The fintech industry has been growing impressively, with $1 out of every $5 raised globally in the first quarter of 2021 going to this field. The recent deal by Bharatpe and CFSL to acquire PMC hints at the promise of fintech in Indian markets. Moreover, the deal could show promising results of the collaboration between the new age fintech world and the traditional banking platforms.
On January 16th 2021, Bharatpe and Centrum Financial Services Ltd. (CFSL) jointly entered a bid to acquire Punjab and Maharashtra Cooperative bank ltd. (PMC). The bank was involved in lending to a now-defunct real estate company despite a clear conflict of interest. A couple of months down the line, Bharatpe- a relatively young startup- has received the prized licensing to acquire PMC and convert it to a small finance bank (SFB). The newly managed Need PMC strays from the previous traditional offline methods of lending and will instead look towards a streamlined online process much like the one Bharatpe is currently involved in. This move pulls the norm further away from conventional banking and closer to the fintech arena.
The RBI is judicious when granting bank licenses. Bagging this coveted grant has enabled the joint acquisition of PMC. The nod to the new management of PMC has given hope to PMC depositors regarding their frozen assets. This unprecedented move by the RBI also opens up questions about the future moves for other fintech players like Paytm, Gpay, and Phonepe. Will this decision open up the floodgates for future bank mergers or acquisitions? Something interesting to note is that other fintech platforms have also, albeit unsuccessfully, sought banking licenses.
However, going into the details of the PMC merger, in particular, uncovers many unusual factors that are hard to replicate elsewhere. In the last year, PMC has been embroiled in a scandal that has caught the attention of the public. The fiasco with Housing Development and Infrastructure Limited (HDIL) uncovered a deep pit of bad loans amounting to Rs. 6300 crore which resulted in the sacking of the then CEO, an RBI probe into the matter, and the open-ended freeze of PMC depositors’ money.
Punjab and Maharashtra co-operative bank ltd. (PMC) is a multi-state cooperative bank that started operations in 1983. Today, it has grown to more than 9 lakh depositors, 137 bank branches, and the status of one of the most profitable cooperative banks in India. That is, until September 2019 when the RBI imposed operational restrictions on the bank following its loaning out 73% of its credit book to a single entity- HDIL. Almost 6300 crores of the total 8300 crores available for lending went to the now-bankrupt real estate entity. Going deeper exposed murkier details like the then PMC chairman, Waryam Singh, having a clear conflict of interest by owning a 1.9% stake in HDIL along with holding the position of a non-executive director until 2015. During this period, PMC was actively sanctioning loans to the now-defunct HDIL. The owners of HDIL- the Wadhwans- were known for a lavish lifestyle and had been implicated in the YES bank loan probes as well. The then managing director, Joy Thomas said that disclosing the details of the defaulting of loans by HDIL would hamper the reputation of both the bank and the company. Along the same lines, classifying the loan as an NPA (non-performing asset) would have disallowed the bank to charge interest and further taken away from the profitability of the bank. Interestingly enough, the bank has been indebted to the Wadhwan family for past infusions of capital at desperate times.
The crackdowns on more than two banks within a single year itself took a toll on investors’ confidence. With depositors weary of the freeze on deposits and a potential run on the bank situation if it were eased, the RBI must have been desperate to revive PMC with a long-term solution. This is the crack that Bharatpe managed to wedge open to their favor.
Bharatpe, or Resilient innovations pvt. ltd., is a fintech platform that has been tagged as an emerging unicorn. Founded in 2018, the company started off using a merchant-centric strategy and was rewarded handsomely. By using an algorithm based on past transactions and cash flow history to calculate a credit score, the company was able to provide quick loans for small businesses. With a repayment rate of 96%, Bharatpe’s strategies ensured that their business was not only safe from the pandemic but also benefited them to a degree from the surge of online transactions. The startup also created great exits for 18 of its angel investors with an impressive 80% return.
Streamlining this thinking into the banking field in the form of PMC bank can only benefit all the stakeholders. With a history in lending to the MSME space, Bharatpe’s vision aligns with PMC’s target, albeit not as conventionally. Bharatpe’s business is lending to small shopkeepers and Kirana stores. Creating an SFB is a more structured approach to their core competence of lending to these niches. There is also speculation that Bharatpe’s acquisition of Payback, a multi-brand loyalty program, in January hinted at its plans to grow into where it is today. The acquisition is a valuable addition to Bharatpe’s timeline with them now having the authority to lend at a larger capacity. With a bank in its pockets, one can only wonder what the next move for Bharatpe will be.
The jointly managed bank now has set hard targets for itself like giving itself 90 to 120 days to be operational. A fresh 1800 crore investment will give the bank a much-needed boost, not only financially, but also for public perception and investors’ confidence. However, there are doubts about whether this merger will stand the test of time and public confidence. There is the issue of the liabilities racked up by PMC and whether the RBI will allow the new merger to refinance these liabilities into new capital. There is also the question of whether depositors will only receive money according to the DICGC (deposit insurance and credit guarantee corporation). A slight relief may come from the government amending the DICGC act to increase the deposit insurance cover.
Bharatpe’s foray into the traditional banking sector is not only unprecedented in India but also an unusual merger globally. Ultimately, a move like this that is approved by the RBI incentivizes others to notice the new trend and discard the old. Bharatpe’s path may mark the start of a new trend for the rest of fintech, with the RBI also giving the nod for the possibility of payments banks to turn into SFBs. This might have far-reaching effects on the share prices of other fintech companies as well, with hope for other potential mergers and conversions of these platforms into banks.
Disclaimer: SAE India aims to provide a forum for interesting early stage companies at a fundraising stage to present. However SAE India is not a fund, does not do crowd sourced fundraising, nor does it provide investment advice or recommendations. Any due diligence, negotiation or investment activity conducted by members or officers of SAE India is conducted solely as an individual of their own accord as an accredited investor, not as an officer or representative of Stanford University, or Stanford Alumni Association. Stanford University and Stanford Alumni Association are not in any way endorsing or assessing the companies or entrepreneurs who present at SAE India nor are they involved in SAE India members or officers’ individual investment decisions regarding these companies.
4352 Market St
#3200 Philadelphia, PA 19103
6 Split Rock Drive
Cherry Hill, NJ 4563
343 Main St
#232 Singapore, SG 67867
89 Kingstreet St
#3200 London, PObox 19103