AU Small Finance Bank has become the first small finance bank in over a decade to secure a universal banking licence from the banking regulator. The approval marks a significant shift in the bank’s operational scope, explains Ashvin Parekh
l Why a universal banking licence is rarely granted
THE RARITY OF universal banking licences (UBL) reflects the Reserve Bank of India’s (RBI) conservative approach, prioritising financial stability. Such a licence permits a lender to raise retail deposits, lend to corporates and offer them investment services that require adherance to strong governance and high capital adequacy norms, and mature risk management systems. Most banks, especially small finance banks (SFB), need years to build such capacity. AU SFB’s approval signals a consistent compliance track record, stable leadership, and robust financial performance.
The last such licences were issued in 2014 to IDFC Bank and Bandhan Bank, both as new banks, not upgrades. The 11-year gap shows RBI’s preference for institutions that have demonstrated resilience across economic cycles. By granting AU SFB the licence, the RBI acknowledges the bank’s readiness to move to the next level without compromising systemic stability but also underscores that such approvals are exceptional events rather than routine outcomes in India’s regulated banking environment.
l Does RBI have stringent norms for granting such licences?
THE RBI APPLIES rigorous, multi-layered criteria before granting a universal banking licence. Applicants must consistently exceed capital adequacy requirements, maintain strong asset quality, and demonstrate effective governance over time. It reviews compliance history, risk management systems and operational scalability. It also assesses potential systemic impact, including implications for financial inclusion and market competition. The evaluation process ensures that a bank can handle expanded operations without compromising prudential norms. Unlike faster liberalisation in some jurisdictions, India follows a gradualist approach, prioritising long-term trust in the banking system. Even profitable, well-managed banks may face delays if their risk profile, management depth, or operational readiness does not inspire complete confidence. The process is intentionally thorough and often opaque.
l Compliance record flawless
A BANK MUST demonstrate a flawless compliance record over several years. This includes timely adherence to all regulatory directives, maintenance of mandated capital adequacy ratios, accurate reporting, and prompt resolution of supervisory observations. Governance frameworks must be strong, with independent directors, clear board oversight, and transparent decision-making. On the infrastructure side, robust internal audit systems, advanced risk management tools, and real-time compliance monitoring mechanisms are essential. Technology platforms must support secure, scalable operations and regulatory reporting. Zero tolerance for non-compliance means embedding compliance culture across all levels to ensure that breaches, however small, are identified, reported, and rectified at once. This indicates the bank can handle the operational and governance responsibilities of a universal bank without creating systemic vulnerabilities.
l Norms for SFB vs universal lender
SMALL FINANCE BANKS are mandated to advance financial inclusion, lend 60% of adjusted net bank credit to priority sectors and maintain 25% of branches in unbanked rural areas. Some SFBs, after years of operation, gain the capacity to serve broader markets. A universal banking licence has fewer restrictions and allows a lender to offer corporate banking, foreign exchange and wealth management services. This supports diversification, revenue stability, and wider market access. To qualify, an SFB must have operated at least five years with sound asset quality, capital buffers above regulatory minimums, and robust governance. The RBI examines whether the transition will preserve inclusion goals while scaling operations. AU’s approval reflects its readiness to compete with large private-sector peers under full regulatory oversight, but also highlights that such upgrades are earned through sustained performance, not automatically granted with time or size.
l Is transition planning critical?
YES. TRANSITION PLANNING is a key part of the RBI’s assessment. The plan must outline how the bank will expand operations, upgrade infrastructure, and comply with regulatory requirements without service disruption. It should detail capital raising strategies, branch and product expansion timelines, risk management enhancements, tech upgrades and human resource readiness. The RBI examines whether the plan is realistic, time-bound, and supported by adequate resources. It also evaluates the bank’s capacity to manage a larger and more diverse customer base, while maintaining service quality and compliance. The scrutiny is thorough. The RBI looks for evidence that the transition will not compromise the bank’s stability or inclusion mandate. A credible, well-executed transition plan signals preparedness and reassures the regulator of the bank’s ability to handle broader responsibilities from day one of universal bank operations.
The writer is managing partner, Ashvin Parekh Advisory Services LLP
