Guidelines may be issued by RBI to upgrade SFBs to Universal Banks

Guidelines may be issued by RBI to upgrade SFBs to Universal Banks

Subject: Economy

Section: Monetary Policy

Current Scenario:

• SFBs can seek universal bank status after 5 years of operations.
• No additional conditions in existing licensing norms for conversion.

Expected Assessment Criteria:

• Circular may include criteria such as:
• Asset quality and composition.
• Branch network.
• Corporate governance adherence.
• Quality of leadership.
• IT capabilities.

Apprehensions:

• Questioning introduction of additional riders beyond existing norms.
• Potential conflict with essence of licensing norms raised.

Intentions of SFBs:

• Four SFBs – Equitas SFB, AU SFB, Ujjivan SFB, and Jana SFB – intend to convert.
• Informal talks with regulator, plans to apply for universal bank status once window opens.

Small Finance Banks (SFBs):

Purpose:

• Financial institutions catering to unserved and unbanked regions.
• Offer financial services to individuals and businesses previously excluded from mainstream banking.

Eligibility to Become SFB:

• Existing non-banking financial companies (NBFCs), microfinance institutions (MFI), and local area banks (LAB) can apply.
• Must register as a public limited company under the Companies Act, 2013.

Scope of Activities:

• Primarily engage in basic banking activities:
• Acceptance of deposits.
• Lending to small business units, small farmers, micro-industries, and unorganized sector entities.
• Can offer other non-risk sharing financial services such as:
• Distribution of mutual fund units, insurance, pension products, etc.
• Can act as an Authorised Dealer in foreign exchange for clients’ needs.
• 75% of net credits should be in priority sector lending.
• 50% of loans in the portfolio must be below ₹25 lakh.

Universal Banks:

Activities:

• Financial entities offering a wide array of financial services under one roof.
• Act as a “financial supermarket” providing various services.
• Offer services like investment banking, commercial banking, insurance, etc.

Activities under Universal Banking:

• Includes functions such as:
• Investment banking.
• Commercial banking.
• Development banking.
• Insurance.
• Merchant banking.
• Mutual funds.
• Factoring.
• Housing finance, and more.