Newest Indian Bank Plans $11.7 Billion Merger to Meet RBI Rules

(Bloomberg) -- Bandhan Bank Ltd., India’s newest lender, will combine with mortgage financier Gruh Finance Ltd. in a $11.7 billion deal, bringing the bank closer to meeting shareholding rules and helping it accelerate expansion.

Investors in Gruh Finance, controlled by India’s biggest mortgage lender, will get 568 shares of Bandhan Bank for every 1,000 they own, according to exchange filings from the companies. The deal is valued at about 818 billion rupees ($11.7 billion), calculations based on closing share prices on Monday showed.

The transaction is meant to help Bandhan Bank founder and Chief Executive Officer Chandra Shekhar Ghosh comply with the Reserve Bank of India’s ownership rules, and will also allow the micro lender to expand into a new category of loans. India’s regulator has censured lenders for not meeting norms as the central bank tries to clean up an industry that’s been plagued by as much as $210 billion of stressed assets.

“Diluting shareholding is just one benefit of this merger; the main purpose is to grow our business in the best way possible,” Ghosh said at a media briefing in Mumbai on Monday. “We have a strong presence in the east of the country, Gruh has a good network in the west. It is good for both of us.”

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Ghosh’s stake in the lender will fall to 61 percent from 82 percent after the combination. The central bank imposed penalties on the Bandhan Bank after it missed a September deadline to bring Ghosh’s holding down to 40 percent, in line with bank ownership norms. The RBI froze any further increases in his pay and withdrew the bank’s right to open new branches without seeking prior approval.

Bandhan Bank fell 5.8 percent before the announcement, which came after market hours on Monday, while Gruh Finance, a unit of Housing Development Finance Corp., declined 4.1 percent. The deal is be subject to regulatory and shareholder approvals, according to the filings.

“It’s positive for Bandhan and negative for Gruh,” Sameer Kalra, founder of Target Investing, said in an email. While Bandhan’s dependence on micro loans will fall, Gruh loses support of HDFC, he said.

Here are more details from the deal:

  • Combined unit will have a loan book of 500 billion rupees, according to pro-forma data
  • Micro loans will make up 58 percent of the total; home loans will be 28 percent
  • Merged entity will have 4,182 outlets and 31,000 employees

Kolkata-based Bandhan Bank started as a microfinance firm in 2001 and converted to a bank in 2015 as India approved new licenses in an effort to tap rural savings and improve access to credit.

“This merger will create one of the largest rural and semi-urban lending platforms in India,” said Deepak Parekh, chairman of Gruh’s parent HDFC.

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