In the previous edition, this column captured whether there is space for all the small finance banks in the listed universe. This edition, we continue the SFB topic and delve into this question – are they ready yet to take the larger role of universal banks?

Each of these lending outfits that we are referring to here — Equitas SFB, Ujjivan SFB or AU SFB — have proven their mettle over a span of at least two decades in different capacities. As organisations, they have withstood many cycles and the test of time. They hold leadership positions in their domains. But as banking outfits, have they seen enough to upgrade themselves to the next level?

In the last six years, they have seen two cycles — demonetisation and the pandemic. In both these instances, they have established their abilities to handle asset qualities issues and recover from the bad phase in 12-18 months. Today, they want to grow their books faster than what they did in the last six years, and some of them are way larger than the old-generation private sector banks. T

But is weathering two big cycles enough to say that these banks have seen it all? Some of the SFBs have ventured into new territories and ones where they’ve not operated as NBFCs. While it shows their ability to branch out, perhaps for the good of depositors, investors and for the entire ecosystem, it may wait to see how these loan shape up before they upgrade. To simply say, the ageing of accounts sourced prior to 2022 should be tested to get a good grip of their underwriting capabilities. Their systems, processes, and technology should also be tested a little more before handing out the verdict. For instance, AU and Equitas were licensed to operate as forex dealers in April. Four months have lapsed, and the product rollout still work in progress.

Payments banks wanting to become SFBs should also be questioned on similar lines — whether they have the bandwidth to handle assets. Even more, because some of these banks have faced deep operational and staff-related issues in the past. They are still in the process of setting these things right. Allowing them to upgrade at this juncture could be a gamble for these banks and for the SFB fraternity itself. It is only now that depositors have started to trust these banks despite the ‘small finance’ tag. More importantly, if three of the largest SFBs with over ₹1-lakh crore of business opt to become universe banks, the universe of small finance bank might get smaller. Can the RBI and SFB fraternity afford it?