The RBI has been making headlines for the last several months for taking harsh corrective action against multiple companies. The most popular was RBI axing Paytm by barring it from accepting new deposits, which resulted in the stock halving after the news.
But contrary to the series of negatives, the RBI recently made an announcement, which garnered positive reactions. It issued a circular offering a silver lining for small finance banks (SFBs) - outlining a roadmap for SFBs to transition into universal banks.
This even led to stocks like AU Small Finance Bank jumping 7% after the circular released, contrary to the 10-50% negative reactions seen in stocks impacted by RBI’s previous announcements!
What’s happening?
The RBI has issued a circular which unveiled guidelines to transform small finance banks (SFBs) into universal banks. In simple words, a special category of banks (SFBs) like AU Small Finance Banks can now upgrade themselves to becoming full-fledged banks like SBI and HDFC.
SFBs are a specialised banking category to promote financial inclusion by providing credit to underserved sectors like farmers, individuals, and small businesses. Introduced in 2014, there are 11 operational SFBs in India, with 8 of them being listed entities.
They are pivotal in advancing financial inclusion by catering to underserved populations across India, particularly in remote areas. They offer essential banking services like savings accounts and micro-loans, which are crucial for individuals lacking access to traditional banking.
Does This Apply to All Small Finance Banks?
The RBI has laid out certain conditions, on fulfilment of which a SFB would be able to transform into a universal bank. These include:
The bank should be listed on exchanges
It should have a minimum net worth of Rs. 1,000 crore
It should have been profitable in the last 2 years
The gross non-performing assets and net non-performing assets of 3% and 1%, respectively, in the last 2 years
It should meet the prescribed capital adequacy ratio (CAR) of SFBs (15%)
Basically, it should have high standards in order to qualify for the upgrade!
Why Should I Care?
There are a few opportunities the move presents to shareholders:
AU Small Finance Bank meets the eligibility criteria for transitioning into a universal bank
Ujjivan Small Finance Bank too meets most of the criteria. However, 70% of its loan book is exposed to micro group and individual loans, making the portfolio non-diversified, which may be a problem for RBI, according to experts
Capital SFB and Equitas SFB check most of the boxes, other than NPAs. However, over the medium term, corrective action can result in improvement, and hence eligibility
While the transition can benefit some banks (now or later) by enhancing perception, reducing capital adequacy and decreasing constraints around lending; it will also pose challenges in the form of branding, regulatory requirements and migration.