Banks, NBFCs Join Hands: What’s Prompting A Pick-Up In Deals?
The changed environment may rev-up consolidation among banks and NBFCs, which has already picked up over the last 12-18 months.
The last two years saw a surge in business for non-bank lenders. Cost of raising funds from the market was low; lending business was easy to corner from bad-loan laden banks; and private investors were eager to put in capital.
Some of that changed last year when defaults by Infrastructure Leasing and Financial Services Ltd. led to tighter liquidity and an increase in the cost of funds. The tougher market conditions brought back attention to the biggest advantage banks have over non-banks — a wide deposit base. The changed environment may rev-up consolidation among banks and non-banks, which has already picked up over the last 12-18 months.
On Friday, Indiabulls Housing Finance Ltd. agreed to merge with Lakshmi Vilas Bank in a share swap deal. Other recent bank-NBFC deals announced include the merger between Gruh Finance Ltd. and Bandhan Bank Ltd.; IDFC Bank Ltd. and Capital First Ltd., along with an amalgamation of Bharat Financial Inclusion Ltd. with IndusInd Bank Ltd.
IndusInd Bank and Bharat Financial Inclusion
The first major merger of a private bank and a non-bank was announced in December 2017 between IndusInd Bank and Bharat Financial Inclusion, formerly known as SKS Microfinance Ltd. That merger was driven by IndusInd Bank’s desire to increase it reach into rural India but also Bharat Financial’s inability to secure a licence to convert into a small finance bank.
Bharat Financial was among the few large microfinance firms that did not secure a small finance bank licence. Others like Ujjivan Financial Services Ltd., Janalakshmi Financial Services Ltd. managed to convert successfully.
According to a presentation by the bank at the time, the merged entity would have 4,000 branches and outlets, a customer base of 1.95 crore individuals and 44,618 employees.
IDFC Bank and Capital First
In January 2018, IDFC Bank and Capital First came together to create a new bank with a combined loan asset book of Rs 1.03 lakh crore. The bank is now called IDFC First Bank.
This merger too was driven by a gap on both sides. IDFC Bank, the new avatar of IDFC Ltd, was finding it tough to transition into a retail lenders. Capital First, having grown rapidly as an NBFC, needed access to deposits to expand scale.
At the time when the deal was finalised, the new banks’ management stated that IDFC First Bank would service around 72 lakh customers, with the help of 454 rural business correspondents and 203 bank branches.
Bandhan Bank and Gruh Finance
In January this year, Kolkata-based Bandhan Bank announced that it would acquire Gruh Finance, an affordable housing finance company promoted by Housing Development Finance Corporation Ltd.
The merger was partly driven by a regulatory requirement for Bandhan Bank to reduce promoter shareholding. Bandhan Bank’s promoters owned 82.28 percent in the bank. Post merger, their stake was reduced to 61 percent. The swap-ratio gave HDFC a 14.96 percent stake in Bandhan Bank. However, the regulator only permitted it to hold 10 percent.
In HDFC’s case, the merger was a way to unlock value from a subsidiary, which had grown in size. Deepak Parekh, non-executive chairman of HDFC said that it is a “win-win” deal for both entities as Gruh would benefit through expansion of scale and geographies, with access to Bandhan’s branch network, while the bank will benefit by getting a more diversified and secured loan portfolio.
Indiabulls Housing Finance - Lakshmi Vilas Bank
A merger between Lakshmi Vilas Bank and Indiabulls Housing Finance is the latest such deal to be announced.
The merger will create a large, healthy and diverse asset book, said the bank in its statement. It will also allow them to collectively foray into newer businesses that help increase fee income, the bank added. “The merger will create a stable low-cost funding in the form of public deposits and expanded distribution franchise,” Indiabulls Finance said in its statement.
Indiabulls Housing Finance had tried and failed to get a banking licence from the RBI in 2013. While new bank licences are now on tap, Indiabulls has chosen the merger route to get access to a deposit-taking franchise. Indiabulls Housing Finance, like other NBFCs, is also facing strained liquidity conditions post the collapse of IL&FS. Lakshmi Vilas Bank, meanwhile, is struggling with low capital and high non-performing assets, which it hopes to correct via this deal.
What’s Prompting The Deals?
Kalpesh Mehta, Partner, Deloitte Haskins & Sells said that affordable housing is gaining momentum and housing finance companies are building large priority sector lending portfolios which banks find attractive.
“Since there is a ceiling on how much HFCs and NBFCs can build their loan book, at some point they either start selling their portfolio to banks or work with the bank as business correspondents. NBFCs can look at either converting into a small finance bank or they will aggregate with a bank as a route to expand,” he said.
Another senior banking consultant, speaking on condition of anonymity, said that such mergers are working well for both parties.
Competition between private banks is getting tougher every year, so this is one way for a private bank to strengthen its position within the financial system, this person said. Also NBFCs are facing stress after the liquidity crisis last year, so currently the valuations are pretty attractive, so banks are acquiring large loans books at a reasonable valuations, he added.