The RBI has granted AU Small Finance Bank (AUSFB) in principle approval for a universal banking license, making it the first small finance bank to receive this in a decade. This approval, which follows the submission of an application in September 2024, signifies a major milestone for the bank and is expected to pave the way for other well-performing small finance banks to transition.
Key details of the transition
- Application and approval: AU SFB submitted its application to the RBI in September 2024, utilizing the central bank’s “on tap” licensing guidelines and a specific framework released in April 2024 for SFBs voluntarily converting to universal banks.
- Eligibility criteria: The approval was granted after AU SFB met all of the RBI’s stringent requirements, including:
- Operating as a scheduled bank for at least five years with a strong performance record.
- Being listed on a recognized stock exchange.
- Maintaining a minimum net worth of ₹1,000 crore.
- Sustaining healthy asset quality, with gross and net non-performing assets below prescribed levels for the two preceding financial years.
- Relaxation of lending norms: As a universal bank, AU SFB will no longer be subject to some of the restrictions placed on small finance banks, including:
- The requirement to maintain at least 50% of its loan portfolio in loans of small ticket sizes (below ₹25 lakh).
- The mandate to lend 60% of its adjusted net bank credit to priority sectors, with the new requirement aligning with the 40% norm for universal banks.
- Expanded services and reach: The new license will allow AU SFB to offer a wider array of products and services, including larger corporate loans, foreign exchange services, and wealth management, enabling it to compete more broadly with larger private sector banks.
- Customer impact: For existing customers, the transition is expected to be seamless, with no changes to their current accounts, interest rates, access channels, or financial instruments. The bank has indicated it will refresh its brand identity to reflect its new status.
PRACTICE QUESTIONS
Consider the following statements regarding the RBI’s decision to grant a universal license to AU Small Finance Bank:
I. The approval allows AU Bank to expand its operations to include commercial and investment banking, which were restricted under its SFB license
II. As a universal bank, AU Bank is required to allocate at least 60% of its loans to priority sectors, the same as its previous mandate as an SFB
Which of the above statements is/are correct?
a) I only
b) II only
c) Both I and II
d) None
Answer: a
Explanation: Statement I is correct- The universal bank status removes restrictions placed on SFBs, enabling AU Bank to scale up by offering larger loans, catering to a broader customer base, and forming subsidiaries. Universal licenses permit a wide array of services, including commercial and investment banking. Statement II is incorrect- The priority sector lending (PSL) target for universal banks is lower than for SFBs. As a universal bank, AU Bank’s PSL target will be 40%, down from the 60% required of it as a small finance bank.
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