Punjab-based Capital Small Finance Bank has moved closer to meeting the eligibility criteria for applying for a universal banking license. Its net non-performing assets (NPAs) dropped to 1.14% in the June quarter, narrowing the gap on what management called the single remaining pending requirement before seeking an upgrade. However, the bank’s board will decide on submitting the formal application only by FY29.
"From a tickbox perspective, we were left with one tickbox, that is a net NPA," Sarvjit Singh Samra, managing director and chief executive of Capital Small Finance Bank, told Mint, referring to the RBI's threshold of 1% or lower for the previous two fiscal years. He added that the metric has steadily improved from 1.38% in the September quarter.
The small finance bank reported a 29% year-on-year rise in June-quarter net profit to ₹41 crore, supported by 22% growth in net interest income to ₹134 crore and a 23% increase in pre-provision operating profit to ₹65 crore.
Net NPA measures bad loans left uncovered by provisions, and it is one of the thresholds the Reserve Bank of India (RBI) applies when a small finance bank asks to convert into a full-service universal bank. Clearing it matters because universal-bank status reduces the share of mandatory priority-sector lending and allows it to lend more freely. Universal banks need to give 40% of their total loans to the priority sector, while small finance banks must give 60%.
Under RBI norms, small finance banks seeking to convert to universal banks need to meet several criteria. These include being listed; a minimum net worth of ₹1,000 crore at the end of the previous quarter; being profitable in the previous two financial years; and gross NPAs and net NPAs of up to 3% and 1%, respectively, in the previous two fiscal years.
Universal bank ambitions
So far, AU Small Finance Bank is the only one to have received RBI approval to upgrade to a universal bank. Applications by Jana Small Finance Bank and Ujjivan Small Finance Bank were ‘returned’ by the regulator.
“The decision [to submit the application] will be taken by our apex board,” Samra said, tying the timing to two milestones: having more than 300 branches, and a ₹16,000-crore loan book. The bank had ₹9,074 crore in gross advances and 216 branches as of 30 June.
Samra also tightened guidance across several metrics. Gross NPA is now targeted at 2.4-2.55%, narrowed from the earlier range of 2.4-2.7%. Credit cost, the share of the loan book written off and provided for, is being held between 0.15% and 0.30%, with the upper end treated as a ceiling.
The bank guided for a net interest margin between 4.15% and 4.25% for FY27. Margins were squeezed last year when the RBI cut rates sharply because loans are repriced immediately while deposits only reset on maturity. That lag has now closed. "The bad session for the NIM is over," Samra said, adding that a further improvement will come from FY28 as the credit-deposit ratio expands from an average of 83%.
More partnerships
The bank is also scaling its partnership model to reach areas where it has no branches. Its partner count has risen from two in March to six at present, with a target of 10 by the end of September, after which it will pause to see whether more partners are required. Under these partnerships, credit risk stays with the partner non-banking financial company (NBFC), backed by a first-loss default guarantee. The arrangement lets the bank grow its book without the cost of opening branches.
On the foreign exchange business, Capital SFB remains an authorized dealer category II (AD-II) bank, which allows it to handle a limited set of forex transactions and not the full range available to AD-I banks. The bank accepts non-resident external (NRE) deposits but has stayed out of foreign currency non-resident (bank) [FCNR-(B)], the foreign currency deposit product that has drawn aggressive rate competition from larger banks in recent months.
Samra said the bank is eligible for AD-I authorisation and will apply "at the most appropriate time," but has no immediate plan to do so. The decision, he said, will depend on customer profiling and present business metrics rather than on the deposit opportunity itself.