What does the market opportunity for new unity small Finance Bank mean for the country in the year 2022

Unity Small Finance Bank: The economy across the globe is changing with every passing second. There have been constant changes in the economic trends recently after the pandemic shook the economies around the world. They halted the financial activities for over a year, but when they have slowly resumed and are on the track of getting normal, the trends across the economies have started to change. 

One such trend currently prevailing in our country is the trend where the cost of borrowing is low. This current scenario gives the small finance banks a better advantage due to a rising market of small and micro-level borrowers that often take loans at a higher rate than the average market. What is this trend, and to whom would it be helpful? Let us find out together in this article.

Responding to a growing market of small and micro-level borrowers which often help the small finance banks to grow, the Reserve Bank of India issued a Small Finance Bank license on Tuesday to an association of two well-known companies. These companies are the fintech company BharatPe and Centrum Financial Services Ltd. 

The merged entity has been named the Unity Small Finance Bank. This bank will see the business of Centrum’s MSME and will also carry out the microfinance bank businesses which merged into itself. The primary reason for introducing this was a response to a growing market of borrowers residing in small and micro-level finances. However, there are several other causes behind Unity small finance bank’s setup, which we should discuss to know the whole story better. 

What was the reason behind the setting up of Unity Small Finance Bank? 

The Reserve Bank of India was always in favor of setting this up and had already given an in-principle to Centrum Financial Services Ltd, which is required to set up a small finance bank. The consortium of BharatPe and Centrum Financial Services Ltd was very successful as they together took over the Punjab and Maharashtra Cooperative Bank. 

The assets and liabilities of this cooperative bank will be taken over by the newly formed entity known as the Unity small Finance bank. Other than this, both BharatPe and Centrum Financial services ltd had a lot of aspirations to evolve their business into a bank. The fact that the PMC bank was going through a crisis posed an opportunity for both the companies to join hands and act as one single strong entity. 

Let us now learn something about both these companies. 

Centrum Financial Services Ltd.

Incorporated in Mumbai in 1993, the company provides financial services to users across the whole nation. The company offers several benefits: investment banking, institutional brokerage, corporate treasury, wealth management, real estate control, and insurance. Moreover, the company provides services to users of Asia pacific as well as East Africa. It is undoubtedly a top-rated company in our country that offers financial assistance to people and other companies. 

Bharat

Bharat is a popularly known fintech company that caters its services to small merchants and Kirana stone owners residing in the country. Talking about the services provided by this company, it offers a range of fintech products such as interoperable QR codes, which are used for facilitating UPI payments, Bharat Swipe which is used for acceptance of the card. The company also provides small business financing across the nation. The company offers merchant loans to the borrowers, which value up to Rs 7 lacs and is provided for 3 to 12 months. In the year 2020, the company also launched a Digital Gold product for the merchants. 

What does this Union Small Finance Bank mean to both the companies?

In an interview by the Executive Chairman of Centrum Group, Jaspal Bindra, their company aspires to become India’s first digital bank. In turn, it revolutionized the current scenario of traditional banks. Moreover, this also sheds light on the conventional methods the banks follow to accept and promote digital strategies to fulfill the demand of the growing digital economy of India. 

As of now, there have been several attempts made to promote this as several small financial banks and non-banking financial companies have been collaborating with various fintech companies to access and thereby monetize the data collected by these financing firms. Due to the growth of Buy Now Pay Later models and the micro-lending models.

 In these models, the technology-led financing companies like Paytm, Google Pay, Amazon Pay have partnered with several Non-Banking Finance Companies to assess the creditworthiness of the customer already existing in their system to the lender and present them as a potential borrower. 

Talking about the benefits of this deal to BharatPe, a Small Financing Bank license would directly mean that they will now be able to expand their lending business. Currently, the start-up possesses an annual transaction worth $4 billion and engages with many customers daily. Moreover, the company wishes to provide for its customers. By customers, we refer to majorly the tiny and medium level merchants, a bank account, and various lending services based on their earlier transactions. Therefore, the setting up of the bank through this collaboration will help BharatPe provide further services to its existing users and expand its market reach by attracting new customers. 

Market opportunity

Many economists and sectorial analysts have confirmed that the new ongoing trend in the market has to be taken as an opportunity for the small financing banks as the number of small and micro borrowers often take loans at a rate higher than the actual rate prevailing in the market is growing. Another advantage of these small and micro borrowers is that they are never targeted by the more prominent private and state-owned banks, majorly because of the small value of loans demanded by these borrowers. 

Even after knowing the fact that the rate of deposits could be higher than expected for the small finance banks considering the need for customer acquisition, which would for sure affect the net interest margin for them, still, the rate charged by them during lending money can be desirable for the growing small and micro borrowers. These small and micro borrowers are looking to borrow this money to finance their working capital needs. This segment is said to be approached by the companies following the BNPL model. 

The BNPL model-led companies are growing in the nation. There are currently several BNPL wallets across various e-commerce, food delivery, and grocery delivery platforms. Some big banks in the country are also providing equal pay later services. One example of these banks is the ICICI bank. According to the predictions of Goldman Sachs, the BNPL model will grow to a level that will become the fastest-growing online payment option. Its market share has been predicted to rise to 9% by 2024 compared to the current status of 3%.

Article Proofread and Edited by Shreedatri Banerjee