The Reserve Bank of India has established stricter parameters for Small Finance Banks seeking to upgrade into Universal Banks, as per a recent circular. Small Finance Banks will need to have a minimum paid-up capital of Rs. 1000 crores to be eligible for the enhanced banking license.
They will also be required to have scheduled bank status for at least five years and maintain a consistent track record of sound performance over this period. Another prerequisite is that the SFB's shares must be listed on a recognized stock exchange.
On the financial front, the banks need to report net profits in the last two financial years and keep their gross and net non-performing assets below 3% and 1% respectively in the same two year period. Well-diversified loan portfolios will be given preference during the evaluation process.
Existing promoters of eligible SFBs can continue in their role after the transition to a universal bank model. However, no new promoters will be allowed nor will changes be permitted to the existing shareholder structure. There are also no fresh lock-in norms for current promoters' minimum stake.
By stipulating stricter entry barriers around financial strength, asset quality and operational experience, the banking regulator aims to ensure only qualified SFBs with a solid track record can expand their services horizontally across all business segments as Universal Banks. This regulatory update provides clarity to Small Finance Banks on the heightened standards required to transform at the appropriate time.
