Indian financial institutions (FIs) are fast getting their act together to counter stiff competition from the banking entities. They are also gearing up to transform themselves into 'Universal Banks', to capitalize on the opportunities available in the sector with the opening up of the Indian economy.

While some of the major banks are also now catering to demand for long-term and project finance, FIs remain the conventional sources of the same. With most FIs being converted to banks (ICICI [Get Quote], IDBI and the like), the term FI has now remained restricted to NBFCs and HFCs.

Key Positives
	Tax benefits:  The finance ministry proposed amendments in the tax laws to offer tax breaks to FIs merging with banks (with retrospective effect). This will be beneficial to FIs that have got converted to banks ( IDBI and the like).
	Conversion into banking entity:  The RBI has allowed Non-banking finance companies (NBFCs) with a good track record and net worth over Rs 2 bn to convert into a commercial bank. However, the number of licenses to be issued may be restricted to two or three of the best acceptable proposals. Conversion into banking entity will enables the FIs to access low cost deposits and improve their margins.
	Lower capital requirement:  The RBI has reduced the capital adequacy requirement of NBFCs as far as lending to the housing sector is concerned. The RBI has reduced the capital requirement to 50% from the earlier 100% and this has helped the NBFCs to increase their exposure to the housing sector due to availability of a higher quantum of capital.
	Policy benefits:  HFCs are exempted from paying withholding tax on foreign currency borrowings. This enables HFCs to tap foreign markets to raise funds at lower cost.
	Enhanced foreign participation limits:  FII limits for HFCs and financial institutions have been increased to 49% from earlier 40%. Automatic foreign direct investment in NBFCs is also allowed up to 100%.