SAFE AND STEADY
A payments bank
wants to be a lender
that doesn’t lend
Rishi Gupta, CEO of Fino Payments Bank, is not
interested in chasing credit growth even after his
company is allowed to lend directly
Rounak Kumar Gunjan,
8 Aug 2023
After Fino Payments Bank’s board gave the go-ahead late
last month to apply for a small finance bank (SFB) licence,
analysts anticipated that the company would accelerate
lending
But Fino’s senior management is in no hurry to ride the credit
wave in India; once it becomes an SFB, Fino plans to tread
the lending path cautiously, limiting interest income to sub-
20% of overall revenue
So far, Fino has managed to become profitable by erecting an
asset-light model focused on subscription and transaction
fees; it aims to double down on the same strategy
But analysts fear Fino’s plan to go slow on lending may
hamper its ambitions of adding to its 8.2 million customer
base, resulting in a ripple effect on its stock price that has
only recently started recovering
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“We don’t want to be part of the rat race to build a
lending book,” said Rishi Gupta, managing director
(MD) and chief executive (CEO) of Fino Payments
Bank.
These words seem odd coming from a banker.
After all, financial-services firms usually vie for an
impressive loan portfolio. And now seems to be the
perfect opportunity for that as the demand for
credit in India is exploding.
However, Fino won’t be rushing to extend loans.
As a payments bank, it was okay to take this stance
since such banks cannot give loans directly. They
can only partner with other businesses for loan
referrals, as per the rules laid down by the
country’s banking regulator, the Reserve Bank of
India (RBI).
But Fino got its board’s approval to apply for a
small finance bank (SFB) licence on 28 July. Once
it transitions into an SFB, it will get permission to
lend.
“The payments business is like a bullet train, while
the lending business is like a goods train,” Gupta
told The Ken. “We will take our own sweet time in
building it. We will always be a liability-first bank
instead of a lending-first one.”
The liabilities he referred to are interest paid to
customers on deposits, distribution payments,
among others.
“The decision to go slow on lending is surprising,”
said a Mumbai-based banking analyst who did not
want to be named as they are not authorised to
speak with the media.
Their surprise is understandable. Fino, which
started operations in 2017 as a payments bank, is
the only listed entity in this space. According to
Gupta, it has around 8.2 million customers, and
nearly 85% of them are from rural and semi-urban
parts of the country.
Therefore, analysts expected that the company
would use its experience and reach to ride the
never-seen-before surge in credit demand.
Period of boom
In June, India’s non-food credit grew by over 16% year-
on-year, according to the RBI’s latest data. Retail
loans surged over 20% on the back of home and
vehicle advances, and their share in total bank credit
rose to 28% for the year ended March 2023 from 21%
five years ago
But the same credit growth has produced some
discouraging consequences. For instance, wilful
defaults rose by nearly 39% or Rs 94,000 crore
(US$11.3 billion) in the two years to December
2023, according to Transunion Cibil, a credit-
information company registered with the RBI.
“The credit-growth story is a tricky path. With the
rise in the number of loans, banks are also working
doubly hard on their collections,” said DK
Srivastava, chief policy advisor at professional
services firm EY India.
And Gupta, who seems aware of these challenges,
has already informed investors that lending won’t
be the core product.
While other banks derive most of their revenue
from interest income, Fino, as an SFB—provided it
receives the licence to operate as one—will get the
largest chunk of its revenue through fee income on
payment services, current and savings accounts
(CASA), cash-management services (CMS),
remittances, among others.
However, analysts fear that going slow on lending
may come in the way of Fino’s ambitions of
customer acquisition. This may, in turn, hurt its
stock price, which has only started recovering
recently.
Why the step-up?
Payments banks were introduced in 2014 during
the tenure of RBI governor Raghuram Rajan to
provide essential banking services to unbanked and
underbanked people. But they were hobbled,
unable to lend. Despite limitations, Fino managed
to become profitable by erecting an asset-light
model focused on subscription and transaction
fees.
The fintech bank posted a profit of Rs 65 crore
(US$7.9 million) in the year ended March 2023, a
52% jump from the previous year. Revenue rose
22% to Rs 1,230 crore (US$148 million) in the said
period, and CASA deposits surged 66%.
In comparison, rival Airtel Payments Bank’s
revenue grew 37% to Rs 1,291 crore (US$155.9
million) in the same period, and its profit was Rs
22 crore (US$2.6 million). The annual revenue of
Paytm* Payments Bank—the largest payments
bank by revenue—rose around 44% to Rs 4,928
crore (US$595.1 million) for the year ended March
2023. This growth was despite the entity being
barred by the RBI from adding new customers
since March 2022 due to material supervisory
concerns.
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An obvious question follows: If Fino is not too keen
on lending, why would it willingly become an SFB
and increase its regulatory compliance burden?
Gupta listed three reasons for the upgrade.
One, the licence, if granted, will remove the CASA
balance limit of Rs 2 lakh (US$2,400) per account
that Fino, as a payments bank, is bound by. That
would help Fino shore up cheap capital as it will be
able to move beyond low-income households and
micro businesses and likely boost its customer base
and average deposit size.
It will also open the gates to large B2B customers.
“For example, food-delivery companies which want
to make a bulk payout of commission or fees to
delivery partners across India. These payouts are
sometimes in multiple crores,” said Gupta. “With a
balance restriction of Rs 2 lakh, we are unable to
source such B2B clients that provide better margins
on payout services.”
Two, an SFB licence could help Fino generate
higher returns on its deposits. As per the RBI,
payments banks are required to park 75% of their
deposits in government securities with tenure
under one year. SFBs have no such investment
mandates.
Fino currently has nearly 8.3 million CASA
accounts with an average balance of almost Rs
1,150 (US$14), according to its latest investor
presentation. In comparison, Ujjivan Small Finance
Bank, one of the youngest mid-sized SFBs, has an
average savings account balance of Rs 8,500
(US$102), as per its annual report for the year
ended March.
The third reason is to leverage Fino’s already high
transaction-fees income further. The company has
built this income by offering a range of products
such as remittances, cash-withdrawal products,
domestic money transfers, micro ATMs, and
Aadhaar-enabled payment system (AEPS). Airtel
Payments Bank, on the other hand, focuses more
on selling micro-insurance products and offering
digital banking services, among others.
“None of the SFBs have such a high transaction
income. Our DNA is [made] of transactions, and
we will continue to be that way,” said Gupta. The
payments bank estimates that about 80% of its
income will continue to come from transaction
fees.
Banks are referred to as lenders because of their
high exposure to loans. The SFBs’ credit-deposit
(CD) ratio is close to 95%—meaning they are
giving out a big chunk of their deposits as loans,
which usually results in a potential liquidity crunch
and a fall in CASA ratios . But Fino plans to keep
its CD ratio much lower.
For the first three years as an SFB, Fino wants to
limit the share of interest income to only up to
20% of overall revenue. For context, Ujjivan’s
revenue from interest income accounted for nearly
92% of its overall revenue from operations for the
year ended March 2023. Other SFBs, too,
registered similar percentages.
“Fino is not completely averse to lending, but the
senior management is not a fan of fast-paced,
exponential growth. They plan to be extremely
careful. Because of the company’s customer
segment, there are chances of high NPAs [non-
performing assets],” a senior Fino executive told
The Ken.
Also, Fino, like any other listed entity, is
answerable to its shareholders. Its share price is
down by over 36% since its listing in November
2021. However, the stock has recovered from its
lows because of strong financial results and is up
nearly 38% on a year-to-date basis.
The company is the first payments bank to move
towards becoming an SFB. Gupta is certain that
this transition and a passive approach towards
loans will not miff customers and shareholders. He
draws confidence from his six years of experience
running a profitable payments bank that never had
lending as an option.
Doing fine without lending
At 33%, Fino’s largest chunk of revenue for the
quarter ended June came from remittances. CASA
accounted for 19%, CMS was at 10%, and the
remaining came from micro ATMs, AEPS, and
business-correspondent banking, among others.
“None of our products are for free. We charge a
subscription fee for our CASA accounts, too,” said
Gupta. “On average, our savings-account
subscription comes to approximately Rs 325
(US$4) annually. And I’m happy to say more than
60% renewal is there on those accounts.”
Fino was able to do that because of the user
segment it targeted. Nearly 70% of the bank’s
business came from low-income customers in rural
geographies. For users, the alternative to paying a
Rs 10–15 (US$0.12–0.18) subscription per
transaction would be “going to a branch which
would be 30–40 kilometres from their place. It also
means forgoing half a day’s salary as most of them
are daily-wage earners”, said Gupta.
The payments bank acquired these customers by
partnering with close to 1.4 million grocery shops,
he added. The fact that most of Fino’s branches are
in rural areas also makes it an ideal candidate for
an SFB licence, as RBI mandates that at least 25%
of SFB branches must be in rural areas. Fino, which
has a network of 77 branches, aims to continue
following an asset-light model. It plans on opening
only 30 more branches in the first three years of
becoming an SFB.
“But what happens when these customers need
credit?” asked a second banking analyst at a Delhi-
based broking firm. They, too, expressed concerns
about customers moving out of the Fino ecosystem
if credit is difficult to obtain.
The senior Fino executives The Ken spoke with
concurred that the lending scenario, subject to the
RBI’s approval, is at least 2–3 years away. None of
them wanted to be named as they are not
authorised to speak with the media.
“Post application, which is likely in the second half
of the ongoing fiscal, the RBI will take its own time
to process and grant the licence. After that, it will
take at least another 12–18 months to transition
into an SFB in terms of operations, setting up
teams, and more,” said one of them.
When lending begins, Fino aims to give out loans
only to those customers and merchants with whom
it has had over 2–3 years of banking history,
according to the executives. The bank aims to build
a data-driven and—they insist—conservative
credit-disbursement model.
However, Gupta is also preparing to stick to the
core principles of economics if needed. “If the
demand for credit among our customers keeps
rising, we can’t turn them away. We will then have
to ensure our underwriting and collections are
strong enough. But we want to be cautious with
lending,” he said.
Except for AU Small Finance Bank, most other
SFBs were microfinance institutions earlier.
Therefore, it is natural for them to focus on lending
and derive most of their income from that line of
business. But Gupta understands the risks involved.
After all, he has been a banker for the last 27
years. During his nearly 7-year-long stint with
ICICI Bank, India’s second-largest private lender,
Gupta worked closely with Sandeep Bakhshi—the
bank’s current CEO—whom he considers his
mentor.
And it all stems from one piece of advice Bakhshi
gave him: “The celebration does not begin at the
time of disbursal; it begins at the time of collection.
Till the time you’re giving, you’re in a commanding
position. The moment you begin to seek the same
money, you lose that position. So one needs to be
very careful with lending.”
Gupta plans on heeding it.
But to keep optimistic shareholders cheerful, the
management will have to ensure that its cautious
approach does not become a hurdle.
*Paytm founder Vijay Shekhar Sharma is an investor
in The Ken
Edited by Meenal Arora
Lede image: Unsplash/ün LIU
Correction: Fino Payments Bank’s revenue rose 22%
to Rs 1,230 crore (US$148 million) in the year
ended March 2023. An earlier version of the story
and the headline mentioned it as $1.4 billion. The
Ken deeply regrets the error.
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AUTHOR
ROUNAK KUMAR GUNJAN
Starting out as a business journalist in 2016, Rounak has
written about energy, politics, social justice and financial
services. He has worked with BQ Prime, CNN-News18,
Outlook Money and NewsCorp VCCircle.
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3 Comments
S What did you think?
POST RESPONSE
LATEST FIRST
Ateesh Tankha
Rounak, thanks for this.
This article is detailed enough to beg the
question: How can the RBI issue payment
bank licences and then not force the entity
to work with a financial institution to lend to
its customers? The whole purpose of a
Payments Bank is to drive financial inclusion
at the bottom of the pyramid, or is it – please
correct me here if necessary – to allow
startups to sneak through a loophole in the
written mandate and collect deposits and
fees at will? Despite their questionable risk
models, distribution methods, et al, Paytm
and Airtel are lending.
If an entity’s mandate is to distribute loans
(in addition to other financial services),
allowing it to collect deposits (75% of which
is invested in risk-free government
securities), and charge fees of INR 325 for an
average CASA holding of INR 1150 (to say
nothing of the remittance and micro-ATM/
AEPS fees … because UPI is not known/
unworkable in these areas) is
unconscionable. At an average deposit
holding of INR 1,150, one needs to ask what
financial services are absolutely necessary, if
small loans are not part of the offering.
It’s actually a perfect balance of being able
to exploit the financially illiterate and being
allowed to price gouge the financially
dependent. Is it any wonder that it is
profitable?
In fact if some of its executives chose to trim
their emoluments, the PAT margin would be
considerably higher.
AUGUST 8, 2023 AT 12:29 PM REPLY
Shubham Salunke
S Very insightful article. I have one concern
though.
Users are paying Rs. 10 – 15 subscription per
transaction???
Why aren’t these users using UPI for
transactions?
Or am I missing some point over here?
AUGUST 8, 2023 AT 11:28 AM REPLY
Ateesh Tankha
This company is taking advantage of the
fact that there are no smartphones/ lack
of UPI literacy and usage. The GOI/ RBI
should really intercede.
AUGUST 8, 2023 AT 1:56 PM REPLY
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