?
Not really. Anyway, NBFCs which were taken over or those NBFCs which closed down neither had money power nor continuous flow of funds. These NBFCs had no wherewithal and capacity to borrow and lend on a continuous basis. In the financial services sector, NBFCs need money on tap.

These NBFCs were fund-starved and they just came in and went out.

What advantages do NBFCs have over banks and financial institutions in the area of fee-based services?
NBFCs have an advantage over banks and financial institutions in syndication of funds which is the main element of fee-based services. NBFCs can offer faster funds syndication.

What should be the strategy for survival for smaller players in the NBFC sector?
Smaller players in the NBFC sector should assess their strengths. They should concentrate on those products and markets where they have an edge over larger players.

For instance, they could concentrate on offering advisory services or focus on a particular activity such as mergers and acquisitions.

How best should NBFCs manage their assets and liabilities?
NBFCs should have a centralised treasury that looks at the tenure of funds. They should match short-term borrowings with short-term lending and long-term lending with long-term borrowings.

Can NBFCs offer products and services that are distinctly different from those offered by their competitors?
Yes, they can. NBFCs need to strategise by taking into account the size and the needs of customers. For instance, our car finance product has variants. NBFCs should go in for product innovation in a bid to offer products that suit the needs of their customers. Today, if a customer wants a lower equated monthly installment, Tata Finance will try to structure a product accordingly.