The fintech company will be able to provide loans and collect more deposits with a permission to operate as a small finance bank, but the transfer will require addressing its unfavourable shareholding structure.
The application to transform into a small finance bank was authorised by the board of Fino Payments Bank on July 28, according to an exchange filing. It is impossible to overstate the importance of this announcement for the fintech startup situated in Mumbai.
If everything goes according to plan, Fino will be the first payments bank in India to submit an application for a permit to function as a small finance bank. In 2017, payment banks began operating. Fino is one of six such active banks in the nation; competitors include Jio, Airtel, India Post, Paytm, NSDL, and Paytm payments banks.
A payments bank can accept deposits of up to Rs 2 lakh, but it cannot lend. A small finance bank, on the other hand, offers banking services in underserved areas and can issue loans. In 2019, the Reserve Bank of India allowed payments banks to convert to small finance banks if they meet certain criteria: A successful track record of five years, a minimum net worth of Rs 500 crore, “fit and proper” promoters and a specific shareholding structure.
Three business leaders who asked to remain anonymous said that Fino Payments Bank’s management has already had numerous informal contacts with the RBI. One of the three executives says, “The signs point to the central bank being eager to approve the proposal [to convert Fino into a small finance bank], but the management has been instructed to restructure the shareholding of the promoter holding in its payments bank entity.”
But for Fino, which began as a payment technology company about 20 years ago offering remittance services for rural migrants in urban regions, becoming a small financing bank will be a significant step. Fino might gain from the change in a number of ways.
- Through loans, credit cards, deposits, and merchant banking services—all of which are currently either prohibited or subject to restrictions—it might assist the bank in diversifying its sources of income.
- As opposed to receiving commissions from cross-selling services, Fino may offer loans to both current and potential consumers, generating interest money in the process.
- The absence of a set deposit limit—as opposed to Rs 2 lakh for a payments bank—could increase the current accountsavings account (CASA) ratio and lessen reliance on outside funding sources.
- Through an open-banking paradigm, it might increase the prospects for collaboration with other fintech businesses.
- Given Fino’s current network, achieving priority sector loan goals would be simpler.
The payments bank has, by all accounts, so far showed promise. According to the first CEO cited above, “Fino is possibly the only payments bank entity for the central bank that lived up to its promise versus its more illustrious rivals who also received the [payments bank] licence at the same time. The goal of issuing licences to payments banks has always been to encourage inclusion and enable the recipients to provide specialised, niche payment [services] to underserved markets.
It won’t be quick or simple to switch to a tiny financial bank, either. Let’s look at Fino’s business plan before discussing some of the obstacles it might encounter on the route to becoming a small finance bank.
Far From The Beaten Path
Fino Paytech, a technology-driven company that provided last-mile banking services to the unbanked and underbanked, was the forerunner to Fino Payments Bank when it was established in 2006. Its initial team, which had Rishi Gupta as its MD and CEO at the time, was led by Manish Khera, a previous chief executive, and was based in Mumbai.
It obtained a licence as a payments bank in 2017. The company plan is straightforward but distinctive. It purchases small business owners in rural areas and crowded urban areas, converting their stores into banking locations. Fino’s products, such as savings accounts with debit cards, micro-ATM facilities, and loans on behalf of other lenders, are sold to customers, who are primarily migrants from rural areas, who are visiting these shops to send money back home. Some centers also sell insurance policies and investment schemes—all low-margin businesses.
Fino’s emphasis on last-mile banking is the primary factor contributing to its success as a payments bank. Others, like Paytm Payments Bank, Jio Payments Bank, and Airtel Payments Bank, took a more experimental tack, which frequently resulted in regulatory repercussions. Jio, for instance, attempted to operate current accounts through its payment bank, while Paytm and Airtel combined theirs with their wallet services and were penalised. Blackstone, ICICI Bank, Bharat Petroleum Corp. Ltd., and the International Finance Corporation (the investment arm of the World Bank) are among of Fino’s institutional backers. backlashes. Jio, for instance, attempted to operate current accounts through its payment bank, while Paytm and Airtel combined theirs with their wallet services and were penalised. Fino’s institutional backers include Blackstone, ICICI Bank, Bharat Petroleum Corp. Ltd and the International Finance Corporation (the World Bank’s investment arm).
That doesn’t mean everything has gone without a hitch. A mediocre listing for Fino occurred in 2021, partly as a result of its unattractive business strategy.
The market has recently begun to accept it, nevertheless. The stock has increased by about 40% since May, reaching Rs 345 on Tuesday, but it is still below the IPO price of Rs 543. Strong quarterly results and management cues regarding Fino’s intentions to become a small finance bank prior to the official announcement in July may have contributed to the resurgence.
Fino declared a net profit of Rs 18.7 crore for the quarter that concluded on June 30. This figure was up 85% from the same quarter the prior year, but down 15% from the quarter that ended in March. Its revenue for the June quarter rose 21% year-on-year to Rs 348 crore, while its current and savings accounts stood at 8.29 million—deposits worth Rs 1,221 crore—as of 30 June
The second of the three executives described above, who works for a fintech business that deals with Fino Payments Bank, adds that one of the most intriguing things about Fino is that its branches can be found in the most unlikely locations. The majority of its banking locations are stores that also function as mini-ATMs. It bases its operations on last-mile banking and remittance distribution, and it still relies heavily on these markets.
The third executive claims that Fino is also experimenting with a different idea: renting out its licence to other fintech businesses that wish to provide banking and merchant management services. The State Bank of Mauritius and Federal Bank popularised the model.
For Fino, such tests have become routine. Fino Payments Bank has led the nation’s expansion of the Aadhaar-enabled Payment System through micro-ATMs, working with the National Payments Corporation of India and a few other banks. In reality, Fino participated in a 2019 NPCI trial with Yes Bank, RBL Bank, and ICICI Bank to evaluate facial recognition technology for migrant worker authentication on the AePS. Unfortunately, the project fell through because of cost and implementation challenges.
Currently, the biggest project in the pipeline is to become a small finance bank. But this won’t be straightforward.
A pending merger
The second executive asserts that Fino Payments Bank meets all requirements to become a small finance bank, with the exception that its shareholding structure needs to be changed. Over 75% of the company is owned by its promoters; this percentage must be reduced to under 40% in order to meet RBI requirements.
“To reduce its holding, Fino Payments Bank has established an internal committee to start a reverse merger with its promoter firm, Fino Paytech. This guy claims that the procedure is difficult and will probably take at least a year.
On Friday, inquiries to Fino Payments Bank went unanswered.
A reverse merger is when a private company acquires a public company. The shareholders of the private company usually receive large amounts of ownership in the public company and control of its board of directors. In this case, Fino Paytech— the unlisted holding company—will be subsumed into Fino Payments Bank. This will enable Fino Paytech to reduce its direct holding in the payments bank and bring it within the prescribed limit of 40%.
The Economic Times reported in 2021 that Fino intended to contact the RBI to request approval for the reverse merger. However, for unknown reasons, nothing turned out as planned. With the formation of an internal committee, it is anticipated that the conversion process would now go more quickly before Fino’s official proposal to the central bank.
According to the first and second executives, it’s expected that the transfer will take two to three years to complete due to the compliance-heavy nature of the procedure and the fact that Fino Payments Bank is a listed corporation.
But what does Fino want to accomplish with the changeover?
According to public statements given by its senior management, Fino wants to use the small finance bank license to enhance its deposit franchise and extend loans to its customers. At the same time, it doesn’t want to lose its essence as a remittanceoriented financial inclusion bank.
“Through licence upgrading, we seek to supplement payments bank activity with lending to recognised customers. Our chance to expand by moving to SFB is crucial because it would allow us to better meet the unmet credit needs of our merchants and customers, according to MD and CEO Rishi Gupta, who was recently quoted by The Hindu BusinessLine.
The third executive mentioned claims that given the characteristics of its clientele, it is unlikely that Fino will be a highly aggressive lender even after the first few years of the transition. This person says, “I anticipate that its commission-based operations, such as remittance, deposits, and facilitation of AePS services, will account for the majority of the company’s revenue.”
Even if it becomes a small finance bank, Fino will have to grapple with competition from the banks, which are eyeing a pie of the same market because of the mandatory priority sector lending targets set by the RBI.
The third executive claims that “companies like Unity Small Finance Bank, Equitas, and AU Small Finance Bank have all been aggressively acquiring customers in tier-2 and tier-3 cities.” “Fino will be concerned about the increased competition and the wider range of solutions they can provide, and I’m sure these realisations are what are driving the management’s sudden push to get a licence as soon as possible.”
It’s great to have an ambitious objective to advance in the banking industry, but it will be interesting to observe how Fino manages the difficulties of a change while also expanding its clientele.
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