NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, October 27, 2017

Seven years ago, on 11 October 2010, the Andhra Pradesh government notified an ordinance that almost killed SKS Microfinance Ltd (SKS), now known as Bharat Financial Inclusion Ltd (BFIL). On the same date in 2017, the boards of BFIL and IndusInd Bank Ltd (IndusInd) approved the merger of the two entities, giving yet another lease of life to India’s largest micro lender, albeit in a different form. Following the Rs15,486 crore all-stock deal, for every 1,000 BFIL shares held, an investor in IndusInd will get 639 shares of the bank. None of BFIL’s 15,284 employees will lose their jobs, at least for the first three years after the merger is formalized, which is likely to happen by July 2018.

Even the independent directors on BFIL board will become members of the advisory committee of the business correspondent (BC) subsidiary of IndusInd (the entire operating infrastructure of BFIL will be a part of this subsidiary, including BFIL employees) for two years after the merger is completed. The BCs operate as intermediaries between banks and their customers.

BFIL’s Rs10,971 crore loan book will be absorbed by the bank and all these loans will be treated as so-called ‘priority’ loans which Indian banks are required to disburse to the extent of 40% of their overall loan book. Loans to agriculture, micro enterprises and weaker sections of the society comprise priority loans.

Following this, the share of micro loans on IndusInd’s book will rise from 3% to 7%. Backed by the bank’s low-cost funds, the cost of money to be given as micro loans will drop by 3-4 percentage points. Besides, IndusInd will benefit as the risk weight of such loans is less than that of other loans (75% versus 100%). This will free up the bank’s capital.

IndusInd will also get 6.8 million customers of BFIL, its 1,410 branches, spread across 100,000 villages and 347 districts in 16 Indian states. The bank currently has 1,210 branches and 999 vehicle finance outlets of its own and 10 million customers.

Romesh Sobti, managing director and chief executive of IndusInd, said that the subsidiary model would allow BFIL to retain its infrastructure and “culture”. According to him, the merger will be “value accretive” from day one for IndusInd. This means, it will increase the bank’s earnings per share even as most analysts say investors in BFIL have got a better deal than the bank investors.

Photo courtesy of Peter Haden.