Bharat Financial Inclusion (BFIL) and IndusInd Bank on Monday entered into an exclusivity agreement to evaluate a potential merger. MR Rao, managing director and CEO at BFIL, tells Bhavik Nair that the destination point for most microfinance institutions would be to eventually become a bank or to join hands with an established bank. Rao also asserts the proposed deal would bring in strong synergies for the business. Edited
What are the synergies that you see with this possible strategic deal?
One is the cost of funds advantage that we get straightaway on to the table through this arrangement. The other is the fact that from being a single-focussed microcredit organisation, by giving access to a banking platform to borrowers, we will be able to become a full-fledged financial services company. Borrowers can open a savings account which today we are unable to offer as a standalone microfinance company. The third synergy is that we can get into a lot of operating efficiency because once borrowers have a savings account and they are able to park their savings, at an operating level we can go cashless very quickly. It will add to a lot of cost savings for the organisation.
What are the challenges that this proposed arrangement might face in coming months?
The first challenge is for both the teams to get together and agree on the common terms which will move the needle forward. One advantage we have with IndusInd is that we have been a business correspondent partner with them for quite some time and so both the organisations and teams know each other well. So, part of the transition pangs are taken care of. Otherwise, we feel that it is going to be business as usual.
What is the primary reason that you selected IndusInd bank over RBL Bank?
As I said, the fact that we have been engaged with them as a business correspondent has given us the comfort apart from various other things to choose them.
What was the original idea behind this decision for a merger?
I think for most MFIs, the destination point would be to eventually become a bank or do a transaction like ours. As I said, this brings lots of synergies into the business by virtue of being a bank. That was the charging point of the discussions and the thought-process.
Didn’t you think of applying for a banking licence yourself?
As a standalone entity, our larger thought process was that instead of applying for a licence and converting oneself into a universal bank, doing a deal with an existing established bank gives you the advantage of having a ready-made platform to launch the operations quickly. It takes away the pangs of the whole transition that one would associate such transactions with.
Would there be any additions or removal of your branches post this potential merger?
I think these are the details that we expect to come to an agreement with. As of now, I can react saying that there won’t be any reduction in branches. If at all there will be any discussion, my guess is it is going to be on how can we expand more and so on.
How much do you think your cost of funds would go down?
I think it should be close to 200 basis points.
Do you think there would be any regulatory hurdles?
We don’t anticipate any challenge from that end. However, the regulator has the final say and we will respect their view.
What is your average ticket size currently?
It is around Rs 20,000.
Will your workforce be impacted post the merger?
We don’t expect that our workforce will be impacted. They are the lifeline for this business.
What does IndusInd bank gain out of this merger?
I think their plans had been to get into financial inclusion space for quite some time. Apart from this, I believe this question would be best answered by them.
How many more months would this merger take?
First is the definitive agreement that will take a few weeks. Then we have to go through the process of seeking legal and regulatory approvals. That we cannot put a timeline on.
Are the promoters selling their entire stake?
That’s too early to talk about. Our promoters are all different entities. When we went for an IPO, some of our investors supported the company by classifying themselves as promoters. I think that is a call that each entity has to take which we have no control or insight into.