Ujjivan SFB may apply for universal bank license after reverse merger

Ujjivan Small Finance Bank

Bengaluru-based Ujjivan Small Finance Bank (SFB) may apply for a universal banking license after the completion of its reverse merger with parent Ujjivan Financial Services Limited (UFSL), people aware of the development said.

“We may apply for a universal bank license with the regulator after the completion of our reverse merger,” one of the people said.

In October 2022, Ujjivan SFB’s Managing Director and Chief Executive Officer Ittira Davis said the institution may apply for a universal banking license in the future.

Currently, Ujjivan SFB’s reverse merger process with UFSL is pending at the National Company Law Tribunal (NCLT). A reverse merger typically entails a larger company being taken over by a smaller one; the resultant entity is named after the acquirer.

A proposal for the reverse merger has been submitted to the NCLT and approval is expected by October or November 2023, the people cited above said.

Also read: MC Exclusive: Ujjivan SFB eyes double-digit growth in housing finance, to expand network in tier 2 and 3 cities, says MD & CEO

The bank is expecting to complete the reverse merger process around April or May 2024 after receiving NCLT approval.

A universal bank is one that provides services ranging from retail and wholesale to investment banking all under one roof. SFBs can offer deposits as well as loans but cannot set up any subsidiaries to offer any non-banking financial services.

RBI rules

Under the Reserve Bank of India (RBI) guidelines for "on tap" licensing of universal banks in the private sector, large industrial houses cannot apply for bank permits.

Under the so-called fit and proper criteria, applicant promoters should have a past record of sound financials, credentials and integrity, and have a minimum 10-year successful track record.

Also read: MC Explains: What is Annapurna Finance which has applied for a universal banking licence from RBI?

The RBI guidelines have also stipulate an initial minimum paid-up voting equity capital for a bank of Rs 500 crore. Thereafter, the bank shall have a minimum net worth of Rs 500 crore at all times.

The RBI last issued universal bank licenses in 2014 when it gave its approval to IDFC and Bandhan Bank. Since then, IDFC Bank merged with Capital First Ltd to form IDFC First Bank, and Bandhan Bank acquired Gruh Finance (NBFC).

In March 2021, RBI constituted a committee headed by former deputy governor Shyamala Gopinath to evaluate applications for universal banks as well as SFBs.

These applications will be first screened by the RBI to ensure the eligibility of the applicants. Thereafter, the panel will evaluate the applications.

Fragile business model

Experts noted that before applying for a universal bank license, SFBs need to re-check their books as they have a large microfinance book that is very sensitive to macroeconomic issues.

“SFBs have a volatile business model. A majority of their books are concentrated towards microfinance customers and unsecured lending, which is prone to macro issues,” said Chandan Sinha, former executive director at RBI.

Another former RBI executive, who did not wish to be named, said the regulator would look at the numbers and operations of banks who have received the universal banking licenses to look at the overall picture of these banks.

“RBI would look at the operations and books of Bandhan Bank and IDFC First Bank. The regulator would make the decision to give the universal bank license to applicants based on the growth, possibility of risks, and other factors of these banks,” said the executive.

Reverse merger

The reverse merger between UFSL and Ujjivan SFB, which was recommended by an audit committee and committee of independent directors, was given inter-alia approval by the Board of Directors in October 2022.

Also read: Ujjivan Financial Board approves merger with Ujjivan SFB. Check details of scheme

The scheme shall be operational from the effective date and effective from the appointed date defined in the scheme as April 1, 2023, or such other date as may be approved by the NCLT.

UFSL began its operations as a non-banking financial corporation in 2005. The NBFC in 2017 acquired a license to operate as an SFB from RBI and commenced banking operations as Ujjivan SFB.

The bank, in the March 2023 quarter, reported a more than two-fold jump in net profit to Rs 309 crore, helped by higher core income and a write-back in provisions.

Its core Net Interest Income grew 36 percent to Rs 738 crore on a 33 percent increase in the loan book, and limited by a 0.85 percent narrowing in the Net Interest Margin.

Also read: Ujjivan Small Finance Bank Q4 net up 144% to Rs 309 crore

On the asset quality front, it showed an improvement with the gross non-performing assets ratio coming down to 2.88 percent from 3.64 percent three months ago.