A job well begun need not be half done. In 2019, the RBI was staring at two bank failures – YES Bank and PMC Bank. Both were, interestingly, resolved in innovative ways. PMC Bank’s bailout was designed through a small finance bank conversion model. What made it interesting is the uncommon alliance of a non-bank and fintech major.

Unity Small Finance Bank (Unity SFB) is promoted by Centrum Financial Services and backed by Resilient Innovations as financial investor. Resilient Innovations operates BharatPe, an SME-focussed fintech, while Centrum had its eye on bank licence ever since Japal Bindra took charge in 2016.

For the RBI, where relying much on private equity-led entities was never a very comforting aspect and passing the fit-and-proper test is the utmost criteria in the licensing process, the communion of Unity SFB was initially received well by the banking fraternity.

Lost joy

But the joy didn’t last long. BharatPe has been faced with the challenges ever since the bank came into force. It started with the unceremonious exit of Ashneer Grover, a co-founder and ex-chief of BharatPe, who remains a shareholder of the company. Allegations started flowing like water and the series of events that unfolded has repeatedly cast doubts on the strength of the partnership, making it questionable at times.

No doubt then that despite BharatPe celebratedly roping in former SBI Chairman Rajnish Kumar, the fintech’s contribution in the bank in terms of talent and manpower has so far been close to nothing.

Amid this are the recent charged levied by the economic offences wing on Grover, which once again has sparked questions on whether BharatPe is fit enough to remain an equity partner at Unity SFB.

“What is important is the management and not ownership,” says Ashvin Parekh, a noted specialist in the financial services space. “As long as ownership and management control are separate, the regulator is unlikely to have any problem”.

But will Parekh’s confidence hold water for long? As a former banker puts it, the RBI has been very clear that any investor, especially in the capacity of a promoter or large investors, should have a squeaky clean image weather as a corporate entity and/or the people behind it. “We had several potential bank licence candidates getting rejected on this ground,“ he asserted.

Yet, if the RBI is handing out a long rope, it might primarily mean that the resolution process at Unity SFB still has a long way to go, and any imbalance in the structure at this juncture could be detrimental to the interest of the banking system — something that neither Unity SFB nor the RBI can afford.

The bank’s deposit base for FY23 is a good indicator of where things stand. At ₹2,684.62 crore of deposits in FY23, the number shrunk by nearly 30 per cent year-on-year. Login to the bank’s website; the message that ‘deposits insured by up to ₹5 lakh’ is unmissable, and one that we don’t see too often on banks’ websites — certainly not so prominently.

PMC Bank crisis may now be a four-year-old episode, but highlighting the deposit insurance and the bank’s shrinking deposit base indicate that PMC’s failure is more than just a thing of the past.

Unhealed wounds

For depositors, the placards, banners and protest outside the RBI’s office and the erstwhile bank branches are scars still fresh in their minds.

“The PMC amalgamation scheme was sanctioned in January 2022. We received approximately ₹3,800 crore from the DICGC on 31st March 2022, which was credited to the eligible depositors on the same day. Naturally, several of them withdrew funds to meet their expenses. However, we are happy that customers have been appreciative of our efforts, and approximately 40 per cent of this money has been retained as deposits with the bank. We have on-boarded several new customers,” says a confident Bindra.

Well, he may be happy that the run on deposits post the conversion to Unity SFB wasn’t as bad as anticipated, but he still has a tall task of garnering public trust and arresting the shrinkage of deposit base.

That said, growing deposit is also function of deployment avenues — three streams identified by the bank — MSME loans, supply chain finance and micro finance. While the MFI book is acquired from Centrum Group, the other two books are newly formulated to suit the vision of Unity SFB. The bank has managed to grow its assets by 85 per cent. But it’s still an unseasoned book faced with stiff competition from peers and too soon to call out whether Unity SFB got it’s lending side strategy right just yet.

At ₹3,767.36 crore of gross non-performing assets, similar to FY22, Unity SFB closed FY23 with 45 per cent gross NPA ratio, easily the highest in the industry. For Bindra, it’s a mammoth task cut — grow the balance sheet to ensure that the erstwhile PMC Bank’s books is totally run down. Well, the burn on money is also quite significant with the net worth reducing to ₹1,378.89 crore in FY23 from ₹1,623.87 crore in FY22. While Bindra is committed to pumping in capital as and when required, for round two of fundraise, he needs to prove that he is indeed the knight in shining armour who turned around a bank hit by crisis. More importantly, whether Centrum will go solo or remain locked with BharatPe in the next round, which seems imminent, given the NPA levels, are questions that have started to crop up.

“Things are going as per plan and we have completed year one out of our five-year plan. So far there is nothing to suggest that the plan may not be executed as envisaged, or we might have to revise the plan. I would say we are happy with the progress,” Bindra affirms.

But he will be closely watched by the industry and the regulator. The room for error is almost zero, especially if Unity SFB should go the IPO way in 2027.