SFB - Descriptive Answer 1 - Rahul Kopulwar

Q.
Many Small Finance Banks (SFB) are wary about their deposit growth and could not grow
exponentially since its inception. RBI, being cognizance of this, issued some guidelines for the
transition of SFB to a universal bank. Discuss all of the guidelines. (600 words)
Small Finance Banks (SFBs), a differentiated category of banks were introduced by the Reserve Bank
of India in 2014. They were introduced to deepen the financial inclusion i.e. to provide the financial
services to underserved and unserved regions where the universal banks lack in providing the
services.
SFBs have been quite successful in their goals in penetrating the financial inclusion. However, their
profits margins are quite low due to higher amount of capital requirement of 15% of Risk weighted
assets (RWA). Also, the prefix “Small” puts an undue advantage on them in mobilizing high low cost
deposits i.e. CASA, as the depositors are wary about if their money is safe into these banks or not.
Altogether, these two reasons are one of the major roadblocks in increasing its business and the
profitability. In order to increase its business profitably, SFBs have to offer higher interest rates on
their deposits.
RBI, being aware of the challenges faced by SFBs, and hence issued some guidelines or eligibility
criteria for the transitioning of SFBs to universal banks. Achieving universal tag status will help SFBs
achieve higher volume of low cost deposits and also improve the business liquidity. Here is the
following eligibility criteria:
1. SFBs should have a scheduled status with a satisfactory track record of performance for
minimum five years
2. Bank should have its shares listed on the bourses
3. It should have a minimum net worth of Rs. 1000 crores at the end of the previous quarter
(audited)
4. It should meet the minimum prescribed CRAR of 15%
5. It should have a net profit in the last two financial years
6. GNPA and NNPA should be less than or equal to 3% and 1% respectively in the last two financial
years
Apart from the eligibility criteria, the following conditions with respect to shareholders must also be
satisfied:
1. There is no requirement to have a identified promoter of SFB. However, if the promoter is

present, then he should be a promoter while transitioning too.
2. Addition of promoters or change in promoters is not permitted for an eligible SFB while
transitioning to Universal Bank.
3. There should be no new mandatory lock in requirement of minimum shareholding for existing
promoters in the transitioned Universal Bank
4. There shall be no change to the promoter shareholding dilution plan already approved by the
Reserve Bank.
Written By: Rahul Kopulwar

Telegram: https://telegram.me/AnalysisNewspaperBSRahulK Be Better
Youtube: https://www.youtube.com/@RahulKopulwar
5. The eligible SFBs having diversified loan portfolio will be preferred.
Financial Experts and Analysts, RBI, and top management of SFBs anticipates that the transition will
help SFB alleviate the stress it has while mobilizing deposits.
Apart from the problems mentioned above, the priority sector lending for SFB which is now 75% of
Adjusted net bank credit (ANBC) or credit equivalent off balance sheet items (CEOBE) (whichever is
lower) will reduce to 40% of ANBC or CEOBE (whichever is lower). This means that SFB doesn’t
necessarily have to lend in higher proportion to such sectors where the risk is relatively higher such
as renewables, social sectors, agriculture, exports and amongst others. It can also be seen as a ray of
hope by SFB in increasing its profitability.
Unless the eligible SFBs get transitioned into Universal Banks, the problem of SFB will certainly not
be resolved. Hence, it’s the crucial time for all the eligible SFBs to apply to RBI as soon as possible to
reap the benefits of universal bank. RBI, as usual, should be nimble and cautious in its approach in
granting licenses, as the depositors money and economy of the country is at stake.
Written By: Rahul Kopulwar

Telegram: https://telegram.me/AnalysisNewspaperBSRahulK Be Better
Youtube: https://www.youtube.com/@RahulKopulwar

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Q.

2. Bank should have its shares listed on the bourses

4. It should meet the minimum prescribed CRAR of 15%

5. It should have a net profit in the last two financial years

1. There is no requirement to have a identified promoter of SFB. However, if the promoter is

Written By: Rahul Kopulwar

Written By: Rahul Kopulwar

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