Business, geographical expansion key in AU-Fincare merger: experts

AU Small Finance Bank

Geographical and strategic business expansion will be key factors in the merger of Fincare Small Finance Bank with AU Small Finance Bank, experts said.

Fincare has a strong presence in the southern states, whereas AU Small Finance has its major business in the northern and western states.

“The merger will lead to a new business spectrum in a geographical sense for the merged bank. New markets will open up for AU Small Finance,” said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services.

The merger is to capitalise on the complementary geographic footprint and product basket of the two banks to create a pan-India retail banking franchise, AU Small Finance said in a stock exchange notification on October 30.

The merger aids the diversification of AU Small Finance’s portfolio with the addition of the rural, inclusion-focused microfinance, mortgages, and gold loan businesses of Fincare, it said.

Another challenge that experts highlighted was the microfinance business. Microfinance forms a large portion of Fincare’s lending book and may pose a challenge for AU Small Finance, which has limited exposure in this segment.

The merged bank may make provisions every year to tackle the risks in the microfinance segment, Sanjay Agarwal, managing director of AU Small Finance, said at a press conference after the merger announcement.

Unsecured book

“There are risks around the MFI business. We may make a provision of around 2 percent every year,” Agarwal said.

Agarwal said the bank currently has 4 percent of its total book exposed to unsecured loans.

“After the merger, we aim to keep our unsecured book around 10 to 11 percent,” Agarwal said.

Saurabh Bhalerao, associate director at CareEdge Group, said the merger will also bring other challenges.

“The merger between any companies brings some challenges as the IT, culture and other integration between the entities takes time to settle,” Bhalerao said.

Fincare is set to merge with AU Small Finance from February 1. Shareholders of Fincare will receive 579 shares in AU Small Finance for every 2,000 shares they hold in Fincare. Following the transaction, the existing shareholders of Fincare are expected to hold about 9.9 percent ownership in AU Small Finance.

The completion of the transaction is subject to several conditions, including a capital infusion of Rs 700 crore by the promoters of Fincare.

AU Small Finance said all Fincare employees will be included in the merged entity, which is expected to serve 9.8 million customers and employ about 43,000 people, with a combined balance sheet size of more than Rs 1.1 lakh crore