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A majority of the 10 small finance banks (SFBs) currently operating in the country may transform from being differentiated banks to universal banks as a natural progression, according to top officials of some of these banks.
The case of these banks is bolstered as most of them meet the minimum capital requirement of ₹500 crore for transitioning into a universal bank and have about four-five years track record of operations.
The current set of SFBs, which were set up between 2016 and 2018, want to take a shot at becoming universal banks as their own turf is likely to get crowded. Some of the microfinance institutions, payment banks and urban co-operative banks may convert into SFBs.
Higher PSL & CAR criteria
Moreover, the priority sector lending/PSL (entailing loans to agriculture, MSMEs, export credit, education, housing, social infrastructure and renewable energy segments) and capital adequacy ratio (CAR) criteria for SFBs are significantly higher than that for universal banks.
PSL requirement of SFBs is at 75 per cent of their adjusted net bank credit (ANBC) against 40 per cent for universal banks. SFBs are required to maintain minimum capital adequacy ratio (CAR) of 15 per cent against only 9 per cent for universal banks.
Universal banks offer a wide range of financial services, including retail and corporate banking, and investment banking and insurance (via subsidiaries).
A logical step
Baskar Babu R, MD & CEO, Suryoday SFB, said: “Universal bank allows us to continue doing all the things we are currently doing as an SFB. But the reverse is not necessarily true — a small finance bank cannot do all that a universal bank can do. So, it is logical and relevant to graduate into a universal bank.
“So, with the experience of five years, banks, which are fairly confident in terms of managing the transition, will logically go through that…”
Babu added that majority of SFBs meet the minimum net worth criteria of ₹500 crore prescribed for universal banks.
The ‘Report of the (RBI’s) Internal Working Group to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks’ emphasised that if an SFB aspires to transit into a universal bank, such transition will not be automatic. It would be subject to fulfilling minimum paid-up capital / net worth requirement as applicable to universal banks.
Further, the transition would be subject to the SFB’s satisfactory track record of performance and the outcome of the Reserve Bank’s due diligence exercise.
A strategic option
Rajeev Yadav, MD & CEO, Fincare SFB, said: “As five years (since commencement of operations) for most of the SFBs, including Fincare, is getting over, this (transition into a universal bank) becomes available as an option, subject to regulatory comfort and approvals. So, this becomes a strategic option for SFBs to consider.
“So, I would say, this is a natural progression over time towards these outcomes.”
Raj Vikash Verma, Chairman, AU Small Finance Bank, observed that his bank is looking far and beyond its current status in the SFB space.
“We are propelling the bank’s journey to the next important milestone in the bigger banking space, with an aspiration to serve all sectors and segments of the economy under the larger agenda of national development and growth,” he said in a letter to shareholders.
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