Voluntary Transition of Small Finance Banks to Universal Banks: A Comprehensive Overview

Posted On - 29 May, 2024 • By - King Stubb & Kasiva

The Reserve Bank of India has crafted a thorough plan to guide Small Finance Banks in becoming Universal Banks. This strategic move is designed to boost the capabilities and extend the reach of SFBs, allowing them to more effectively serve the financial needs of a larger market. The guidelines were started from April 26th, 2024 and offer an organized direction to SFBs about how they should prepare themselves for becoming Universal Banks, listing down conditions for eligibility along with necessary procedural demands and norms related to shareholding.

Background and Rationale

The idea of SFBs changing into Universal Banks comes from the RBI’s goal to make the banking sector stronger. This is because it allows smaller banks to grow and offer a wider range of operational scope and financial services. From the beginning, when SFBs were started, they had a mission to increase financial inclusion by giving basic banking services to sections in society that were not well served such as small business units, small/marginal farmers, micro/small industries or unorganized sector entities. As these banks have developed and become stable over time, it seems natural for them now to provide complete banking services, thus becoming Universal Banks.

In December 2019, the first rules of licensing for SFBs were put in place to create a structure for their functioning. But it was needed more specific directions in order to help ease the shift towards Universal Banks. The most recent guidelines fill this hole and give a clear understanding of how and what is required if SFBs want to make themselves better than just being small finance banks.

Key Eligibility Criteria

The RBI has put forward strict criteria of eligibility for SFBs to become Universal Banks. These rules are in place so that only those SFBs who have good financial health and operational efficiency can make this transition. The crucial demands are:

  • Performance Track Record:

A history of performance for a minimum of five years is necessary from SFBs. This time frame lets RBI examine how steady and upward-moving the bank’s path is, making sure it has grown enough to handle Universal Bank’s duties.

    • Listing on Stock Exchange:

    The shares of the bank should be listed on a known stock exchange. This need for listing is important because it increases transparency and responsibility, as companies that are listed must follow strict rules about regulation and information sharing.

    • Net Worth:

    The bank should have a minimum net worth of ₹1,000 crore at the end of last quarter (audited). This rule makes sure that there is enough capital for the bank to handle bigger operations and manage possible financial troubles.

    • Profitability:

    The SFB must have shown a net profit in the last 2 financial years. This shows consistent good financial management and effectiveness in operations.

    • CRAR Requirements:

    The bank should satisfy the given Capital to Risk-weighted Assets Ratio (CRAR) of 15%. This guarantees that the bank holds sufficient capital to handle its risk exposures.

    • Asset Quality:

    The rule about Gross Non-Performing Assets (GNPA) and Net Non-Performing Assets (NNPA) is that they need to be at or under 3% and 1%, in the past two financial years. This helps keep the quality of bank’s assets healthy, decreasing chances for monetary instability.

    Shareholding Norms

    The RBI has also provided specific norms for the shareholding pattern during the transition from SFB to Universal Bank. These are created to keep stability and continuity in bank’s operations as well as governance:

    • Promoter Requirements:

    An SFB is not obligated to possess an identified promoter. But, if there are promoters for the bank, they must carry on their duties as we make this shift. This ongoing presence of promoters helps in keeping stability and trust among those involved.

    • No New Promoters:

    The transition phase does not allow for new promoters to be added or changes in the existing ones. This rule keeps the governance structure of the bank stable and avoids any sudden shifts that could interrupt its functioning.

    • Lock-in Requirement:

    There won’t be any fresh demand for a lock-in period on the minimum shareholding of present promoters. Also, no alterations will happen in the plans of promoter shareholding dilution that have been approved earlier.

    • Application and Assessment Process

    For SFBs who want to become Universal Banks, they must go through an application process that is very detailed. They have to give all the needed information for RBI’s evaluation. The main steps in this process are:

    • Rationale for Transition:

    The detailed reasons why SFB wants to become a Universal Bank must be provided. This includes the benefits of such transition, how ready is the bank for it and how they plan on meeting new regulatory requirements.

    Submission of Application:

    The application, together with required papers, has to be presented in the stated structure (Form III) according to Rule 11 of Banking Regulation (Companies) Rules 1949. Send it to the Department of Regulation, RBI Central Office Mumbai.

    Assessment Criteria:

    The RBI will review the application according to the rules for ‘on-tap’ Licensing of Universal Banks in Private Sector that is dated August 1st, 2016 and other related regulatory directions. The assessment will look at financial strength, operational effectiveness and meeting eligibility requirements of this bank.

    Non-Operative Financial Holding Company Structure:

    When transition occurs, the bank will be bound by all relevant norms. If it is necessary, they must follow Non-Operative Financial Holding Company (NOFHC) structure rule. This kind of structure separates banking activities from other financial services to have better control over risk and regulation observation.

    Impact and Future Prospects

    Guidelines from the RBI about transitioning from SFBs to Universal Banks are predicted to have a big influence on the Indian banking field. This step provides fresh chances for SFBs to grow their services, better their competitive position and financial strength. By shifting into Universal Banks, SFBs can provide more diverse banking services, draw in a larger group of customers and explore different income sources.

    In addition, this change may help to grow and stabilize the Indian banking sector as a whole. When good-performing SFBs are allowed to become Universal Banks, it promotes financial inclusion and increases the strength of our country’s financial structure. This action is also likely to motivate other SFBs in improving their performance so they can meet requirements for transition, creating a healthier and more competitive banking atmosphere.


    The RBI’s move to help SFBs change into Universal Banks is a good step forward in the development of India’s banking field. By giving a well-defined and organized route for this shift, the RBI allows SFBs to improve their operational abilities, financial steadiness, and range of services. If more Small Finance Banks fulfill eligibility standards and become Universal Banks, then Indian banking sector will experience increased growth along with stability plus inclusiveness for all parties involved. This action shows the RBI’s dedication to creating a flexible and strong financial system, one that can meet different requirements of the economy while also helping it grow in a lasting way.