In September’19 Punjab and Maharashtra Co-operative (PMC) Bank’s MD, Joy Thomas unveiled misery (ironically) upon the bank’s depositors as he confessed to the RBI of a bank fraud, forcing seizure of the bank’s operations and restriction on depositors from withdrawing most of their cash. Ever since, the depositors have prayed for a knight in shining armor to come with a relief package (loaded with cash) and allow the depositors to take home their deposited cash. Little did they know that the knight won’t come for 635 long nights and when it finally does, it’ll come in a set of 2:
On June 19, 2021, RBI gave ‘in-principle’ approval to fintech startup BharatPe and Centrum Financial Services Ltd. to come together and set up a Small Finance Bank (SFB) which will take over the beleaguered PMC Bank. This news got us excited and thinking:
Excited because: We have numbers to share:
Back in Sep’19, PMC bank had come to grief as loans worth INR 6,500 Cr given to real estate company HDIL, forming nearly 73% of its total loan book, turned non-performing. Big money!
The bail out amount offered by the Centrum and BharatPe duo comes to INR 900 Cr which is to be brought in immediately by the two in equal parts and another INR 900 Cr to be pumped in over the next 2 years.
Once the duo takes over PMC Bank, it will get a ready-made branch network of about 100 branches in Mumbai and few other States.
Thinking because: Well, we’re always overthinking. Here’s why:
Why does the fintech startup, BharatPe, want its hand on a troubled bank?
Well for starters, banking license is a rare achievement:
One needs to have 10 years of experience in the field of banking and finance to prove credibility to the RBI. Our startup ecosystem is much too young for that feat.
And one cannot simply take over a small bank to get their hands on a license because as per the RBI only 2 banks can merge together for the resultant entity to continue with banking operations. (RBI: 2 Startups: 0)
Many have tried and many have failed. Ask Sachin Bhansal (Be polite) who tried getting one through his venture Navi Technologies and has so far, failed. Even Paytm still runs a ‘Payments Bank’ which is a carved-out category of a real bank! So the benefits are simple: BharatPe has a network of 60 Lakh merchants. Opening an SFB will allow it to offer, to its existing network, facilities of opening deposit accounts, running overdrafts, obtaining bank guarantees, taking loans against security and so much more.
2. BharatPe has been trying its luck with RBI since a while now which tells us about the
Startup’s aspirations: In Jan’20 BharatPe had applied for an NBFC license with the RBI but failed. It’s however surprising that the RBI refused the license, given that BharatPe had a track record of around 4 months of lending at that time! Or is it?
3. BharatPe can finally lend on its own: Without a financial institution license one cannot lend
money to the public. So the likes of BharatPe, tie up with NBFCs to enable lending on their platform. Now with 50% stake in an SFB, the money can flow directly, bringing down their cost of capital.
“Earlier we had to rely on other banks to park our (transaction) floats, but now being a bank, our ability to lend to merchants increases, since we do not have to pay additional interest to park these floats,"
~ explained Ashneer Grover (co-founder and CEO of BharatPe) in an interview with Mint.
4. Clear alignment with its business: Apart from being a single interface for all existing UPI
apps, which you best know it for, BharatPe is big time into small ticket lending. It lends for a period of 3-12 months and charges interest @1.2-2% per month. Its average ticket size is only 75,000 per merchant. This works out very well in an SFB which is legally required to issue at least 50% of its loans for an amount less than INR 25 Lakh.
5. Disrupting the Indian Banking System: There is at least a dozen payment fintech startups
and/or entrepreneurs in India dreaming of disrupting the Indian Banking System right now. Grover has luckily been chosen as one of the first persons who can help achieve this dream. BharatPe can now use all of its digital stack in the end-to-end entire banking framework.
Why does BharatPe, which is luxuriously backed by VCs (Of the USD 240 million equity funding, it has used up only USD 60 million so far), want to couple up with Centrum to buy the bank?
Credibility: Like we said, RBI demands at least 10 years of experience in Banking and Finance to issue a banking license. While BharatPe is only 3 years old, Centrum Financial Services (CFS) has been around since 1997. And it’s currently led by its executive chairman, Jaspal Bindra, who is former Standard Chartered Bank, Asia-Pacific CEO, which dare we say, really forms the entire credibility.
History: Centrum has done similar M&As in the past. So it brings in the experience of taking over and merging businesses. Here are some examples:
It acquired FirstRand Bank Ltd. which had 70,000 customers with an average ticket size of INR 20,000.
It purchased L&T Finance’s supply chain finance wing in 2018.
It also acquired microlender Altura Financial Services Ltd in 2019 which had 48 branches and 45,000 customers with average ticket size of INR 20,000.
3. Alignment of business strategy: If you notice their ticket size, it turns out that CFS is also a
lot into micro-finance, just like BharatPe. So when entering an unchartered territory, why not go in with a partner which is like minded?
Why does Centrum group, which has decades of proven credibility, want to partner with a startup like BharatPe?
Free Cash flow: Let’s admit it, the VC backed Indian startups club has multiple times more cash in hand than most of the legacy businesses of India today. Which means that CFC really wants this deal but does not have the bandwidth to make the full investment. We’re sure because on June 22, Centrum Capital announced that its raising INR 1,500 Crore through debt and equity, which is most probably to buy PMC bank itself. Probably that’s why it was seeking a match with a fintech startup.
Not that experienced after all: Even though Centrum Group has been around since ‘97, its experience in lending business is no more than 5 years. The new sheriff in town, BharatPe on the other hand has had a dream run. It disbursed INR 1,600 crore in 2020-21 to 1.8 lakh merchant customers and clocked a seven-times growth in revenue to over INR 700 crore. Oh, sweet digital! So why not partner with someone who has the cash and knows modern techy ways of doing the business too?
Lucky draw: Maybe and we’re really shooting in the dark here, maybe Mr. Bindra just picked up chits to narrow down on one payment fintech. Let’s be honest, we would have glorified any startup who ended up getting a deal like this.
And lastly, why did Oh-so-mighty-RBI allow such a rare occasion of granting a license like this?
This is probably simple! It was the need of the hour: RBI was desperate to bring relief to the depositors and to clean up the dirt. 4 organizations had applied for taking over the operations of the PMC Bank and the RBI had to choose the 1 that made the most generous offer and met the bank’s criteria too. It turns out that the joint application of BharatPe and CFC made this cut.
So, there’s a lot to rejoice when this deal comes through. Like you can be happy for the depositors who will finally get their hands on some of the cash that they owned, if not all. Or you can be happy for yourself as your days of having to deal with traditional banking systems may soon be behind you. No no, don’t underestimate the significance of this event. An Indian entrepreneur and a young tech startup have just got access to an industry that has for long been troubled. Before you know it, they’ll come in numbers and before you can pinpoint, the entire ecosystem would have transformed. This is just the Day 1 of the next big change.
This article is a part of the June'21 edition of our Startup Newsletter. Here's the complete publication:
