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RBI lays out Framework for Voluntary Transition of Small Finance Banks(SFBs) to Universal Banks(UBs)

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RBI lays out a roadmap for voluntary transition of small finance banks to universal banksOn 26th April 2024, Reserve Bank of India (RBI) laid out a framework in the form of eligibility conditions for the voluntary transition of Small Finance Banks(SFBs) to Universal Banks(UBs).

  • These conditions are in reference of “Guidelines for ‘on-tap’ Licensing of Small Finance Banks in Private Sector” issued on 5th December, 2019. These guidelines provide a transition path for SFBs to convert into UBs.
  • RBI issued these instructions in exercise of the power given under Section 22(1) of the Banking Regulation Act 1949.

Note: In 2015, RBI granted in-principal approval to 10 applicants to set up SFBs in India.

Eligibility Criteria for conversion of SFBs into UBs:

RBI has prescribed 6 eligibility conditions for conversion of SFBs into UBs are:

i.SFBs should have a minimum net worth of Rs1000 crore as at the end of the previous quarter(audited).

ii.Interested SFBs should have scheduled status with a satisfactory track record of performance for a minimum period of 5 years.

iii.It should meet the prescribed Capital to Risk-Weighted Assets Ratio (CRAR) requirements of 15% of SFBs.

iv.Shares of the bank should have been listed on a recognized stock exchange.

Note: Among 10 SFBs only North East Small Finance Bank is not listed on any recognised stock exchange.

v.SFB should have a net profit in the last 2 financial years.

vi.SFB should have Gross Non-Performing Asset(GNPA) and Net Non-Performing Asset(NNPA) of less than or equal to 3% and 1% respectively in the last 2 financial years.

Conditions related to shareholding pattern:

i.There is no mandatory requirement for eligible SFB to have an identified promoter.

  • However, the existing promoters of the eligible SFB if any, shall continue as the promoter on the transition to Universal Bank(UB).

ii.Eligible SFB while transitioning to UB is not permitted for addition of any  new promoters or change in promoters.

iii.There shall be no new mandatory lock-in requirement of minimum shareholding for existing promoters.

iv.The eligible SFBs which have diversified loan portfolio will be preferred.

v.There shall be no change to the promoter shareholding dilution plan already approved by RBI.

Note: When a SFB transitioned into UB, it will be subjected to Non-Operative Financial Holding Company (NOFHC) structure (as applicable) as per the said guidelines

Key Points:

i.The eligible SFB shall be required to provide detailed rationale for such transition.

ii.The application for conversion of SFB into UB shall be assessed in accordance with “Guidelines for ‘on-tap’ Licensing of Small Finance Banks in Private Sector” dated August, 2016

  • RBI (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023 dated 16th January, 2023 as amended from time to time.

Name of the SFBS in India are:

AU Small Finance Bank Limited (Jaipur, Rajasthan), Capital Small Finance Bank Limited(Jalandhar, Punjab), Equitas Small Finance Bank Limited(Chennai, Tamil Nadu), ESAF Small Finance Bank Limited(Thrissur, Kerala), Suryoday Small Finance Bank Limited(Navi Mumbai, Maharashtra), Utkarsh Small Finance Bank Limited(Varanasi, Uttar Pradesh), North East Small Finance Bank Limited(Guwahati, Assam), Shivalik Small Finance Bank Limited(Noida, Uttar Pradesh), Unity Small Finance Limited(New Delhi, Delhi), Ujjivan Small FinanceBank Limited(Bengaluru, Karnataka) and Jana Small Finance Bank Limited(Bengaluru, Karnataka).

Note: On 1st April 2024, RBI approved the merger of Fincare SFB into AU Small Finance Bank Limited. Now, there are 11 SFBs in India.

About Small Finance Banks(SFBs):
SFBs are financial institutions that will provide financial services to the unserved and unbanked region of the country. They are established under the Companies Act, 2013 and governed by the provisions of RBI Act, 1934 and Banking Regulation Act, 1949.

About Reserve Bank of India(RBI):
Governor: Shaktikanta Das(25th Governor of RBI)
Headquarter: Mumbai, Maharashtra
Established: 1 April, 1935