RBI shares guidelines norms for voluntary conversion of SFBs into universal banks

The Reserve Bank of India (RBI) has published guidelines for the voluntary conversion of small finance banks (SFBs) into universal banks. As per the guidelines of the central bank, small finance banks that are eligible must have a minimum net worth of Rs 1,000 crore at the end of the previous quarter and meet the prescribed CRAR requirements. 

It added that the SFBs aspiring to become a universal bank need to have scheduled status with a satisfactory track record of performance for a minimum period of five years. Besides, the shares of the bank should have been listed on a recognised stock exchange, the RBI said.

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.

Earlier, the RBI under the “Guidelines for ‘on-tap’ Licensing of SFBs in Private Sector”, dated December 5, 2019, shares 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 in the release. 

It stated that these instructions are issued in exercise of the powers conferred on the RBI under Section 22 (1) of the Banking Regulation Act, 1949.

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.

As per media reports, AU Small Finance Bank is one of the frontrunners in this league. The board of directors of the AU Small Finance Bank are scheduled to meet the RBI officials to discuss the plan for the application of a universal bank licence, Moneycontrol reported on April 26.

AU Small Finance Bank got listed on the stock exchanges on July 10, 2017, as per exchange data. AU Small Finance Bank’s standalone net worth of the bank stood at Rs 12,560 crore at the end of March 2024. After the merger with Fincare Small Finance Bank, it is at Rs 14,981 crore. The net worth of the bank is higher than the requirement of the RBI’s guidelines.

The bank's gross NPA in the last three financial year stood at 1.67 per cent in FY24, 1.66 per cent in FY23, and 1.98 per cent in FY22.

In Q4 FY24, AU Small Finance Bank reported a 12.69 per cent fall in net profit to Rs 370.74 crore as against a net profit of Rs 424.63 crore in the corresponding quarter a year ago. Its asset quality fell, with the gross non-performing asset (NPA) ratio rising to 1.67 per cent, as compared to 1.66 per cent in a quarter-ago period.

Its net NPA ratio rose to 0.55 per cent as on December 31 as compared to 0.42 per cent in the year-ago period.

The provision coverage ratio of the bank stood at 76 per cent in FY24 as compared to 78 per cent in the last fiscal year.