Hi everyone, 

Welcome to the 108th edition of The Pattern, a weekly newsletter where I bring you the latest from the worlds of finance, technology, and economy. Let’s get started! 

RBI gives SFBs a chance to shed the ‘small’ tag  

In April, the Reserve Bank of India (RBI) laid out a roadmap for small finance banks (SFBs) to voluntarily transition to becoming universal banks. The regulator, however, put in place a number of conditions that would be required of SFBs to become eligible for the transition: 

1. They must be listed on a recognised stock exchange 

2. They must have had a minimum net worth of Rs 1,000 crore at the end of the previous quarter 

3. They must meet the CRAR of 15% prescribed for SFBs 

4. They must have a scheduled status with a track record of satisfactory performance for at least five years 

5. They must have made a net profit in the last two financial years 

6. They must have a GNPA of less than or equal to 3% and NNPA of less than or equal to 1% in the last two financial years 

As far as shareholding is concerned, the RBI notification said there is no mandatory requirement for SFBs to have an identified promoter. But it stipulates that existing promoters must continue as promoters during the transition. The addition of new promoters or a change in promoters during the transition phase is not permitted. Notably, the regulator says that SFBs with diversified loan portfolios will be preferred. 

Good news for SFBs?  

Small finance banks have requested the RBI to allow them to shed – or at least downplay – the ‘small’ tag citing that it hurts their branding. As a result, they cannot attract adequate current account and saving account (CASA) deposits due to customer apprehension. In fact, SFBs lend at higher rates than their other regulated counterparts. They also incur a high cost on their deposits.  

They further claim that the tag negatively impacts their investment prospects as institutional investors are skeptical to divert larger shares of their corpus to SFBs compared to other financial institutions. Shedding the ‘small’ tag, therefore, would allow them to attract cheaper deposits and more institutional investment, and stay competitive with other financial institutions. 

Is the play for a full baking license that easy?  

In theory, the proposition is an exciting one. But there’s a reason the industry isn’t making more noise around it.  

Firstly, small finance banks were only constituted as recently as 2016. The RBI’s transition conditions are stiff, and few SFBs have matured to meet these requirements as of 2024. Of the 11 small finance banks in the country, only AU Small Finance Bank meets the criteria laid down by the RBI. Other entities like Jana, Shivalik, and Capital small finance banks require at least one to two more years to meet the asset quality requirements. 

Second, small finance banks were set up with the objective of delivering financial services to underserved and unbanked areas like MSMEs, agriculture, and unorganised sectors. SFBs’ expansion to universal banks would require them to expand their franchise to other segments. Doing so would dilute the financial inclusion goals of small finance banks.  

Could this move leave a vacuum in the financial inclusion efforts of the banking system? Or could it allow small finance banks to carry out their responsibilities on a larger scale? 

The road leading to this answer is a long one – SFBs will take a few years to mature and meet the eligibility criteria, before they can even start the transition process. We’ll just have to wait and watch. 

That’s all from me this week. I’ll see you next week. 

As always, leaving some reading recommendations below.  

Reading list  

1. It’s time India gets a FraudStack  

2. Our post-pandemic slump in household savings should disappoint but not alarm us  

3. Managing the trilemma of inflation, growth and exchange rate  

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to always get all updates. 

Cheers, 

Mayank