Challenges Ahead for Small Finance Banks Seeking Universal Licenses
Small Finance Banks' universal licence dream: It's a long road ahead
Business Standard
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Small Finance Banks (SFBs) in India face significant hurdles in obtaining universal bank licenses due to governance issues and asset quality concerns. The Reserve Bank of India's recent rejection of Ujjivan SFB's application highlights the challenges, as only one out of five applicants has been approved since 2024.
- 01Only five entities have secured universal bank licenses in the last 25 years.
- 02The Reserve Bank of India rejected Ujjivan SFB's application for conversion to a universal bank.
- 03AU Small Finance Bank is the only SFB to receive approval under new 2024 norms.
- 04Governance and risk management practices are critical for SFBs seeking universal licenses.
- 05Most SFBs still struggle with high non-performing asset (NPA) ratios.
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In the past 25 years, only five entities have successfully obtained universal bank licenses in India, with the latest being AU Small Finance Bank (SFB) in 2025. The Reserve Bank of India (RBI) has introduced new norms in 2024 aimed at facilitating the transition of Small Finance Banks into universal banks. However, the recent rejection of Ujjivan SFB's application underscores the ongoing challenges these banks face, particularly in governance, asset quality, and risk management. Ujjivan's stock fell 3% following the news, reflecting investor concerns. As of December 31, 2025, Ujjivan's unsecured loans accounted for 52% of its ₹37,057 crore portfolio, indicating a need for diversification. The RBI's eligibility criteria require banks to maintain net and gross NPA ratios below 1% and 3%, respectively, for two consecutive years, which many SFBs currently fail to meet. Analysts suggest that meaningful diversification and improved governance practices are essential for SFBs to successfully transition into universal banks, but this process will take time.
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The rejection of Ujjivan SFB's application could hinder its growth plans and impact investor confidence, potentially leading to tighter credit conditions for consumers.
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