The track record of a few of the promoter-driven banks in India over the past couple of decades would make any regulator cautious. While some have done exceptionally well, Bandhan, which graduated from micro-finance institutions (MFI), is muddling along. It’s the casualties — whether a Global Trust Bank or a Yes Bank — that tell us not all promoters are fit and proper. In fact, the Reserve Bank of India (RBI) has been reluctant to allow even strong non-banking financial companies (NBFC) to become banks if they are a part of any business group. Against this backdrop, the RBI came out with the eligibility norms for small finance banks (SFB) to transition to universal banks. While eight of the 12 SFBs were earlier MFIs, they are gradually de-risking themselves and have forayed into secured products — home, gold, micro, small and medium enterprise, and vehicle loans. That has lowered the share of microfinance credit to about a third of the book at the end of March 2023 from 40% in March 2020. This is an encouraging signal because a lender like Bandhan Bank has suffered because it is yet to shed its microfinance bias.

But SFBs, too, are coming out of a very rough patch. Since their borrowers are financially weaker, delinquencies rose sharply during the pandemic, driving down profits and, in some instances, causing losses. If their accounts look much better today, it is partly due to substantial write-offs. Many SFBs were compelled to raise growth capital after the pandemic. Going by the eligibility criteria, as of now only AU Small Finance makes the cut. Apart from a set of financial parameters, the RBI will also assess the qualitative criteria of a satisfactory five-year track record. Though some have criticised the subjective element in such assessments, it is very much required because numbers tell just one part of the story. In fact, the requirement that an SFB should have been profitable only in the last two........

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