Indusind Clinches Largest MFI Deal, Takes Over Bharat Financial

Ending months of speculation, Indusind Bank and the second largest microlender Bharat Financial Inclusion (BFIL) today announced largest merger in the MFI space in an all-share deal, which will help the private sector lender push its rural network and bring down credit cost for small borrowers.

The merger, which will add 6.8 million customers to Indusind's 10 million now, and which comes amid a slew of similar announcements involving the urban-focused new age private sector lenders such as Kotak Bank and IDFC Bank, will also help reduce cost of lending for micro borrowers as cheaper deposits can be used to fund their credit needs.

"The biggest gain for us is the rural network. It will also us help reduce cost of funds by 3-4 per cent," Indusind Bank managing director and chief executive Ramesh Sobti said.

Earlier this afternoon, the boards of both the lenders separately decided on the merger and approved the share swap ratio wherein BFIL shareholders will get 639 shares of Indusind for every 1,000 shares held.

The balance-sheet of BFIL, including the entire capital, assets and liabilities will move into Indusind, while the operation team will continue as a wholly owned subsidiary and work as business correspondents.

The combined entity will have 40,000 employees, Sobti said, stating all the 15,000 employees of BFIL will be absorbed and continue in the same role. However, the board of the Hinduja Group promoted bank will remain unchanged.

The Indusind scrip closed 0.43 per cent up at Rs. 1,750.15 on the BSE on Friday, while BFIL shares closed 0.38 per cent up at Rs. 1,003.45.

Sobti conceded that there is a 12-13 per cent premium over the average stock prices in the past two weeks which BFIL shareholders will get, but justified it on the Rs. 9,500-crore loan book which his bank gets and also the synergies that will deliver higher value going forward.

The merger, expected to take up to 10 months to consummate, will help the bank in its rural play, where it has only 250 of its 1,210 branches, Sobti said.

BFIL's network touches 1 lakh villages across the country and the merger will help it act as a full service bank rather than the monoline micro-loan provider, BFIL managing director and chief executive MR Rao said.

In the past few months, speculation has been strong about BFIL's suitor, especially after repeated attempts by the microlender which has survived multiple crises to turn into a small finance bank have failed. Many of its peers did manage to turn into the new-age entities.

PH Ravi Kumar, non-executive chairman of BFIL, said the merger is not "an easy one" for the MFI and shared a trivia by stating that the announcement comes on the seventh anniversary of the passage of the Andhra MFI Act, which had led to doubts over the very survival of the sector.

This regulatory overreach had forced BFIL, floated by the high profile Vikram Akula as SKS Microfinance, and taken to a historic IPO in 2010 making it the first MFI to go public, to even change to its present name. The Andhra law left every player bleeding for a few years and forced RBI to bring the sector under its purview.

BFIL feels only two areas of the banking segment -- the lower-middle class and those around poverty line --are the ones accretive to margins and when coupled with the full range of service offerings, the merger is a win-win.

Sobti elaborated saying that apart from reducing cost of funds, merger will help Indusind not just achieve the priority sector lending sub-targets but also exceed them, making it a player in the PSL certificates market that is fee-accretive.

Because of the lower risk weights attached to lending by banks, it will help conserve capital as well, Sobti added, adding "the merger is value accretive from day one."

When asked about the structure of absorbing the balance sheet and keeping operations as a wholly-owned subsidiary, Sobti said it is in sync with past precedents which have been cleared by the regulators and will also help maintain the ethos of the company.

The merger, which comes amid a surge in agri loan losses by banks, will increase share of micro loans to 7 per cent of the loan book of Indusind from 2.8 per cent now, Sobti said, but will dip to 5 per cent over the next three years.

Asserting that microloan segment is "high yielding and has low delinquency rates", Sobti said it will not lead to much troubles on the asset quality as BFIL has a 99.6 per cent repayment levels in this calendar year, after the note-bank hiccups stabilised.

Rao chipped in saying demonetisation led to a Rs. 400-crore loan loss for BFIL, but it has been fully provided.

The deal will have to pass through a slew of regulators such as the Reserve Bank, National Company Law Board Tribunal and fair-play watchdog CCI.