Jana Small Finance Bank Moves Closer to Universal Banking License: A Deep Dive into Its Strategic Provisions and Financial Performance

Jana Small Finance Bank Accelerates Provisions for Universal Banking Licence

In a strategic move aimed at securing eligibility for a universal banking license from the Reserve Bank of India (RBI), Jana Small Finance Bank has intensified its provisions to maintain non-performing assets (NPA) ratios well within the regulatory thresholds. As part of its effort to meet RBI’s stringent criteria, the bank has made provisions designed to keep its gross non-performing assets (GNPA) and net non-performing assets (NNPA) below the required limits of 3 percent and 1 percent, respectively.

Jana Small Finance Bank’s Managing Director and CEO, Ajay Kanwal, discussed these initiatives in an interview with Moneycontrol, emphasizing that this move is crucial for the bank’s long-term growth. He noted that the accelerated provisions have helped bring the bank’s net NPA down from 0.95 percent in the previous quarter to 0.91 percent.

Kanwal also revealed that the bank made an accelerated provision of Rs 93 crore in the October-December quarter of FY25, a sharp increase from Rs 61 crore in the previous quarter. This is part of the bank’s broader strategy to maintain a net NPA ratio below the 1 percent mark, a critical threshold in securing the coveted universal banking license.

Understanding the RBI's Criteria for Universal Banking Licenses

The RBI’s guidelines for small finance banks (SFBs) seeking to convert into universal banks are clear. Small finance banks must meet a number of financial and operational benchmarks, including a profitable track record for the last two financial years. Specifically, the bank must demonstrate a net profit for two consecutive years and maintain gross NPAs below 3 percent and net NPAs below 1 percent during the same period.

Jana Small Finance Bank, a prominent player in the Indian banking sector, has been focused on these regulatory standards as it plans its future. The RBI also requires that aspiring banks be operational for at least five years, have scheduled status, and maintain a satisfactory track record. Moreover, for a small finance bank to convert to a universal bank, its shares must be listed on a recognized stock exchange.

The Financial Performance of Jana Small Finance Bank: Growth Amid Challenges

While Jana Small Finance Bank has taken significant steps towards achieving its universal bank status, its financial performance for the third quarter of FY25 paints a mixed picture. The bank reported a 17.8 percent year-on-year decline in net profit, which dropped to Rs 110.6 crore from Rs 134.6 crore in the same period last year.

Despite the decline in net profit, the bank showed encouraging signs of growth in key areas of its business. Net interest income (NII), which is the difference between interest earned and interest paid, rose by 8.1 percent to Rs 593 crore, up from Rs 548.5 crore in the third quarter of FY24. This growth reflects the bank's ability to optimize its lending operations and generate a healthy margin from its core business.

The bank’s assets under management (AUM) reached Rs 27,984 crore as of December 2024, reflecting a robust 19 percent year-on-year growth. Notably, 68 percent of these assets are secured, highlighting the bank’s prudent risk management strategies and focus on lending against collateral.

Focus on Credit Quality and Secured Assets

Ajay Kanwal emphasized that one of the primary drivers of Jana Small Finance Bank's performance has been its focus on improving credit quality and the growth of secured assets. In his comments, he noted that the bank has made significant strides in enhancing its asset portfolio, with a particular emphasis on secured lending.

"Credit quality is improving, and we are seeing strong growth in secured assets," Kanwal said. This approach aims to mitigate risks associated with unsecured lending, particularly in the microfinance space, where the bank has faced challenges. He noted that the difficulties in the microfinance business had bottomed out, but the bank remains cautious in its approach to this segment.

Jana Small Finance Bank has also placed increased attention on growing its retail Current Account, Savings Account (CASA) base, which is critical for reducing its dependence on costlier sources of funding. The bank is focusing on strengthening its retail CASA portfolio, a key strategy to improve liquidity and reduce interest expenses.

Microfinance Business: Challenges and Recovery

The microfinance sector, which has been a cornerstone of Jana Small Finance Bank’s business model, continues to face some headwinds. However, Kanwal remains optimistic, stating that the challenges in the microfinance business have likely bottomed out. As the bank continues to grow its secured asset base and work on improving overall credit quality, it is cautiously optimistic about the future of its microfinance portfolio.

The microfinance industry has faced several challenges in recent years, including regulatory changes, collection issues, and a shift in borrower behavior. However, with the bank’s strategic focus on secured lending and improving asset quality, the outlook for this segment is expected to improve in the long term.

Looking Ahead: Strategy for the Universal Banking License

As Jana Small Finance Bank prepares for its potential transition to a universal bank, the bank’s leadership is focused on maintaining healthy financial metrics, including low NPA ratios and continued growth in secured assets. The accelerated provisions made in recent quarters reflect the bank’s commitment to adhering to the RBI’s eligibility criteria for universal banking.

Looking ahead, the bank’s future growth will likely depend on its ability to manage its microfinance challenges while continuing to expand its retail banking business. With a clear focus on improving its credit quality and growing its CASA base, Jana Small Finance Bank is positioning itself for success as it moves closer to its goal of becoming a universal bank.

A Strategic Move Towards Expansion

In conclusion, Jana Small Finance Bank’s decision to make accelerated provisions and focus on maintaining low NPA ratios is a calculated and strategic move to meet the RBI’s requirements for a universal banking license. While the bank has faced challenges in its microfinance business, it has made significant progress in growing its secured assets and improving credit quality. The next few years will be crucial for Jana Small Finance Bank as it works towards its goal of becoming a universal bank, with a strong emphasis on risk management, credit quality, and retail banking growth.

By staying focused on these strategic priorities, Jana Small Finance Bank is positioning itself for a successful future in India’s competitive banking sector.