Fino Payments Bank is set to expand its workforce significantly as it transitions from a payments bank to a small finance bank (SFB), with plans to add 600 employees over the next three years. The Navi Mumbai-headquartered entity received in-principle approval from the Reserve Bank last month for this strategic transformation.

Revenue Strategy and Business Model

Despite the transition to lending operations, transaction income will remain the dominant revenue stream for Fino Payments Bank. Managing Director and Chief Executive Rishi Gupta indicated that transaction fees are projected to contribute 75% of the topline even three years after operationalising the SFB, suggesting limited reliance on interest income.

Target Market and Lending Strategy

The bank plans to leverage its extensive existing network for its lending operations. Fino Payments Bank will primarily target its current base of merchants and customers, utilizing the substantial data and insights accumulated over years of transaction processing.

Gupta emphasized that the bank's biggest asset in this transition is its wide network built over nearly two decades and the absence of an existing asset or loan base. This clean slate approach differentiates Fino from many existing SFBs that transitioned from microfinance operations with legacy portfolios of riskier, unsecured assets.

Operational Infrastructure and Technology

The bank is implementing several technological and operational enhancements to support its SFB operations:

• Development of an artificial intelligence-powered, fully digital customer onboarding journey
• Migration to a new core banking platform
• Adoption of a hub and spoke model utilizing the existing network
• Establishment of approximately 100 outlets or hubs to process requirements for the network

Financial Position and Cost Management

Fino Payments Bank maintains a strong financial foundation for its transition. The entity currently holds liabilities of over ₹3,000.00 crore with a cost of funds below 2%. This low cost of funds is attributed to the bank's distribution strength, which is expected to continue benefiting the SFB operations.

Gupta noted that the cost of transition to SFB will be limited, as a significant portion of the core banking system costs has already been incurred. The focus on hiring additional personnel will help the organization gain the necessary expertise to handle new processes as an SFB.

Regulatory Timeline and Next Steps

The Reserve Bank has provided Fino Payments Bank with an 18-month period to meet specific requirements before receiving final approval for the SFB conversion. This timeline allows the bank to implement its planned operational changes, technology upgrades, and workforce expansion while ensuring compliance with regulatory standards.

The hub and spoke operational model is designed to optimize costs by eliminating the need for traditional branch infrastructure, instead leveraging the existing network for SFB operations while maintaining centralized processing capabilities.

Fino Payments Bank has recently found itself in a tax dispute with the Goods and Services Tax (GST) authorities. The bank has paid Rs. 10.18 crores under protest following the conclusion of search operations by GST officials.

Details of the Dispute

The dispute centers around Input Tax Credit (ITC) claims made by Fino Payments Bank. According to the bank's disclosure to the BSE, the GST Authority has taken a prima facie view regarding these claims. In response to this, Fino Payments Bank has decided to contest the GST Authority's stance.

Key Points of the Situation

Bank's Response

Fino Payments Bank has stated that it considers the GST Authority's view as untenable. The bank plans to challenge this position, indicating its confidence in the legitimacy of its Input Tax Credit claims.

Implications

Despite the significant amount paid under protest, Fino Payments Bank has assured stakeholders that this development will not affect its operations or other activities. This statement suggests that the bank is financially prepared to handle such regulatory challenges without disrupting its core business functions.

The bank's decision to contest the GST Authority's view also indicates its commitment to protecting its financial interests and maintaining transparency with its investors and the public.

As this situation develops, stakeholders will be watching closely to see how the dispute is resolved and whether it will have any long-term implications for Fino Payments Bank or the broader banking sector's approach to Input Tax Credit claims under the GST regime.