Mumbai: The Reserve Bank of India (RBI) has returned Ujjivan Small Finance Bank’s application to upgrade to a universal bank, sending a clear signal to the industry: meeting financial criteria is not enough. The regulator is placing heavy emphasis on the diversification of loan books, a move that will force other hopefuls to reassess their transition timelines.
Ujjivan was among the three small finance banks (SFBs) that had applied to the central bank to transition to a universal bank. Conceptualized by a committee headed by former RBI board member Nachiket Mor, SFBs are supposed to undertake basic banking activities like accepting deposits and lending to unserved and underserved sections, including small businesses and small farmers.
An upgrade allows these banks to lend 40% of their total loans towards the priority sector, instead of the 60% applicable now, permitting greater discretion. It also allows access to cheaper funds, especially from the market. In August, AU Small Finance Bank became the only such bank to receive a conditional approval from RBI. Two months later, RBI returned the application of Jana Small Finance Bank.
Ujjivan told the stock exchanges on Monday that RBI “took note of the bank’s recent efforts towards diversification of its loan portfolio”.
However, RBI was of the view that there is scope for progress in this area and therefore has returned the application and advised the bank to consider applying again after demonstrating a diversified loan portfolio.
In a separate statement, the bank's spokesperson said that Ujjivan will continue to embark on the path of diversification and will resubmit the application in due course, keeping RBI’s guidance in mind.
As of 31 December, 48% of Ujjivan’s loan book was secured, backed by collateral, while the remaining was unsecured and included microfinance loans. A year ago, the secured book was at 39% of total loans, per data from its analyst presentation.
In comparison, AU Small Finance Bank’s secured loans accounted for 90% of the total book at the end of the June quarter of FY26, the quarter preceding its in-principle licence. The bank’s secured loans are primarily driven by housing loans and micro mortgages.
Path to diversification
The bank’s secured loans are primarily driven by housing loans. At ₹9,560 crore at the end of December, these accounted for over half of all secured loans. Other segments contributing to the ₹17,825 crore secured book include loans to small businesses, while newer segments like vehicle finance and gold loans were also present.
The bank has a plan to diversify even further. Sadananda Balakrishna Kamath, chief financial officer of Ujjivan Small Finance Bank, told analysts on 22 January that by 2030, the bank expects 30-35% of its loans will be unsecured and the balance will be secured.
“We are going to have a diversified book, and as shared in our plan for 2030, we have worked out the entire plan,” said Kamath.
Experts said that regulators are generally known to be cautious. “The bar for a universal bank is very high, and therefore, RBI gives small finance bank licences, and they can gradually transition to universal banks,” said Prakash Agarwal, partner, Gefion Capital, and former head of financial institutions at India Ratings.
Agarwal said that RBI had a certain expectation, a certain structure in mind when it proposed the transition, and since it has been returned and not rejected, it would mean that this is not the end of the road.
He said that RBI’s caution also stems from its extensive experience of dealing with different kinds of banks and its awareness of systemic risks and challenges. “RBI's own experience with private sector banks and state-owned banks means that they know what could make banks vulnerable. From that perspective, it's a healthy sign that RBI is actually asking applicants to bring more to the table before granting a licence,” said Agarwal.
Regulatory roadblocks
Meanwhile, in its master directions on universal bank licences, the central bank had said that eligible small finance banks with diversified loan portfolios will be preferred.
To be eligible, a small finance bank must have a ‘satisfactory track record’ of performance for at least five years; be listed on a stock exchange; have a minimum net worth of ₹1,000 crore; have gross and net non-performing assets (NPA) of less than or equal to 3% and 1%, respectively, in the last two financial years.
In February 2025, Ujjivan Small Finance Bank submitted its application to RBI. Sanjeev Nautiyal, the bank’s chief executive, told analysts on 22 January that on its application being considered by the regulator, it continues to remain hopeful. He said it was “being actively considered by the Reserve Bank of India” and “would expect it (the decision) to happen as quickly as possible”.
- RBI returned Ujjivan’s universal license bid due to insufficient diversification in the loan book.
- The central bank emphasizes balanced portfolios over meeting basic financial eligibility criteria.
- Universal status would lower priority lending requirements from 60% to 40% of their total loans.
- Ujjivan increased secured loans to 48% but needs further progress to reapply.
- Regulator remains cautious to prevent systemic vulnerabilities seen in past private banks.