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

The Reserve Bank of India on Tuesday issued a small finance bank (SFB) license to a consortium of financial technology firm BharatPe and Centrum Financial Services Ltd. The new business entity Unity Small Finance Bank will see the merger of Centrum’s MSME and microfinance activities.

What happened behind the creation of this SFB?

The RBI had already given its agreement in principle to Centrum Financial Services to create a small financing bank and, together with BharatPe, it took over the Punjab and Maharashtra Co-operative Bank, whose assets and liabilities will be taken over by the new entity. Centrum and BharatPe had the ambition to transform their activities into a bank and the merger of the two companies, in parallel with the PMC Bank crisis, gave the two entities the opportunity to join hands.

What does this mean for the two companies?

In a statement, Centrum Group Executive Chairman Jaspal Bindra said, “We aspire to be India’s premier digital bank.”

This highlights the need for traditional lenders to expand their digital infrastructure to meet the market’s needs for digital products. There have been several examples of small financial banks and non-bank financial companies working with financial technology companies to access and monetize the data collected by these mainstream technology companies. This has especially gained momentum in Buy It Now and Pay Later (BNPL) and micro-lending models, where companies like Paytm, Google Pay, Amazon Pay, etc. partnered with NBFCs to assess and present an existing customer’s creditworthiness. to the lender as a potential borrower.

For BharatPe, on the other hand, an SFB license allows it to expand its loan portfolio. The startup already processes around $ 4 billion in transactions on its platform each year, and it planned to offer its clients, mostly small and medium-sized merchants, a bank account and loan services based on their transactions. .

Is there a market opportunity for these services?

Industry analysts have pointed out that in the current low cost of borrowing scenario, there is an addressable market of small and micro borrowers who typically take out loans at higher than market rates. In addition, this segment of borrowers is generally not targeted by large private and public banks for loans given the small size of the ticket.

Although for smaller financing banks the deposit rate could be higher given the need to acquire customers, which would impact their net interest margin, the lending rates they offer could be higher. still be attractive to small traders across the country looking to borrow to fill their working capital. Needs. This segment is also targeted by BNPL companies.

In India, several BNPL wallets are prevalent on e-commerce, grocery and food delivery platforms. These include LazyPay, Simpl, Zest Money, Amazon Pay, Paytm Postpaid, in addition to several subsequent payment services offered by banks like ICICI Bank, etc. Goldman Sachs predicted BNPL would become the fastest online. payment option, its market share dropping from 3% today to 9% in 2024.

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