The Reserve Bank of India (RBI) has introduced guidelines for the voluntary transition of Small Finance Banks (SFBs) to Universal Banks, effective immediately. According to the guidelines, SFBs seeking to transition into Universal Banks must meet specific eligibility criteria. Firstly, they must maintain a satisfactory track record of performance for a minimum of five years.

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Additionally, their shares should be listed on a recognized stock exchange, and they must possess a minimum net worth of Rs 1,000 crore as at the end of the previous quarter (audited).

Moreover, they should meet the prescribed Capital to Risk-weighted Assets Ratio (CRAR) requirements for SFBs and have recorded a net profit in the last two financial years.

Asset quality is also a key factor, with GNPA and NNPA required to be less than or equal to 3 percent and 1 percent respectively in the last two financial years.

Furthermore, the RBI has outlined conditions regarding shareholding patterns during the transition. There is no mandatory requirement for an eligible SFB to have an identified promoter.
Existing promoters will continue as promoters on transition, and no addition or change in promoters is permitted during the transition.

There will be no new mandatory lock-in requirement for existing promoters, and the promoter shareholding dilution plan already approved by the RBI will not change. Eligible SFBs with a diversified loan portfolio will be preferred for transition.

SFBs seeking transition must provide a detailed rationale for the shift and submit their application in the prescribed form to the RBI's Department of Regulation in Mumbai.

The application will be assessed in accordance with the guidelines for 'on-tap' Licensing of Universal Banks in the Private Sector dated August 1, 2016, and RBI (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023.

Upon transition, the bank will be subjected to all relevant norms, including the Non-Operative Financial Holding Company (NOFHC) structure, as per the guidelines.

This initiative, outlined in Paragraph 14 of the "Guidelines for 'on-tap' Licensing of Small Finance Banks in Private Sector" dated December 5, 2019, provides a clear pathway for SFBs to convert into Universal Banks, subject to certain conditions.