Largest MFI deal: IndusInd Bank to buy Bharat Financial Inclusion

By: | Published: October 15, 2017 4:42 AM

IndusInd Bank’s managing director Romesh Sobti said BFIL's shareholders will receive 639 shares of IndusInd for every 1,000 shares of the microfinance major, implying a premium of 12.6% to BFIL over two-week volume weighted price.

IndusInd Bank MD Romesh Sobti

Almost a month after entering into an exclusivity agreement, IndusInd Bank and the country’s second-largest microfinance player, Bharat Financial Inclusion (BFIL), on Saturday announced their merger, which will be effected through an all-stock transaction. The deal—which would mark the largest merger and acquisition in the microfinance space—is expected to be completed in the next nine to 10 months. IndusInd Bank’s managing director Romesh Sobti said BFIL’s shareholders will receive 639 shares of IndusInd for every 1,000 shares of the microfinance major, implying a premium of 12.6% to BFIL over two-week volume weighted price.

The merger will be effected through an all-stock transaction of BFIL into IndusInd through a composite scheme of arrangement. The scheme contemplates merger of BFIL with IndusInd and simultaneous transfer of BFIL’s business correspondent operations into a wholly-owned subsidiary of IndusInd, which would be incorporated after receipt of requisite regulatory approvals. All the assets and liablities originated by the wholly-owned subsidiary will be booked in the balancesheet of IndusInd. The scheme is subject to the approval of the Reserve Bank of India, the Competition Commission of India, the Securities and Exchange Board of India, among others. The appointed date for the composite scheme is January 1, 2018.

“The merger is expected to be value accretive from inception given IndusInd Bank’s lower cost of funds, ability to monetise excess priority sector lending qualifying assets, efficient capital utilisation and optimal resource utilisation,” Sobti said, adding that the merger would bring down the cost of funds by 3-4% for the combined entity. With regard to the workforce, he said all the employees of BFIL will become part of the bank’s family and not a single employee would be replaced. The merger will not only expand the balancesheet size of the bank, but also increase the network of outlets. Post-merger, the new entity will have over 3,600 branches and outlets and over 16 million customers. The deal will also lead to an increase in the priority sector lending book. IndusInd Bank’s current priority sector lending stands at 42% — above the regulatory requirement of 40% —and post the merger, this will cross 50%. “This will lead to an opportunity to earn a fee income in the PSLC market to the tune of 1.5-2%,” Sobti said. The bank’s microfinance portfolio, which currently stands close to 3%, will increase to nearly 5-6% post this merger.

IndusInd bank also indicated there will be preferential allotment of warrants to the promoters of IndusInd in accordance with the applicable RBI and Sebi guidelines as an anti-dilutive measure. The promoter holding, which will first get diluted by 1.5%, will rise back to 15% post the issue of warrants, the bank indicated. The management said there will be no change in the board of IndusInd bank and an MFI advisory committee will be set up for the wholly owned subsidiary. Last month, both the entities had initiated talks to explore the possibility of merger. BFIL, formerly SKS Microfinance, had a customer base of 68 lakh and loan portfolio of `7,709 crore as of June 30.

However, the microfinance company suffered a loss of `37 crore for the quarter to June. For 2016-17, the company had recorded a profit of `290 crore. MR Rao, MD and CEO at BFIL, pointed out that with IndusInd, BFIL will have the advantage of deriving the benefit of a large universal bank from the first day. “Our network, client base and last-mile customer access to one lakh villages are unique. We are excited with the possibilities the merger will bring,” Rao said.

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