A woman holds the loan she has received, a stack of rupee bills, during a meeting organized by SKS Microfinance Ltd. (Photographer: Adeel Halim/Bloomberg)

IndusInd Merger Will Enable Transition To Full-Service Banking, Says Bharat Financial

Bharat Financial Inclusion Ltd., on Monday, informed the stock exchanges that it has entered into exclusive talks with IndusInd Bank Ltd. to explore a merger between the two. The formal intimation of the merger talks puts an end to months of speculation of a deal between the two entities. Bharat Financial’s Managing Director and CEO MR Rao spoke to BloombergQuint and explained the rationale behind the deal. On closure of the transaction, Bharat Financial will see its independent journey as India’s first listed microfinance company come to an end.

Here are edited excerpts from the conversation.

If this deal does get concluded, is it an end to the independent history of India’s most-celebrated microfinance model?

Yes, in a sense. But I think the management will continue to play a key role in whichever fashion because on-ground expertise for the microfinance business is required and it is being acknowledged by IndusInd Bank also. So, while we will be a part of this merged entity, operations will continue to be run by the current management and employees. Essentially, I think we will be a part of the larger organisation without the scheme of things being changed at the operating level at all.

You have not announced the swap ratio. How soon will we get the final contours of this deal? What’s holding back the announcement of the final deal? Is it asset quality or something else?

I can categorically say that asset quality is not an issue. I heard Mr. Sobti also stating that they are very happy with the asset quality. I think a transaction of this kind is a very complicated transaction because it involves a lot of stakeholders, employees and customers. So, the whole idea of this exclusivity is that we engage one-on-one and thrash out the modalities of the arrangement. I think it will take a few weeks to flesh out the details.

Can you run us through the rational and why you thought that the time was right to merge with a bank?

For any merger deal you need to have a stable stock market. So the timing aspect came into play on that front. On the synergies, cost of funds is one synergy. But we believe that on the operating level there could be more synergies because this gives us the ability to become cashless at the field level today. While, we are disbursing the loans into the bank accounts of borrowers, we have to travel 3-5 kilometers to their banks to withdraw the funds. By being a part of the merged entity, we can get them to open savings accounts and disburse directly to their savings accounts. Also, we will be able to offer more savings products like savings accounts, small recurring deposits and so on. Essentially, from being a standalone microcredit company we will become a full-fledged financial inclusion entity post the merger. That’s a great synergy because stickiness with the customer will improve because you are able to offer more products. Lower cost of funds is also an advantage that is there. And the fact that this is a ready made platform for us post these transactions, gives us a competitive advantage because we don’t have to go through the transition pangs of being a microfinance company converting ourselves into a small finance bank or universal bank.

Does the identity of Bharat Financial stay in any way, either in product, brand or does it entirely get usurped by IndusInd Bank?

Those are the details which will be fleshed out in the next few weeks.

You are saying you will prefer a way where the Bharat Financial brand is somehow maintained?

I am not saying that. I am only saying that we have to engage with IndusInd in the next few weeks to flesh out the details of all the arrangements - whether we will retain our name and what will happen so on and so forth.

Can you tell us whether you see a continued uptick in non-performing assets in over the current quarter and subsequent quarter too? Or has the market stabilised? Also tell us about the collection and the recovery numbers in the couple of months.

We see demonetisation and issues in a couple of states as a one-time event. All loans that we have given from January 1, 2017, have an impeccable payment record of 99.9 percent. We see the growth run rates coming back into the business. So, we are confident of our guidance of 50 percent growth in the book and reiterate our guidance on the profit as well.

How are you going to grow at those kinds of rates? You do not have a small book anymore. Ratings agencies like India Ratings have raised concerns about the microfinance sector growing rapidly in the last 18 odd months. And it’s not like you are expanding into huge new geographies. I am concerned about the growth rates that are projected both by you and the industry.

Let me talk about myself rather than speaking about the industry. Let me talk about our company. We are predominantly rural-focused when you compare us with the industry. I think 66 percent of the industry’s book is in urban and 33 percent is in rural, whereas 75 percent of our book is in rural and only 25 percent is in urban. There is a huge demand-supply gap in the microfinance space which allows us to grow much higher than 50 percent but as a management team we had taken a conscious decision a few years back that we will not grow beyond 40-50 percent as on a standalone entity bases. We are fairly confident given the huge demand-supply gap, the number of unbanked population, especially women in the rural areas.

Which states do you have the maximum concentration in now?

The top five states are Odisha, Maharashtra, West Bengal, Karnataka and Bihar.

And these five states will make up how much of the book?

I think about 40 percent.

If and when this deal gets concluded, how do the Bharat Financial customers get on-boarded into IndusInd? Do a proportion of them already have IndusInd Bank saving accounts as you had done a deal with them in the past too.

Yes. We have done a pilot for savings account and the Kirana stores cashless transactions also. Once the definitive agreement is done, both the teams will sit together on the operating plan and figure out how soon we can open accounts and so on and so forth.