A Moment for Indian Fintech

June 21

Hello folks, hope the weekend has been a good one. It was Juneteenth in the US - a new federal holiday! - and I for one am not looking forward to the work week after the weekend. This will be a fintech-heavy newsletter given what a big week it was for fintech in the country. Let's dive in.

🏦 BharatPe-Centrum to rescue PMC bank

In the biggest start-up story of the week, The Reserve Bank of India gave in principle approval to Centrum Financial Services and BharatPe to rescue the failing Punjab & Maharashtra Cooperative Bank.

The RBI will give the Centrum-BharatPe consortium a small finance bank license which will enable the bidders to take over PMC's franchise and the assets and liabilities of PMC Bank will be transferred to the small finance bank. Centrum is a nonbank financial company (NBFC) and BharatPe, a young fintech.

For those who haven't followed the PMC bank saga, it is an eye-opening example of the mess that is India's banking sector. In 2019, the MD of the Cooperative bank confessed to cooking the books. It turned out that nearly 70% of its entire asset base, and nearly four times the regulatory limit, were loans given to one entity: Housing Development & Infrastructure Limited (HDIL)

Once considered the third largest realty developer in India, HDIL was badly hit by the real estate downturn, impeding its ability to payback PMC, which it seems to have treated as its personal bank. To avoid classification of HDIL's loans as non-performing assets, PMC's management began concealing the company's accounts. It was only when things were no longer tenable that the bank's MD reported the issue to the RBI.

For the last 18 or so months the RBI has been looking for a rescuer for PMC bank, especially since 15% of PMC depositors haven't yet received their money back. The RBI received four offers, only one of which was even somewhat serious and workable: Centrum-BharatPe.

That BharatPe, a three year-old fintech which helps offline merchants accept digital payments and secure working capital, is one of the rescuers of an older, brick-and-mortar cooperative bank was, unsurprisingly, big news in start-up circles. [Pranav had a good thread on BharatPe a while ago].

As we have written about before, getting a bank license isn't easy in India. By offering the RBI a solution to the PMC issue, Centrum Financial and BharatPe have managed get one, which opens up a lot of possibilities.

That said, how things will play out will be interesting to see. It looks like PMC’s assets will get merged with Centrum’s assets and BharatPe’s MSME lending business. Jaspal Bindra, who heads Centrum and was formerly CEO of Standard Chartered Asia, will take the lead in setting up the strategy and management of the new entity. He had some interesting things to say on which direction PMC might be going:

  • On lending: "we will initiate some new lines but all the lines we initiate will be only those that lend themselves 100 percent to digital"

  • On customers: "we would want to make it pan-India and very consumer-focused. So it will probably become a much wider audience than the concentrated one, as it is now

In the middle of this, it also emerged that BharatPe is in talks with Tiger to raise $250M at a $2.5B valuation. It's definitely a good time to invest. Techcrunch reports that the company is working to launch two new apps, one of which is called PostPe and enables credit on QR UPI, while the other B2C app will facilitate peer-to-peer lending at up to 12% interest. Expanding its lending business under the aegis of a banking entity will definitely give BharatPe more agility in execution.

Writing about the developments, our favourite banking sector guru, Anirudha Basak wrote: "While this is a landmark step, it will not act as a true measure of how a Fintech-turned-bank will perform (because of Centrum’s involvement). In reality, across the world, FinTechs have realised that banking (or lending) is a completely different ballgame and success as a FinTech company may not automatically guarantee success in the field of banking." This might be true, but I think it speaks to BharatPe's ingenuity that it partnered with Centrum and approached getting a SFB license in this way. Kudos to the team!

📰 Other news this week

📚 Reads of the week