What’s in store for Sachin Bansal's Navi as RBI rejects bank licence?

In 2018, when US retail giant Walmart acquired a 77% stake in Flipkart in a $16-billion deal, the Indian e-commerce major’s co-founder and chief executive officer Sachin Bansal cashed out with a neat $1 billion. 

By all accounts, Bansal did not want to quit the company he founded along a fellow Indian Institute of Technology engineer Binny Bansal (the two are not related), but exit he did. And soon after that, he put his pile of cash to work. 

Six months after leaving Flipkart, in December 2018, Bansal and his college friend Ankit Agarwal founded Navi Technologies, a fintech he compared to banks and non-banking finance companies (NBFCs).

“We are trying to work backwards and see what a bank for a billion people looks like. It has to be a lot more automated, things have to be a lot more simple, users should be able to help themselves. Banking should be as easy as going on Swiggy and ordering food,” he told business news website Moneycontrol in September 2021. 

But last week Bansal’s dreams of forming India’s newest bank got a jolt, when the Reserve Bank of India (RBI) said it had found Navi’s subsidiary, Chaitanya India Fin Credit, unsuitable for a universal banking licence. 

Incidentally, Chaitanya India Fin Credit has been in the microfinance business since 2009 and in the lending business via a non-governmental organisation (NGO) since 2007. Moreover, its erstwhile promoters, Anand Rao and Samit Shetty, continue to be with the lender as joint managing director and a nominee director, respectively.

To be sure, Bansal’s Navi was not the only applicant found unsuitable for a banking licence by India’s central bank. There were others, including UAE Exchange and Financial Services Ltd, The Repatriates Cooperative Finance and Development Bank Ltd (REPCO Bank) and Pankaj Vaish. Only two entities, VSoft Technologies Pvt. Ltd and Calicut City Service Co-operative Bank Ltd, were found suitable for being granted a small finance banking licence.  

If this snub by the RBI left Bansal perturbed, he wasn’t showing it. Incidentally, the announcement of the rejection came even as he was addressing a press conference to announce Navi’s maiden issue of non-convertible debentures (NCDs), almost forcing Bansal to put up a brave face. 

Bansal said the rejection was not the end of the road for Navi’s banking ambitions and that the company would consider going in for an appeal against the decision. 

“We haven't received written communication from RBI yet. We are going to look at it once we get it, and then chart the next course of action. There are lots of options in front of us. It is not the end of the road for us. I mean, there are many things to explore including re-applying,” he said.

“We have to go back and analyse this. We will consider whether we want to appeal this and weigh our options.”

Navi's IPO plan

But Bansal should be a worried man, for more reasons than one. For one, this rejection comes even as Navi has filed draft papers with the Securities and Exchange Board of India (SEBI), to go public via an initial public offering (IPO).

In the draft red herring prospectus (DRHP) filed with the market regulator in March, Navi had said that it was looking to raise Rs 3,350 crore through the IPO via a fresh issue of shares. Bansal, who owns 97.39% of the company’s shares, has said that there will be no offer for sale, effectively meaning that shareholders like him are not yet looking to cash out and that all of the money being raised will go into the company itself. 

While Navi’s plans on having a bank have been thwarted for now, the fintech’s various businesses include personal and home loans, asset management and health insurance. 

Navi's Financial performance

The financials of the newly minted fintech, however, could be a cause of concern for potential investors. In the financial year 2020-21 Navi clocked a profit of Rs 71.1 crore on revenue of Rs 780 crore. But in the first nine months of 2021-22, the financial services company reported a loss of Rs 206.42 crore on an income of Rs 719 crore. 

This was thanks to a much larger cash burn in the just the first nine months of the just concluded financial year (2021-22), during which period the company clocked expenses of Rs 966 crore, as against just Rs 673 crore in the full 12 months of the financial year 2020-21. 

The DRHP says that the company plans to invest its proceeds from the IPO in two subsidiaries, Rs 2,370 crore in Navi Finserv and Rs 150 crore in Navi General Insurance, while the rest of the money will go towards funding its growth plans in general.

Business segments

A further perusal of the company’s numbers shows that Navi’s biggest vertical is microfinance loans under which it had assets under management of the order of Rs 1,808 crore as of the end of the third quarter of 2021-22. 

This was followed by personal loans, where it managed assets worth Rs 1,418 crore, and home loans, which had an AUM of just Rs 177 crore.

While the microfinance segment was the biggest, it also had the worst gross non-performing asset (GNPA) ratio at 3.83% and a net non-performing asset (NNPA) ratio of 0.98%. Personal loans fared a whole lot better with GNPAs of 1.12% and NNPAs of 0.03%. 

On top of that, Navi boasts of more than one lakh mutual fund investors and its asset management arm had an AUM of Rs 943 crore till the third quarter of 2021-22, according to latest available numbers. A significant proportion of these customers were acquired when Navi bought Essel Mutual Fund from Subhash Chandra-promoted Essel Group in February 2021. 

Its general insurance arm was much smaller with gross written premiums of just Rs 29.6 crore and less than 19,000 retail health policies sold till that time.  

But more than the numbers, Bansal may have cause to worry about the myriad litigations he faces, which could have been a key reason for the central bank not granting his company a banking licence. 

In the crosshairs

The Enforcement Directorate (ED) recently served the two Bansals a notice in June 2021, for an alleged violation of the country’s Foreign Exchange Management Act (FEMA). 

Citing unnamed government officials, news agency Reuters reported in August 2021 that the ED had asked Flipkart and the two co-founders of the company (Binny too has since left Flipkart, after facing allegations of inappropriate conduct) to explain why they should not face a penalty of $1.35 billion for alleged violation of foreign investment laws. 

The ED had been probing Flipkart and its competitor Amazon India for allegedly bypassing foreign investment laws that strictly regulate multi brand retail and restrict such ecommerce companies from operating marketplaces for sellers. 

The report further said that the case concerned an investigation into allegations that Flipkart attracted foreign investment and a related party, WS Retail, then sold goods to consumers on its shopping website, which was prohibited under law.

Reuters said that a "show cause notice" was issued in early July 2021 by the agency's office in Chennai to Flipkart, Sachin and Binny Bansal as well as investor Tiger Global, to explain why they should not face a fine of $1.35 billion for the lapses. 

Moneycontrol reported that Bansal moved the Madras High Court, seeking the quashing of the notice and the complaint filed by ED. His petition is pending before the court and no steps have been taken by the ED following the notice, the report added.

But Bansal’s legal woes are not restricted merely to the ED probe. There are at least six other cases being heard against him in courts across India. All of these cases were filed between 2015 and 2021, and are related to his association with Flipkart. 

And then there’s more. Navi has recently been under the crosshairs of India’s financial watchdogs for revealing permanent account number (PAN) details of investors. This happened even as the central bank has been coming down heavily on new age digital lending companies, warning of frauds and mishandling of KYC data. 

In December last year, Navi was accused of spanning users with loan offers, in messages that contained their PAN data. This caused an uproar on social media, and brought to the fore safety of personal data in an increasingly digitised world. 

As things stand right now, the IPO appears to be on track to open on 23 May. But as the markets have turned volatile and the IPO rush has slowed down in the last few months, Navi is looking to raise Rs 600 crore in debt, by issuing NCDs. 

Commenting on the NCD issue, Agarwal, who is the managing director at Navi, said: “The upcoming NCD issue aims to raise funds for onward lending and financing purposes. This will further diversify our borrowing profile and add more retail investors to our portfolio to complement our wide base of institutional partners. This is a secured instrument with A (stable) rating, a low application size and an effective yield of up to 9.8%."

The company has also brought on board four independent directors including WhatsApp India’s Abhijit Bose and Meesho co-founder Vidit Aatrey. 

While Bansal is hustling to court investors to buy into his new idea, the next few months will tell if they show confidence in him, or if, like Paytm, they discount his stock and turn their backs.