Introduction: The Reserve Bank of India (RBI) has issued guidelines facilitating the voluntary transition of Small Finance Banks (SFBs) to Universal Banks. These guidelines, outlined in Paragraph 14 of the “Guidelines for ‘on-tap’ Licensing of Small Finance Banks in Private Sector,” present a structured path for SFBs seeking to convert. This transition, subject to various criteria, signifies a significant evolution in the banking landscape, enhancing the scope and services offered by these institutions.
Detailed Analysis:
1. Transition Criteria: To qualify for the transition, SFBs must fulfill specific prerequisites:
- Minimum paid-up capital/net worth requirement applicable to Universal Banks.
- Satisfactory performance track record as an SFB for at least five years.
- Compliance with RBI’s due diligence exercise.
2. Effective Provisions: The circular issued by RBI, exercising its authority under Section 22(1) of the Banking Regulation Act, 1949, outlines the commencement and applicability of the transition provisions. It applies uniformly to all SFBs.
3. Eligibility Criteria Clarification:
- Scheduled status with a proven track record of performance.
- Listing of shares on recognized stock exchanges.
- Minimum net worth of ₹1,000 crore as of the last audited quarter.
- Compliance with prescribed CRAR requirements.
- Sustained net profit in the preceding two financial years.
- Maintaining GNPA and NNPA within specified limits.
4. Shareholding Patterns:
- No mandatory requirement for an identified promoter.
- Existing promoters continue as promoters during the transition.
- Restriction on addition or change in promoters during the transition.
- No new mandatory lock-in requirement for existing promoters.
- Preservation of approved promoter shareholding dilution plan.
5. Application Process:
- SFBs desiring transition must submit a detailed rationale.
- Assessment follows the guidelines for ‘on-tap’ Licensing of Universal Banks and RBI (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023.
- Compliance with NOFHC structure norms.
6. Submission Procedure:
- Application submission, as per Form III and Banking Regulation (Companies) Rules, 1949, to the Department of Regulation, RBI.
Conclusion: The voluntary transition of Small Finance Banks to Universal Banks, as per RBI guidelines, reflects a strategic move towards enhancing the banking ecosystem’s robustness and efficiency. This transition empowers SFBs to expand their offerings, increase market penetration, and contribute more comprehensively to the nation’s financial inclusion objectives. By adhering to stringent eligibility criteria and procedural guidelines, the RBI ensures the stability and integrity of the banking sector while fostering innovation and growth opportunities for financial institutions.
***
Reserve Bank of India
RBI/2024-25/28
DOR.LIC.REC.20/16.13.218/2024-25
April 26, 2024
All Small Finance Banks
Madam/ Dear Sir,
Voluntary transition of Small Finance Banks to Universal Banks
Please refer to Paragraph 14 of the “Guidelines for ‘on-tap’ Licensing of Small Finance Banks in Private Sector” dated December 5, 2019, which provides a transition path for Small Finance Banks (SFBs) to convert into Universal Banks. Such conversion shall be subject to the SFB’s fulfilling minimum paid-up capital/ net worth requirement as applicable to Universal Banks, satisfactory track record of performance as an SFB for a minimum period of five years and RBI’s due diligence exercise.
2. These instructions are issued in exercise of the powers conferred on the Reserve Bank of India under Section 22 (1) of the Banking Regulation Act, 1949.
Commencement
3. The provisions contained in the circular shall be effective from the date of this circular.
Applicability
4. This circular is applicable to all Small Finance Banks.
Provisions
5. With the objective of bringing better clarity, the eligibility criteria for an SFB to transition into a Universal bank will now be as follows:
a. scheduled status with a satisfactory track record of performance for a minimum period of five years;
b. shares of the bank should have been listed on a recognised stock exchange;
c. having a minimum net worth of ₹1,000 crore as at the end of the previous quarter (audited);
d. meeting the prescribed CRAR requirements for SFBs;
e. having a net profit in the last two financial years; and
f. having GNPA and NNPA of less than or equal to 3 percent and 1 percent respectively in the last two financial years.
6. The following conditions shall be applicable with regard to shareholding pattern:
a. There is no mandatory requirement for an eligible SFB to have an identified promoter. However, the existing promoters of the eligible SFB, if any, shall continue as the promoters on transition to Universal Bank.
b. Addition of new promoters or change in promoters shall not be permitted for an eligible SFB while transitioning to Universal Bank.
c. There shall be no new mandatory lock-in requirement of minimum shareholding for existing promoters in the transitioned Universal Bank.
d. There shall be no change to the promoter shareholding dilution plan already approved by the Reserve Bank.
e. The eligible SFBs having diversified loan portfolio will be preferred.
7. The eligible SFB shall be required to furnish a detailed rationale for such transition. The application for transition from SFB to Universal Bank shall be assessed in accordance with the Guidelines for ‘on tap’ Licensing of Universal Banks in the Private Sector dated August 1, 2016, as applicable, and Reserve Bank of India (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023 dated January 16, 2023, as amended from time to time. Further, on transition the bank will be subjected to all the norms including NOFHC structure (as applicable) as per the said Guidelines.
8. The eligible SFB may submit its application for transition to Universal Bank, in the prescribed form (Form III) in terms of Rule 11 of the Banking Regulation (Companies) Rules, 1949, along with other requisite documents, to Department of Regulation, Reserve Bank of India, Central Office, 12th Floor, Central Office Building, Shahid Bhagat Singh Road, Mumbai – 400001.
Yours faithfully,
(Manoranjan Padhy)
Chief General Manager
