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INTRODUCTION

  • The Reserve Bank of India (“RBI”) has published the “Guidelines on Voluntary transition of Small Finance Banks to Universal Banks” dated April 26, 2024 (“SFB Guidelines 2024”), setting out the glide path for voluntary transition of Small Finance Banks (“SFBs”) to universal banks (“Universal Banks”) in terms of:
    • Guidelines for “on-tap” Licensing of Small Finance Banks in Private Sector dated December 5, 2019 (“SFB Guidelines 2019”);
    • Guidelines for “on tap” Licensing of Universal Banks in the Private Sector dated August 1, 2016 (“Universal Bank Guidelines”);
    • Reserve Bank of India (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023 dated January 16, 2023 (“Acquisition Directions 2023”); and
    • Guidelines on Acquisition and Holding of Shares or Voting Rights in Banking Companies dated January 16, 2023 (“Acquisition Guidelines 2023”).
  • The SFB Guidelines 2024 provide greater clarity on the eligibility criteria for SFBs that aim to transition to a Universal Bank.

    BACKGROUND

    The RBI set out a transition path for SFBs to convert to Universal Banks under the SFB Guidelines 2019, subject to the SFB’s fulfilling the minimum paid-up capital/net worth requirement as applicable to Universal Banks, satisfactory track record of performance as an SFB for at least 5 (five) years, and RBI’s due diligence exercise.[1] However, the need for instructions in more granular detail and for better clarity on the extant guidelines prompted the RBI to issue the SFB Guidelines 2024.

    WHAT ARE THE CHANGES IN THE NEW GUIDELINES?

    • The key changes in the SFB Guidelines 2024 with respect to the eligibility criteria for an SFB to transition into a Universal Bank are as follows:
    #CriteriaSFB Guidelines 2024SFB Guidelines 2019Note/Remarks
     Performance and Track RecordSatisfactory track record of performance for a minimum period of 5 (five) years.[2]  No change.
     Listed on a Stock ExchangeShares of the bank to be listed on a recognised stock exchange.[3]   Listing mandatory within 3 (three) years after SFB reaches the net worth of INR 500 crore for the first time.[4]No change.
     Net Worth requirementMinimum net worth of INR 1,000 crore as at the end of quarter (audited) preceding the application.[5]Minimum paid-up voting equity capital/net worth for SFB is INR 500 crore.The net worth requirement has been increased to INR 1000 crore from 500 crore in the SFB Guidelines 2024.
     Net ProfitSFB to have net profit in the last 2 (two) financial years.[6]N/AThe net profit requirement has been introduced in the SFB Guidelines 2024.
     CRAR RequirementMeeting the prescribed CRAR requirements for SFBs.[7] SFBs to maintain a minimum capital adequacy ratio of 15% of its risk-weighted assets (RWA) on a continuous basis, subject to any higher percentage as may be prescribed by RBI.No change.
     GNPA and NNPA requirementGNPA and NNPA to be less than or equal to 3% and 1%, respectively, in the last 2 (two) financial years.[8]N/AThe GNPA and NNPA requirement has been introduced in the SFB Guidelines 2024.
    • The RBI has also outlined norms regarding the shareholding pattern for SFBs wishing to convert to a Universal Bank. There is no mandatory requirement for SFBs to have an identified promoter. However, the existing promoters will continue in the same capacity upon transition to a Universal Bank. Also, SFBs will not be permitted to add or change their existing promoters during the transitioning phase. The conditions for SFBs pertaining to shareholding pattern to apply for a Universal Bank license under the SFB Guidelines 2024 are:
      • No mandatory requirement for an eligible SFB to have an identified promoter;
      • The existing promoters of the eligible SFB, if any, to continue as the promoters on transition to Universal Bank;
      • Addition of new promoters or change in promoters not be permitted;
      • No mandatory lock-in requirement of minimum shareholding for existing promoters in the transitioned Universal Bank. As per Paragraph #6 of the SFB Guidelines 2019, promoters have a lock-in period of 5 (five) years;
      • No change to the promoter shareholding dilution plan already approved by the RBI is permitted;
      • SFBs having diversified loan portfolio will be preferred;
      • The SFBs will be required to furnish a detailed rationale for conversion; and
      • Transitioned bank to be subject to all the norms including NOFHC structure.

    NEXT STEPS

    SFBs fulfilling the criteria and desirous of applying as a Universal Bank may submit to the RBI an application for transition to Universal Bank, in the prescribed form (Form III) in terms of Rule 11 of the Banking Regulation (Companies) Rules, 1949, along with other requisite documents. SFBs not yet fulfilling these criteria may work towards putting in place the necessary guardrails on the path to become a Universal Bank.

    CONCLUSION

    • At present, as things stand, only 1 (one) out of the 11 (eleven) SFBs meets the criteria to apply for and become a Universal Bank. The SFB Guidelines 2024 present an opportunity to the other SFBs to meet the eligibility criteria. 
    • The SFB Guidelines 2024 provides clarity to SFBs aspiring to become Universal Banks, and it is expected that eligible SFBs would make applications to the RBI to be granted the Universal Banking license, which have hitherto not been granted since the Universal Bank Guidelines were first published in 2016, marking a welcome step forward in the Indian regulatory landscape.

    [1] Paragraph 14, SFB Guidelines 2019.

    [2] Paragraph 5(a), SFB guidelines 2024 and Paragraph #14, SFB Guidelines 2019.

    [3] Paragraph #5(b), SFB Guidelines 2024.

    [4] Paragraph #6, SFB Guidelines 2019.

    [5] Paragraph #5(c), SFB Guidelines 2024.

    [6] Paragraph #5(e), SFB Guidelines 2024.

    [7] Paragraph #5(f), SFB Guidelines 2024.

    [8] Paragraph #5(f), SFB Guidelines 2024.

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    Photo of Lily Vadera Lily Vadera

    Senior regulatory advisor in the  Financing Practice at the Mumbai office of Cyril Amarchand Mangaldas. She is the former Executive Director, Reserve Bank of India (RBI)  has served RBI for more than three decades and headed the crucial department of regulation where she…

    Senior regulatory advisor in the  Financing Practice at the Mumbai office of Cyril Amarchand Mangaldas. She is the former Executive Director, Reserve Bank of India (RBI)  has served RBI for more than three decades and headed the crucial department of regulation where she dealt with the regulatory framework for various entities in financial sector, covering all categories of banks and non-banking finance companies. She framed regulations for Fintech players and played significant role in amalgamation of banks in stress. She also played an important role as a member of Insolvency Law Committee set up by Ministry of Corporate Affairs. She can be reached at lily.vadera@cyrilshroff.com

    Photo of Anu Tiwari Anu Tiwari

    Partner and Co-Head in the Fintech Practice at the Mumbai office of Cyril Amarchand Mangaldas. Anu represents Indian and multinational banking, broker-dealer, exchange, asset management, speciality finance, fintech and information/ emerging technology companies on transactional, enforcement and regulatory matters. His transactional practice focus…

    Partner and Co-Head in the Fintech Practice at the Mumbai office of Cyril Amarchand Mangaldas. Anu represents Indian and multinational banking, broker-dealer, exchange, asset management, speciality finance, fintech and information/ emerging technology companies on transactional, enforcement and regulatory matters. His transactional practice focus is on public & private M&A, capital raising, commercial agreements and activism matters. Anu advises financial services clients on matters before the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Ministry of Finance, Enforcement Directorate and appellate tribunals. He can be reached at anu.tiwari@cyrilshroff.com

    Photo of Vishrut Jain Vishrut Jain

    Senior Consultant in the financial regulatory practice at the Mumbai office of Cyril Amarchand Mangaldas. Vishrut has represented various Indian and multinational fintech and information / emerging technology companies on transactional, enforcement and regulatory matters. He can be reached at vishrut.jain@cyrilshroff.com.

    Photo of Shobhit Dave Shobhit Dave

    Associate in the Financial Services Regulatory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Shobhit advises clients on regulatory matters and mergers & acquisitions. He can be reached at shobhit.dave@cyrilshroff.com

    Photo of Yusuf Kathawala Yusuf Kathawala

    Associate in the Financial Services Regulatory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Yusuf advises clients on regulatory matters and works on various transactional matters with respect to financial services. He can be reached at yusuf.kathawala@cyrilshroff.com