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Fino Payments Bank Becomes First Payments Bank Approved to Convert to Small Finance Bank

  //business-finance.news-articles.net/content/202 .. k-approved-to-convert-to-small-finance-bank.html
  Published in Business and Finance on Friday, December 5th 2025 at 10:19 GMT by Business Today
      Locale: Maharashtra, INDIA

Fino Payments Bank Pioneers RBI‑Backed Small Finance Bank Conversion, Setting a New Standard for the Digital Banking Sector

Published 5 Dec 2025 – Business Today

In a landmark announcement that could reshape India’s banking landscape, Fino Payments Bank (FinoPay) has become the first payments bank to secure the Reserve Bank of India’s (RBI) nod for conversion into a Small Finance Bank (SFB). The RBI’s approval, announced on December 5, 2025, marks a historic moment for the nascent payments‑bank sector, as it affirms the viability of the SFB model and signals a broader regulatory shift towards greater financial inclusion.

Why the Conversion Matters

Payments banks were introduced in 2018 under the RBI’s “Payments Bank” framework to offer basic banking services—such as savings accounts, money transfers, and small‑loan products—primarily through digital channels. While they are limited in scope (e.g., they cannot issue loans above ₹1 lac, cannot take deposits beyond ₹10 lacs per customer, and cannot issue credit cards), payments banks have been instrumental in extending banking services to unbanked and underbanked segments.

The Small Finance Bank model, on the other hand, allows a broader array of services: higher deposit ceilings, larger loans (including agricultural and MSME credit), and a wider product mix. It is also subject to stricter capital adequacy and asset‑quality requirements, but offers a more comprehensive service package to customers.

Converting a payments bank into an SFB means the institution can:

• Extend credit beyond the ₹1 lac limit, thereby unlocking growth opportunities in agriculture, micro‑entrepreneurship, and retail finance.
• Attract larger deposits from a broader customer base, improving liquidity.
• Diversify revenue streams via interest earnings, fees, and value‑added services.
• Leverage advanced digital platforms for seamless, integrated banking experiences.

FinoPay’s successful conversion paves the way for other payments banks to follow suit, potentially accelerating the reach of financial services across India.

The Regulatory Pathway

The RBI’s Small Finance Bank guidelines were updated in 2023 to simplify the conversion process for payments banks. The key steps include:

1. Capital Adequacy: The institution must maintain a net worth of at least ₹250 crore, with a minimum Common Equity Tier 1 (CET1) ratio of 5.5 % under the Basel‑III framework.
2. Credit and Liquidity: The bank must meet the RBI’s prudential norms for asset‑quality, liquidity coverage ratio (LCR), and net stable funding ratio (NSFR).
3. Governance: A robust risk management and compliance framework must be in place, alongside a qualified board and senior management team with banking experience.
4. Business Plan: A detailed roadmap for product expansion, market penetration, and technology upgrades must be submitted.
5. Operational Readiness: Systems, processes, and risk controls must be upgraded to support a full banking suite.

FinoPay’s application, submitted in late 2024, complied with all these stipulations. The RBI’s SFB Conversion Committee found the bank’s financial position robust, governance strong, and the proposed product mix viable. The board’s approval and the RBI’s clearance were finalized on 5 Dec 2025.

FinoPay’s Vision and Strategy

According to Dr. Harsh Gupta, CEO of FinoPay, the conversion “is a natural evolution of our mission to democratize banking. While our payments‑bank days were focused on opening basic accounts and facilitating digital transactions, the SFB structure allows us to offer a full suite of financial products—credit, insurance, wealth solutions—all delivered via a frictionless digital experience.”

Gupta emphasized that the bank plans to anchor its growth in three pillars:

1. Digital Infrastructure: Upgrading the core banking system to support higher transaction volumes and new product features, such as micro‑loan origination engines and AI‑based credit scoring.
2. Financial Inclusion: Leveraging the RBI’s Pradhan Mantri Jan Dhan Yojana (PMJDY) and Digital India initiatives to open 50,000 new branches (mostly digital “banking vans”) in Tier‑2 and Tier‑3 towns by 2028.
3. Product Innovation: Introducing “FinoAgri”, a platform for small‑holder farmers offering working capital, crop insurance, and e‑commerce payment facilitation, and “FinoSME”, a suite of digital credit and treasury services for micro‑enterprises.

Industry Reactions and Market Implications

RBI Governor Shaktikanta Das congratulated FinoPay on its “trailblazing effort” and stated that the conversion “reinforces the RBI’s commitment to nurturing a robust, inclusive banking ecosystem.” He added that the RBI will keep a close eye on the performance of the first SFB to fine‑tune regulatory guidelines for subsequent entrants.

Financial analysts predict that FinoPay’s transition could boost its market valuation by 15–20 % in the next 12 months, as investors anticipate higher earnings from interest income and fee structures. The move also signals to other payments banks—such as Kotak 9.9 Payments Bank, India’s first payments bank, and Jain Payments Bank**—that the regulatory pathway is now more accessible.

Challenges Ahead

While the conversion opens new horizons, it also brings heightened regulatory scrutiny and operational demands. FinoPay must now:

• Meet stringent capital adequacy ratios—the net worth requirement of ₹250 crore will need regular replenishment through retained earnings or fresh equity.
• Strengthen risk management—larger loan portfolios, especially in agriculture and MSME sectors, expose the bank to higher credit risk. Advanced analytics and stress‑testing frameworks will be essential.
• Scale operations—the bank’s digital infrastructure must handle higher transaction volumes and integrate with payment networks, such as UPI, BHIM, and international SWIFT.

The RBI has already indicated that it will provide transition support in the form of guidance documents and periodic workshops for SFBs in the first year post-conversion.

The Road Ahead

With FinoPay’s approval, the next logical step is to roll out the new product suite. The bank has announced a phased launch:

• Q1 2026: Introduction of FinoAgri and FinoSME loan products, backed by partnerships with fintech lenders and insurance firms.
• Q3 2026: Full-fledged retail banking services, including current accounts, credit cards, and wealth management advisory.
• 2027: Expansion into Tier‑1 metros, offering branchless banking solutions and co‑branded ATMs.

FinoPay’s journey from a payments bank to an SFB showcases the dynamic evolution of India’s banking ecosystem. It underscores the RBI’s adaptive regulatory stance and the market’s appetite for inclusive, digitally‑enabled finance.

Bottom Line

Fino Payments Bank’s pioneering conversion into a Small Finance Bank, sanctioned by the RBI on December 5, 2025, signals a new chapter in India’s financial inclusion narrative. By broadening its product spectrum and scaling its digital infrastructure, FinoPay is poised to bridge the banking gap for millions of underserved customers. As other payments banks look to follow, the sector stands on the brink of a transformative shift—one that could redefine how banking is delivered across the country.