Most SFBs Would Not Clamour to Become Universal Banks if RBI Eases Some Curbs, Says Ex-Secy

Highlighting the importance of small finance banks (SFBs) in fostering financial inclusion, former Financial Services Secretary D K Mittal said most of them would not clamour to become universal banks if some restrictions are eased by the Reserve Bank.

To promote financial inclusion in the country, RBI, in 2014, issued the guidelines for licensing of small finance banks (SFBs) in the private sector. Following this, RBI granted licences to a dozen entities.

As per the RBI guidelines, SFBs are required to open at least 25 per cent of their branches in unbanked rural centres and are mandated to provide 75 per cent of loans to the priority sector compared to 40 per cent for the commercial banks.

Last month, the RBI invited applications from small finance banks meeting specified criteria, including a minimum net worth of Rs 1,000 crore, for becoming regular or universal banks.

"While issuing guidelines for Small Finance Banks to become universal banks, it would be in the larger national interest of financial inclusion if RBI lifts some of the restrictions imposed on such SFBs including tag of SFBs," he told PTI.

Talking about restrictions, he said, the RBI should consider allowing co-lending, pass through certificate (PTC) and securitisation, and setting up of subsidiaries.

Idea should be to make them at par with commercial banks except for three basic principles of priority sector, below 25 lakh and Basel II for capital, he said, adding that these should work as universal banks with a differentiated focus on financial inclusion.

"After all they comply with all guidelines applicable to universal banks except a few related to capital but with additional responsibility of 75 per cent priority sector and 50 per cent below Rs 25 lakh lending. This will ensure that customers look at all commercial banks as equal which is so," he said.

"If it is done, they would be as good as a universal bank with the added responsibility of furthering the objective of financial inclusion and serving the population of the lowest strata of society. This will also ensure that most SFBs would not clamour to become universal banks," he added.

As per the April guidelines of the RBI, an SFB aiming to become a universal bank should have a minimum net worth of Rs 1,000 crore at the end of the previous quarter (audited) and the shares of the bank should have been listed on a recognised stock exchange.

It should also have a net profit in the last two financial years and Gross NPA and Net NPA of less than or equal to 3 per cent and 1 per cent, respectively, in the last two financial years.

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