Several Indian startups, backed by prominent venture capital funds and private equity investors, are in a frenzied bid to strategize their investments in a sector seldom tapped by the startup ecosystem: banking.
On Oct. 10 TechCrunch highlighted a growing interest among entities like Premji Invest, Multiples, Zerodha, Gaja Capital, and MobiKwik in securing an investment with Nainital Bank, an arm of the Bank of Baroda.
According to sources, four consortia, which include up to 16 participants, have set their sights on this Bank of Baroda division. Simultaneously, separate investment evaluations in Shivalik Small Finance Bank are being undertaken by Lightspeed India Venture Partners and Elevation Capital.
The investment landscape saw Accel and Quona support Shivalik Bank in a move considered out of the ordinary last year. Currently, the bank is on the lookout for fresh capital injection, a development not previously disclosed. The ongoing discussions peg the bank’s valuation at just below the $100 million mark. However, new investors will be restricted to a maximum stake of 4.9% in the bank.
Previous ventures into banking by startups, such as an investment exploration by Peak XV–backed neobank Jupiter, have set a precedent in the industry. The primary motivation behind these venture capitalists exploring bank investments lies in the prospect of forging future partnerships between their fintech startups and these established lenders. Such collaborations promise to enhance revenue growth for banks, given the substantial fintech presence in many investor portfolios.
The scarcity of banking licenses in India has driven startups to secure banks’ stakes. These partnerships potentially allow startups to slash their capital procurement costs.
While the advantages are evident on paper, several industry insiders confessed their lack of clarity on how a bank license could bolster their position. For some, their participation stems from a competitive need to match their rivals’ bids. This race among entities to collaborate with banks gained momentum when Bengaluru-based fintech Slice, received the nod from the Reserve Bank of India (RBI) for a merger with North East Small Finance Bank.
LAST YEAR, the RBI’s revised guidelines mandated several fintech startups, especially those in the lending and card issuance sectors, to overhaul their modus operandi. By greenlighting Slice’s merger, the central bank set a new trajectory for the Indian fintech industry.
Yet, bank mergers and acquisitions of banking licenses remain rare in the South Asian market. This rarity is heightened by the RBI’s stringent regulations, even for minor licenses like those granted to NBFCs. The central bank’s apprehension over tech behemoths’ increasing stake in the finance sector is palpable.
In recent times, the RBI has essentially turned down universal bank applications. A case in point was the rejection of Flipkart magnate Sachin Bansal’s application last year. Bansal’s Navi subsequently parted with its microfinancing division, selling it to Svatantra Microfin for approximately $178.5 million.
In a unique move in 2021, a joint venture of Centrum Financial Services and fintech giant BharatPe was awarded a small finance bank license by the central bank. However, this decision was primarily a measure to alleviate a financial crisis resulting from the disreputable dealings of small lender PMC, limiting BharatPe’s participation as an investor.
The landscape of banking in India is in flux, and the emergent partnerships between startups, VCs, and traditional banks could reshape the financial sector in unprecedented ways.
Featured Image Credit: Photo by Thirdman; Pexels; Thank you!