The Universal Test

AU SFB becomes the first of its kind to secure the RBI's nod to transition into a universal bank, but there are a few cautionary tales in past experiments

- By SALIL PANCHAL

In August, AU Small Finance Bank received an in-principle approval from the Reserve Bank of India (RBI) to become a universal bank. AU will now be the first small finance bank (SFB) in the country to transition into a universal bank. The bank's top management attributed the milestone to their “robust business model, sound governance, and enduring commitment to financial inclusion.”

The last time RBI granted universal banking licences was in 2015, to Bandhan Bank and IDFC First Bank. Bandhan was originally a microfinance institution, while IDFC First was formed out of infrastructure financing firm IDFC Ltd. It later merged with NBFC Capital First to become IDFC First Bank.

Between 2014 and 2016, the RBI initiated the AQR (asset quality review) programme to deal with a high level of impaired loans in public sector banks. Some of these large stressed assets were pushed towards and resolved by the National Company Law Tribunal (NCLT).

“Banks which last got a universal banking licence, Bandhan Bank and IDFC First Bank, were both experiments. Over a 10-year period, both have seen limited success,” says Krishnan ASV, analyst (institutional equities), HDFC Securities. “In terms of shareholder returns, both have not delivered well, showing muted profitability. IDFC First has never delivered double-digit RoE (return on equity) in the past decade.”