RBI RULES FOR UNIVERSAL BANK LICENSE (Syllabus: GS Paper 3 – Economy)

Context: The Reserve Bank of India (RBI) has said small finance banks (SFBs) should have a minimum net worth of Rs 1,000 crore to become universal banks in accordance with the on-tap licensing norms.

RBI Rules for Universal Bank License

• Scheduled Status Requirement: SFBs aspiring to become universal banks must hold scheduled status with a satisfactory performance record for at least five years, as per the central bank's directive.
• Listing on Recognised Stock Exchange: The shares of these aspiring banks should be listed on a recognized stock exchange, as outlined in the RBI circular.
• Financial Performance Criteria: Eligible SFBs must demonstrate a net profit in the last two financial years, along with maintaining GNPA and NNPA of less than or equal to three percent and one percent, respectively, during the same period, according to the RBI.

o The circular specifies that there's no mandatory requirement for an identified promoter for eligible SFBs. However, existing promoters, if any, must continue their role during the transition to a universal bank.

• Shareholding Lock-in Requirements: The circular emphasizes that there should be no new mandatory lock-in requirement for the minimum shareholding of existing promoters in the transitioned universal bank.
• Preservation of Promoter Shareholding Plan: It's specified that the promoter shareholding dilution plan, once approved by the Reserve Bank, should remain unchanged during the transition process, as per the RBI's guidelines.

Small Finance Banks (SFBs)

• About: SFBs are banks that have limited financial resources and are regulated by the Reserve Bank of India.
• Purpose of SFBs: SFBs aim to provide financial inclusion to low-income individuals and underserved communities who are often excluded from traditional banking systems.