How did BharatPe win a rare banking license?

BharatPe, a barely three-year-old payments startup, is going to be the half-owner of a bank in India - a prize that has eluded many of the country's pedigreed tycoons.

It's a lucky break. Even Jaspal Bindra, who'll own the other half, has had to wait six years for this chance, ever since his reign as the top Asia banker at Standard Chartered Plc ended amid a heap of losses in India and Indonesia.

The in-principle approval for BharatPe and Bindra is a marriage made in heaven, or rather the capital-starved hell that has been the country's banking system for much of the past decade. The regulator is rewarding the duo for agreeing to help remove the debris of a scam-tainted small lender. Punjab & Maharashtra Co-operative Bank (PMC) collapsed after it made 70 per cent-plus of its loans to one bankrupt shantytown developer. To prevent a run, the Reserve Bank of India (RBI) had to stop PMC depositors from freely accessing their money.

That was in September 2019. After two years and two waves of a pandemic, the stuck savers finally have a resolution: BharatPe and a unit of Bindra's Centrum Capital Ltd. will put their financial businesses into a newly licensed bank tasked with making small-ticket loans to unbanked segments of the population. For the privilege of getting that license, the new lender will have to assume at least some of the liabilities of the troubled PMC, as well its moth-eaten assets.

It's unclear how much of the past baggage the new bank can be expected to carry. PMC's March 2020 deposit base of 107 billion rupees ($1.5 billion) may have shrunk after the RBI relaxed restrictions on withdrawals in June last year. But it doesn't have many good assets left to earn a return: About 80 per cent of its 45 billion rupee loan book had gone bad by March last year. Depending on the deal the regulator strikes on their behalf, one option may be to sweeten PMC depositors' take - beyond what they'll be paid out by the deposit guarantee corporation - with some equity in the new bank.

Beyond that, it's a clean slate. BharatPe, which allows merchants to accept payments from any of the several apps popular with consumers, is yet to join the unicorn club of startups with at least $1 billion in valuation. TechCrunch has reported a Tiger Global-led fundraising round that will take it comfortably past that hurdle. The money will also come in handy in creating a new-age bank. Gauging retailers' creditworthiness from real-time customer data, and making that the basis for pricing working capital loans, will preclude the need for a costly physical branch network.

Tens of millions of India's small retail shops rely on personal relationships with wholesalers for credit. Bringing them under the ambit of formal lending will also draw them into the tax net, helping ease the resource crunch for a government that has seen its debt explode because of the Covid-19 crisis. For Bindra, it's time to try something different from the old corporate banking model of financing empire-building by large conglomerates. In India, taking errant corporate debtors through a formal bankruptcy process or coming to a settlement with their politically influential owners was always like pulling teeth. Of late, extraction of capital from failed businesses has become a painful joke - yielding recovery rates of 4 per cent to 6 per cent for creditors.

In the absence of a formal mechanism to deal with bank failures, expect more bespoke arrangements. Inviting Singapore's DBS Group Holdings Ltd. to take over the assets and liabilities of struggling Lakshmi Vilas Bank Ltd. offered a strong hint that the Indian central bank had learned its lesson from unsatisfactory half-rescue of Yes Bank Ltd, a major corporate lender that was allowed to hobble along as a standalone lender.

BharatPe's unexpected bonanza could well set a template for post-Covid recapitalization of Indian lenders. The RBI responded to the pandemic by slashing interest rates and making available nearly 7 per cent of GDP in easy liquidity. When that cheap money is eventually unwound, more banks with depleted capital coffers may need new homes. If RBI Governor Shaktikanta Das is going to reprise the anxious Mrs. Bennet from Pride and Prejudice, maybe other fintech suitors, too, will get to play Mr. Darcy.