AU Small Finance Bank Seeks Universal Banking License Amidst Merger with Fincare SFB

AU Small Finance Bank (AU SFB), based in Jaipur, has taken a significant step towards expanding its banking operations by submitting an application to the Reserve Bank of India (RBI) for a universal banking license. The application, filed on September 3, 2024, marks the bank's intent to transition from a small finance bank (SFB) to a universal bank.

In a notification to the stock exchanges, AU SFB stated, "We wish to inform that the bank has submitted an application to the Reserve Bank of India to seek approval for voluntary transition from a small finance bank to a universal bank today, i.e., on 3 September 2024." The submission of the application comes at a time when AU SFB is in the process of integrating with Fincare Small Finance Bank (SFB), following their merger announcement on April 1.

The move is in line with RBI's guidelines issued in April 2024, which outline the criteria for SFBs seeking to convert to universal banks. According to these guidelines, only listed SFBs can qualify for a universal banking license. The banks must have a minimum net worth of ₹1,000 crore, maintain a scheduled status with a satisfactory track record of at least five years, and demonstrate profitability with gross non-performing assets (NPAs) below 3% and net NPAs below 1% over the past two financial years. They must also meet the prescribed capital adequacy norms and provide a detailed rationale for the conversion.

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Currently, AU SFB and Ujjivan SFB are among the few small finance banks that meet the eligibility criteria to transition to universal banks. Others, like Jana SFB, are expected to qualify next year, pending improvements in their net non-performing asset (NNPA) ratios.

The transition to a universal bank is seen as a significant growth opportunity for many SFBs that feel constrained by their current geographical and lending limitations. As per the existing rules, small finance banks are required to keep at least 75% of their loans below ₹25 lakh, and 25% of their branches must be in rural areas with limited banking services. In contrast, universal banks do not face such restrictions, except for the mandate to allocate 40% of their loans to priority sectors like agriculture and micro, small, and medium enterprises (MSMEs).

For AU SFB, this transition comes at a time of strong financial performance. The bank reported a 30% increase in net profit to ₹502 crore for the quarter ending June 30, 2024, compared to ₹387 crore in the same period last year. Additionally, the bank's net interest income (NII), which represents the difference between the interest earned from lending activities and the interest paid to depositors, surged by 54% to ₹1,920.5 crore, up from ₹1,246 crore in the corresponding quarter of FY24.

Despite the positive financial growth, AU SFB's gross non-performing assets (GNPA) as a percentage of total loans stood at 1.78% for the June quarter, slightly higher than the 1.67% recorded in the year-ago period. However, the bank remains confident in its trajectory and believes that the conversion to a universal bank will further enhance its growth prospects and market presence.

The move to seek a universal banking license represents a strategic milestone for AU SFB, positioning it for expanded operations and greater flexibility in its service offerings.

Reference: Mint