Mumbai: The board of IndusInd Bank Ltd has approved the merger between the bank and microfinance firm Bharat Financial Inclusion Ltd (BFIL), IndusInd informed the stock exchanges on Saturday. The share exchange ratio for the merger shall be 639 equity shares of the bank for every 1000 equity shares of BFIL.
IndusInd said that a wholly owned subsidiary will be incorporated for facilitating the merger which will primarily be engaged as business correspondent by the bank.
“The wholly owned subsidiary will, upon incorporation and pursuant to the composite scheme, be inter alia engaged primarily in providing business correspondent services to the bank,” the exchange notification stated.
Commenting on the deal structure, Romesh Sobti, managing director and chief executive at IndusInd Bank at a press conference said that the subsidiary model will allow BFIL to retain its infrastructure and “culture”.
“There is a regulatory precedent for such model. Plus, the culture and ethos of Bharat Financial will be maintained,” Sobti said adding that the completion of merger is likely to take 9-10 months. Bharat Financial has 1,408 branches and employs 15,284 people. All employees of BFIL will be absorbed.
The merger will allow IndusInd to increase its customer base and deepen its reach in unbanked and underserved regions of the country. IndusInd stated that merger will provide “access to business correspondent services to deepen the reach and widen the delivery mechanism of banking service while simultaneously ensuring compliance with RBI’s regulatory framework.”
As per RBI’s priority sector lending norms, scheduled commercial banks in India are required to provide at least 40% of their credit to priority sectors which include agriculture, micro enterprises and weaker sections of the society.
“The share of MFI loans will go up to 7% in the total book from around 3% currently,” Sobti said.
As of 30 June 2017, Bharat Financial had a loan book of Rs10,971 crore and a customer base of 6.8 million. “On merger, there will be 3-4% reduction in cost of funds and the entire portfolio that we will get will be 100% priority sector-compliant. Some capital will be released as risk-weights calculation for microfinance loans is lower for banks than MFI.” Sobti said.
The transaction is subject to approvals from the Reserve Bank of India (India), Securities and Exchange Board of India (Sebi), National Company Law Tribunal (NCLT), Competition Commission of India (CCI) and shareholders among others.
The deal, on being finalized, will allow IndusInd Bank to expand its retail loan book as well as fulfil Bharat Financial’s ambition to offer banking services. The announcement of merger comes at a time when Bharat Financial is facing stiff competition from banks, both universal and small finance banks.
According to analysts, the subsidiary model will allow IndusInd to manage operating expenses better. “Operating costs of MFIs are higher than that of banks as the infrastructure has to be set up in under-served areas. The subsidiary model will allow IndusInd to keep its opex low on a standalone basis as the workforce and branches will be part of the subsidiary,” said Karthik Srinivasan, group head of financial sector ratings at Icra, a rating agency.
Srinivasan also said that the merger will provide IndusInd with high yielding MFI assets and help the bank to bolster its priority sector lending.
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. “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,” MR Rao, managing director and chief executive of BFIL had told Mint on 11 September.
On 11 September, IndusInd and Bharat Financial had entered into an exclusivity agreement to evaluate the merger scheme.
THE MFI had also seen a sharp rise in non-performing assets due to demonetization. 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.
“70% of the loans that will be transferred are those which were disbursed post 1 January , which is after demonetisation. Here the collections are over 99%,” Rao said.
The bank will allot warrants to its promoters on preferential basis as part of the merger scheme.
“The merger will lead to 1.8%-1.9% dilution of promoter stake warrant issue by the bank will take the stake back to 15%,” said Sobti.