Indian startups and venture capital funds are seizing a rare opportunity in the country as they rush to invest in banks. Prominent names like Premji Invest, Multiples, Zerodha, Gaja Capital, and MobiKwik are now evaluating an investment in Nainital Bank, a subsidiary of Bank of Baroda. This move comes as four consortia, with a total of 16 participants, compete for the Bank of Baroda unit.
Key Takeaway
Indian startups and venture capital funds are actively exploring investment opportunities in Indian banks, aiming to leverage these partnerships for future collaborations and increased revenue growth. The scarcity of banking licenses in the country has made such investments highly sought after by startups.
Exploring Investment Opportunities
Additionally, Lightspeed India Venture Partners and Elevation Capital are separately assessing whether to invest in Shivalik Small Finance Bank. The involvement of these venture capital firms demonstrates their keen interest in leveraging partnerships with traditional banks for potential future collaborations with their fintech portfolios.
Last year, Accel and Quona backed Shivalik Bank, a move that was seen as highly unusual at the time. Now, the bank is seeking fresh funds, which has sparked talks regarding its valuation, estimated to be under $100 million. However, new investors are only permitted to acquire a maximum stake of 4.9% in the bank.
Startups like Jupiter, backed by Peak XV, have also explored the possibility of investing in a bank. The scarcity of banking licenses in the country makes such investments highly attractive to startups, as they can benefit from reduced capital acquisition costs and potential revenue growth through partnerships with traditional banks.
The Road to Banking Licenses
Obtaining a banking license or merging with a bank remains a rarity in the South Asian market due to increased regulatory oversight. The Reserve Bank of India (RBI) has rejected many applications for universal banks in recent years.
However, the RBI’s guidelines became clearer last year, prompting fintech startups operating in lending and card issuance categories to rework their strategies. Recently, Bengaluru-based Slice received regulatory approval to merge with North East Small Finance Bank, marking a significant milestone for the Indian fintech sector.
In 2021, the RBI granted a small finance bank license to a consortium formed by Centrum Financial Services and fintech BharatPe. This move aimed to address capital-starved situations and mitigate the aftermath of a scam-tainted small lender called PMC.
Despite the potential benefits of investing in banks, some industry players admit that they do not have a clear thesis on how a banking license would necessarily help their startups. Nevertheless, several investors are participating in the bidding process due to competitive pressures.
The landscape for Indian fintech is evolving, with greater collaboration between startups and traditional banks becoming more evident. As the financial services sector undergoes transformation, these strategic partnerships could shape the future of the Indian fintech ecosystem.
