The Reserve Bank of India (RBI) on Friday came out with guidelines for the voluntary conversion of small finance banks (SFBs) into universal banks.

The “Guidelines for ‘on-tap’ Licensing of SFBs in Private Sector”, dated December 5, 2019, provide a transition path for SFBs to become universal banks. “Such conversion shall be subject to the SFB’s fulfilling minimum paid-up capital/net worth requirement as applicable to universal banks, satisfactory track record of performance as an SFB for a minimum period of five years, and the RBI’s due diligence exercise,” the banking regulator said a release, stating that these instructions are issued in exercise of the powers conferred on the RBI under Section 22 (1) of the Banking Regulation Act, 1949.


To be eligible for conversion into a universal bank, the RBI stipulates that only listed SFBs will qualify. Those intending to convert must have a minimum net worth of Rs 1,000 crore. 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 universal bank. Those with a diversified loan portfolio will be preferred.


“The application for transition from SFB to universal bank shall be assessed in accordance with the Guidelines for ‘on tap’ Licensing of Universal Banks in the Private Sector dated August 1, 2016, as applicable, and RBI (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023, dated January 16, 2023, as amended from time to time,” the RBI said.

 Further, upon transition, the bank will be subjected to all the norms including NOFHC structure (as applicable) as per the said guidelines.

Previously, Business Standard reported that some SFBs’ chief executives had met with the RBI a few weeks ago and requested a glide path to become universal banks, as most of them are eligible for such a conversion after completing five years of operations.

AU SFB, the largest amongst SFBs, is seen as the front runner to approach the banking regulator for conversion into a universal bank, banking industry sources said. An executive working with an SFB stated that AU SFB had been contemplating the idea for conversion even before the merger of Fincare SFB with itself.

While AU SFB is larger than a few universal banks, it has to offer a higher interest rate to attract deposits. A change in SFBs’ status to a universal bank would enhance their acceptability, enable them to attract liabilities at lower rates, and benefit from lower priority sector lending norms of 40 per cent as opposed to the current 75 per cent applicable to SFBs.

The RBI granted licenses to the first set of SFBs, totalling 10, in 2015, and most of them began operations in 2016-17. As of the end of June 2023, 12 SFBs with 6,589 domestic branches across the country were operational. With the merger of AU SFB and Fincare, there are now 11 SFBs.

A top executive of a listed SFB expressed sincere appreciation for the move, stating, “As an association (of SFBs), we have been requesting the RBI for some clarity. Now, since the clarity has come, we will discuss, evaluate and take an appropriate decision accordingly. The conditions are very reasonable, and we welcome the decision.”

The RBI also outlined norms regarding the shareholding pattern for SFBs wishing to convert to a universal bank. The central bank stated that there is no mandatory requirement for SFBs to have an identified promoter. However, the existing promoters will continue as the promoters when it transitions to a universal bank. Also, SFBs will not be permitted to add or change their existing promoters during the transitioning phase.

After the transition to a universal bank, there will be no new mandatory lock-in requirement for the promoters. Also, there will be no revision to the promoter shareholding dilution plan already approved by the RBI.

First Published: Apr 26 2024 | 11:46 PM IST

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