Fincare merges with AU Small Finance Bank to create pan-India SFB with diversified portfolio

The respective boards of AU Small Finance Bank and peer Fincare Small Finance Bank had met on Sunday to approve an all-stock merger of the two entities. Image: Debarchan Chatterjee/NurPhoto via Getty Images

The respective boards of AU Small Finance Bank and peer Fincare Small Finance Bank had met on Sunday to approve an all-stock merger of the two entities. This marks the second such development in India’s small finance bank (SFB) space in recent weeks, after fintech Slice entered the banking space with its merger with troubled North East Small Finance Bank on October 4 this year.

The merger terms indicate that Fincare SFB shareholders shall receive 579 shares in AU SFB for 2,000 shares of Fincare SFB. Post-merger, existing shareholders of Fincare SFB shall hold around 9.9 percent in AU SFB.

On news of the merger, the AU SFB stock fell as much as 8.01 percent to an intraday low of Rs630.8 in morning trade at the Bombay Stock Exchange (BSE), before recovering to Rs662.15 in afternoon trade, still down about four percent. Analysts say the deal is not coming cheap, in view of a premium cycle which the microfinance sector is witnessing.

“At 3x BV FY25E, AU is expensive because its RoA is equal to/lower than peers including ICICI, HDFC Bank and IIB, which trade cheaper,” Nuvama brokerage said in a note to clients.

For AU SFB, the deal will mean getting a diversified portfolio and a better reach. The merged entity will have more than 98 lakh customers, pro forma gross advances of Rs75,570 crore, more than 43,000 employees, and 2,334 touch points across 25 states and union territories.

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The merger aids diversification of AU SFB’s portfolio with addition of rural, inclusion-focused microfinance, mortgages, and gold loan businesses of Fincare SFB, bolstering its financial inclusion charter with a focus on micro entrepreneurs and small enterprises.

“This is not just a merger of two entities, it is a union of shared values, common goals, and a vision for the future. Rajeev and team are one of the most experienced and seasoned MFI teams in the country who have over the years, built the business ground up despite multiple challenges and also a strong tech-enabled SFB franchise,” said Sanjay Agarwal, managing director and CEO of AU SFB.

Also read: The Slice-NE SFB merger shakes up banking landscape

AU gets unsecured portfolio

Unlisted Fincare SFB—which was predominantly a microfinance-focussed entity—has been diversifying its book further to reduce its dependence on this one segment. When Disha Microfin (rechristened Fincare) got a banking licence in March 2017, it had just a six percent secured lending book and the majority 94 was unsecured (microfinance). This has now become a little more balanced 39:61 percent, but with the majority still unsecured.

Fincare SFB’s then CFO Keyur Doshi, in an earlier conversation with Forbes India, said he believes the bank has crossed the phase of “being over-dependent on the microfinance sector”. “The MFI sector faced three crises in the last 12 years, but there is an underlying fact that this business has proved to be scalable, economically viable and for social good. One cannot eye this sector from just a limited commercial angle. The sector is slowly evolving, and the joint liability group concept is also getting evolved,” he said.

Fincare SFB had always indicated that it wanted to grow the secured book at a faster pace than the unsecured one. The merger will obviously be a positive.

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AU SFB has, as of September 30, 2023, operations across 1,042 banking touch points while serving 44.3 lakh customers in 21 states and three union territories with an employee base of 28,523 employees. The bank has a net worth of Rs11,763 crore, deposit base of Rs75,743 crore, gross advance of Rs65,029 crore and a balance sheet size of Rs95,977 crore. With the merger, the bank’s loan book will increase by Rs10,541 crore with a mix of microloans, business loans, housing loans, gold loans and other loan products.

Siddharth Srivastava, partner at Khaitan & Co, said the merger will help “AU SFB pivot their exposures in microfinance lending and expand their portfolio to a large extent. Microfinance lending assumes a greater role in a country like ours where a major chunk of gross domestic product (GDP) growth and employment opportunities emanate from the unorganised sector which finds availing loans from structured banks difficult. In addition AU SFB will benefit from the retail deposits which Fincare SFB’s balance sheets boasts of.”

In the case of the earlier announced Slice and NE SFB, both stood to gain equally from the merger. Slice had already picked up a 10 percent stake in NE SFB in two separate and equal tranches in 2022 and 2023. Founded by former Flipkart staffer Rajan Bajaj in 2016, Slice is backed by 82 investors, which include 64 institutional investors including Tiger Global, Insight Partners, Moore Ventures, Gunosy, Das Capital and Blume Ventures.

NE SFB, the only one of its kind in the Northeast region, had seen a significant decline in its Tier-I capital ratio, to just 2.75 percent in March 2023 from 23.26 percent in March 2020 and a widening of losses, ensuring a merger made more sense.