Small Finance Banks Vs Universal Banks: Understanding The Key Differences
Universal banks offer a wide range of services, such as commercial and investment banking.
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.
What Is A Universal Bank?
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
Eligibility Criteria For SFBs To Become Universal Banks
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.
Difference Between SFBs And Universal Banks
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.
Which Other SFBs Have Applied To Become Universal Banks?
Ujjivan Small Finance Bank and Jana Small Finance Bank have also applied for a universal banking licence.
