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Fino Payments Bank Ltd Management Discussions

Jul 12, 2024|03:32:25 PM

Fino Payments Bank Ltd Share Price Management Discussions

Indian economy

Overview: Even as the global conflict remained geographically distant from India, ripples comprised increased oil import bills, inflation, a cautious government and a sluggish equity market. Indias economic growth is estimated at 6.8% in FY 2022-23. India emerged as the second fastest-growing G20 economy in FY 2022-23. India overtook UK to become the fifth-largest global economy. India surpassed China to become the worlds most populous nation (Source: IMF, World Bank)

Growth of the Indian economy

FY 20 FY 21 FY 22 FY23E
Real GDP growth (%) 3.7 -6.6 8.7 6.8

Growth of the Indian economy quarter by quarter,

FY 2022-23

FY 20 FY 21 FY 22 FY23E
Real GDP growth (%) 13.1 6.3 4.4 4.9

(Source: Budget FY24; Economy Projections, RBI projections)

Till the end of Q3 FY23 total gross non-performing assets (NPAs) of the banking system fell to 4.5% from 6.5% a year ago (covid era). Gross NPA for FY23 was expected to be 4.2% and a further drop is predicted to 3.8% in FY2023-24.

As Indias domestic demand remained steady amidst a global slowdown, import growth in FY23 was estimated at 16.5% to USD 714 billion as against USD 613 billion in FY22. Indias merchandise exports were up 6% to USD 447 billion in FY23. Indias total exports (merchandise and services) in FY23 grew 14% to a record USD 775 billion and are expected to touch USD 900 billion in FY24. Till Q3 FY23, Indias current account deficit, a crucial indicator of the countrys balance of payments position, decreased to USD 18.2 billion, or 2.2% of GDP. Indias fiscaldeficit was estimated in nominal terms at ~ H17.55 Lakh Cr and 6.4% of GDP for the year ending March 31, 2023. (Source: Ministry of Trade & Commerce) Indias headline foreign direct investment (FDI) numbers rose from USD 74.01 billion in 2021 to a record USD 84.8 billion in 2021-22, a 14% Y-o-Y increase, till Q3 FY23. India recorded a robust USD 36.75 billion of FDI. In 2022-23, the government was estimated to have addressed 77% of its disinvestment target (H50,000 Cr against a target of H65,000 Cr).

Indias foreign exchange reserves, which had witnessed three consecutive years of growth, experienced a decline of approximately USD 28 billion in FY22, primarily influenced by rising inflation and interest rates. Starting from USD 606.47 billion on April 1, 2022, reserves decreased to USD 578.44 billion by March 31, 2023. The Indian currency also weakened during this period, with the exchange rate weakening from H75.91 to a US dollar to H82.34 by March 31, 2023, driven by a stronger dollar and an

increasing current account deficit.

Despite these factors, India continued to attract investible capital.

The countrys retail inflation, measured by the consumer price index (CPI), eased to 5.66% in March 2023. Inflation data on the Wholesale Price Index, WPI (calculates the overall price of goods before retail) eased to 1.3% during the period. In 2022, CPI hit its highest of 7.79% in April; WPI reached its highest of 15.88% in May 2022. By the close of the year under review, inflation had begun trending down and in April 2023 declined below 5%, its lowest in months.

In 2022-23, total receipts (other than borrowings) were estimated at 6.5% higher than the Budget estimates. Tax-GDP ratio was estimated to have improved by 11.1% Y-o-Y in RE 2022-23. The total gross collection for FY23 was H18.10 Lakh Cr, an average of H1.51 Lakh Cr a month and up 22% from FY22, Indias monthly goods and services tax (GST) collections hit the second highest ever in March 2023 to H1.6 Lakh Cr. For 2022 23, the government collected H16.61 Lakh Cr in direct taxes, according to data from the Finance Ministry. This amount was 17.6% more than what was collected in the previous fiscal.

Per capita income almost doubled in nine years to H172,000 during the year under review, a rise of 15.8% over the previous year.

Indias GDP per capita was USD 2,320 (March 2023), close to the magic figure of USD 2,500 when consumption spikes across countries. Despite headline inflation, private consumption in India witnessed continued momentum and was estimated to have grown 7.3% in 2022-23.

The rural economy in India plays a crucial role, accounting for more than 50% of the national income. It serves as a primary driver of overall growth and development in the country. The government aims to achieve significant contributions of 1 trillion dollars from agriculture, 3 trillion dollars from services, and 1 trillion dollars from the manufacturing sector, striving to make the Indian economy a 5 trillion dollar economy. Recognizing its potential, the rural economy offers opportunities for creating productive jobs and contributing to sustainable development and economic growth. This importance is further emphasized in the 2030 Agenda for Sustainable Development, which places increased focus on rural development, agriculture, and food security.

Indias rural per capita GDP has consistently grown at 6.2% over the past two decades. With the majority of the population residing in rural areas, the growth, income, and consumption patterns in rural India play a vital role. They have the potential to drive demand, stimulate economic revival, and sustain overall economic growth. Notably, the rural economy has shown resilience even during periods of economic slowdowns.

This is a tailwind for brands that are focussed on this market. Importantlyittranslatesinto growthin transfers, remittances, credit, insurance and consumption which benefits ly included particular, Fino gained disproportionately. Industry overview

India remains a global leader in the digital payments landscape, accounting for 46% of global real-time payments. In 2022, India recorded H89.5 million real-time payment transactions. Indias dominance in digital payments is evident as its transactions surpass the combined total of the next four leading countries. Indias digital payments market is poised to expand more than threefold from USD3 trillion to USD10 trillion by 2026. This unprecedented surge will lead to a significant shift, with digital payments (non-cash) accounting for two-thirds of all payment transactions by 2026. products Indias fintech market is experiencing attractive growth, positioning itself as one of the worlds fastest-growing sectors and is projected to reach a market size of approximately USD150 billion by 2025. The Indian fintech industry encompasses sub-sectors such as Payments, Lending, Wealth Technology WealthTech, Personal Finance Management, Insurance Technology (InsurTech), Regulation Technology (RegTech), and others. By 2023, the fintech sector in India is expected to reach USD1 trillion in Assets Under Management (AUM) and generate USD200 billion in revenue. The equity funding for Indian FinTech companies has witnessed a notable growth rate of 26% CAGR over the past four years. However, this growth has gained even greater momentum since 2020, catalysed by the accelerated adoption of digital services due to the pandemic. Despite the challenges posed by the pandemic, the Indian FinTech industry continues to showcase a robust growth trajectory.

The use of UPI transactions in semi-urban and rural areas in India has also increased significantly, with nearly 25% and 14% growth in value and volume respectively largely through assisted financial governmental outlay as support for digital payments.

Financial year

Digital transactions (H cr)
2017-18 2,071
2018-19 3,134
2019-20 4,572
2020-21 5,554
2021-22 8,840
2022-23 9,192

(Source: Invest India, Digital Transactions in India Press release dated 8th Feb 2023, ddnews.gov.in)

Government initiatives

The fintech revolution in India is the outcome of made over the years to establish crucial facilitators through significant initiatives: Jan Dhan Yojana: One of the most expansive financial initiatives globally, enabling more than 450 million beneficiaries to obtain new bank accounts. Through this program, individuals have gained access to an array of financial services, such as direct pensions.benefit This substantial increase the number of the banking sector. individuals has created a sizable consumer base for fintech companies to develop and deliver technology-driven products and services tailored to serve the needs of this population.

This coupled with access to consumption courtesy easier access to media, e-commerce, has led to adoption of financial digital banking

Financial literacy: In 2020, the Reserve Bank of India initiated the Centre for Financial Literacy project with the objective of promoting financialawareness and education among the general public, particularly in rural and semi-urban regions. This project seeks to enhance knowledge and understanding of financial planning and management by offering guidance on diverse financial and services, including bank accounts, insurance, pension schems, and digital payments. To facilitate this, the project trains local volunteers as financial to educate and assist their communities in matters of financial literacy.

India Stack: India Stack is a set of APIs that allows for easy and secure access to digital infrastructure and has played a significant role in driving innovation and growth in Indias fintech sector. It has enabled the development of various digital services, including digital payments, digital identity verification and eKYC, among others. The use of India Stack has also contributed to the growth of financial inclusion by allowing easier for millions of under-banked individuals. (Source: Invest India) The India Stack is a great example of government and private participation.

Payments Bank Industry structure and developments

Payments Banks are regulated entities operating in the larger fintech and payments space. Their main objective is to widen transactions. Interestingly this growth is despite limited access of payments and deposit facilities to emerging businesses, low-income but increasingly aspirational households, peripatetic workers and other unorganized entities by enabling high volume low value transactions. Thus covering segments not adequately covered by conventional banking. In order to confine its activities within the gamut of objectives for which it was incepted, payments banks are allowed to set up their own branches, ATMs and business correspondents.

These entities are allowed to accept non-NRI demand deposits, issue ATM/ debit cards/ PPIs, offer remittance services and internet banking services, act as a business correspondent to other banks, facilitate utility bill payments and undertake non-risk sharing simple financial services. sustainedefforts Given that the primary role is to offer payments, remittance and harmonize bank account access, the maximum account balance of customers was initially restricted to H100,000 at the end of the day.

This was subsequently raised to H200,000 by the regulator. inclusion In addition, these banks have not been allowed to lend and in order to earn yields to pay interest to savings account holders,

75% of the demand deposit balances can be invested in Government securities/treasury bills with maturity up to one year and the remaining 25% of the demand deposit balances should be current and time/fixed deposit instruments with other scheduled commercial banks for operational and liquidity purposes. The investments in Government securities or treasury bills with one year maturity will be recognized by RBI as eligible securities for maintaining the Statutory Liquidity Ratio (SLR).

Within the regulatory contours, payments banks have been able to set up a vast network of banking points either through an own business correspondent channel or by leveraging any existing branch infrastructure of parent or core business, if any. Fino Payments Bank, for instance, has more than 13.7 Lakh banking points pan-India (including open banking channel).

Opportunities and Threats

According to the Global Findex report published by World Bank, nearly 78% of Indias population above 15 years of age has a bank account. But the findingsof the report highlight some interesting insights on the usage trends of bank accounts in India:

Of the population above 15 years of age that had deposited money in a bank account, only 41% deposited twice or more than that in a month

Only 27% above the age of 15 years owned a debit card and out of that, only 12% used the card

Only 16% of the population above the age of 15 years used a mobile phone or internet banking to check account balance

In the credit card segment, only 5% above the age of 15 years owned a credit card The biggest opportunity for Fino Bank is not just in extending widespread access of bank accounts. It is already evident that penetration of bank accounts in India is fairly ubiquitous. But the larger opportunity is to promote everyday banking in these customer segments, HarDinFino!. The above data point suggests

that merely opening a bank account doesnt necessarily promote a ‘banking behaviour among the masses.

Financial institutions need to tailor products and services for this segment of customers. Fino Bank has taken a lead by making financial services not only accessible but affordable Bank has been capitalizing on the surge in smoother internet connectivity and deeper smartphone penetration across the country. With more customized products and better access, it is easier to reach out to the last mile customers through more efficient channels and with a Fino Bank operates in a fairly commoditized environment. The products and services are standardized (largely payment services) or have limited attributes (simple, no frill banking). Importantly not being allowed to lend due to regulatory reasons does constitute a threat to the organization.

The orientation of the business model with its emphasis on

Distribution-Technology-Partnerships plays a big role in mitigating business risk. Over the last few years Fino Bank has been building brand name for itself. The strength of the brand makes it easier for the ecosystem to recall and hence prefer Fino. By reinforcing the merchants status as a banker to the local ecosystem and establishing that Fino is #FikarNot we are driving preference for the brand. #Hamesha

Segment-wise or Product-wise performance

Sharing insights on how our key products have performed over the last few quarters. This will give you an insight into the progress made by the bank and how predictable the business has started to become CASA: This is a focused business for us as it lays the foundation for customer ownership. The product proposition of a “Hatho Hath Debit Card” at the nearby Fino merchant point plays a key role here. Importantly the visibility of Fino Bank on government schemes (MNREGA etc.) creates a sustainable hook.

Consistent CASA sourcing and focus on getting better profile consumers (significantly large numbers transact using UPI) also drives our Subscription Revenues (renewal of the bank account and hence relationship with Fino). The use of ensemble AI ML models has played a pivotal role in driving renewals. Most importantly investment in acquiring better quality customers has paid dividends.

Fino Bank launched Digital Savings Account in December 2022, opened ~ 40 K accounts in FY23. This will be an important growth area for the bank in the year 23-24 and beyond. It points to the ever changing profile of the Fino Bank customer.

MATM & AePS A part of our transactional business. Access to cash for withdrawal is a key banking need and we have been addressing it across 90%+ districts across the country. This is often a consumers first interaction with us.

Importantly the merchant pays an on-boarding fee, which improves the stickiness of the relationship and has a very positive impact on the P&L.

We see ~1% of all footfalls for MATM, AePS convert to CASA.

Domestic Money Transfer (DMT): This was a fundamental product when the bank launched in 2017. And it laid the foundation for the initial distribution (focused on remittance corridors e.g. South, Gujarat to Bihar).

Covid lockdowns severely impacted the DMT business. But we have since recovered.

Cash Management Services (CMS): This is the partnership business which makes cash available across the Fino Bank ecosystem for consumers to walk in and withdraw.

We now work with 186 of Indias leading corporates across NBFC, E-com, and Logistics etc. and help them manage their cash risk. This is ecosystem play at its best it benefits the partners, the merchant ecosystem and the end consumers, thus creating win-win outcomes

A growing throughput plays a big role in driving profitability for the bank. Most critically it keeps the ecosystem going! We also offer banking services on behalf of other banks. It contributes to ~10% of the banks total revenue.


The Banks revenue grew by 22% Y-o-Y to H1,229.9 Cr aided by a 36% Y-o-Y growth in overall transaction throughput value to H2,55,011 Cr in FY23. Significantly, the digital throughput value surged substantially by 166% Y-o-Y to be at nearly 19% of the overall throughput value in FY23.

The Bank processed ~121 Cr transactions in FY23, higher by 79% as compared to FY22. It also opened ~30 Lakh Fino Bank current and savings accounts during the year, which is nearly 45% more than the accounts opened in the previous year. The merchant enabled banking points crossed 13.7 Lakh as on 31st March 2023, a jump by 34% Y-o-Y.

The highest growing businesses in FY23 were CASA and CMS that constituted 26% of overall revenue in FY23. Within CASA, revenue in the subscription and renewal business combined grew by 73%

Y-o-Y in FY23 while the renewal business grew exponentially by 167%. Throughput in CMS business grew by 93% Y-o-Y in FY23. We expect the growth run rate to continue for CASA and CMS in FY24 as well. The other mature businesses like DMT, Micro-ATM and AEPS will continue to grow in the range of 10-15%. At a blended portfolio level, we expect to grow at ~ 20 - 25%. Net Revenue Margins are expected to remain range bound.

Financial overview Key ratios


2022-23 2021-22

EBITDA/Turnover (%) (before exceptional items)

11.1% 8.4%
Return on net worth (%) 12.0% 9.0%
Book value/share (H) 65.1 57.3
Earnings per share (H) 7.8 5.3
Operating profit margin (%) 5.3% 4.2%
Net profit margin (%) 5.3% 4.2%

Risk and Mitigation




Technology risk

Technology is inherently dynamic, and what may be a significant advantage today can easily be redundant tomorrow. This is because the technology relies on multiple integrations, and the success of a transaction depends on various moving parts. As a result, risks to technology pose a significant threat to the Companys day-to-day operations.

The Company has implemented a Financial Risk Management (FRM) system and is closely monitoring transactions to identify any irregularities. This enables the Company to take corrective action as needed, such as modifying our applications or setting limits on transactions.

Cyber security risk

The Companys digital division is susceptible to viruses and other threats, which can leave the company vulnerable to attacks.

To avoid such vulnerabilities, the Company has implemented multiple layers of protection. Additionally, the Company has established protocols for the transmission of data and has security measures in place to maintain confidentiality and prevent any data leakage.


Regulatory risk

As a payments bank, the Company is required to comply with numerous regulations, laws, and standards. Failing to comply with these requirements could result in a loss of customers.

The Company has established a specialized compliance team that continually monitors all relevant regulatory requirements and periodically presents its findings to the board.

Competition risk

The Company operates in a fiercely competitive environment where customers and merchants have numerous options to choose from.

To maintain its market leadership, the Company is continuously striving to enhance its platform and offer tailored services that cater to the needs of its customers and merchants.

Operational risk

The Company being a payments bank is primarily responsible for managing cash within its branches and Customer Service Points (CSPs), while the responsibility of managing cash outside the bank (such as Merchant BCs, Distributors, CMS, etc.) lies with the merchants and distributors.

This risk is mitigated by the prepaid model which Fino offers to its merchants. The Company has incorporated sufficient internal checks and balances in its policies and processes to prevent fraudulent activities, misappropriation, theft, embezzlement, and other financial crimes. In cases of exceptions, prompt is taken to recover any losses, and the bank ensures timely regulatory reporting as well as updates to the Operational Risk Management Committee and RALM.

Internal Control Systems

The Company adheres to all applicable local regulatorystandardstoensuretheeffectiveandefficientmanagement of its business. It places great importance on establishing a strong internal control system as a cornerstone of effective corporate governance. The Company has implemented internal controls that are appropriate for the size and nature of its operations. These controls are continuously monitored and updated as necessary to safeguard against loss or unauthorized use of assets. The Company has also established an audit committee, which considers all internal factors and recommends corrective action when needed.

Human Resource

Fino Bank recognizes that its employees are fundamental to the companys success and represent its most valuable asset. The Companys ability to ensure smooth operations and secure its future is dependent on its human capital. With this in mind, the Banks HR philosophy prioritizes attractingandretaininghighlyskilledtalentbyfosteringfulfilling and supportive work environment that emphasizes professional development. To achieve this goal, the Company provides competitive remuneration packages and implements best-in-class hiring, training, motivation, and performance assessment procedures to attract and retain top talent. As a result of these practices, Fino Bank has been able to maintain an attrition rate that remains well below the industry average. As of March 31st, 2023, the total number of employees in the Company was 2,868.

Cautionary Statement

Statement in the Management Discussion and Analysis describing the Companys objectives, projections, expectations and estimates regarding future performance may be “forward-looking statements” and are based on the currently available information. The management believes these to be true to the best of its knowledge at the time of preparation of this report. However, these statements are subject to certain future events and uncertainties, which could cause actual results to differ materially from those, which may be indicated in such statements.

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