Almost 20 years after its birth, Bharat Financial Inclusion, India’s first listed micro finance institution (MFI), will soon merge with mid-sized private lender IndusInd Bank in a likely all-stock deal.
IndusInd Bank took the final cake while other potential buyers including Kotak Mahindra Bank, IDFC, Aditya Birla group and RBL Bank in the fray seem to have lost out.
In August 2010, the erstwhile SKS Microfinance (now rechristened as Bharat Financial Inclusion) debuted on the Bombay Stock Exchange at a price of Rs 1,040. On Monday, it ended at Rs 967.25 apiece.
MR Rao, MD & CEO, Bharat Financial Inclusion, told Moneycontrol, “In the long run, most microfinance institutions’ destination point would be a bank and hope this translates into good business into the financial inclusion space."
According to reports, the swap ratio being considered is one share of IndusInd Bank for 1.75 shares of Bharat Financial while RBL had proposed a 2:1 ratio.
If the merger fructifies, it will be the third deal for IndusInd Bank, after Deutsche Bank's credit card portfolio in 2011 and RBS' diamond financing book in 2015.
As for Bharat Financial, given that its financials have been in trouble post demonetisation and farm loan waiver announcements, this merger comes as a relief to reduce their costs and improve efficiencies.
According to Rao, "One obvious synergy is that this will reduce our cost of funds. Also, our borrowers get an avenue to put their small savings into the bank’s savings accounts. We have this kirana store concept where the borrowers can park their savings with us. So, from purely being a micro-credit company, this transaction will catapult us into a full-fledged financial inclusion entity."
In Q1 FY18, it made a loss of Rs 36.6 crore while in FY17, the loss stood at Rs 235.6 crore due to higher provisions with rising defaults and lower collections.
Rao added that Bharat Financial customers can also be offered the bank’s loan products such as housing loan, or two-wheeler loans, etc. and at an operating efficiency level, the bank will help us get more cashless or digital.
The microlender already has a business correspondent relationship with IndusInd in Karnataka for many years now.
At present, Bharat Financial Inclusion has 1,408 branches and employs 15,284 people. With 6.8 million customers, it has a loan book of Rs 10,971 crore.
Bharat Financial Inclusion’s journey
In 1997, Vikram Akula-founded SKS Microfinance and pushed into a for-profit microfinance model in India, in a bid to make it sustainable by attracting talent and investors while lending to the bottom of the pyramid.
Soon after its listing in 2010, a crisis broke out in the MFI sector in Andhra Pradesh where SKS Microfinance had focused its operations. Soon after, followed an ordinance by the state government which restricted microlending in the southern state and clamped down on loan recovery practices.
This crippled the microfinance firms in Andhra Pradesh, including SKS Microfinance, and the Reserve Bank of India took over the regulation of the microfinance industry.
The crisis for the industry ended but not for SKS Microfinance. In November 2011, founder Akula was forced out of the company following a high-stakes battle between the management and the board regarding the company’s future strategy.
After Akula’s exit, the company and its new management tried to de-risk the company’s balance sheet. It also applied for a licence to convert itself into a small finance bank which was denied by the Reserve Bank of India in 2015.
Fast forward two years later, on Monday, Bharat Financial informed the stock exchanges that the “company has entered into an Exclusivity Agreement with IndusInd Bank Limited (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.”
The deal also comes at a time when it is faced with tough competition from both universal and small finance banks.
Rao says both parties intend to conclude the deal within 30 days with more intense engagement and come out with the final arrangement as soon as possible. "We will need approvals from the RBI, CCI, etc. once the definitive agreement is signed…Once we see the complete transition, we will see more details on the impact on cost of funds. The deal amount, changes in the senior management and whether it will be a separate entity or now will be a part of the definitive agreement."
This suffices to say that amid the slowdown faced by the microfinance industry today, it may look at further consolidation. And Bharat Financial could soon see a rating upgrade along with a turnaround in its profits very soon.
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