Overview of Universal Bank Licensing in India

In the past 25 years, only five entities have been granted universal bank licenses in India. The licensing process has evolved, moving from infrequent windows to an on-tap regime. Despite this, the response has been tepid, with no large non-banking financial companies (NBFCs) applying for conversion to a universal bank, and entities owned by corporate houses ineligible.

2024 RBI Norms for SFB to Universal Bank Conversion

The Reserve Bank of India's 2024 guidelines for converting small finance banks (SFBs) into universal banks introduced hope for the emergence of more full-service banks, essential for India’s aspiration to be a $5 trillion economy. However, recent rejections of applications from Ujjivan and Jana SFBs indicate challenges remain. Only AU Small Finance Bank met the criteria and received approval.

Eligibility Criteria for Conversion

• Non-Performing Assets (NPAs) thresholds.
• Net worth requirements.
• Listing status.
• A satisfactory track record of at least five years.
• Subjective criteria include a diversified loan portfolio.

Challenges and Diversification Efforts

Ujjivan SFB's application was returned, with the RBI suggesting room for improvement in loan portfolio diversification. The bank plans to resubmit its application. Stock reaction was negative, but analysts predict medium-term performance improvement due to better credit costs and operational efficiencies.

Current State of SFBs

Of the 11 operational SFBs, many originated as microfinance institutions (MFIs), leading to portfolios dominated by unsecured loans. Ujjivan's unsecured loans accounted for 52% of its portfolio, while AU SFB had a more secure loan book at 67%.

Industry Perspectives on Diversification

Industry experts emphasize that portfolio diversification must be meaningful and not merely cosmetic, with governance and risk management being crucial. Aggressive write-offs to meet NPA thresholds are viewed negatively.

Scale and Future Prospects

Achieving scale is a significant factor, with AU being the largest SFB with a ₹1 trillion loan book. Most SFBs need to grow further to reach substantial scale. AU's growth was partly through acquiring Fincare SFB, the only such acquisition within the cohort.

Eligible SFBs and Future Eligibility

• Equitas could qualify if it maintains low NPAs.
• Most other SFBs have NPA ratios that exceed qualifying thresholds and are unlikely to meet the criteria soon.