Due to the stringent standards set by the Reserve Bank of India (RBI) regarding asset quality, only AU Small Finance Bank out of the 11 small finance banks meets the criteria for applying for a universal banking licence. The other banks will likely have to wait for several quarters.

AU Small Finance Bank, being the largest among them, has met all the regulatory criteria. It has a net worth of ₹12,560 crore, has been profitable for the past two fiscal years, and has kept its non-performing assets below the mandated levels of 3% for gross and 1% for net, as required by the RBI.

After merging with Fincare Small Finance Bank on April 1, its balance sheet has grown to ₹1.25 lakh crore, with a net worth approaching ₹15,000 crore. The bank currently serves around 10 million customers through 2,382 banking touchpoints.

Equitas Small Finance Bank, which aims to obtain a universal banking licence and maintain a diversified loan portfolio, will have to wait two more years to become eligible due to its net non-performing asset ratio exceeding 1% in the last two fiscal years.

AU Small Finance Bank stands out as a leading contender in this category. The board of directors from AU Small Finance Bank is set to convene with RBI officials to deliberate on the strategy for applying for a universal banking licence.

Universal banking licences are only available to publicly listed entities. Recently, the RBI released guidelines for small finance banks interested in voluntarily converting to universal banks. These guidelines require eligible banks to have a minimum net worth of ₹1,000 crore and meet prescribed capital adequacy ratio (CRAR) requirements.

Additionally, aspiring universal banks must have a scheduled status with a solid performance record for at least five years. They should also have listed shares on a recognised stock exchange, maintain a gross non-performing asset ratio of 3% or less, and a net non-performing asset ratio of 1% or less in the past two financial years.

Earlier guidelines from December 5, 2019, outlined the transition process for small finance banks to become universal banks, subject to meeting capital and performance criteria as per RBI's due diligence.

“Such conversion shall be subject to the SFB’s fulfilling minimum paid-up capital/net worth requirement as applicable to universal banks, satisfactory track record of performance as an SFB for a minimum period of five years, and the RBI’s due diligence exercise,” the banking regulator said in the release.