Rationale

 The rating revision factors in the steady growth in Fino Payments Bank Limited's (FPBL) scale of operations as reflected in the increasing throughput volumes (gross value of transactions), which supports its profitability given the nature of operations. FPBL reported throughput volumes of Rs. 1.38 lakh crore in FY2021 against ~Rs. 1.00 lakh crore in FY2020. Though the entity witnessed a decline in its net yield1 , the growth in volumes negated the impact to some extent and helped it turn profitable. FPBL reported a net profit of Rs. 20.5 crore in FY2021 (Rs. 3.1 crore in Q1 FY2022; provisional) against a net loss of Rs. 32.0 crore in FY2020. Consequently, FPBL's net worth increased to Rs. 150.6 crore as on March 31, 2021 from Rs. 130.1 crore in FY2020 against the regulatory requirement of Rs. 100 crore. ICRA also notes FPBL's comfortable leverage profile, given that the need for external funding is limited to the extent of working capital requirements to cover the timing mismatch in the payment cycles. The rating also factors in the diverse set of products/services offered by FPBL, which includes micro-ATM (MATM) services, Aadhaar enabled payment system (AePS) transactions, business correspondent (BC) banking for its banking partners, remittances, current and savings accounts (CASA), cash management services (CMS), third-party products like insurance, gold loan referrals, etc. The rating further factors in the entity's expanding merchant network and geographically diversified operations. It had a merchant/agent network of 3.34 lakh as on March 31, 2021 against 1.92 lakh as on March 31, 2020. The rating is, however, constrained by the high operational risk given entity's external merchant/agent-driven model and the risks associated with high cash handling activities. ICRA takes note of the checks and systems put in place by the bank, which help mitigate the risk to some extent, however, the same is not eliminated completely and the risk persists. Moreover, competition and the increasing digitisation of the payment infrastructure pose a challenge for FPBL for retaining and adding merchants/agents and customers. Also, the credit profile could be impacted by any adverse regulatory change. ICRA notes that FPBL has filed a draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (SEBI) for an initial public offer (IPO) to raise fresh equity of Rs. 300 crore. The proposed capital raise will help the entity improve its capital profile. Also, FPBL was granted scheduled commercial bank (SCB) status by the Reserve Bank of India (RBI) in February 2021, which allows it to raise funds directly from the RBI at the bank rate.