North East Small Finance Bank (NE SFB), the Guwahati-based lender that was in violation of the Reserve Bank of India’s (RBI’s) regulations on capital and promoter shareholding, seems to have received a lifeline, with financial technology (fintech) firm Slice planning to infuse capital and help dilute the existing promoters’ holding.

NE SFB has received a no-objection certificate (NOC) from the RBI to proceed with merging Slice with itself, a process expected to be completed in six to nine months.

Upon completion of the merger, subject to a final approval from the RBI, investors in Slice — such as Tiger Global and Blume Ventures — will directly own shares in the bank, according to an informed source.

“Investors will directly hold shares in the bank because Slice, as a distinct entity, is merging with it. Currently, Slice has non-banking financial company (NBFC) and prepaid payment instrument (PPI) licences, which it will surrender in favour of a banking licence,” said the source.

Slice has a valuation of $1.5 billion, and NE SFB of about $60 million. According to another source, the entities will merge at their current valuations.

Following the receipt of the NOC, the bank will now formally initiate the merger process and submit applications to relevant regulatory bodies like the Securities and Exchange Board of India (Sebi) and National Company Law Tribunal.

“Slice is a fintech company, while NE SFB is a brick-and-mortar organisation. This proposed merger, once it materialises, will enhance customer experience in financial inclusion,” said another source.

According to a secretarial audit report for 2022-23, NE SFB has not adhered to the RBI licensing rule that requires the promoter shareholding to be reduced to 40 per cent within five years from the start of operations. The bank, which started operations on October 17, 2017, has been non-compliant since October 18, 2022.

Additionally, NE SFB has not complied with RBI regulations regarding its subscribed and authorised capital. The paid-up share capital of the bank as on March 31, 2023, was Rs 346.85 crore, nearly 50 per cent short of its authorised share capital of Rs 700 crore.

Besides, the bank has yet to comply with RBI guidelines on whole-time directors and chief executive officers’ compensation, according to the audit report.

“The post of head of treasury and front-office dealer remained vacant during the reporting period, and these roles were covered by bank staff lacking the requisite qualifications according to RBI guidelines,” the report said.

NE SFB, formerly known as RGVN (North East) Micro Finance, is one of the 10 entities that received the RBI’s approval in 2015 to set up small finance banks. The bank’s annual report for 2021-22 revealed an increase in non-performing assets (NPAs), primarily due to non-compliance with the Assam government’s Assam Micro Finance Incentive and Relief Scheme. “Customers did not repay their debts hoping that the Assam government would waive off these loans. That led to a surge in NPAs,” Rupali Kalita, managing director and chief executive officer, NE SFB, informed shareholders.

Slice said the merger would integrate its technology prowess with NE SFB’s ground-level financial inclusion efforts. Both Slice and NE SFB customers would benefit from a wider range of products and channels.

“We aim to further strengthen our risk-underwriting capabilities through technological advances and data analytics while keeping customers’ needs at the forefront. We view this merger as an opportunity to build an inclusive and responsible bank supported by robust risk management and strong governance,” said Slice founder and CEO Rajan Bajaj.

NE SFB, which will continue to serve parts of the Northeast, announced that the partnership with Slice would assist in addressing gaps in financial services for underserved communities.

“We are committed to enhancing governance, compliance, and risk management continuously. Together, we aim to provide accessible and exceptional services, fostering inclusive and responsible banking for all,” said Kalita.

Earlier, Slice had acquired a 5 per cent stake in NE SFB for $3.4 million in September last year.

Slice, which boasts a customer base of 15 million, stopped issuing prepaid cards with credit lines following an RBI circular last year banning such practices. For 2021-22, the company reported a net loss of Rs 254 crore — a significant year-on-year increase from Rs 8.9 crore the previous year — on a revenue of Rs 293 crore, according to data from Tracxn.

The company has so far secured $290 million across its Series A, B, and C funding rounds from investors including Tiger Global, Insight Partners, Advent International, Blume Ventures, and Gunosy Capital.