The recent statements of the chiefs of Ujjivan Small Finance Bank and Jana Small Finance Bank give the impression that they are keeping their eyes firmly on the prize.

The RBI returning their application for voluntary transition to a universal bank seems to have only hardened their resolve to go the full nine yards to achieve their cherished goal.

Of the 11 SFBs in the country, only three have approached the regulator so far to transition to a universal bank (UB), confident that they tick all the boxes related to eligibility criteria. Only one made the cut — AU SFB (the biggest of the lot with deposits of ₹1.52 lakh crore and advances of ₹1.4 lakh crore as at March-end 2026).

It may be pertinent to mention here that among the 10 entities that were granted in-principle approval to set up an SFB in September 2015, eight were non-banking financial company-microfinance institutions (NBFC-MFIs). AU Financiers and Capital Local Area Bank were an exception. All 10 started their banking journey in the 2016-17 period.

Jaipur-based AU Financiers was an asset financing NBFC, primarily engaged in vehicle financing (about 51 per cent of its loan portfolio in 2016), with diversification into small and medium enterprises (SME) and construction finance, and loans to NBFCs and housing finance companies (HFCs). Jalandhar-based Capital Local Area Bank was a niche entity, with operations in three contiguous districts.

So, NBFC-MFIs such as Janalakshmi Financial Services, Ujjivan Financial Services, Equitas Holdings, ESAF Microfinance and Investments, RGVN (North East) Microfinance, Suryoday Micro Finance and Utkarsh Micro Finance began their banking journey with a portfolio loaded with microfinance loans, which are extended to low-income segments and are generally unsecured.

The NBFC-MFI loans were highly vulnerable to shocks arising from natural calamities, local political interference, and over-indebtedness, among other factors. There is still a high preponderance of these loans in SFBs that had their origins in an NBFC-MFI. Over the last 4-5 years, these SFBs have been working assiduously to have a balanced mix of secured and unsecured loans.

Diversified portfolio

When it came to getting an “in-principle” regulatory approval, AU SFB, which was the first SFB off the block to submit its application (on September 3, 2024) for a UB licence, may have had it easy. Apart from fulfilling the eligibility for UB transition, it also has a well-diversified portfolio.

AU SFB’s gross advances portfolio was well-diversified even as of June-end 2024 (if one considers this as the reference point for applying for a licence), with retail assets accounting for 72 per cent of its loan book, followed by commercial assets (21 per cent), and credit cards and others (3.5 per cent each).

Ujjivan SFB, which applied for a UB licence in February 2025, had a high proportion of unsecured loans (61 per cent) as at December-end 2024.

The bank, in its April 2026 exchange filing, observed that the RBI took note of its recent efforts to diversify its loan portfolio. However, the central bank was of the view that there is scope for progress in this area.

Therefore, the RBI has returned the bank’s application and advised it to consider applying again after demonstrating a diversified loan portfolio.

Jana SFB, which applied for a UB licence in June 2025, had a high proportion of secured advances (70 per cent) as at March-end 2025. Yet its application could not pass muster with the RBI. Fitting the eligibility criteria alone seems not enough.

The regulator appears to be laying emphasis on the qualitative aspects of a bank’s financial performance and operations too.

The “returning” of an application doesn’t mean the end of the road for Jana SFB or Ujjivan SFB. Both Bengaluru-headquartered banks can approach the regulator again for a UB licence once they fulfil all norms.

Key requirements

The eligibility criteria for an SFB’s transition to a universal bank include having a scheduled status with a satisfactory performance record for at least five years; listing of shares; having a minimum net worth of ₹1,000 crore; and meeting the prescribed capital to risk-weighted assets ratio (CRAR).

Further, an SFB should have clocked net profit in the last two financial years, and its gross non-performing asset (GNPA) and net non-performing asset (NNPA) should be less than or equal to 3 per cent and 1 per cent, respectively.

Sanjeev Nautiyal, MD and CEO, Ujjivan SFB, told analysts that the regulator, while returning the bank’s application, had acknowledged its ongoing efforts to diversify its loan portfolio.

“We shall continue to engage with the RBI and re-apply as per their constructive guidance at an appropriate time, demonstrating a diversified portfolio. We remain committed to our universal banking aspirations,” he said.

Nautiyal emphasised that Ujjivan SFB would continue to strengthen the secured book to ensure the UB journey is palatable, maintaining the profitability underpinnings while also ensuring that the secured-to-unsecured loans ratio is better than what the bank had shown the RBI.

“So, this will be a self-discovery, I would say. But certainly, we will calibrate and decide at what ratio, by what time... so that we are in a position to apply to the RBI. For this year, I can only guide that our secured portfolio would be a little upwards of 56 per cent,” Nautiyal said.

Deposit target

Ajay Kanwal, MD and CEO, Jana SFB, said during a recent analyst call: “We would get back to working on re-submitting the application... we needed the audited results to be completed. And we have maintained gross NPA of 3 per cent and net NPA of 1 per cent. So, at least these are not the approval criteria, but these are the gating criteria for an application.

“We are diversified. We continue to diversify (loan portfolio). So we do think we probably meet that criteria. But yes, the work to resubmit the application will start now.”

Kanwal emphasised that Jana SFB’s interest in applying for a UB licence is largely from a liability book standpoint.

“We thought the velocity of deposits and the cost of deposits will improve as we change our name and drop the words ‘small finance’. We still think we have a strong business case in our numbers,” he said.

Stress factor

Karthik Srinivasan, Group Head–Financial Sector Ratings, ICRA, noted that over the last two years the microfinance sector has hit a bad patch. So the SFBs that were originally MFIs diversified into MSME lending, which is also seeing stress.

“So, at a sector level, MFI is seeing stress, SME is also seeing stress. So the RBI may be wanting to hold back on licensing for some time. This is just my hunch,” he said.

Srinivasan highlighted the SFBs’ argument that since their name carries the tag “small finance”, they find it difficult to reach out to depositors, including tapping government business.

“So, the moment the ‘small finance’ tag is removed it’ll be a bit more easier for these banks to raise deposits,” he said.

Secured lending

Upon conversion into a universal bank, while the liability side will undergo a change, with the banks gaining access to cheaper and granular deposits, it is unlikely that they will jump into wholesale lending.

Referring to the benefits in an SFB converting into a UB, Baskar Babu R, MD and CEO, Suryoday SFB, said: “I think the cost of deposits will reduce by 50 to 70 basis points. And most of us want to go deeper into secured lending. For this, we have to have a better cost of funds.”

Babu underscored that Suryoday SFB is not in a hurry to apply for a UB licence. “Let the larger ones (SFBs) convert first. Based on their experience, we will explore,” he said.

For an SFB, the advantages inherent in converting to a UB include lower capital requirement (lower capital to risk-weighted assets ratio requirement at 11.5 per cent against 15 per cent for SFBs), lower priority sector lending target of 40 per cent against 60 per cent, and access to cheaper deposits.

While the idea of converting into a universal bank may be irresistible, SFB chiefs will cross the river by feeling the stones, mindful of the fact that one swallow (AU SFB’s licence to convert into a UB) does not make a summer.

Published on June 22, 2026