Mumbai, April 15 -- The Reserve Bank of India (RBI) has returned Ujjivan Small Finance Bank's application to upgrade to a universal bank, sending a clear signal to the industry: meeting financial criteria is not enough. The regulator is placing heavy emphasis on the diversification of loan books, a move that will force other hopefuls to reassess their transition timelines.

Ujjivan was among the three small finance banks (SFBs) that had applied to the central bank to transition to a universal bank. Conceptualized by a committee headed by former RBI board member Nachiket Mor, SFBs are supposed to undertake basic banking activities like accepting deposits and lending to unserved and underserved sections, including small businesses and small...