RBI Declines Ujjivan Small Finance Bank’s Universal Banking Licence Request

Key Insights 

• The RBI has sent back Ujjivan Small Finance Bank's application for a universal banking licence because its loan portfolio is not diversified. 

• Ujjivan Small Finance Bank submitted its application on 4 February 2025 to become the second small finance bank to apply through the RBI's voluntary transition route. 

Why does the RBI Take This Decision Matters?

The RBI recognised that Ujjivan has started diversifying its portfolio, but said the bank still needs to make some further progress. It returned the application and told Ujjivan to reapply after showing a broader loan portfolio. 

Ujjivan must keep its “Small Finance Bank” status. This means it still has a 60% Priority Sector Lending requirement, higher deposit costs, and limited access to corporate clients. These are areas where universal banks have an advantage.

Ujjivan has reduced its unsecured loan portfolio from 70% in 2024 to 54% now, and aims to have 65% to 70% of its loans secured by March 2030. 

However, Ujjivan Small Finance Bank is already a full-service bank, which means it provides almost every service, and any delay moves Ujjivan Bank one step back in terms of competitive disadvantage.

Why Does the Loan Book Remain a Major Challenge?

Ujjivan started in microfinance, which is an unsecured and higher-risk area. This remains the main concern for the RBI because the Ujjivan Bank is moving into housing finance, MSME loans, and vehicle financing. It is also improving its digital systems to meet regulatory standards. 

The Issue of Microfinance Overhang

Ujjivan Bank has focused on serving low-income borrowers through microfinance, which is unsecured and tends to carry higher credit risk during tough economic times. 

The RBI allows only listed small finance banks with at least ₹1,000 crore in net worth, a five-year track record, gross NPA below 3%, and net NPA below 1% to apply, with a clear preference for banks that have a diversified loan portfolio. 

According to Business Standard, Ujjivan meets most of these requirements, but its high concentration in microfinance is still a major concern.

What Needs to Change?

The bank is also investing in digital and IT infrastructure to meet regulatory standards. One of the SFBs, Jana Small Finance Bank, had its universal banking application returned by the RBI around the same time because it was also failing to meet the required criteria of the RBI. This shows that the RBI is holding all applicants to the same high standard, it does not just go for Ujjivan.

Conclusion

Ujjivan can still work toward a universal banking licence, but it needs to build customer relationships that help it build a more diverse portfolio and help it to stable loan book first.