The Reserve Bank of India unveiled a plan for the optional transformation of small finance banks (SFBs) into universal banks. The guidelines specify certain criteria that these banks must meet, including maintaining a minimum net worth of ₹1,000 crore, demonstrating net profit over the last two fiscal years, maintaining a low non-performing asset (NPA) ratio, and having a diversified loan portfolio.
Following the Reserve Bank of India’s recent release of new guidelines outlining a transparent framework for small finance banks (SFBs) to transition into universal banks, the majority of SFB shares have experienced an increase in value.
While AU Small Finance Bank is the sole existing player among SFBs that fulfills the eligibility criteria for becoming a universal bank, the increased clarity regarding the transition process for such lenders has positively impacted market sentiment.
Based on the six specified eligibility criteria, experts in the industry suggest that the majority of the 10 applicants who received “in-principle” approval in 2015 to establish SFBs may only be prepared to transition to universal banks next year. This is because they are currently not meeting the requirements of maintaining gross NPA and net NPA ratios of less than or equal to 3% and 1%, respectively, over the past two fiscal years.
The Reserve Bank of India specified that for an SFB seeking conversion into a universal bank, certain conditions must be met. These include being listed on a recognized stock exchange (with the exception of North East Small Finance Bank among the 10 SFBs), maintaining a minimum net worth of ₹1,000 crore as of the previous quarter (verified by audit), fulfilling the prescribed CRAR (Capital to Risk-Weighted Assets Ratio) requirement of 15% for SFBs, and having scheduled status with a satisfactory performance track record for at least five years.
Regarding the shareholding pattern, the RBI stated that there is no compulsory condition for an eligible SFB to have a designated promoter. However, in the event of transitioning to a Universal Bank, the current promoters of the eligible SFB must remain as promoters.
During the transition process to a universal bank, eligible SFBs are not allowed to introduce new promoters or alter existing promoters.
The Reserve Bank of India clarified that there won’t be a new mandatory lock-in period for minimum shareholding of existing promoters in the transitioned universal bank. This differs from the “Guidelines for ‘on tap’ licensing of SFBs in the private sector,” where promoters are subjected to a lock-in period of five years.
“The promoter shareholding dilution plan previously approved by the Reserve Bank will remain unchanged. Preference will be given to eligible SFBs with a diversified loan portfolio,” as stated in the circular.
The Reserve Bank of India stated that eligible Small Finance Banks (SFBs) must provide a comprehensive explanation for their transition into a universal bank. Additionally, upon transition, the bank will be subject to all relevant norms, including those concerning the non-operative financial holding company structure outlined in the mentioned Guidelines.
At present, there are a total of 11 Small Finance Banks (SFBs) in operation. These include AU Small Finance Bank (following the merger with Fincare SFB on April 1, 2024), Capital Small Finance Bank, Equitas Small Finance Bank, Suryoday Small Finance Bank, Ujjivan Small Finance Bank, Utkarsh Small Finance Bank, ESAF Small Finance Bank, Jana Small Finance Bank, North East Small Finance Bank, Shivalik Small Finance Bank, and Unity Small Finance Bank.
The initial batch of small finance banks, comprising ten institutions, received licenses in 2015, and the majority of them commenced operations in the fiscal year 2016-17. By the end of June 2023, a total of twelve SFBs, operating 6,589 domestic branches nationwide, were functional. Following the merger of AU Small Finance Bank and Fincare, the current count stands at 11 SFBs.
The regulatory body the reserve bank of India is receptive to the notion of such a transformation. Although licenses for universal banks were made available in 2016 through an “on-tap” system, none have been granted such a license thus far.
The regulator has stressed the importance of upholding high governance standards and ensuring compliance. However, the Reserve Bank of India (RBI) is content with the progress achieved by these banks over the past eight years.
In conclusion, the Reserve Bank of India’s guidelines for the optional transition of Small Finance Banks (SFBs) into universal banks have sparked positive market sentiment and increased clarity within the industry. While AU Small Finance Bank stands out as meeting the eligibility criteria, the majority of SFBs are expected to align with these requirements in the near future. This transformation represents a strategic shift towards stronger governance standards and compliance, marking significant progress in the financial landscape over the past eight years.
