The talks are still at an early stage and, given the overall funding winter, might take a few months to close, the people said.
The funding will be made in the new entity to be formed by the merger of Slice and North East Small Finance Bank. Under the deal, Slice’s non-banking finance company is merging with the small finance bank. The other entities of Slice will cease to operate, the people said.
“The funding is mainly required from the perspective of maintaining the newly formed bank’s capital adequacy ratio. Currently the merged entity should have around 35%, which is at a comfortable stage, but it cannot go below 15% as per regulatory mandate,” said one of the people. “Once the merger is completed, Slice will have to infuse additional capital into the bank.”
ETtechIn its FY23 filings, the small finance bank had reported its tier 1 capital ratio at 2.75%, well below the regulatory threshold of 15%. Its gross bad assets or loans that had not been repaid on time shot up to 18.2% last fiscal year compared with 10.9% the previous year.
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The people spoke on the condition of anonymity. The company did not respond to detailed queries from ET.
Slice is backed by the likes of Tiger Global, Gunosy Capital and Axis Bank. Tiger Global, an aggressive investor in Indian startups, has slowed down its pace of investments here lately.
ETtechIn November, the company raised $9 million of debt from venture debt platform Stride Ventures. The deal valued Slice at around $1.8 billion, according to data from market intelligence firm Tracxn.
“The point of deliberation is the valuation at which the round will get closed. During the announcement of the merger Slice was valued at around $1.5 billion,” the person said. When the deal was announced, the valuation was not revealed publicly.
The third person in the know said Slice wants to raise the fresh funds at a higher valuation from its last equity round given its banking licence. Rajan Bajaj, the founder of Slice, is already a nominee director on the board of North East Small Finance Bank and he wants to get the right terms from his investors. But given the overall funding climate and the size of the cheque, the valuation might remain flat or it might take time to close the deal.
The elusive banking licence
Slice, which started operations only in 2015, managed to grab the coveted banking licence by merging with North East Small Finance Bank, which has been struggling with high NPAs and low capital adequacy.
The merger was announced in October. Currently the merger process is underway, with filings being made at the National Company Law Tribunal and the Competition Commission of India, according to one of the people. It could take a few more months to close the merger and launch the bank in a new avatar, he added.
Slice founder Bajaj did not comment on his plans for the new entity, but ET spoke with two senior industry insiders in the know who said it is trying to build a digital-first bank focused on retail consumers.
Currently, Slice offers UPI payments, consumer credit and a prepaid banking account through its app. Once the bank is formed, Slice prepaid account holders will be offered the option to graduate to a full-service bank account. The card and UPI will be leveraged for all consumption activities and eventually credit will become the main revenue generator.
“The idea is to create digital banking units in multiple areas, use branches for services primarily and offer a digital-first experience to the customers,” said the person cited above.
The person added that Slice is looking to create three major credit products -personal loans which are already offered, small-value merchant loans and affordable home loans.
“These products will be focused on retail customers and that will also help Slice achieve the priority sector mandates for a small finance bank,” the second person cited in the story said. “Slice cannot do big ticket corporate loans.”
Also Slice plans to cater to the migrant population of the north-eastern states living in large cities to connect them to their native places better. This could help it drive financial inclusion in meaningful ways, a mandate it needs to drive as a small finance bank.
The surprise winner
For the fledgling fintech industry, a banking licence has always been the north star. But despite many trying for it, only Paytm, and recently BharatPe (through Centrum), have got the green light from the central bank.
“But the RBI wanted a new breed of banks to emerge with the small finance banks, but that did not happen as per expectation. With Slice, perhaps the regulator wants to achieve a digital-first lender,” said a senior banker who has worked with the Reserve Bank of India very closely.
Also, the RBI wanted to salvage North East Small Finance Bank and Slice was at the right place at the right time, the banker added.
But for the Bengaluru-headquartered fintech, it will not be easy to set up a bank focused in the restive Northeast of the country. Building a credit franchise in those areas will require localised expertise and models which can work for external factors unique to those states.
“For the RBI also this is an experiment; it will help channel venture money towards banking and financial inclusion and at the same time give a positive message to the tech world,” the banker added.