SFBs seek glide path from RBI to become universal banks citing eligibility

Lower priority sector lending norms would help in reducing cost

Chief executives of various Small Finance Banks (SFBs), which met the Reserve Bank of India recently, have urged for a glide path to become universal banks, as most of them are eligible for such a conversion having completed five years of operations.

The first set of small finance banks – totalling ten – were granted licenses in 2015, and most of them started operations in 2016-17. As of end-June 2023, twelve SFBs with 6,589 domestic branches across the country were operational. With the merger of AU Small Finance Bank and Fincare, there are now 11 SFBs.

“Most small finance banks have completed five years of operations. We have requested the regulator if we can have a glide path for conversion into universal banks,” said a person who wished not to be identified.

These entities requested that banks that have attained a certain scale may be allowed some relaxations in norms like maintaining 75 per cent of advances in the priority sector.

SFBs are differentiated or niche banks with a minimum net worth of Rs 200 crore, lower than other SCBs. Considering their focus on financial inclusion, SFBs are required to lend at least 75 per cent of their adjusted net bank credit (ANBC) to priority sectors, compared with 40 per cent in the case of other scheduled commercial banks.

“This will help us in reducing the cost of funds which, in turn, will reduce the cost of lending to the borrowers. So we have asked whether there can be a glide map so that the same norms do not apply if a bank has completed say five years,” the person said, adding the glide path could be with respect to scale or vintage or a combination of both.

Bankers said the regulator is open to the idea of such a conversion. While licenses for universal banks have been made on tap in 2016, none has received such a license so far.

Sources said while the regulator has emphasised maintaining high governance standards and the importance of compliance, RBI is satisfied with the progress made by these banks in the last eight years.

RBI has noted in the Trends and Progress report for 2022-23 which, consistent with the trend observed since their establishment in 2016, the consolidated balance sheet of SFBs grew at a pace faster than SCBs during 2022-23, notwithstanding some moderation during the year.

SFBs also pointed out the challenges arising from the nomenclature, the ‘small’ tag, which is associated with them. They said extending loans is not an issue, but depositors are at times wary of such a tag.

“We can continue with what we are mandated to do, that is catering to small customers without the small tag. This removes the ambiguity that may be there in the depositor’s mind,” said another person.

During 2022-23, SFBs’ net interest income was buoyed by a sharp increase in interest income relative to interest expended. Their Gross NPA ratio, which had surged in 2020-21 under the impact of Covid-19, has been moderating since then. In line with the asset quality improvement, the provisions and contingencies contracted during 2022-23, RBI had said.