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Small finance banks (SFBs) are likely to seek clarification from the Reserve Bank of India (RBI) on loan portfolio diversification, as the regulator has not specified the extent of diversification that should be seen as desirable.
In the recent glide path provided by the RBI for the voluntary transition of SFBs to universal banks, the regulator said “eligible SFBs having diversified loan portfolios will be preferred”.
Currently, there are 11 SFBs, following the merger of AU and Fincare earlier this year. Of these, two — Unity and Shivalik — have not completed five years of operation, while NE SFB is not listed.
A satisfactory track record of performance for a minimum period of five years and being listed on a recognised stock exchange are the first two criteria mandated by the regulator for conversion into a universal bank.
“The only area where they have not been very specific, and they may evaluate case by case, is the diversification of loans,” said a top official from an SFB. “It is not clear to what extent the regulator will prefer diversification while considering the application for converting into a universal bank,” the person said.
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Of the 10 SFBs that were licensed in the first phase in 2015, eight were converted from microfinance institutions. As a result, most of them started with a loan book that was predominantly composed of microloans, which are unsecured. Over the years, SFBs began to diversify their loan books as they started offering products, such as home loans, car loans, and gold loans, which are secured loans. By doing so, the share of microloans declined.
“According to norms, all SFBs have to lend at least 75 per cent to the priority sector. And 50 per cent of the loans have to be below Rs 25 lakh. So their exposure is more in the priority sector. The other diversification is regarding secured and unsecured loans. The RBI has been cautioning about the rapid growth of the unsecured loan book,” said another senior industry official.
The largest SFB in the country, AU SFB, which has a well-diversified loan book, meets all the parameters set by the regulator for conversion to a universal bank.
At the same time, AU SFB, which merged with Fincare SFB earlier this year, said the bank’s current focus was on integrating with Fincare.
“Prima facie, it looks like we are meeting most of the criteria set out by the regulator. However, we are in the process of studying the circular in detail and will discuss with our board in the near future on the next course of action,” said Uttam Tibrewal, executive director and deputy chief executive officer, AU SFB.
“Currently, we are fully focused on ensuring a smooth integration with Fincare SFB and scaling our recently launched Authorised Dealer-I business of cross-border trade and forex for our customers."
Jaipur-based AU SFB has a total business of over Rs 1.61 trillion as on March 31, with a loan book of almost Rs 74,000 crore and deposits of Rs 87,182 crore.
