Equitas Small Finance Bank is delaying its transition to a universal bank to ensure its application meets regulatory standards. Management is reviewing the returned applications of peer banks like Jana and Ujjivan to avoid similar outcomes. The transition could eventually lower capital requirements and ease lending rules for the bank.
Equitas Small Finance Bank has decided to adopt a measured approach regarding its voluntary transition into a universal bank, opting to prioritize regulatory alignment over speed. Despite meeting the formal eligibility criteria, the bank’s management indicated that they are carefully reviewing the experiences of other small finance banks to understand why the Reserve Bank of India (RBI) has returned similar applications in the past.
Learning from Peer Applications
The management highlighted that Jana Small Finance Bank and Ujjivan Small Finance Bank recently faced setbacks when their applications for a universal bank license were returned by the regulator. While the reasons for returning Jana’s application were not publicly detailed, Ujjivan was reportedly advised by the RBI to further diversify its loan book. By observing these outcomes, Equitas aims to refine its own strategy to ensure that its eventual submission is robust and meets all regulatory expectations, minimizing the risk of a rejection.
Impact of Universal Banking Status
Transitioning to a universal bank license, a path successfully taken by AU Small Finance Bank, offers several structural advantages that could change the bank’s operating profile. Currently, small finance banks face a priority sector lending target of 60%, which would decrease to 40% under a universal bank license. Furthermore, the bank would no longer be subject to the requirement that 50% of its loan portfolio must consist of loans under Rs 25 lakh. These changes could provide greater flexibility in loan distribution and capital deployment.
Additionally, the regulatory capital adequacy ratio requirement could drop from 15% to 11.5%. This shift in capital norms could potentially allow the bank to manage its balance sheet more efficiently. Removing the small bank designation may also assist in deposit mobilization by potentially reducing risk perceptions among certain customer segments.
Financial Context and Next Steps
Equitas became eligible for this transition after meeting performance benchmarks, including maintaining gross non-performing assets below 3% and net non-performing assets below 1% for two consecutive years. For the fiscal year ending in 2026, the bank reported a net profit of Rs 103 crore, compared to Rs 147 crore in the prior year. Its capital base currently stands at Rs 1,144 crore, satisfying the net worth criteria for the application.
Investors should monitor the bank’s future communication regarding its loan portfolio diversification, as this has been a key area of regulatory scrutiny for peers. The bank has stated there is no immediate deadline for this transition, suggesting that the timing of the application will remain contingent on internal preparation and ongoing dialogue with the regulator.