Bandhan Bank’s branch at Prabhadevi, Mumbai.

Gruh Finance To Merge With Bandhan Bank

Gruh Finance Ltd. is set to merge with Bandhan Bank Ltd. in a share-swap deal.

The boards of both lenders met separately on Monday where it approved the “merger co-operation agreement”, according to the housing finance company’s exchange filing. The effective date of the merger shall be Jan. 1, 2019, subject to regulatory approvals.

The deal follows the Reserve Bank of India’s decision to impose strictures on Bandhan Bank for failing to reduce promoter shareholding as per the agreed regulatory timeline. The merger will help reduce the stake of Kolkata-based bank’s promoter entities, while giving HDFC—the largest shareholder in Gruh Finance—a 14.96 percent stake in the combined firm.

Shareholders of Gruh Finance will receive 568 shares of Bandhan Bank for every 1,000 shares of the housing finance company.
  • Bandhan Bank’s shareholding in the merged entity will come down to around 61 percent. Bandhan Bank’s promoters owned 82.28 percent in the bank before the merger.
  • HDFC will own 14.96 percent in the merged entity. It owned 57.83 percent in Gruh Finance and is the largest shareholder of the company.

The merger is a “win-win” deal for both Gruh and Bandhan Bank, said Deepak Parekh, non-executive chairman of HDFC Ltd.

Gruh Finance will benefit through expansion of scale and geographies. Bandhan Bank will benefit by getting a more diversified and secured loan portfolio.  
Deepak Parekh, Non-Executive Chairman, HDFC Ltd.

Parekh added that HDFC will seek approval from the RBI to retain upto 15 percent in the merged entity. As per the RBI’s rules, HDFC can hold upto 10 percent. It needs approval for holding anything more than 5 percent stake in a bank. “If the RBI doesn’t give us approval, we will bring down our holding to 9.9 percent since this is a financial investment for HDFC,” Parekh added.

The merger is being executed as a scheme of amalgamation under the Companies Act and hence there will be no open offer, said Keki Mistry, vice chairman and chief executive officer of HDFC Ltd. Mistry said the deal represents a premium of 2.05 percent for Gruh Finance’s shareholders.

A Complementary Merger?

The merger between Bandhan and Gruh Finance may have been driven by regulatory compulsions but also makes business sense for the former.

It helps the bank inherit a large low-ticket housing finance portfolio, which will help diversify the loan book. Currently, 85 percent of Bandhan Bank’s Rs 33,373-crore loan book is in the form of micro loans. To this, the bank will add Rs 16,663 crore in housing loans. After the merger, the share of micro loans in the combined loan book will reduce to 58 percent, said the bank in a press release.

“In our new phase, we decided that we needed to diversify,” said C.S. Ghosh, chief executive officer of Bandhan Bank at a press conference. “This is a way to reduce concentration risk on our book,” Ghosh said. Post the deal, the proportion of unsecured loans on the combined entity’s books will be at about 50 percent compared to the 86 percent unsecured loans held by Bandhan Bank, Ghosh added.

The two entities also have similar customer profiles with both targeting lower income urban and rural customers.

Bandhan Bank’s focus has been primary rural and semi-urban. As of September, 37 percent of the bank’s customers were in rural areas and another 35 percent were in semi-urban centers. In the case of Gruh Finance, 46 percent of outstanding loans are in centers which have a population of 50,000 or less.

Gruh Finance has a strong presence in the Western part of India while Bandhan Bank is strongest in the east.

Bandhan Bank had been on the lookout for inorganic growth opportunities after the RBI placed restrictions of fresh branch openings and executive compensation at the bank. In its notification, the regulator had said that the penalties were placed on Bandhan Bank because it had failed to bring down promoter shareholding to below 40 percent within three years of being listed. The condition was mentioned in the RBI’s February 2013 licensing guidelines. The bank was granted in-principle approval in April 2014 and began operations a few months later.

Why Is HDFC Paring Stake In Gruh?

Gruh Finance was promoted by HDFC and the Aga Khan Foundation (AKFED) in 1986. The idea was to provide housing finance to lower income segments. While promoter HDFC is in the same business, it tends to focus on higher ticket loans. Nesting the low-ticket housing finance business in a separate entity allowed HDFC to ring-fence its operations and returns from volatility that may emerge in lower income markets.

However, over time, HDFC has expanded its presence in the lower income segments.

During the half-year ended Sept. 30, 2018, 37 percent of home loans approved in volume terms and 18 percent in value terms have been to customers from the economically weaker segment and low income group segments. The average home loan to the EWS and LIG segment stood at Rs 10.1 lakh and Rs 17.6 lakh, respectively. The average ticket size for Gruh Finance is Rs 9.4 lakh.

Given the similarity in loan profiles, HDFC could have eventually considered merging Gruh with itself or exiting its holding in the business. Via the deal with Bandhan Bank, it has chosen to do the latter.

Mistry said that merger between Gruh and Bandhan made more sense than a merger between Gruh and HDFC. Geographically, this benefits Gruh more, said Mistry. From a valuation perspective too, the deal made sense, Mistry added.

The merger of Gruh with Bandhan will address any conflict of interest concerns within the HDFC group, said Parekh.