In the wake of the Reserve Bank of India’s (RBI) proposal for the voluntary transition of Small Financing Banks (SFBs) to universal banks, a wave of uncertainty looms over the clarity regarding loan portfolio diversification. With the RBI indicating a preference for diversified loan portfolios among eligible SFBs, the lack of defined parameters has prompted SFBs to seek explicit guidelines from the regulatory authority.
The RBI‘s recent proposition outlined a glide path for SFBs eyeing conversion to universal banks, emphasizing the importance of diversified loan portfolios for eligibility. However, the absence of specific benchmarks or indications regarding the optimal level of diversification has left SFBs grappling for direction.
There are currently 11 SFBs, following the merging of AU and Fincare earlier this year. Of these, two—Unity and Shivalik—have not completed five years of operation, and NE SFB is not included.
The first two requirements required by the regulator for conversion into a universal bank are a good track record of performance over a minimum of five years and listing on a recognised stock exchange.
Of the ten SFBs licenced in the first phase in 2015, eight were converted from microfinance organisations. As a result, the majority of them began with a loan portfolio primarily made up of unsecured microloans. Over time, SFBs began to diversify their loan books by offering products such as home loans, auto loans, and gold loans, all of which are secured loans. As a result, the share of microloans fell.
“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 country’s largest SFB, AU SFB, with a diverse loan book, meets all of the regulator’s requirements for conversion to a universal bank.
“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 (ED) and Deputy Chief Executive Officer (CEO), AU Small Finance Bank.
