In­dusind Bank, BFIL to start merger talks

Deal, if fi­nal­ized, will let In­dusind Bank grow its retail loan book, ful­fil Bharat Fi­nan­cial’s am­bi­tion to of­fer bank­ing ser­vices

Mint Asia ST - - Inside - B Y MA LVIKA J OSHI

One of India’s old­est mi­cro-lenders Bharat Fi­nan­cial In­clu­sion Ltd and Hin­duja Group-backed pri­vate sec­tor lender In­dusind Bank Ltd on Mon­day an­nounced they will start talks for a merger, some­thing that could help the for­mer bring down credit costs and the lat­ter of­fer a bou­quet of retail loans.

The two com­pa­nies have signed an ex­clu­siv­ity agree­ment to ham­mer out a deal be­fore the end of this fi­nan­cial year.

The deal, if fi­nal­ized, will al­low In­dusind Bank to ex­pand its retail loan book and ful­fil Bharat Fi­nan­cial’s am­bi­tion to of­fer bank­ing ser­vices.

“Bharat Fi­nan­cial has en­tered into an ex­clu­siv­ity agree­ment with In­dusind Bank for agree­ing to have an exclusive dis­cus­sion with In­dusInd Bank about the pro­posed po­ten­tial strate­gic com­bi­na­tion by way of amal­ga­ma­tion through a scheme of ar­range­ment, or any other suit­able struc­ture,” Bharat Fi­nan­cial said in a no­tice to the stock ex­changes.

The trans­ac­tion will help In­dusind grow its mi­cro lending busi­ness.

“We have been in the mi­cro lending space for the past five-six years and al­ready have a (mi­cro) loan book of Rs3,000 crore. Merger with Bharat Fi­nan­cial will help us to fur­ther ex­pand in this space as it has a large net­work and proven track record,” Romesh Sobti, man­ag­ing di­rec­tor (MD) and chief ex­ec­u­tive of­fi­cer (CEO) at In­dusind Bank said over the phone. As of 30 June 2017, Bharat Fi­nan­cial had a loan book of Rs10,971 crore.

If the deal goes through, In­dusind Bank will also cross the pri­or­ity sec­tor lending tar­gets. “There is a good mar­ket for pri­or­ity sec­tor lending cer­tifi­cates right now. The deal will al­low us to sell these cer­tifi­cates to banks that are fall­ing short of their pri­or­ity sec­tor tar­gets. More­over, we will be able to fur­ther ex­pand the mar­ket for our sav­ings prod­ucts,” Sobti said.

Founded as SKS Mi­cro­fi­nance Ltd by Vikram Akula in 1997, the com­pany fell into tough times in 2010 af­ter al­leged mal­prac­tices in the mi­cro­fi­nance in­dus­try forced the Andhra Pradesh gov­ern­ment to crack down on these in­sti­tu­tions. It be­came India’s first pub­licly-listed mi­cro­fi­nance com­pany in 2010. The de­mon­e­ti­za­tion in 2016 that dis­rupted all cash-based sec­tors was another jolt for the com­pany.

Mor­gan Stan­ley Mau­ri­tius Co. Ltd holds a 6.74% stake in Bharat Fi­nan­cial, while East Bridge Cap­i­tal Mas­ter Fund Ltd, Mathews India Fund, Amansa Hold­ing Pvt. Ltd and BNP Paribas Ar­bi­trage own close to 3% each.

In the last six months, shares of Bharat Fi­nan­cial have gained 16.78%, while those of In­dusind Bank have gained 34.05%.

The com­pa­nies did not com­ment on the deal val­u­a­tion as the trans­ac­tion clo­sure de­pends on ap­proval from the cen­tral bank, share­hold­ers and the boards of the two com­pa­nies. Sobti, how­ever, said it will be an all­stock deal and will fac­tor in all the risks as­so­ci­ated with a mi­cro­fi­nance in­sti­tu­tion (MFI) loan port­fo­lio.

On 8 Septem­ber, Mint re­ported that Bharat Fi­nan­cial is close to an­nounc­ing a merger with In­dusind Bank, and the swap ra­tio be­ing con­sid­ered is one share of In­dusind Bank for 1.75 shares of Bharat Fi­nan­cial.

The with­drawal of high-value notes on 8 Novem­ber 2016 trig­gered a coun­try­wide cash crunch, hurt­ing loan re­cov­er­ies at mi­cro­fi­nance com­pa­nies across the board. Bharat Fi­nan­cial’s gross non-per­form­ing as­sets (NPAS) in the first quar­ter of the cur­rent fis­cal stood at 6%, against 0.1% dur­ing the cor­re­spond­ing pe­riod last year. In­dusind Bank had a gross NPA of 1.09% as on 30 June.

On be­ing asked how the bank will deal with high credit risk as­so­ci­ated with the mi­cro­fi­nance sec­tor, Sobti said, “Given the cur­rent sce­nario, ex­po­sure to the cor­po­rate sec­tor is far more risky as com­pared to the MFI seg­ment.”

Call­ing de­mon­e­ti­za­tion a “Black Swan event”, Sobti said it had only a one-time im­pact and Bharat Fi­nan­cial has been re­cov­er­ing well. M.R. Rao, MD and CEO of Bharat Fi­nan­cial, said the new loans of­fered since Jan­uary 2017 have a re­cov­ery rate of 99.9%.

“For every MFI, the ul­ti­mate des­ti­na­tion is to be­come a bank. We ap­plied for the small fi­nance bank li­cence but did not get it. Since then, we had been ex­plor­ing var­i­ous al­ter­na­tives. Merger with In­dusind will ben­e­fit all stake­hold­ers,” Rao said.

In Septem­ber 2015, 10 MFIS re­ceived in-prin­ci­ple ap­proval from RBI to op­er­ate as small fi­nance banks. Bharat Fi­nan­cial, how­ever, did not make the cut. “Af­ter merg­ing with In­dusind, we will be­come a fi­nan­cial in­clu­sion com­pany. We can then bring our bor­row­ers on board and of­fer them other fi­nan­cial prod­ucts like sav­ings ac­count and low-cost home im­prove­ment loans, among oth­ers,” said Rao.

Bharat Fi­nan­cial also said its cost of funds will come down by 200 ba­sis points af­ter be­ing in­te­grated with In­dusind Bank. Due to the large amount of loan write-offs and higher pro­vi­sion­ing on ac­count of the im­pact of de­mon­e­ti­za­tion, the cost of funds for the MFI sec­tor has gone up. The note ban pushed up credit costs for the mi­cro­fi­nance in­dus­try to 5-8% of loan book in the cur­rent fi­nan­cial year com­pared to 1% the pre­vi­ous year, said Supreeta Ni­j­jar, vice-pres­i­dent at rat­ing com­pany Icra Ltd. One ba­sis point is a hun­dredth of a per­cent­age point.

Ac­cord­ing to an­a­lysts, there is a lot of in­ter­est in the MFI sec­tor as banks are now look­ing to grow their retail books ag­gres­sively. “De­spite the fact that MFI loan book is a high-risk as­set to ac­quire, it is easy to eval­u­ate the port­fo­lio qual­ity as the re­pay­ment cy­cles are short. This al­lows the ac­quirer bank to un­der­stand the cus­tomer be­hav­iour of the tar­get MFI,” said Har­ish H.V., part­ner at con­sul­tancy firm Grant Thorn­ton India Llp. He said the “core fun­da­men­tals” of the sec­tor re­main strong as the mi­cro loan seg­ment is still un­der­served.

Ex­pan­sion strat­egy: Romesh Sobti, MD and CEO of In­dusind Bank.

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