The Reserve Bank of India (RBI) has issued directives outlining the process for small finance banks (SFBs) to transition into universal banks voluntarily. According to the RBI’s guidelines, eligible SFBs must maintain a minimum net worth of Rs 1,000 crore as of the preceding quarter and satisfy the specified Capital to Risk (Weighted) Assets Ratio (CRAR) requirements.
Guidelines By RBI
- RBI added that the SFBs aspiring to become universal banks 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.
- The banking regulator emphasized that the conversion process is contingent upon SFBs meeting the minimum paid-up capital/net worth requirement applicable to universal banks, maintaining a satisfactory performance record as an SFB for at least five years, and undergoing the RBI’s due diligence examination. The RBI issues these directives in accordance with its authority under Section 22 (1) of the Banking Regulation Act, 1949.
- SFBs are mandated to furnish a comprehensive rationale for their decision to convert into a universal bank, with preference given to those possessing a diversified loan portfolio.
AU Small Finance Bank: Merger Boosts Net Worth, FY24 Challenges
According to reports from the media outlet Moneycontrol on April 26, AU Small Finance Bank is reportedly among the leading contenders in this endeavour. The board of directors of AU Small Finance Bank is scheduled to convene with RBI officials to deliberate on the strategy for pursuing a universal bank license.
According to exchange data, AU Small Finance Bank was listed on the stock exchanges on July 10, 2017. As of March 2024, the bank’s standalone net worth amounted to Rs 12,560 crore. Following its merger with Fincare Small Finance Bank, this figure rose to Rs 14,981 crore, surpassing the RBI’s guideline requirement.
In the last three fiscal years, the bank’s gross NPA stood at 1.67% in FY24, 1.66% in FY23, and 1.98% in FY22.
In the fourth quarter of FY24, AU Small Finance Bank reported a 12.69% decline in net profit to Rs 370.74 crore, compared to Rs 424.63 crore in the corresponding period the previous year. Asset quality also deteriorated, with the gross non-performing asset (NPA) ratio increasing to 1.67% from 1.66% in the previous quarter.
The net NPA ratio increased to 0.55% as of December 31, compared to 0.42% in the same period the previous year.
The bank’s provision coverage ratio stood at 76% in FY24, down from 78% in the preceding fiscal year.
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