The Reserve Bank of India (RBI) has recently issued guidelines for transforming Small Finance Banks (SFB) into universal banks. This is a positive step that will help SFBs expand their business and reach more customers.
Let’s understand what eligibility criteria SFBs need to fulfil to become universal banks and what changes may occur after becoming one.
What Does it Mean to Become a Universal Bank?
In simple terms, universal banks are those banks that offer all kinds of banking services. For example, these banks can provide not only small loans but also large business loans. Additionally, they can offer various financial products such as credit cards, mutual funds, and investments.
Eligibility Criteria for Becoming a Universal Bank
To become a universal bank, small finance banks need to fulfil certain eligibility criteria, which include:
Minimum net worth of Rs 1,000 crore.
A satisfactory track record of at least five years.
Listed on a recognised stock exchange.
Gross non-performing asset ratio of less than 3% and net non-performing asset ratio of less than 1% in the past two financial years.
Being profitable in the last two financial years for small finance banks
Who is Eligible to Become a Universal Bank?
According to ET, the report by Investec Equities (UK) suggests that currently, only two out of eight listed SFBs meet RBI’s essential criteria to become universal banks. Among these two, AU Small Finance Bank is the only bank that fulfils all criteria, including diversified lending.
Not only this, according to the Indian Express, on April 12, RBI denied granting a small finance bank license to Dvara Kshetriya Gramin Financial Services Pvt Ltd and Tally Solutions Pvt Ltd.
What Does it Mean for Investors?
The successful transformation of small finance banks into universal banks can bring several benefits to investors. With a stronger and more diversified bank, there could be an increase in the share price of SFBs. However, if we look at the performance of listed small finance banks on the Indian Stock Exchange over the past year, it has been better compared to major private banks, which you can understand from the table provided below.
Benefits of Becoming a Universal Bank
By allowing small finance banks to become universal banks, the Reserve Bank has also provided them with several regulatory benefits. Let’s see what these benefits are:
Reduction in the Capital Adequacy Ratio: Currently, small finance banks are required to maintain 15% of their capital at all times. With the transformation into universal banks, this requirement will be reduced to 11.5%.
Relaxation in Priority Sector Lending Obligation: Small finance banks are required to lend up to 75% to priority sectors. However, upon becoming universal banks, this limit will decrease to 40%. This will allow banks to lend according to their preference and explore more profitable opportunities.
Removal of Compulsory Loan Cap of Less Than 25 Lakhs: Currently, small finance banks are required to provide at least half (50%) of their loans for amounts less than 25 lakhs. With the transformation, this restriction will be removed. This will enable banks to lend to larger businesses, which could also lead to improved earnings for the bank.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.
*Disclaimer: Teji Mandi Disclaimer
