SFBs shares rise as RBI grants universal banking license approval to AU SFB

ET Intelligence Group: The shares of small finance banks (SFBs) rose between 1% and 8% on Friday morning amid weakness in the broader market. The rally was triggered by the Reserve Bank of India's move to grant a universal banking licence to AU Small Finance Bank, fuelling investor hopes that other SFBs may follow suit in securing similar approvals. Ujjivan Small Finance Bank applied for universal bank licence in February this year while Jana Small Finance Bank applied in June. Equitas Small Finance Bank has also expressed interest in seeking universal banking licence.

However, industry experts believe that it will unlikely be an easy task for other SFBs to get universal bank licence given tighter scrutiny by the RBI.

"SFBs should focus on Know Your Customer (KYC) and cyber security related compliances issues," HR Khan, chairman, AU SFB told ET adding that product and geographical diversification are critical factors in securing a universal banking licence.

Unlike universal banks, SFBs operate under stricter capital requirements and have higher priority sector lending obligations. They are subject to several restrictions, such as being unable to run non-banking financial subsidiaries. They are required to allocate 75% of their net advances to priority sectors. For universal banks this requirement is 40%.

The RBI also mandates that SFBs must have 50% of their loan portfolio comprised of low-ticket loans up to ₹25 lakh. These restrictions can pressure the SFBs' asset quality and profitability, often leading to higher gross non-performing assets (NPA) ratios.

To apply for a universal license, the RBI regulations stipulate that an SFB must be listed, maintain a minimum net worth of ₹1,000 crore, and have a gross NPA and net NPA of 3% and 1% or lower, respectively, for the past two financial years. They are also required to maintain a capital adequacy ratio of 15% compared with 9% for scheduled banks.