RBI’s ban on SBM Bank’s forex transactions hurts fintech firms

Wealthtech startups Vested Finance and IndMoney have been impacted after the Reserve Bank of India (RBI) had barred SBM Bank (India) Ltd from undertaking outward remittance transactions until further orders.

The ban has also hit banking-tech firm Niyo.

The RBI, in a directive on January 23, directed the SBM Bank to stop all liberalized remittance scheme (LRS) transactions under sections 35A and 36(1)(a) of the Banking Regulation Act, 1949.

The regulator has said that the action is based on “certain material supervisory concerns observed in the bank.”

“The bank is engaging with RBI to address certain supervisory concerns at the earliest,” SBM Bank said in a mail to its customers, adding that it remains open for business in all other areas.

The LRS scheme which was introduced on February 4, 2004, allows any Indian resident, including minors, to transfer up to $250,000 abroad in a financial year.

On Tuesday, SBM Bank had secured Rs 99 crore from the Life Insurance Corporation of India. With the latest round, it has so far raised Rs 224 crore in total funding.

Following RBI’s diktat, Vested has temporarily stalled processing fresh deposits for investments via Vested Direct while Tiger Global-backed IndMoney has completely stopped accepting fresh deposits for investments in US stocks.

Vested had partnered with SBM India in October to power its global investment platform Vested Direct. With the ban on SBM, the platform isn’t able to reduce the overall cost of depositing funds to the US brokerage accounts of its customers. It is allowing users to use other existing bank accounts to add funds, which is a rather expensive process.

“We are working hard to provide another low-cost and digital deposit solution on the Vested platform. We will keep you posted on any new updates as soon as we receive them,” Vested said in a blog post earlier this week.

IndMoney had a similar partnership with SBM Bank, and as a result of the ban its users are unable to fund their accounts.

“Due to a temporary issue with the banking partner, you are unable to add money right now. Your money is absolutely safe in your regulated US stocks a/c. We will notify once you will be able to add money,” says the IndMoney app’s cautionary note.

IndMoney, which offers multiple investment options, is one of the learning players in the global investment space. It claims to have catered to more than 5 million customers since its inception in 2019.

Operated by Finzoom Investment Advisors Pvt Ltd, the startup had last raised $86 million in its Series D round from Steadview Capital, Tiger Global Management, and Dragoneer Investment Group at a $650 million valuation.

On the other hand, customers of Niyo’s Global Card, which it had issued in partnership with SBM Bank, have complained of not being able to use the cards for international transactions.

Some of Niyo’s customers, who are traveling to foreign countries, had loaded their Niyo cards to save fees on foreign exchange transactions. However, to no avail, these customers are taking their frustration to Twitter, complaining how the sudden move has left them stranded in a foreign country.

Queries sent to Niyo did not elicit any response until the filing of this report.