On 13 April, the Reserve Bank of India (RBI) returned Ujjivan Small Finance Bank's (SFB) application for a voluntary transition to a universal bank, asking it to diversify its loan portfolio. RBI had also returned Jana SFB's application in October 2025 for failing eligibility criteria under its April 2024 framework for SFB-to-universal bank transitions. Jana and Ujjivan are expected to reapply. AU Small Finance Bank, the largest among SFBs, is the only entity in the category to receive the approval. While this shows there is a pathway, the RBI's moves signal it is not just about size.
Valuation gap
Ujjivan's shares fell nearly 6% following RBI's move, reflecting investor disappointment. Becoming a universal bank removes key constraints on SFBs and gives room to grow. Capital requirements fall from 15% to 11.5%, freeing up funds for lending. Priority sector lending targets also ease to 40%, helping build a more balanced loan book. Removal of 50% small-ticket loan requirement makes it easier to issue larger, more efficient loans. Relaxed limits on lending to a single borrower opens opportunities with bigger customers.
Markets reward such transitions. AU Small is six times larger than Ujjivan, nine times larger than Equitas, and 17 times larger than Jana Small Finance Bank. Its price-to-book ratio is 4 times that of Ujjivan's 1.85 times. Investors no longer see SFBs as one uniform category. A clear split is emerging between banks seen as ready to transition and those still working to prove they can sustain it.
Scale matters
AU Small Finance Bank leads with a loan book of about ₹1.30 trillion as of Q3 FY26, up 19% year-on-year. This came amid merger with Fincare SFB and a steady organic growth. In the second rung, Equitas, Ujjivan, and Jana operate in ₹30,000- ₹45,000 crore range. Growth rate of 16-22% is respectable, but scale is a work in progress.
Larger loan books provide strong buffer during downturns and allow better diversification without high concentration risks. They also support bigger loans, new customer segments, and stable operations. This difference shows up in profits. AU reported a net profit of ₹668 crore in Q3 FY26, compared with ₹90 crore for Equitas and ₹185.7 crore for Ujjivan. Larger balance sheets tend to support higher earnings capacity over time. For smaller SFBs, closing this gap and improving diversification are critical for long-term resilience and to fully benefit from a transition to universal banking.
Legacy problem
The primary reason the RBI returned Ujjivan's application was portfolio diversity. Ujjivan has been expanding into housing, micro, small and medium enterprises (MSMEs), and gold loans. Yet only 48% of its books are secured. Its microfinance legacy runs deep.
The transition is not easy. Microfinance loans typically yield 20% to 22%, supporting strong margins in the short term. Secured loans usually yield 8% to 15%, which can reduce margins during the shift. Even so, SFBs seeking a universal banking licence have to diversify. The RBI's April 2024 framework places as much emphasis on a balanced loan book as on financial thresholds such as non-performing assets (NPAs).
Among the leaders, AU Small Finance Bank stands out with 93% of its portfolio in secured loans, including about 68% in retail secured segments, and very low dependence on microfinance. Equitas has around 88% of its book secured.
A more diversified and secure portfolio improves stability. Secured loans, such as housing, vehicle, gold, and MSME, tend to have lower losses and better recovery rates. Heavy reliance on microfinance, by contrast, leaves banks exposed to borrower stress, monsoon shocks, and policy changes.
Quality check
The RBI's April 2024 framework requires SFBs seeking universal bank status to keep gross NPA at or below 3% and net NPA at or below 1% for the preceding two financial years. AU and Ujjivan have reported gross NPAs in the 2.2% to 2.5% range in recent periods.
Asset quality also shapes capital and returns. Higher NPAs require more provisioning and larger capital buffers, limiting growth and compressing returns. Ujjivan's return on equity has moderated to around 11.5% to 12.4%, partly reflecting its historical exposure to unsecured microfinance and the volatility that comes with it.
In recent analyst calls, executives across leading SFBs said the peak of asset quality stress, particularly in microfinance segment, was behind them. Slippages have bottomed out, and collections were improving.
Recent regulatory actions suggest that hitting the numbers is not enough. Jana's application was returned in October 2025 despite meeting key thresholds, pointing to concerns that go beyond reported ratios. RBI's message is clear. Meeting NPA thresholds is necessary, but not sufficient.
Deposit wars
While asset quality and diversification set the entry bar, long-term success as a universal bank depends on liability. The key is ability to build a low-cost deposit base through a strong current account savings account (CASA) ratio.
AU and Equitas have built strongest CASA franchises, at around 29% and 30% respectively, giving them access to more stable, lower-cost funding. Ujjivan's CASA ratio rose to 27.3% from 25.5% a year ago. It targets 35% by FY30, supported by branch expansion and sharper focus on retail deposits.
CASA matters because the alternative is expensive. Banks with weaker ratios often rely on fixed deposits, typically offering 8.5% to 9% to attract funds. That forces them to lend to higher-yield, riskier segments just to protect margins—a structural disadvantage when competing against larger universal banks.
The challenge is that this is not an easy environment to build deposits. AU SFB's Gaurav Jain said in the recent analyst call deposit environment was highly competitive with tight liquidity conditions.
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