Synergies seen for IndusInd Bank and microfin Bharat Financial, as talks for merger begin

Private lender IndusInd Bank and microfinance company Bharat Financial Inclusion have entered into an exclusivity agreement to discuss with each other a proposed potential strategic amalgamation. The investor community and stock markets had expected the development for several months.

Stocks of both IndusInd Bank and Bharat Financial rose smartly after the announcement, with IndusInd Bank closing up 5.56 percent to ₹1,790.65 and Bharat Financial ending up 3.34 percent to ₹967.25. But clarity on the valuations of the deal is awaited, which could be finalised in the coming weeks.

Post-demonetisation, India’s microfinance sector has been going through a rough patch, with disbursements falling. According to an ICRA report, the securitisation volume of microfinance institutions (MFIs) fell 21 percent to ₹7,150 crore in FY17 compared to ₹9,000 crore the previous year.

But analysts see this development as a positive, with strong synergies for both entities. In the case of Bharat Financial (formerly SKS Microfinance), the benefit is that it will become a complete “financial inclusion” firm, as its chairman and CEO MR Rao, calls it. If the amalgamation goes through, Bharat Financial will be able to reduce its own cost of funds, be able to sell more products and garner small deposits.

“The deal would be margin accretive from the first day and IndusInd will be able to cross-sell products and services to a wider range of customers,” said Dhananjay Sinha, head of research, economist and strategist at Emkay Global Financial Services.

The bank will be able to expand its reach in a systematic manner, through 1,408 of Bharat Financial’s branch network. Also Bharat Financial is almost completely into priority sector lending. The microfinance firm already works as a business correspondent with IndusInd Bank.

Despite a period of stress which most microfinance companies have faced, analysts expect the cycle to turn for some of the larger microfinance companies, in coming quarters.

The proposed transaction would be subject to due diligence, approval of the Boards, shareholders and regulatory agencies.