Only AU Small Finance Bank eligible to apply for universal bank license now

Stringent asset quality norms set by Reserve Bank of India has made just one out of 11 small finance banks eligible to apply for a universal banking licence while others would need to wait at least a few more quarters to get there.

AU Small Finance Bank, the largest lender of the pack, has met all the eligibility criteria set by the regulator.

AU has Rs 12,560 crore of net worth, made profits for the last two fiscals, and its gross and net non-performing assets were less than 3% and 1% respectively during the period as prescribed by RBI. It also has a well-diversified loan book as desired by the regulator.

Following the merger with Fincare Small Finance Bank effective April 1, AU's balance sheet has grown to Rs 1.25 lakh crore and a net worth of nearly Rs 15000 crore. It now caters to around 10 million customers through 2,382 banking touchpoints.

"We are complete as a bank with every product suite in our bouquet, servicing bottom of the pyramid customers to corporate customers with Rs 500 crore balance sheet. Now the whole idea to become universal is more symbolic," AU managing director Sanjay Agarwal told ET last week, days ahead of RBI's notice on the guidelines.

"We are preparing ourselves for this because we will get a scale in the next one year," he added.

Equitas, which had on occasions in the past spoken about its intent to seek a universal banking licence and also having a diversified loan portfolio, will only be eligible after two years as its net NPA ratio remained over 1% in the last two fiscals.

According to a report by Investec Equities, a division of Investec Bank Plc (UK), only two out of eight listed small finance banks meet RBI’s NPA criteria. But AU is the only one which meets all the criteria including a diversified loan book.

"For the rest of the SFB pack, the RBI may not be comfortable given their high concentration towards microfinance," it said.

For example, Ujjivan may become eligible if its gross NPA comes below 3% for the March 2024 quarter but it has a high concentration of unsecured portfolio just below 70%.

"But there is a catch. If the NPA criteria is based on two consecutive financial closings, then Ujjivan may become eligible, but if it is based on eight consecutive quarters, then it may need to wait for a couple of more quarters," a person familiar with the matter said.

Only listed entities are eligible for seeking a universal banking licence.