ET Explains: The regulatory benefits for small finance banks transitioning to universal banking
Reserve Bank of India last Friday set the eligibility criteria for small finance banks willing to upgrade themselves as universal banking franchises. Here's an ET Explainer on the benefits of such a transition. Out of 11 small finance banks that exist in the country, merely one is currently eligible to seek a universal banking license, while at least two other banks had earlier voiced their willingness for a transition. Why would a small finance bank want to become a universal bank?
At the very first place, it's a major branding issue for small finance banks. Wherever their field officers go, they face an inevitable question: what is a small finance bank? Even in the urban market, a sizeable segment of banking customers are not very familiar with this differentiated banking franchise even after over a half-a-decade of their existence. «Most importantly, when you are a universal bank, the perception of “small bank” goes and that improves your standing with every stakeholder,» a chief executive of a small finance bank said.
What are the regulatory benefits?
First, small finance banks need to maintain a 15% capital adequacy ratio. Transition to universal bank would reduce this requirement to 11.5% including capital conservation buffer.
Second, for universal banks, the priority sector lending norm would be lower at 40% instead of 75% as in the case for small banks.
Third, the norm of having at least 50% of loan portfolio in loans less than Rs 25 lakh would no longer be applicable for universal banks.
Do universal
