Why small finance banks want to glide faster into universal banking
Subscribe to enjoy similar stories. Earlier this month, AU Small Finance Bank, the country's largest small finance bank (SFB) by market capitalization and advances, said it had applied for a universal banking licence. If it gets one, AU would become the first SFB to transition into a full-fledged bank.
Its smaller rival, Capital SFB, is also eyeing this shift within 12-18 months. The Reserve Bank of India's updated criteria, released in April, require a net worth of ₹1,000 crore, gross non-performing assets (NPAs) below 3%, net NPAs under 1% for two consecutive years, and a public listing, among other conditions. As of March 2024, AU was the only SFB meeting all these benchmarks.
However, many of them hope to turn into a full-fledged bank. “Universal banks have relatively lower capitalization and priority sector lending requirements, along with higher borrower and group exposure limits," credit rating agency Icra Ltd pointed out in an April 2024 report, adding that it could also "lower risk perception and thereby facilitate the improvement and diversification of their deposit franchise." SFBs, as a group, have not impressed stock markets this year. Of the 11 SFBs, eight are listed, and six have underperformed the broader BSE Sensex and the BSE Bankex, which tracks the banking sector.
One reason for this underperformance is pressure on profits. In the June-ended quarter, while the total income of these eight SFBs increased 29%, their profits dropped. This was led by Equitas SFB, which set aside ₹180 crore to strengthen its provisioning coverage ratio, done typically as a buffer against bad loans.
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