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Author: Don Obrien

Explained: What’s the market opportunity for new Unity Small Finance Bank


The Reserve Bank of India Tuesday issued a small finance bank (SFB) licence to a consortium of fintech company BharatPe and Centrum Financial Services Ltd. The new business entity Unity Small Finance Bank will see Centrum’s MSME and micro finance businesses merged into itself.

What went behind the setting up of this SFB?

The RBI had already given an in-principle approval to Centrum Financial Services to set up a small finance bank, and along with BharatPe, it took over the Punjab and Maharashtra Co-operative Bank, the assets and liabilities of which will be taken over by the new entity. Both Centrum and BharatPe had aspirations to evolve their businesses into a bank and coming together of both the companies, along side the PMC Bank crisis presented an opportunity for the two entities to join hands.

What does this mean for the two companies?

In a statement, Centrum Group’s Executive Chairman Jaspal Bindra said: “We aspire to be India’s first Digital Bank”.

This sheds light on the need for traditional lenders to expand their digital infrastructure in order to address the market’s requirement for digital products. There have been several examples of small finance banks and non-banking financial companies collaborating with fintech companies to access and monetise the data collected by these consumer tech firms. This has particularly gained momentum in the buy-now-pay-later (BNPL) and the micro-lending models, where companies like Paytm, Google Pay, Amazon Pay, etc have partnered with NBFCs to assess creditworthiness of an existing customer and present it to the lender as a potential borrower.

For BharatPe, on the other hand, an SFB licence means it could expand its lending portfolio. The startup already processes around $4 billion worth of transactions on its platform annually, and it had been planning to offer its customers — primarily comprising small and medium sized merchants — a bank account and lending services based on their transactions.

Is there a market opportunity for these services?

Sectoral analysts have pointed out that in the current scenario, where cost of borrowing is low, there is an addressable market of small and micro borrowers that typically take loans at higher-than-market rates. Also, this segment of borrowers are usually not targeted by larger private and state-owned banks for loans given the small ticket size.

Even though for small finance banks the rate of deposits could be higher considering the need for customer acquisition, thereby impacting their net interest margin, the lending rates they offer could still be attractive for small merchants across the country looking to borrow to fulfil their working capital needs. This segment is also being targeted by BNPL companies.

In India, there are several BNPL wallets that are prevalent on e-commerce, grocery, and food delivery platforms. These include PayU-run LazyPay, Simpl, Zest Money, Amazon Pay, Paytm Postpaid, in addition to several pay later services being offered by banks such as ICICI Bank, etc. Goldman Sachs has predicted that BNPL will rise to become the fastest growing online payment option with its market share growing from 3% now to 9% in 2024.



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