The Reserve Bank of India (RBI) on Friday set norms for the voluntary transition of small finance banks (SFBs) to universal banks, which included a minimum net worth of Rs 1,000 crore, net profit in the last two financial years, low non-performing asset (NPA) ratio and diversified loan portfolio.

Most of the SFBs are currently not meeting the gross NPA and net NPA criteria of less than or equal to 3% and 1%, respectively, in the last two financial years.

As per the RBI norms, SFBs wanting to convert into a universal bank should be listed on a recognised stock exchange. Out of the 10 applicants to set up SFBs in 2015, only North East Small Finance Bank is not listed.

According to the central bank, SFBs aspiring to become a universal bank need to have scheduled status with a satisfactory track record of performance for a minimum period of five years. Also, the shares of the bank should have been listed on a recognised stock exchange, the RBI said in a circular.

An SFB aiming to become a universal bank should have a minimum net worth of Rs 1,000 crore as at the end of the previous quarter (audited).

Other conditions include a prescribed CRAR (capital-to-risk weighted assets ratio) requirement of 15% for SFBs and scheduled status with a satisfactory track record of performance for a minimum period of five years.

On shareholding pattern, the RBI said there is no mandatory requirement for an eligible SFB to have an identified promoter. However, the existing promoters of the eligible SFB, if any, shall continue as the promoters on the transition to universal bank.

Further, the addition of new promoters or change in promoters would not be permitted for an eligible SFB while transitioning to universal bank.

"There shall be no new mandatory lock-in requirement of minimum shareholding for existing promoters in the transitioned universal bank," the RBI circular said.

As per the “Guidelines for ‘on tap’ licensing of SFBs in the private sector”, promoters have a lock-in period of five years.

“There shall be no change to the promoter shareholding dilution plan already approved by the Reserve Bank. The eligible SFBs having diversified loan portfolio will be preferred,” as per the circular.

The RBI said the eligible SFB will be required to furnish a detailed rationale for such transition. Further, on transition the bank will be subjected to all the norms including non-operative financial holding company structure (as applicable), as per the guidelines.

Currently, there are 11 SFBs – AU (Fincare SFB merged with AU on April 1, 2024), Capital, Equitas, Suryoday , Ujjivan , Utkarsh , ESAF Jana , North East , Shivalik and Unity.

On 12 April, the RBI rejected applications received from Dvara Kshetriya Gramin Financial Services and Tally Solutions to start SFBs in the private sector. The two entities had applied to the RBI for setting up a small finance bank in 2021 under the guidelines for on-tap licensing.