How Slice Scored A Bank License From RBI

The fintech world is abuzz with excitement after one of their own essentially scored an entry into formal banking.

Last week, the Reserve Bank of India gave a no-objection certificate for a merger between fintech unicorn Slice and North East Small Finance Bank.

In what is a first-of-its-kind approval, the banking regulator has allowed a new-age finance company to rescue a licensed bank. The regulator has been attempting to find a buyer for North East Small Finance Bank since last year, two people with direct knowledge of the matter told BQ Prime on the condition of anonymity.

In September 2022, Slice announced that it would buy a 5% stake in North East Small Finance Bank, a deal that was concluded in March. This was a starting point, as the fintech wanted to buy more stakes and had been conducting discussions with the RBI.

While discussions with Slice were on, the RBI hired a big four consulting firm to find a new buyer for North East Small Finance Bank earlier this year, the two people quoted above said. One clear mandate to the consultancy was to find a buyer other than Slice.

After a few months of conversations, it became clear that no other buyer would come forward, the first of the two people mentioned above said. If the small finance bank was not rescued, it ran the risk of financial collapse, putting the system at risk. This prompted the banking regulator to greenlight the Slice transaction, the person said.

The deal involves a merger between the two entities, which would eventually lead to Slice controlling the majority equity in the small finance bank. Quadrillion Finance Pvt., a non-bank finance lender under Slice will also be merged with the small finance bank. Finer details of the transition, such as management and future strategy, are still in the works as a National Company Law Tribunal approval is still pending and is expected next year.

Having said that, it is likely that Slice will leverage its technological prowess to tap into the wide network of North East Small Finance Bank, the second of the two people quoted above said.

Queries mailed to RBI on Tuesday did not elicit any response.

What's At Stake?

RGVN (North East) Micro Finance Ltd. had originally received in-principle approval from the RBI to set up a differentiated bank in 2015. A year after, it had incorporated the North East Small Finance Bank as a subsidiary, which started operations in 2017.

At last count, the Assam-headquartered small finance bank has a 208-branch network. It has presence in all North Eastern states of India and West Bengal, though a majority of its branch network is based in Assam. The bank controlled assets worth Rs 1,908 crore as of March 2023 and a deposit base of Rs 2,040 crore.

North East Small Finance Bank's asset quality suffered a big blow during Covid. As of March 31, troubled assets at the small finance bank accounted for 18% of the book, compared to 12% in FY22, 11% in FY21 and 1.92% in FY20.

In FY23, the small finance bank had to take the full hit on capital, after it raised provisions against these loans. From a peak of nearly 25% as of March 2020, the capital adequacy ratio dropped to 5.5% as of March 2023. Tier-1 capital ratio also dropped to 2.75% at the end of last fiscal from 23.36% in FY20.

Bangalore-headquartered Garagepreneurs Internet Pvt., which owns the Slice brand, started out as a card fintech. It focussed on a prepaid card product that mirrored credit cards, which allowed customers to avail credit lines. They could then use the prepaid card to make purchases and repay their dues over time. Dubbed as a credit card challenger, Slice positioned itself as a viable and transparent alternative to credit cards.

Slice's biggest strength has been its superior underwriting standards, which has allowed it to continue recording low losses on the credit business, according to the first person quoted above.

But all of that came crashing down when the RBI blocked prepaid payment instrument issuers from using credit lines to top up their card products in June 2022. Slice was one of the few card fintechs which suffered a decisive blow. Slice did relaunch its services, offering credit to customers through its mobile app, with the card acting as an add on.

To that effect this merger was one between two entities which have had troubles in recent years. While North East Small Finance Bank's problems are purely financial, those of Slice were more existential. According to the second person quoted above, the merger would solve both their problems.

While Slice is struggling with a differentiated business case, it has a strong capital base, with large venture capital firms like Tiger Capital, Insight Partners, Blume Ventures, among others. In North East Small Finance Bank's favour is a ready customer base, a physical branch network across eight states and a liability business.

"Customers of both entities will have a broader range of products, omnichannel offerings, and a seamless experience in the future. In the upcoming months, there will be an integration process with both entities working diligently to ensure a smooth transition for all customers," Slice had said in a statement on Oct 4.

What Next?

The RBI extending a no-objection certificate to the merger can only be seen as an experiment by the regulator, the two people quoted earlier said. If the entities rise above their problems and are able to sustain themselves, then the RBI gets a lot of the credit. On the other hand, if this does not take off, the regulator can always use the instance as a cautionary tale to deny banking entry to other fintechs.

While addressing reporters after the monetary policy announcement on Friday, RBI Deputy Governor Rajeshwar Rao said that the regulator's approach to fintechs had not changed.

"We have not taken any change as far as fintech is concerned. As far as approval of a banking license or a proposal for voluntary amalgamation, we do carry a fit and proper assessment of things where the financials are involved," Rao said.

But simply the fact that a fintech was able to cross the RBI's "fit and proper" barrier where others have failed is being seen as a positive sign. Last year, Flipkart founder Sachin Bansal was denied a banking license for not clearing that barrier. Large industrial houses who are keen on opening a bank have also been denied entry.

Over the next two or three years, as the Slice-North East Small Finance Bank merger plays out, we may see more fintechs vying for a bank license.