The Reserve Bank of India (RBI) has returned the universal banking licence application filed by Ujjivan Small Finance Bank (SFB) on the grounds that the lender has not sufficiently diversified its asset book to qualify for it, according to an exchange filing. 

“The RBI, through their aforesaid letter, took note of the Bank’s recent efforts towards diversification of its loan portfolio. However, they were of the view that there is scope for progress in this area. Therefore, the RBI has returned the above-mentioned application and advised the Bank to consider applying again after demonstrating a diversified loan portfolio,” the notice said.

This is the second application by a small finance bank that the RBI has “returned” in the recent past. The regulator had earlier returned Jana SFB’s universal bank license application, while giving in-principle approval to AU SFB to convert to a universal bank and granting in-principle approval to Fino Payments Bank’s request to transition into an SFB.

Ujjivan SFB’s gross loan book stood at Rs. 37,057 crore in Q3FY26, and group loans formed 45 per cent of the loan book.

The Reserve Bank encourages small finance banks to diversify their loan portfolios to reduce heavy reliance on high-risk, uncollateralised microfinance, which often suffers from high non-performing assets (NPAs) during economic downturns. By reducing priority sector lending requirements and encouraging diversification into retail, vehicle, and SME loans, the RBI aims to improve asset quality, stabilise earnings, and prepare SFBs to become resilient universal banks.

Many SFBs have high exposure to microfinance. Diversifying into secured loans like car, two-wheeler, and housing finance reduces asset quality risks, especially when microfinance ecosystems are stressed.

Diversification helps manage higher Gross Non-Performing Assets (GNPAs) that can arise from sector-specific issues. It acts as a safety net, as seen when SFBs shifted from high-risk unsecured lending to more secured segments.