Inside Fino Payments Bank’s Troubles And Transition To A Small Finance Bank

Fino Payments Bank, which has been in choppy waters since the arrest of its CEO Rishi Gupta in February, saw its net profit slump 43% YoY to ₹52.5 Cr in FY26. In the final quarter, Q4 FY26, the payments bank’s net profit plummeted 70% to ₹7.1 Cr from ₹24 Cr in the same quarter a year earlier. 

While the arrest of its CEO brought the company under intense scrutiny in the March quarter, its revenues and profits have been on a declining trend for the first few quarters. 

There are three reasons behind this. The first was the collapse of the domestic money transfer business. In November 2024, the RBI issued a circular that effectively killed a large chunk of bank-led remittance transactions. This move impacted the entire industry-wide, but Fino was among the most exposed institutions.

Secondly, the stress in the NBFC and microfinance sector over the past few quarters also impacted the payments bank. Fino earns a significant revenue through its Cash Management Services and BC Banking segments, which together contributed 15% of revenues in FY25 and are heavily dependent on NBFC and MFI activity, with NBFC & MFI clients accounting for 59% of CMS throughput in FY25. 

When these sectors came under stress in FY26, lenders pulled back sharply, dragging NBFC & MFI’s share of CMS throughput down to 50% for the full year and 46% in Q4 FY26. 

This resulted in CMS revenue declining 26% YoY and overall transaction business contracting meaningfully, contributing to Fino’s total revenue falling 14% in FY26.

The third reason behind the fall in revenue was Fino’s decision to pull back from parts of its digital payments business, a story that began with the ban on real-money gaming and ended with the arrest of Gupta. 

Before we delve into the events over the past couple of months at Fino, let’s take a look at its business model.

The Last-Mile Banker

Fino is a Mumbai-based payments bank — a category of financial institution created by the RBI to expand access to basic banking services across India. Payments banks can accept deposits, offer savings accounts, facilitate money transfers and distribute financial products, but cannot lend. 

This single restriction is central to understanding nearly everything that has happened with Fino. Its business model is built around a network of over 20 Lakh merchants, small shop owners, local agents and business correspondents who act as human ATMs and banking touchpoints across the country, particularly in semi-urban and rural India. 

Through this network, Fino has accumulated 1.75 Cr CASA (current account and savings account) customers, and positions itself as the infrastructure layer for digital payments in India’s hinterland.

For several years, the model worked. The bank grew steadily, listed on stock exchanges, and became the first payments bank in December last year to get in-principle approval from the RBI to convert into a small finance bank (SFB), which would finally allow it to lend money and build a full-banking business. 

Then, in the space of a few months, trouble struck with the arrest of Gupta. 

CEO’s Arrest and UPI Payment Business

Fino works with programme managers to take digital payments and other services to hinterlands. These programme managers are technology service providers that onboard merchants and bring payment-processing business to the bank. The bank relies on programme managers to know who its merchants actually are and what they are doing.

Over the past few years, real-money gaming emerged as a highly lucrative merchant category in India. However, the Centre, in August 2025, banned all forms of real money gaming. Fino says, following the government’s move, it blocked all merchants in the category.

But, Fino was under the radar of the Directorate General of GST Intelligence (DGGI) for alleged GST evasion by its programme managers pertaining to real-money gaming. This investigation led to the arrest of Gupta. 

While the RBI approved the reappointment of Gupta weeks before his arrest, his return to the position is not guaranteed as of now. His reinstatement is contingent on a reassessment of his “fit and proper” status by Fino’s nomination and remuneration committee and board, and the final decision of the central bank. Notably, Gupta is currently out on bail.

In the weeks following the CEO’s arrest, Fino shut its UPI PQM (payments and QR merchant) business for merchant partners. Existing merchants can no longer transact through this channel, and no new merchants are being onboarded. 

The stated reason is a comprehensive review of monitoring systems and a desire to build a “long-term sustainable business model”.

Notably, by the time this pause was announced, the digital payments business had already shrunk due to the ban on real money gaming and a broader cleanup of programme manager relationships undertaken by the bank in the second half of FY26. 

In Q4, digital payment services revenue slumped 70% YoY to ₹40.5 Cr. Active merchants in the digital segment dropped to 229 in March quarter of 2026 from 347 in December 2025 . 

Going ahead, the revenue of this segment is expected to decline further. The bank’s management said that its revenue for the month of April would be “not zero but minimal. The management has refrained from giving a timeline for the resumption of this service. They said a new digital plan would be shared towards the end of the current quarter.

The bank didn’t say what percentage of the ₹40.5 Cr digital revenue in Q4 came from UPI PQM and refused to give segment-level guidance for FY27. In the absence of clarity on the new digital plan, it is not possible to quantify the hit on revenue in FY27. 

However, if the merchant base has to be reconstructed largely from scratch, with more stringent onboarding and a narrower risk appetite, the business is likely to be structurally much smaller than before, in case of resumption.

Besides the impact on revenue, the digital payments segment was part of the data and transaction infrastructure which Fino planned to leverage when it eventually transitioned to a SFB. Every merchant transaction is a data point for future credit underwriting. While pausing it now may be necessary from a compliance standpoint, it can set back some of that preparatory groundwork for the SFB transition. 

How The SFB Conversion Will Work

Beyond the digital payments pause, Fino’s business correspondence (BC) vertical is likely to shut shop, as SFB can’t operate BC under RBI guidelines.

Under this service, Fino acts as an agent for other banks, operating banking points in areas where those banks have no physical presence. Fino’s agents process transactions for such banks for a last-mile service fee.

It contributes a meaningful chunk to the bank’s revenues, bringing in about ₹140 Cr to its revenue in FY26.

Moving forward, Fino argues that the lending income it will generate as a bank would more than compensate for what is given up.

Amid all of this, management highlighted one set of numbers that look robust: the deposit franchise.

In March 2026, the month immediately after the CEO’s arrest, Fino claims to have opened 3.2 Lakh new CASA accounts, the highest in three years. 

Total deposits reached ₹2,957 Cr, also a record. Renewal income, the annual fee customers pay to keep their savings accounts active, reached ₹62.2 Cr in Q4 alone, the highest single-quarter figure in the bank’s history, with full-year renewal income growing 25% YoY to ₹237 Cr from ₹190 Cr in FY25.

Notably, roughly 60 to 65% of CASA subscribers actively choose to renew each year. That means 6 in 10 customers are paying a fee to stay with the bank. Of the total CASA revenue of approximately ₹630 Cr, around ₹130 Cr is this sticky, recurring fee income. 

Average deposits rose 20% YoY to ₹2,535 Cr, and the total CASA base grew 22% YoY to 1.75 Cr. Management’s argument is that these numbers demonstrate the business model is sound and the customer base is loyal even under serious duress. 

Many of Fino’s customers use it for very basic savings and transactions rather than complex financial products, and they appear to have stayed put even as their bank made the front pages for all the wrong reasons.

The Lending Vision 

The most consequential question hanging over all of this is whether Fino can successfully build a lending business once the SFB licence comes through.

The company’s lending vision is built around secured loans, housing loans, gold loans, loan against property, and MSME lending. Roughly 90% of the eventual book is anticipated to be secured. 

Fino is also targeting an asset-light model for its banking business. About two-thirds of both deposits and loans are expected to be sourced through the existing merchant network rather than through expensive branches. The return on equity target is 20% by FY30.

The financials of this vision hinge on one structural advantage Fino has — cost of funds. 

As much of its deposit base consists of low-cost CASA accounts, ordinary savings balances that earn relatively low interest, its cost of funding those deposits is below 2%. 

A typical small finance bank’s cost of funds is considerably higher. Management claims this gives Fino a 300-basis-point advantage going into the lending business, which, if true, would be a meaningful competitive edge when pricing loans.

The referral business, where Fino refers potential borrowers to other lenders and earns around 100 basis points in fees, is the proof of concept for all of this. 

While this might look to give Fino’s SFB play an edge, will it actually play out as is expected? Only time will tell. 

Edited by Vinaykumar Rai

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