Hinduja group promoted IndusInd Bank Ltd and microlender Bharat Financial Inclusion Ltd (BFIL) agreed to merge, betting on shared synergies and reduced costs for both.
For now, based on the swap ratio announced by the two companies, BFIL shareholders are the clear winners. They will get 0.639 share of IndusInd Bank for every one share they own in BFIL. The Street had anticipated a ratio of 0.57:1, which was what was also reflected in Friday’s share prices of the two companies.
Bharat Financial’s shares closed at Rs1,003.5 on Friday; while based on the announced swap ratio, it has been valued at Rs1,118.25 for the purposes of the merger.
In addition, the deal is essentially a short cut exposure to a banking licence. Recall that BFIL had applied for a small finance bank, but didn’t make the cut for the Reserve Bank of India then.The investor presentation also highlights that the private lender would get access to 6.8 million potential customers for its liability side, 2,407 access points, in addition to its current 1,210 branches, and the chance to sell priority sector lending certificates since it would overshoot its target. This is aimed at countering the competition from small finance banks even as IndusInd Bank makes deeper inroads into rural areas.
BFIL’s loans would be subsumed in IndusInd Bank’s balance sheet but its distribution network will be housed in a wholly owned subsidiary of the bank. This distribution network will act as a business correspondent to the private bank.
But how much of a liability franchise would a micro borrower bring? Surely, self-help groups, farmers and small borrowers wouldn’t go beyond a Jan Dhan account. Building a scalable deposit base from micro borrowers is not a smart move. But to be fair, there is a cross-selling opportunity that couldn’t have been ignored.
All in all, it looks like IndusInd Bank shareholders bought a business correspondent network at a premium. Considering the dilution in equity post the merger, IndusInd’s promoters will be issued warrants to maintain their stake. That means the bank’s minority shareholders will be diluted further, while those of BFIL can rejoice that they got a good deal.