IndusInd Bank Seals Deal To Acquire Bharat Financial Inclusion

IndusInd Bank seals deal to acquire Bharat Financial Inclusion.

IndusInd Bank Branch at Prabhadevi, Mumbai. (Photographer: Anirudh Saligrama/BloombergQuint)
IndusInd Bank Branch at Prabhadevi, Mumbai. (Photographer: Anirudh Saligrama/BloombergQuint)

IndusInd Bank Ltd., on Saturday, sealed a deal to acquire Bharat Financial Inclusion Ltd., more than a month after the two companies informed stock exchanges that they have entered into exclusive merger talks.

IndusInd Bank has entered into a composite scheme of arrangement, it said in a notice to stock exchanges. The scheme of arrangement is between Bharat Financial, the bank and a wholly-owned subsidiary of the bank, which is yet to be incorporated.

The scheme, to take effect from January 1, contemplates the merger without winding up India’s largest microfinance lender. Bharat Financial Inclusion shareholders will get 639 shares of the bank for every 1,000 held, according to the filing.

This is the largest transaction in the microfinance segment, said Romesh Sobti, chief executive officer of IndusInd Bank at a press conference on Saturday. “The basic rationale behind the deal is that there is a deep belief in the power of livelyhood loans across both institutions,” Sobti said.

The swap ratio is broadly in line with what the market was expecting. “We were expecting a share swap ratio of 550 to 600 shares. The swap ratio announced, of 639 shares of IndusInd Bank for 1000 of Bharat Financial, is on the positive side,” Payal Pandya, analyst at Centrum Broking told BloombergQuint.

The deal values Bharat Financial at Rs 1,118 apiece, a premium of 11.4 percent over the last closing price, according to BloombergQuint’s calculations.

The filing from IndusInd Bank added that the “business correspondent business” would be transferred as a going concern from the bank to a wholly owned subsidiary on a slump-sale basis. This means that while the assets and liabilities of Bharat Financial will be merged with the bank, the distribution infrastructure will function separately through the wholly owned subsidiary, Sobti explained. This is similar to the strategy followed by the bank when it acquired Ashok Leyland Finance.

Separately, the board of the bank also approved the issue of warrants to the promoters to ensure that they retain a 15 percent shareholding in the merged entity.

What The Deal Means For IndusInd Bank

The deal will help IndusInd Bank scale up its microfinance book, which will eventually account for about 8 percent of the total book on closure of the deal, Romesh Sobti, chief executive officer (CEO) of IndusInd Bank, told BloombergQuint in a phone conversation on September 11. The deal will become accretive from day one because the margins will improve dramatically, said Sobti while explaining that along with the assets that IndusInd Bank gets immediately, the deal also allows the bank to strengthen the rural liabilities franchise and cross-sell other products.

This is one of the rare transactions which is accretive from day one. It is accretive not just in terms of the balancesheet but also in terms of the profit and loss account.
Romesh Sobti, CEO, IndusInd Bank

Digant Haria, analyst at Antique, agreed that the merger will be accretive in terms of earnings per share (EPS). “There is a scope for huge margin improvement in Bharat Financials’s operations due to absence of cap on spreads for banks and the lower cost of borrowings under the IndusInd umbrella,” Haria said in an emailed comment.

Bharat Financial's loan book stands at just over Rs 9,600 crore while that of IndusInd Bank stands at Rs 1.23 lakh crore. Over the past few quarters, Bharat Financial has seen its bad loans rise due to disruption caused by the announcement of demonetisation in November 2016. However, since then the sector has stabilised. MR Rao, managing director and chief executive office of the microfinance firm, told BloombergQuint in September that asset quality indicators have stabilised and collection ratios are back on track.

We are comfortable with the kind of risk involved in livelihood loans, said Sobti while adding that they are confident that the bank is not taking additional risks. He added that apart from one-off events like demonetisation, the microfinance portfolio is not overly risky.

IndusInd Bank Seals Deal To Acquire Bharat Financial Inclusion

An End To SKS Microfinance

Bharat Financial, a name that was adopted by the firm in 2016, has had a chequered history. The firm, initially known as SKS Microfinance, was founded by Vikram Akula in 1997. It was the first to take the approach that microfinance needs to be a for-profit activity to really flourish in India.

In July 2010, SKS Microfinance was listed on the Bombay Stock Exchange. Soon after, in late 2010, a crisis broke out in the microfinance sector in Andhra Pradesh, where SKS’ operations were concentrated. The crisis followed an Ordinance by the state government which restricted microlending in the state and clamped down on loan recovery practices. Microfinance firms in Andhra Pradesh, including SKS Microfinance, were crippled. By a curious coincidence, it is exactly seven years since the Andhra Pradesh ordinance was issued, said PH Ravikumar, chairman of the board of Bharat Financial at the press conference on Saturday.

The industry settled after regulation of microfinance was shifted to the hands of the RBI. The crisis for SKS, however, did not end. In November 2011, founder Akula was forced out of the company following a high-stakes battle on the future strategy of the company with the board. 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 but was denied one.

Post the merger, the board of Bharat Financial will be invited to form an advisory board for the wholly owned subsidiary that will manage the distribution network, said Sobti while adding that there will be no lay-offs following the deal. He added that the structure is a “lift and drop” and would ensure the Bharat Financial’s operations would not be destabilized due to the merger.