“Small” tag, big concern: SFBs waiting to apply for universal banking license

Small is not beautiful, certainly not in banking circles and the small finance banks are eagerly waiting for the green light from the Reserve Bank of India when they can apply for upgrading their license to universal banks, The Economic Times has reported. These small finance banks are faced with a regulatory requirement to complete five years of business as a small finance bank before they can seek a change in status.

All of them think that getting rid of the ‘small finance bank’ tag would enhance their prestige and respectability and trust among the investing public of the country. Ironically some of these SFBs – a not-so-glorious label in the banking circles – have bigger size than a few private sector banks in the country and they perceive the tag as a drag on their business.

“Our customers still ask me why I am a small bank, still customers on the ground do not know what this small finance bank is all about. I have to tell them, educate them,” said Uttam Tibrewal, executive director of AU Small Finance Bank.
AU Small Finance Bank is the biggest small finance bank with total business of Rs 1.41 lakh crore and a lending portfolio of Rs 65,000-crore. It also has deposits of Rs 75,743 crore.
SFBs such as AU, Equitas and Ujjivan are now all waiting for the RBI signal to appeal for license upgrades. These lenders have virtually each and every product for the retail customer.
The deposits, advances and total business of prominent SFBs stand as the following:
Equitas SFB: Deposits Rs 31,231 crore, advances Rs 30,829 crore, total business Rs 62,070 crore.
Ujjivan SFB: Deposits Rs 29,134 crore, advances Rs 26,600 crore, total business Rs 55,734 crore.
In comparison some of the private sector banks are smaller in numbers.
CSB Bank: Deposits Rs 25,438 crore, advances Rs 22,468 crore, total business Rs 47,906 crore.
Dhanalaxmi Bank: Deposits Rs 13,789 crore, advances Rs 10,312 crore, total business Rs 24,101 crore.
A licence that enables them to function as universal bank is the ultimate goal for any financial institutional in India. But apart from the mere prestige value, a universal banking license also entails very well-defined advantages. For example, such a tag brings down its capital adequacy requirement from 15% (in case of SFB) to 11.5%. A universal bank’s priority sector lending norm would stand at 40%, whereas it is 75% for a SFB. Small finance banks also have to comply with the requirement to have at least half of the loans below the Rs 25 lakh category.
“We will apply for a universal banking licence when the window opens for it and subject to our qualifying to norms that may be applicable. So far, the regulator has not said anything about conversion of small finance banks into universal lenders. So, it will be difficult to say anything about our future business if we get a licence,” said P N Vasudevan, MD of Equitas SFB.
According to the norms, the license for universal banks can be submitted to RBI at any point of time. However, the regulator is yet to say when this norm would be applicable to the set of ‘small’ lenders.
SFBs are also reckoned to be riskier to depositors and they have to offer higher interest rates to woo deposits.