RBI’s New Guidelines for Small Finance Banks to Become Universal Banks

The Reserve Bank of India (RBI) has recently introduced a significant shift in its banking regulations that could reshape the landscape for Small Finance Banks (SFBs). These new guidelines allow SFBs to transition into Universal Banks, granting them a wider scope of operations and a more extensive customer base. Let’s break down these new guidelines and explore how AU Small Finance Bank, among others, stands to benefit from this opportunity.

The RBI’s Framework for Transition

The guidelines from the RBI set clear eligibility criteria for SFBs that wish to transition to Universal Banks. Here’s what they require:

• Track Record: A minimum of five years of satisfactory performance.
• Net Worth: A minimum of Rs 1,000 crore at the end of the previous quarter (audited).
• Stock Exchange Listing: The SFB’s shares must be listed on a recognized stock exchange.
• Capital Adequacy: Meeting the prescribed Capital to Risk-weighted Assets Ratio (CRAR).
• Profitability: Net profit recorded in the last two financial years.
• Asset Quality: Gross Non-Performing Assets (GNPA) and Net Non-Performing Assets (NNPA) must be less than or equal to 3% and 1%, respectively, over the last two financial years.

Additionally, there are specific conditions regarding shareholding patterns and promoters during the transition. These include:

• Promoter Structure: Existing promoters will remain, with no changes allowed during the transition.
• Shareholding: No new mandatory lock-in requirement for existing promoters.
• Loan Portfolio: SFBs with a diversified loan portfolio are preferred for transition.

Eligible SFBs must submit their application to the RBI’s Department of Regulation in Mumbai, with a detailed rationale for their transition. Once transitioned, the bank will adhere to all relevant norms, including the Non-Operative Financial Holding Company (NOFHC) structure.

How AU Small Finance Bank Could Benefit

AU Small Finance Bank (AU SFB), one of India’s leading small finance banks, has shown interest in this new opportunity. Uttam Tibrewal, Executive Director and Deputy CEO of AU SFB, welcomed the guidelines and mentioned that the bank is evaluating its next steps towards becoming a Universal Bank. He acknowledged that the bank meets many of the criteria outlined in the guidelines and will soon discuss the conversion process with its board.

“The recent RBI Guidelines on voluntary transition of Small Finance Banks to Universal Bank is a welcome step and provides clarity to all SFBs,” Tibrewal said. With a solid track record, profitability, and net worth, AU SFB appears to be well-positioned to make this transition.

The Road Ahead for AU SFB

In October 2023, AU SFB announced its merger with Fincare SFB, receiving RBI approval for the same in March 2024. While the bank is currently focused on integrating with Fincare SFB and scaling its Authorised Dealer-I business for cross-border trade and Forex, the potential to become a Universal Bank is a tantalizing prospect.

This transition could open new doors for AU SFB, allowing it to offer a broader range of services and expand its reach. With the backing of the RBI’s new guidelines, the future looks bright for small finance banks aiming for universal status. Stay tuned as AU SFB and others explore this new avenue, reshaping India’s banking landscape in the process.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.