RBI Guidelines for Conversion of Small Finance Banks into Universal Banks
The Reserve Bank of India (RBI) has issued guidelines for the voluntary conversion of small finance banks (SFBs) into universal banks. These guidelines, titled "Guidelines for ‘on-tap’ Licensing of SFBs in Private Sector" and dated December 5, 2019, provide a clear path for SFBs to transition into universal banks.
Only listed SFBs are eligible for conversion.
The SFB must have a minimum net worth of Rs 1,000 crore.
The SFB must have a scheduled status and a satisfactory track record of at least five years.
The SFB must have a gross non-performing asset (NPA) of 3% or less and a net NPA of 1% or less in the past two financial years.
The SFB must have reported a net profit in the past two financial years.
The SFB must have met the prescribed capital adequacy norms.
The SFB must provide a detailed rationale for its desire to convert into a universal bank.
The SFB must have a diversified loan portfolio.
The application for transition from SFB to universal bank will be assessed in accordance with the "Guidelines for ‘on-tap’ Licensing of Universal Banks in the Private Sector" dated August 1, 2016, and the RBI (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023, dated January 16, 2023.
Enhanced acceptability.
Ability to attract liabilities at lower rates.
Benefit from lower priority sector lending norms of 40% as opposed to the current 75% applicable to SFBs.
As of June 2023, there are 11 SFBs operational in India. With the merger of AU SFB and Fincare, there are now 11 SFBs.
The industry has welcomed the RBI's move, stating that it provides much-needed clarity. SFBs are now evaluating their options and will take appropriate decisions accordingly.
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. 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.