Small Finance Banks Vs Universal Banks: Understanding The Key Differences

The AU Small Finance Bank (SFB) has received ‘in-principle’ approval from the Reserve Bank of India (RBI) to become a universal bank. This is the first time a small finance bank in India has received approval to become a universal bank.

In the context of this development, let us take a look at the differences between SFBs and universal banks and which other SFBs have applied for a universal banking licence.

A universal bank is a financial institution that provides a comprehensive range of services. These include:

• Commercial banking

• Investment banking

• Insurance

• Wealth management

• International banking

An SFB must meet the following criteria to apply to become a universal bank:

• Have a net worth of over Rs 1,000 crore.

• Possess a satisfactory track record of performance over the past five years.

• Have a net profit in the last two financial years.

• Have a gross NPA of less than 3% and a net NPA of less than 1% for two financial years.

• The bank must be listed.

Here are some of the key differences between SFBs and universal banks:

• Freedom To Lend

At least 50% of the portfolio of an SFB must comprise loans and advances up to Rs 25 lakh.

On the other hand, no such restrictions are imposed on universal banks.

• Priority Sector Lending

An SFB needs to allocate a minimum of 60% of its portfolio to priority sector lending. For universal banks, the figure stands at 40%.

• Product Suite

SFBs are primarily focused on providing basic banking services like accepting deposits and lending to underserved sections of the population. As a result, there are restrictions on the range of services they can offer.

On the other hand, there are no restrictions on the financial services that a universal bank can offer.

• Branch Geography

A minimum of 25% of an SFB’s branches must be located in rural and unbanked areas. No such restrictions apply to universal banks.

• Subsidiaries

SFBs cannot set up subsidiaries for non-banking activities. However, universal banks are free to set up subsidiaries to offer services such as insurance.

• Capital Adequacy

SFBs need to maintain a minimum capital adequacy ratio (CAR) at 15% of risk-weighted assets (RWA). The CAR requirement for universal banks stands at 11.5% of RWA.

Ujjivan Small Finance Bank and Jana Small Finance Bank have also applied for a universal banking licence.