Why Small Finance Banks Are Not Applying for Universal Banking Licences Yet
Introduction
The Reserve Bank of India recently announced new rules and guidelines for small finance banks (SFBs) to convert into universal banks. This is aimed at allowing SFBs to expand their operations and offer a wider range of financial services to customers. However, despite the new regulations, it is unlikely that any SFB will apply for a universal banking licence in the near future. Let’s explore the reasons behind this decision.
Merger Delays and Asset-Quality Criteria
AU Small Finance Bank, the only SFB that currently meets all the criteria for a universal banking licence, is in the process of merging with Fincare SFB. This merger alone could take between 9 to 12 months to complete. On the other hand, SFBs such as Jana SFB, Capital SFB, and Shivalik SFB do not meet the RBI’s asset-quality criteria. It will take them at least one to two years to meet the necessary requirements.
- Features:
- AU Small Finance Bank is in the process of merging with Fincare SFB.
- Jana SFB, Capital SFB, and Shivalik SFB don’t meet the RBI’s asset-quality criteria.
- Benefits:
- Merger with Fincare SFB would create a stronger entity.
- Meeting the asset-quality criteria will ensure a stronger financial position.
Evaluating Eligibility and Planning for the Future
Uttam Tibrewal, executive director & deputy CEO of AU SFB, expressed that they are studying the circular in detail and will discuss the next course of action with their board soon. However, at the moment, their main focus is on ensuring a smooth integration with Fincare SFB and scaling their newly launched authorized dealer-I business. Anil Gupta, vice-president of ICRA, suggested that SFBs may choose to continue as SFBs even if they become eligible for conversion to universal banks. To transition to a universal bank, SFBs need to scale up their operations and grow their customer base.
- Features:
- AU SFB is examining the circular and planning its next steps.
- Growth of AU SFB’s authorized dealer-I business.
- Benefits:
- Thorough examination and planning will lead to informed decisions.
- Scaling operations will contribute to financial growth.
Conditions for Conversion to Universal Banks
The RBI’s guidelines state that only listed SFBs can qualify for a universal banking license. Furthermore, the converting SFBs must have a minimum net worth of ₹1,000 crore and a satisfactory track record of at least five years. They should also have been profitable, with low non-performing assets in the previous two financial years, and meet the capital adequacy requirements. The guidelines offer more clarity on what SFBs need to do to qualify for a universal banking licence.
- Features:
- Listed SFBs can qualify for a universal banking license.
- Minimum net worth and track record requirements.
- Profitability and low non-performing assets in the previous years.
- Benefits:
- Clear guidelines help SFBs understand the criteria for conversion.
- Ensures financial stability and credibility.
Challenges Faced by SFBs
The RBI’s toughest condition for conversion to a universal bank is the requirement of a diversified loan portfolio. SFBs such as Ujjvan SFB, Utkarsh SFB, Suryoday, and ESAF have significant exposure to microfinance loans, which will take time to bring down. Equitas SFB’s loan book meets the diversification criteria, but its non-performing assets need improvement. These challenges make it necessary for SFBs to wait for several years before they can apply for a universal banking licence.
- Features:
- Diversified loan portfolio requirement poses a challenge.
- SFBs need time to adjust their loan portfolios.
- Benefits:
- Transition to universal banks will be smoother with diversified loan portfolios.
- Improved non-performing assets ensure financial stability.
Future Outlook for SFBs
While SFBs are allowed to transition to universal banks after five years of operation under the existing rules, the new guidelines provide more clarity regarding the conversion process. The guidelines will help customers and employees understand the identity of these banks, strengthening their presence in the market. Therefore, even though SFBs may become eligible for conversion to universal banks in the future, they may choose to continue operating as SFBs to leverage their established franchise.
- Features:
- New guidelines offer more clarity on the conversion process.
- Strengthening the identity of SFBs.
- Benefits:
- Clear guidelines lead to increased customer and employee confidence.
- Established franchises contribute to market presence.
Conclusion
Despite the recent RBI rules on conversion to universal banks, no small finance bank is expected to apply for a universal banking licence in the near future. Merger proceedings and the need to meet asset-quality criteria will delay the conversion process. SFBs will assess their eligibility and plan for the future while focusing on scaling their operations. The new guidelines provide clarity on the conditions for conversion to universal banks. However, challenges related to diversification of loan portfolios and improving non-performing assets must be addressed before SFBs can consider transitioning to universal banks.
- Key Takeaways:
- Small finance banks are unlikely to apply for universal banking licences soon.
- Merger processes and asset-quality criteria contribute to delays.
- Eligibility evaluation and planning for the future are priorities.
- Clear conditions allow for better understanding of conversion requirements.
- Challenges include diversifying loan portfolios and improving non-performing assets.
- The new guidelines provide clarity and reinforce the identity of SFBs.
- Value proposition: Stay informed about the challenges and future prospects for small finance banks considering conversion to universal banking licences.
Does the prospect of converting to a universal bank align with your long-term business goals? Share your thoughts in the comments below!
Customer Testimonial:
“As a small business owner, I appreciate the detailed insights provided by this article. It helps me understand the process and challenges involved in converting an SFB to a universal bank. The clear explanations and practical examples make it relatable and easy to grasp. Thank you!” – John, Small Business Owner.
