RBI lays out a roadmap for voluntary transition of small finance banks to universal banks

The Reserve Bank of India on Friday laid out a roadmap for the voluntary transition of small finance banks (SFBs) to universal banks, prescribing criteria such as minimum net worth of ₹1,000 crore, net profit in the last two financial years, low non-performing asset (NPA) ratio and diversified loan portfolio.

businessline had reported on April 7 about the possibility of RBI issuing these guidelines for SFBs to convert into universal bank.

Eligibility criteria

Going by the six prescribed eligibility criteria, most of the 10 applicants, which were granted “in-principle” approval in 2015 to set up SFBs, may be ready to upgrade to a universal bank only next year as currently they are not meeting the gross NPA and net NPA of less than or equal to 3 per cent and 1 per cent, respectively, in the last two financial years, say industry experts.

The central bank said SFB wanting to convert into a universal bank should be listed on a recognised stock exchange (among the 10 SFBs only North East Small Finance Bank is not listed); have a minimum net worth of ₹1,000 crore as at the end of the previous quarter (audited); meeting the prescribed CRAR (capital to risk-weighted assets ratio) requirements of 15 per cent for SFBs; and scheduled status with a satisfactory track record of performance for a minimum period of five years;

When it comes to shareholding pattern, RBI said there is no mandatory requirement for an eligible SFB to have an identified promoter. However, the existing promoters of the eligible SFB, if any, have to continue as the promoters on transition to Universal Bank.

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Another aspect of these loans which is under scrutiny is whether the income assessment of the borrower has been done adequately.

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SFBs have adopted a ‘high cost-high return-high spread’ business mode

Small Finance Banks’ ‘universal’ conundrum

Currently, At least four small finance banks - Equitas SFB, AU SFB, Ujjivan SFB and Jana SFB - have indicated their intention to elevate to universal bank.

RBI may issue guidance on SFB upgradation to universal banks

Addition of new promoters or change in promoters will not be permitted for an eligible SFB while transitioning to universal bank.

Lock-in requirement

The central bank said there will be no new mandatory lock-in requirement of minimum shareholding for existing promoters in the transitioned universal bank. As per the “Guidelines for ‘on tap’ licensing of SFBs in the private sector”, promoter have a lock-in period of five years.

“There shall be no change to the promoter shareholding dilution plan already approved by the Reserve Bank. The eligible SFBs having diversified loan portfolio will be preferred,” per the circular.

The RBI said the eligible SFB will be required to furnish a detailed rationale for such transition. Further, on transition the bank will be subjected to all the norms including non-operative financial holding company structure (as applicable) as per the said Guidelines.

Currently, there are 11 SFBs – AU (Fincare SFB merged with AU on April 1, 2024), Capital, Equitas, Suryoday , Ujjivan , Utkarsh , ESAF Jana , North East , Shivalik and Unity.

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RBI lays out a roadmap for voluntary transition of small finance banks to universal banks