RBI’s ban on SBM Bank’s foreign exchange transactions hurts fintech firms

Wealthtech startups Vested Finance and IndMoney have been affected after the Reserve Bank of India (RBI) barred SBM Bank (India) Ltd from making outgoing remittances until further orders.

The ban has also affected the banking technology company Niyo.

The RBI, in a January 23 directive, directed SBM Bank to stop all Liberalized Remittance Scheme (LRS) transactions under Sections 35A and 36(1)(a) of the Banking Regulation Act, 1949.

The regulator has said the action is based on “certain material supervisory concerns observed at the bank.”

“The bank is engaging with the RBI to address certain supervisory concerns at the earliest,” SBM Bank said in an email to its clients, adding that it remains open for business in all other areas.

Introduced on February 4, 2004, the LRS scheme allows all Indian residents, including minors, to remit up to $250,000 abroad in a financial year.

On Tuesday, SBM Bank had secured Rs 99 crore from the Life Insurance Corporation of India. With the latest round, it has so far raised Rs 224 crore.

Following the RBI’s diktat, Vested has temporarily stopped processing fresh deposits for investments via Vested Direct, while Tiger Global-backed IndMoney has completely stopped accepting fresh deposits for investments in US stocks.

Vested had partnered with SBM India in October to operate its global investment platform Vested Direct. With the ban on SBM, the platform is unable to reduce the overall cost of depositing money into the US brokerage accounts of its clients. It allows users to use other existing bank accounts to add funds, which is quite an expensive process.

“We are working hard to offer yet another cheap and digital deposit solution on the Vested platform. We will keep you posted on new updates as soon as we receive them, Vested said in a blog post earlier this week.

IndMoney had a similar partnership with SBM Bank and as a result of the ban, users are unable to fund their accounts.

“Due to a temporary problem with your banking partner, you are unable to add money right now. Your money is completely safe in your regulated US stocks a/c. We will notify you when you will be able to add money,” says the IndMoney app’s warning.

Offering multiple investment options, IndMoney is one of the learning players in the global investment space. It claims to have taken care of more than 5 million customers since its inception in 2019.

Operated by Finzoom Investment Advisors Pvt Ltd, the startup had last raised $86 million in Series D round from Steadview Capital, Tiger Global Management and Dragoneer Investment Group at a valuation of $650 million.

On the other hand, customers of the Niyos Global Card, which it had issued in partnership with SBM Bank, have complained that they could not use the cards for international transactions.

Some of Niyo’s customers, traveling abroad, had loaded their Niyo cards to save on foreign exchange transaction fees. But to no avail, these customers are taking their frustration to Twitter, complaining about how the sudden move has left them stranded in a foreign country.

Inquiries sent to Niyo did not yield a response prior to filing this report.