Minimum Requirements for SFBs Transitioning to Universal Banks
- April 27, 2024
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Minimum Requirements for SFBs Transitioning to Universal Banks
Subject: Economy
Sec: Monetary Policy
The Reserve Bank of India (RBI) has outlined a roadmap for small finance banks (SFBs) voluntarily transitioning to universal banks, setting forth specific criteria for eligibility:
- Financial Criteria:
- Minimum Net Worth: SFBs aspiring to become universal banks must have a net worth of at least ₹1,000 crore, as audited at the end of the previous quarter.
- Profit Track Record: A track record of net profit in the last two financial years is essential.
- NPA Ratio: SFBs should maintain a low non-performing asset (NPA) ratio, with gross and net NPA norms not exceeding 3% and 1%, respectively, in the last two financial years.
- Operational Requirements:
- Stock Exchange Listing: SFBs seeking conversion must be listed on a stock exchange. (Note: North East Small Finance Bank is not listed)
- CRAR Compliance: Compliance with the prescribed Capital to Risk-Weighted Assets Ratio (CRAR) of 15% for SFBs is mandatory.
- Scheduled Status: SFBs should have a satisfactory track record of performance for a minimum of five years.
- Shareholding Pattern:
- While there is no mandatory requirement for an identified promoter, existing promoters, if any, must continue post-transition to a universal bank.
- No addition of new promoters or change in promoters is permitted during the transition.
- Lock-In Requirement:
- Existing promoters are not subject to new mandatory lock-in requirements for minimum shareholding in the transitioned universal bank.
- The lock-in period of five years for promoters, as per the guidelines, remains unchanged.
- Loan Portfolio Diversification:
- SFBs with diversified loan portfolios will be preferred for transition.
- Transition Process:
- Eligible SFBs must furnish a detailed rationale for the transition.
- Upon transition, the bank will be subject to all norms, including those governing non-operative financial holding company structure, as per guidelines.
Current Status:
- As of now, there are 11 SFBs, including AU, Capital, Equitas, Suryoday, Ujjivan, Utkarsh, ESAF Jana, North East, Shivalik, and Unity.
About Small Finance Banks (SFBs):
Small Finance Banks (SFBs) are specialized banks licensed by the Reserve Bank of India (RBI) to cater to the financial needs of low-income individuals and underserved communities.
Objective: The primary aim of SFBs is to promote financial inclusion by providing access to banking services for segments of the population often excluded from traditional banking channels.
Services Provided: SFBs offer a range of financial products and services tailored to the needs of their target clientele, including microfinance, micro-enterprise services, small loans, savings accounts, insurance, and other basic banking facilities.
Regulatory Framework:
- SFBs are registered as public limited companies under the Companies Act, 2013, and are governed by various banking regulations, including the Banking Regulation Act, 1949, the RBI Act, 1934, and other relevant statutes and directives issued by RBI.
- The RBI introduced guidelines for SFBs in 2014 to regulate their operations and ensure compliance with regulatory standards.
Key RBI Guidelines for SFBs:
- Scheduled Bank Status: SFBs are granted scheduled bank status after meeting operational criteria and being deemed suitable under section 42 of the RBI Act, 1934.
- Financial Requirements: SFBs must maintain a minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 15% and extend 75% of their Adjusted Net Bank Credit to Priority Sector Lending.
- Branch Expansion: They are mandated to open at least 25% of their total branches in unbanked rural areas to promote financial inclusion.
- Minimum Capital Requirement: The minimum paid-up voting equity capital for SFBs is set at Rs. 200 crore.
- Microfinance Focus: SFBs are required to allocate at least 50% of their loan portfolio to microfinance and extend advances of up to Rs. 25,00,000.
- Compliance: SFBs must adhere to various prudential norms and regulations concerning income recognition, asset classification, and provisioning.
- Technology Adoption: Encouragement is provided for SFBs to leverage technology to enhance operational efficiency and expand their reach to target segments.