The Reserve Bank of India (RBI) on April 27 released the guidelines for the voluntary conversion of small finance banks (SFBs) into universal banks.
- 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.
- The “Guidelines for ‘on-tap’ Licensing of SFBs in Private Sector”, dated December 5, 2019, provide a transition path for SFBs to become universal banks. RBI issued these guidelines in exercise of the powers conferred on the RBI under Section 22 (1) of the Banking Regulation Act, 1949.
Eligibility
- To be eligible for conversion into a universal bank, the RBI stipulates that only listed SFBs will qualify.
- Those intending to convert must have a minimum net worth of Rs 1,000 crore.
- The SFBs must have a scheduled status and a satisfactory track record of at least five years with a gross non-performing asset (NPA) of 3 per cent or less and a net NPA of 1 per cent or less in the past two financial years.
- Interested SFBs must have reported a net profit in the past two financial years and met the prescribed capital adequacy norms.
- Those with a diversified loan portfolio will be preferred.
Universal banks (UBs)
- Universal banks (UBs) are financial entities like commercial banks, financial institutions, NBFCs, etc. that undertake multiple financial transactions.
- UBs were underscored as a development financial institution (DFI) by the Narsimham committee.
Small Finance Banks (SFBs)
- Small Finance Banks (SFBs) are focused financial institutions registered as a public limited company providing banking and credit services to unserved & unbanked regions of the country. The concept of SFBs was laid down in Raghuram Rajan Committee.
- After the announcement during Union Budget for the year 2014-15, RBI issued the guidelines for Small Finance Banks in November 2014.
- SFBs are registered as public limited companies under the Companies Act, 2013 and governed by Banking Regulations Act, 1949; RBI Act, 1934 and other relevant Statutes and Directives from time to time.
- Small Finance Banks are operational under the regulation of the RBI in India.
- Small Finance Banks offer basic banking services such as Savings Accounts, Current Accounts, Fixed Deposits, Recurring Deposits, Loans, etc.
- They cannot set up any subsidiaries to offer any non-banking financial services.
On-tap bank licensing
- On-tap bank licensing facility enables a window for making applications for bank licenses at the RBI throughout the year.
- The concept was introduced in 2016 with the view to further financial Inclusion and creation of more financing institutions. Prior to that, banking licenses were granted upon invitation of applications by RBI to prospective players.
