A majority of the 10 small financial banks (SFBs) currently operating in the country could transform from differentiated banks to universal banks as a natural progression, according to senior officials at some of these banks.
The case of these banks is reinforced as most of them meet the minimum capital requirement of 500 crore for the transition to a universal bank and have an operating history of around four to five years.
The current set of SFBs, which were set up between 2016 and 2018, want to try to become universal banks, as their own territory risks being congested. Some of the microfinance institutions, payment banks and urban cooperative banks can transform into SFBs.
Higher PSL & CAR criteria
In addition, priority sectoral loan / PSL criteria (involving loans to agriculture, MSMEs, export credits, education, housing, social infrastructure and renewable energies) and ratio criteria capital adequacy (CAR) of MFIs are significantly higher than those of universal banks.
The PSL requirement for SFBs is 75 percent of their Adjusted Net Bank Credit (ANBC) compared to 40 percent for Universal Banks. SFBs are required to maintain a minimum capital adequacy ratio (CAR) of 15 percent compared to just 9 percent for universal banks.
Universal banks offer a wide range of financial services, including retail and corporate banking, as well as investment banking and insurance (through subsidiaries).
A logical step
Baskar Babu R, MD & CEO, Suryoday SFB, said: “Universal banking allows us to continue doing everything we currently do as SFB. But the reverse is not necessarily true: a small financial bank cannot do all that a universal bank can do. It is therefore logical and relevant to become a universal bank.
“So, with the experience of five years, the banks, confident enough to manage the transition, will logically go through this …”
Babu added that the majority of SFBs meet the minimum net worth criteria of 500 crore prescribed for universal banks.
The “Report of the Internal Working Group (RBI) to Review the Ownership Guidelines and Corporate Structure of Indian Private Sector Banks” pointed out that if an SFB aspires to become a universal bank, this transition will not be automatic. It would be subject to compliance with the minimum paid-up capital / net worth requirement applicable to universal banks.
In addition, the transition would be subject to SFB’s satisfactory performance results and the outcome of the Reserve Bank’s due diligence exercise.
A strategic option
Rajeev Yadav, Managing Director and CEO of Fincare SFB, said: Regulatory comfort and approvals. This therefore becomes a strategic option for SFBs to consider.
“So, I would say, it’s a natural progression over time towards those results.”
Raj Vikash Verma, chairman of AU Small Finance Bank, observed that his bank is looking far beyond its current status in the SFB space.
“We are propelling the banking journey to the next important step in the grand banking space, with an aspiration to serve all sectors and segments of the economy as part of the broader agenda of national development and growth,” a- he said in a letter to shareholders.