NEWSLETTER

PwC’s 2021 report on neobanks in India delved into the ambiguity surrounding regulations for smaller digital financial institutions. Neobanks is a term used for financial institutions or fintech companies that operate digitally, without a physical presence. “Currently, unlike neobanks, the regulatory regime does not envisage a completely digital method of offering financial products. It is extremely critical that the current indirect regulations are relooked at in light of the digital offerings of neobanks and their relationship with financial entities.”

For a fintech company, opting to go through the due diligence of getting a bank license and following regulatory norms can prove to be a headache. At present, RBI rules state that a payments bank or an NBFC with a successful track record of 10 years is eligible to apply for a bank license. This may seem like a long wait for a fintech company as it may take years for some companies to even break even.

A fintech company usually has three options when it comes to the renewal of its license. One, it either applies for a non-banking finance company license with the RBI. Two, it can choose to join hands with another fintech company. And three, taking the heartbreaking decision of shutting shop in case they don’t rake in enough value. The option of merging with a small finance bank as a business objective was never really given much thought, until now.

Meanwhile, for a small finance bank, merging with a fintech company is a shortcut to upgrading its technology, staying relevant to the youth, and paring its losses to some extent. North East Small Finance Bank reported losses for the third straight year with losses widening to ₹288 crores in 2022-23. Its net worth dropped to ₹60 crore, much lower than RBI norms of maintaining a net worth of ₹200 crore. A section of the media has raised eyebrows over the shelf-life of this collaboration, given the losses on both sides and the contrasting cultures in both organizations.

However, the Slice-NESFB merger seems to be a well-planned strategy and not a spur-of-the-moment decision. In March, Slice acquired a 5% stake in NESFB, to get “comfort”. Media reports have also quoted an unnamed source from the company claiming that Slice had been following through with due diligence over the past 15 months to get the deal through.

True to their nature, startups, and fintech companies prefer to see this merger as a window of opportunity rather than view the deal with scepticism.

Points to Be Noted

Before celebrations begin within the fintech space, it is time for companies to ponder over making the most of this development. How can they be the next in line as far as envisioning their banking ambitions are concerned? Taking cues from this new-age merger, we enlist a few parameters on which fintech companies can buckle up and chart a similar route to growth:

Self-regulate Prudently
Fintech companies have long borne the ‘bad boy’ image in the eyes of the regulator.

In 2022, RBI barred non-banking entities from embedding credit lines in their loading PPIs (prepaid payment instruments) such as prepaid cards or mobile wallets. This decision had hit Slice itself which then applied for a PPI license and received it by the end of 2022.

Recently RBI Governor Shaktikanta Das asked fintech companies to form a self-regulatory organization. In RBI’s view, such an organization would help to evolve best practices, protect privacy and data norms, avoid mis-selling, and promote ethical business practices.