Merger of North-East SFB and slice: RBI kills two birds with one stone

The proposed merger of slice with North East Small Finance Bank seems to reflect a dual thought process, wherein the RBI has given its quiet nod to the fintech sector while at the same time saving a struggling small finance bank.

The merger aimed at “expanding tech-enabled financial accessibility” will help bring together the unicorn’s technology and digital prowess with the physical presence and banking licence of the SFB.

Originally established as RGVN (North East) Micro Finance, the SFB was weighed down by elevated NPAs and governance challenges. It was in violation of regulatory norms on reduction of promoter shareholding to 40 per cent within five years, and other guidelines on authorised share capital, and key personnel compensation and appointment.

On the other hand, fintech unicorn slice has been working to rebuild its business model and strategy after the RBI’s guidelines on prepaid payment instruments brought a temporary halt to its prepaid card business--conducted in partnership with SBM Bank India--from September to November 2022.

This merger proposal seems to kill two birds with one stone, simultaneously solving the issue of technology upgradation and data analytics to streamline and improve the SFB’s operations, and offering the NBFC fintech with a credible business model and operational direction by channeling its technology capabilities towards one region and customer segment.

The grant of an indirect fintech banking licence, only the second after Bharat Pe’s investment in Unity SFB, is also significant for the gravitas it adds to the regulator’s dealings with the fintech sector. Given RBI’s historically cautious and conservative approach in granting to bank licences, including to NBFCs, the merger is a testament to slice’s ability to secure it.

In some sense, the initiative is also reminiscent of Singapore-based DBS Banks’ takeover of Lakshmi Vilas Bank. There too the central bank, among many options, took the opportunity to support a foreign bank to encourage more long-term foreign investments in the banking sector, while avoiding a domestic bank failure. 

The complete merger and integration of slice and North East SFB, subject to other regulatory approvals, will obviously take some time as the fintech realigns its capabilities in-line with the SFB’s geographical presence, income segments, product requirements, and customer base. The SFB said it will continue to focus on North East states but whether slice too cuts down operations in other states, remains to be seen. 

“This approach allows us to serve a wider audience,” slice Co-Founder and CEO Rajan Bajaj said, adding that the company will further strengthen its risk underwriting through the use of technology and data. Meanwhile, North East SFB said it will “fortify governance, with continuous improvements in compliance, risk management, and leadership.” 

On Friday, RBI Deputy Governor Rajeshwar Rao said that the for now the central bank has only given a no-objection certification (NoC) after carrying out due diligence, but that it does not reflect any change in the regulator’s stance towards the fintech sector.  

The RBI seems to have tried an innovative solution, and its success will now depend on how the two entities meet each other halfway. As an analyst said,for slice it’s “a great bounce back post regulatory challenges but much work will be needed”.

COMMENT NOW