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Microfinance in India is starting a new conventional life. IndusInd, a large private sector bank, has agreed to buy Bharat Financial Inclusion – the country’s poster child for niche lending – in an all-share deal for $2.4 billion. That works out as a premium of 11.4 percent over the last trading price, or more if calculating from earlier in the year, when deal rumors started circulating. Either way, the terms look fair given concerns over the sustainability of independent pure-play lenders to the poor.
Bharat Financial has faced crisis more than once. The company, formerly known as SKS Microfinance, nearly collapsed seven years ago after a spate of borrowers committed suicide. The scandal led authorities in the state of Andhra Pradesh to stop micro-lenders from collecting debts. Prime Minister Narendra Modi’s ban on high-value bank notes late last year resulted in two quarters of losses for the business, which was primarily cash-based at the time.
With this sale Bharat Financial will immediately stop living on the edge. The micro-lender will be part of an $18 billion enlarged entity that enjoys a lower cost of funds. It will also be able to offer products to its 6.8 million borrowers more seamlessly, including bank savings accounts and micro-insurance. Some rivals have already merged with banks, or converted themselves into institutions that can take deposits, but Bharat Financial failed to secure a license to do the latter. Investec reckons that banks already have a share of around 36 percent of the traditional microfinance business.
The all-paper deal crystallizes the lofty valuations of both entities at above four times forward book value. Yet there are lingering concerns about banks moving deeper into providing unbanked people with unsecured loans. Indian politicians are once again promising to waive farm loans; investors worry about the impact such populist gestures might have on credit culture. Prior to Modi’s demonetisation experiment, Bharat Financial was growing net interest income over 50 percent year-on-year, roughly twice as fast as IndusInd. But Bharat Financial last reported gross nonperforming loans at 6 percent, compared to around 1 percent for its suitor. The deal terms underscore that micro-lending comes with sizeable risks.