The curious case of SBM Bank and how it became a fintech darling

In June, after the Reserve Bank of India (RBI) issued a letter to all non-bank PPI (prepaid instrument or wallet) licensees advising that PPIs cannot be topped up with lines of credit, a strange thing. While the regulator had not explicitly included bank PPIs in its circular, several banks decided to hit the pause button. A close reading of the RBI’s master instructions, some said, even allowed bank PPIs to load lines of credit.

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There was only one exception: SBM India.

Several banking and fintech officials told Mint that SBM India continued to lend its PPI BIN (bank identification number) to fintechs. It has even partnered with emerging fintechs – such as Kissht. Three senior fintech executives confirmed that SBM had told them that they have been “unofficially” told by the regulator to continue with this business. SBM did not respond to Mint’s email inquiry about this claim. A Bengaluru-based fintech entrepreneur said his firm had avoided working with SBM India “because we thought it was a regulatory weak bank”. But when RBI regulations clamped down on the fintech space, he wrote to the bank because it was “the only game in town.”

However, on August 17, the bank finally issued a communication to its partners, saying it plans to stop onboarding new customers on PPI. SBM did not respond to questions about why it continued with prepaid card business when other banks did not, and what made it change its mind. The bigger mystery is this: How did a banking unit with no Indian roots, no branding or visibility become the “only game in town” for fintechs? Read on.

The fintech approach

SBM Bank (India) Ltd is a step-down subsidiary of SBM Holdings Ltd, a listed entity on the Mauritius Stock Exchange, promoted by the Government of Mauritius. Despite a “big bang” inauguration by Mauritian Prime Minister Pravind Kumar Jugnauth in January 2019, the bank attracted little interest.

The collapse of Yes Bank in 2020 was the turning point. “SBM’s Indian management saw this as a great opportunity [to enter the fintech space,” said a former SBM Bank official who did not want to be named.

SBM has been in the market since the 1990s, as an Indian branch of its Mauritius parent, but it did not build any name in the market, a second former SBM Bank official said. “Before I joined them, I didn’t know that there was a bank called State Bank of Mauritius in India. So, they positioned themselves as a new player in the market.” Initial plans to become a premium bank were discarded. “Instead, after 2020, they went and partnered with fintechs,” the second official said. In fintechs, SBM saw a cost-effective customer acquisition channel, rather than invest in branches and compete for customers with giants like State Bank of India.

SBM Bank’s fintech strategy is led by Neeraj Sinha and Girish Parpillewar. While Sinha heads the retail and consumer banking division at SBM, Parpillewar, who reports to Sinha, is senior vice-president.

“All the products, partnerships, the discussions and negotiations are driven by Neeraj. He involves Girish, who heads prepaid cards,” the second official cited above said. While there were just three people, including Sinha and Parpillewar, to manage fintech partnerships at the bank last year; currently there are about four people working under Parpillewar. Mint sent queries to both on LinkedIn; Parpillewar directed them to the bank’s corporate communications, which did not respond. Sinha did not respond.

The bets appear to have paid off. The bank’s overall net worth increased to ₹715 crore as on 31 March 2022 from ₹599 crore as on 31 March 2021, which is well above the regulatory requirement of ₹500 crore. This was mainly due to the ₹100-crore infusion by the parent in FY2022.

The selling point

For startups in a hurry, all roads led to SBM. “ICICI Bank, HDFC, Yes Bank, take a lot of time to onboard. From conceptualization to get the product out in the market, it would take around 6-7 months,” the second official said.

Larger banks are also more discerning about whom they take on as their partners. “At SBM, there was nothing of this sort. You could be an average startup with a good idea and you could come and pay SBM and launch your product. From integration to going live would take 2-3 months at most. We have even gone live in a month,” the second official said. SBM did not respond to queries by Mint on its overall fintech strategy.

The bank has enabled some popular fintechs such as Slice, Uni, Lazypay to offer credit lines on its PPI via the API (application programming interface) infrastructure company M2P Fintech, which connects the bank and a fintech. The SBM and M2P partnership is an important one, wherein M2P does the platform work for the fintechs. Other API infra companies in the market are Happay, Zeta, M2P, Decentro and Card91. “The bank does not come to fintechs and tell them to work with them. The infra providers go to a fintech and say that we work with 2-3 banks and depending on your volume, we will put you on one bank,” a fintech NBFC founder, who partnered with SBM via M2P, informs. He recalls that he went with SBM because it was giving the startup lower rates compared to Yes Bank.

In terms of revenue lines from PPI fintechs, there is a one-time set-up charge ( ₹1-5 lakh) that SBM gets to keep. The big revenue line is cut in interchange, i.e. MDR (merchant discount rate is a cost that is charged to merchants for processing debit and credit card transactions). This fee, which is between 1.75-1.9% of the transaction cost, gets split between the card networks such as Visa, Mastercard, Rupay (0.2%); SBM (0.8-1%); M2P (0.1%-0.5%); and the fintech (0.4%-1%), according to multiple sources. The split between the bank and the fintech is almost equal, though it can differ in some cases. The bank did not respond to Mint’s queries on how it scouts for fintech partnerships, or details about its revenue lines and revenue sharing.

Early last year, the bank was partnering with 1-2 fintechs per month on pre-paid products, the second official shares. “Slowly and steadily, most prepaid card businesses came to SBM.”

“Through M2P, SBM currently has about 18 partnerships across product lines, of which 7-8 are on the hold. They are also in the process of launching credit cards in partnership with some fintechs who are stuck, one such fintech is Uni,” a person aware of the matter told Mint.

SBM does have more partners because it is open to working with even a small fintech, admit most founders. “Historically, RBL Bank and Yes Bank were far more open in terms of partnerships. They became so successful that they started having a volume cut-off. This means the banks will say, ‘I want to make this much revenue from you (startup) in a year. Either you give that much in my hand or you guarantee that I will make that much revenue through this partnership,” the fintech NBFC founder quoted above said.

“Other banks walked away because they had their own customer acquisition engine through branches. And they didn’t want to pass on substantial benefits to fintechs. Fintechs, too, had issues while sharing more than requisite amount with partner banks. But with SBM, fintechs found a sweet spot,” said SKV Srinivasan, former executive director at IDBI Bank and currently an independent fintech and NBFC consultant.

How have fintechs shaped SBM’s financial health? According to the bank’s 2021-2022 annual report, its current and savings accounts (CASA) deposit base grew to ₹6,799 crore in FY22, largely driven by CA deposits. Current accounts (demand deposits) showed an exceptional growth, whereas the savings deposit was just about 6% of the total deposit base, amounting to ₹427 crore.

A report from rating agency ICRA states that the overall deposit concentration level as reflected by the share of the top 20 depositors moderated to 34% of the total deposits as on 31 March 2022 (38% as on 31 March 2021, and 43.01% as on 31 March 2020) although it remains high.

In addition, SBM Bank’s assets under management (AUM) grew to ₹8,084 crore in FY22 as compared to ₹4,739 crore in the previous year. The loan book increased 49.2% from ₹2,917 crore in FY2020-21 to ₹4,355 crore in FY2021-22.

According to SBM’s FY22 annual report, the corporate banking vertical accounted for 79.44% of its total loan book as well as 68.96% of its deposits. “SBM is not relying on the private banking side. With limited branches [which have increased to 11 now] they’re not going to make much of a difference. If you see their branches, they are all in prime business locations. Most accounts are only through fintechs,” said the first former SBM official. The bank did not respond to Mint’s queries about its current account base.

Despite growth in deposits and assets, the bank’s profit after tax fell ₹16.31 crore in FY22, as compared to ₹18.64 crore last year, due to higher provisions made against loans. “The bank has made an additional provision of 0.5% of the year’s operating income with an effect of ₹1.2 crore, as recommended by the RBI in view of certain discrepancies observed in its inspection,” the bank’s annual report said. Simply put, SBM had to pay ₹1.2 crore as penalty for regulatory slippages.

The compliance game

Why did SBM continue to support prepaid products after the RBI circular? On this, a person who has worked closely with M2P and SBM informs that SBM’s strategy is to grow through partnerships. “There were several regulatory notices around reporting and even M2P was asked to provide a few reports. Sometimes the RBI auditors visited the SBM office and the bank has even been fined,” the first official said. The bank did not respond to Mint’s queries on whether it has faced any reporting and compliance-related scrutiny from the RBI or whether it has been fined by the regulator.

But now fintech as a business is no longer about partnership, but compliance; and the RBI wants the banks to fall in line. With new fintech regulations coming in, it’s going to be very difficult even for SBM, “if most functions from technology to customer service are outsourced,” the second SBM official said. In October 2018, SBM claimed they lost ₹143 crore in cyber fraud which was reported by the bank to the Mumbai Police’s Economic Offenses Wing on October 2. Despite the investigation, the hacker has not yet been identified. “It shows the vulnerability of the system. So when you’re working with 40-50 players and when you want to do a thorough monitoring of these people, it’s going to be difficult,” Srinivasan said.

With most businesses on hold and stricter fintech regulation, market experts believe it makes sense for banks to go slow with fintech partnerships. “They can re-prioritize, re-strategise, re-look and come back … it’s not that they want to go away because what they’ve done is phenomenal and is appreciated by the market. So they can just come back with more caution, ” adds Srinivasan.

But SBM, it seems, is currently going aggressively on the personal loan and joint loan category. “They now seem to be focusing on personal loans and co-loans,” said another fintech entrepreneur, who associates with SBM on the personal loan side. The bank did not respond to questions about its future strategy.

The conclusion is this: SBM needs fintechs and vice versa, each for its own survival.