MC Exclusive | RBI may put on hold Fino’s SFB conversion plans

RBI may put on hold Fino’s SFB conversion plans

• RBI may pause Fino's small finance bank conversion post-CEO arrest
• Fino CEO Rishi Gupta arrested for GST evasion in gaming probe
• Bank says probe targets partners, not Fino

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Following the arrest of Fino Payment Bank’s MD & CEO, Rishi Gupta, highly placed sources say the Reserve Bank of India may put on hold the in-principal approval granted for its conversion to a small finance bank (SFB). It is gathered that in the wake of recent developments, the RBI has sought information pertaining to Gupta’s arrest, and whether the bank was involved in the alleged irregularities.

“Till clarity emerges on the bank’s involvement in the alleged malpractices, the RBI may not allow Fino to covert from a payments bank to an SFB,” said a person aware of the matter but who did not want to be named. The bank is currently in the process of converting to an SFB, following a go-ahead from the RBI on December 5 last year. Fino was given 18 months for the conversion.

Emails sent to Fino Payments Bank and RBI seeking comments on the matter remained unanswered till the time of publishing the article. Fino is the first payments bank which is on the way to becoming an SFB.

Interestingly, Gupta’s arrest is also the first time when a bank CEO has been arrested in recent times. It is also the first time  that a CEO of a listed company has been arrested on charges of GST (goods and service tax) evasion.

Likely KYC lapses

Sources indicate at a possible lapse in adherence on the know-your-customer (KYC) front, which may have resulted in prolonged non-compliance.

“The RBI has called for details from the bank. Based on initial feedback, the issue seems to be a case of inadequatecompliance particularly those involving third-party transactions. Some of these transactions trace back to online gaming platforms which are already under scrutiny for questionable practices,” said another senior bank executive not authorised to speak to media.

“Unlike a universal bank operating in the payments space, payments banks have leeway with respect to KYC compliance. In a few cases, partial KYC was done at the time of on-boarding a customer. But some of these customers have not undergone full KYC within a stipulated timeframe leading to compliance lapses,” said sources with knowledge of the issue. News reports peg the extent of irregularities in transactions at Rs 13,000 crore, though the bank has not revealed any information in this regard.

Fino’s net worth stood at Rs 799 crore and deposits at Rs 2,500 crore in December FY26 quarter.

Gupta was arrested on Friday last week (February 27) under the provisions of Central and State GST Acts, namely sections 132(1)(a) and 132(1)(i) of the respective Acts. Section 132(1)(a) of CGST is related to supplying goods/services without an invoice and section 132(1)(i) of SGST pertains to cases where tax evasion or wrongful input tax credit (ITC) exceeds Rs 5 crore. This section attracts imprisonment up to 5 years and a fine.

Online gaming nexus

According to a PTI report dated February 28, the Directorate General of GST Intelligence (DGGI) is investigating GST evasion by Fino Payments Bank, which is suspected of using shell companies and payment aggregators to funnel illicit funds generated by online money gaming. According to the report,  the investigation conducted so far has revealed the involvement of a senior bank functionary, Gupta,  in the fraud,  who has been placed under arrest. A Times of India report published the same day, a day after Gupta’s arrest, specifies that Gupta and the bank failed to furnish key information and documents despite repeated reminders and summons by the DGGI, leading to his arrest

According to the report, DGGI Hyderabad is probing an alleged international online gaming syndicate which is allegedly involved intransactions of over Rs 13,000 crore. The agency is verifying his role in the transaction and his  links to other accused persons in the online gaming syndicate. Officials are said to be examining Gupta’s foreign visits as part of the investigation, the TOI report adds.

A search was conducted by the DGGI on February 26. “The investigation further found that programme managers and partners of Fino Bank including PSRao Digital Solutions Private Ltd, Billexpress Solutions and Powerfin Technology Pvt Ltd, were reportedly non-functional and dummy entries,” the TOI report adds.

Fino’s response

On February 27, when the bank disclosed the arrest of Gupta, it said the investigation is related to business partner(s) of the bank and not  to  GST compliance by the bank. “The Bank is co-operating with the authorities to provide all the necessary information. Presently there is no impact on the Bank. The arrest has been done only in respect of Mr. Rishi Gupta, MD & CEO of the Bank,” Fino said in a stock exchange release. It appointed Ketan Merchant, CFO of the bank as a Head of the Organization to carry on and oversee the day-to-day operations in absence of Gupta.

A day later, the bank in its stock exchange disclosure said: “The issue is with regards to a GST investigation pertaining to program managers who have relationship with other banks including Fino Payments Banks Limited. The Bank and its MD & CEO - Mr. Rishi Gupta have nothing to do with the actions of the programme managers.”