Transition woes: SFBs' long bumpy road to becoming universal banks

Reserve Bank of India (RBI) Governor Sanjay Malhotra, in an interview to Business Standard this week, said the central bank would soon take a decision on the applications made by small finance banks (SFBs) to convert into a universal bank.  “The proposed review of the bank licence framework shall be a study and assessment of the extant framework, in the context of current as well as the evolving economic priorities, so that banks are able to meet the funding needs of aspirational India. As far as SFB’s applications for transition into Universal Banks are concerned, these applications are under various stages of assessment and processing. A decision on these applications will be taken soon,” he said. 

So far, three SFBs — AU Small Finance Bank, Ujjivan Small Finance Bank, and Jana Small Finance Bank — have made an application to the RBI to convert into a universal bank. While AU SFB applied in September last year, Ujjivan SFB applied in February, and Jana SFB applied earlier this month. According to RBI guidelines, to be eligible for conversion into a universal bank, only listed SFBs will qualify. 

Those intending to convert must have a minimum net worth of ₹1,000 crore at the end of the quarter preceding the application. Also, the SFBs must have a scheduled status and a satisfactory track record of at least five years, with a gross non-performing asset (NPA) of 3 per cent or less and a net NPA of 1 per cent or less in the past two financial years. 

Furthermore, interested SFBs must have reported a net profit in the past two financial years and met the prescribed capital adequacy norms. 

The RBI requires SFBs to provide a detailed rationale for their desire to convert into a universal bank. Those with a diversified loan portfolio will be preferred. 

Business Standard examines the listed SFBs — excluding AU SFB, Ujjivan SFB, and Jana SFB — against the various criteria set by the RBI for conversion into a universal bank. 

Data suggests that, except for Equitas Small Finance Bank, most others remain far from meeting the eligibility requirements, as the financial year 2024-25 (FY25) proved to be a challenging year for them due to stress in the microfinance segment. Most SFBs saw asset quality worsening in FY25.