Recent small finance bank mergers driven by search for higher return on investments, say experts

Jindal Haria, a financial and banking analyst said, “Investors saw more value for two banks merging rather than a bank operating independently. This eventually led to mergers in the SFB industry.”

Similarly, a chief executive officer of an SFB, who did not wish to be named, said that private equity investors see a robust business model and more financial value in a merger.

Whereas Baskar Babu Ramachandran, managing director and CEO, Suryoday SFB, said that merging or acquiring a bank could be a company-to-company strategy.

“The mergers in the SFB space could be due to a company-to-company strategy. Some saw more value in a merger and good business growth and opportunities and hence went for a merger,” Ramachandran said.

The recent mergers

On October 3, Bengaluru-based fintech credit and payments startup Slice announced its merger with Guwahati-based North East SFB. In March 2023, Slice acquired a 5 percent stake in NESFB for a value of $3.4 million, or Rs 28.30 crore.

And on October 29, Fincare SFB said that it would merge with AU SFB. The completion of the transaction is subject to several critical conditions, including approval from the shareholders of both Fincare SFB and AU SFB, regulatory endorsements from the Reserve Bank of India (RBI) and the

Competition Commission of India (CCI), and a capital infusion of Rs 700 crore by the promoters of Fincare SFB.

In the past, the RBI has mentioned that it is not in favour of fintechs getting licences through backdoor by acquiring licence-holding regulated entities such as banks and non-banking financial companies (NBFCs). The regulator had earlier approved Centrum Capital and fintech payments firm BharatPe’s investment in Unity SFB. However, Slice and North East SFB’s merger is the first instance of a fintech firm becoming a bank.

Universal licence

The RBI has a step-by-step process to examine applications for banking permits. In the initial stage, the applications will be referred to a Standing External Advisory Committee (SEAC) to be set up by RBI.

The committee will then submit its recommendations to the central bank for consideration. The Internal Screening Committee (ISC), consisting of the RBI Governor and Deputy Governors, will examine all the applications and then submit its recommendations to the Committee of the Central Board of RBI for the final decision to issue in-principle approval.

Even if an applicant meets the eligibility criteria, the central bank can exercise its discretion to decide whether an applicant is fit to run a bank or not. The last time the RBI issued universal banking permits was in 2015 when IDFC and Bandhan were given banking licences.

In September 2023, in an exclusive interaction with Moneycontrol, AU SFB’s MD and CEO Sanjay Agarwal said the bank has no plans to apply for a universal licence soon.

“We got the AD-1 licence recently, so we would like to work on that. And whenever the opportunity comes, we will be there to think it through and will be happy to apply for the universal licence,” said Agarwal.

Additionally, Haria highlighted that the central bank’s experience in giving universal licences has been satisfactory.

“The latest cases where RBI has given universal licence to a bank are Bandhan Bank and IDFC First Bank. Here, the central bank’s experience has been satisfactory. Owing to this, the central bank will hesitate to give licences.

From an SFB perspective, Haria said that the transition from an SFB to a universal bank is not easy. “SFBs have a large microfinance and small loan base. To transition this and the geographical and operations size to that of a universal bank becomes challenging,” said Haria.