Small finance banks would become universal banks under the transition plan announced by the RBI

Guidelines for the voluntary conversion of Small Finance Banks (SFBs) to Universal Banks have been introduced by the Reserve Bank of India (RBI), and they are now in force.

The guidelines stipulate that SFBs that want to become Universal Banks have to fulfil certain qualifying requirements. They must, first and foremost, continue to function satisfactorily for a minimum of five years.

They must also have a minimum net worth of Rs 1,000 crore as of the end of the previous quarter (audited), and their shares must be listed on an established stock exchange.

They should also have generated a net profit in the previous two fiscal years and satisfy the specified Capital to Risk-weighted Assets Ratio (CRAR) requirements for SFBs.

A crucial component is asset quality, wherein the last two fiscal years’ GNPA and NNPA must have been less than or equal to 3% and 1%, respectively.

In addition, the RBI has specified guidelines for shareholding practices during the shift. An specified promoter is not required to be present for an eligible SFB to qualify.

During the transition, current promoters will remain promoters, and no new promoters may be added or changed.

For current promoters, there won’t be any additional obligatory lock-in requirements, and the RBI-approved promoter shareholding dilution plan won’t alter. For the transition, eligible SFBs with a varied loan portfolio will be given priority.

SFBs requesting a transition must submit an application in the required form to the RBI’s Department of Regulation in Mumbai, along with a thorough justification for the change.

The application will be evaluated in compliance with RBI (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023, and the guidelines for “on-tap” licencing of universal banks in the private sector, dated August 1, 2016.

Following the transition, the bank will be governed by all applicable regulations, including the standards pertaining to the Non-Operative Financial Holding Company (NOFHC) structure.

This programme gives SFBs a clear road to become Universal Banks, subject to specific requirements, as stated in Paragraph 14 of the “Guidelines for ‘on-tap’ Licencing of Small Finance Banks in Private Sector” dated December 5, 2019. (ANI)