Merger with Fincare to help enter MFI segment, southern markets: AU SFB

Allaying investors' concerns, AU Small Finance Bank (AU SFB) on Monday said its $ 530 million all-share merger with Fincare Small Finance Bank has a slew of advantages like helping it enter the lucrative microlending segment and expanding into southern India.

Fincare said its Rs 625-crore initial public offer goes on the back burner because of the deal, which is expected to be closed by February 2024 after mandatory clearances.

Under an agreement announced on Sunday, shareholders of Fincare will get 579 shares of the listed AU SFB for every 2,000 shares that they own.

Post the merger, shareholders of Fincare will own 9.9 per cent equity in AU SFB. Promoters of Fincare have also agreed to infuse Rs 700 crore of fresh capital into the entity before the merger.

AU SFB's Managing director and chief executive Sanjay Agarwal termed the merger a complementary deal, which will help the Jaipur-based lender gain a foothold in micro finance assets as well.

The share of AU SFB's unsecured assets it offers credit cards and personal loans stand at 4 per cent which will go to 7.5 per cent after Fincare's MFI book comes in, Agarwal said, adding that it will be keen to expand the share to 10-11 per cent of the book.

The micro finance business delivers a higher net interest margin of over 10 per cent which is lucrative even if the cyclical reverses in the business are considered, Agarwal said, stressing that political interference is not too big an issue in India now.

However, investors were not enthused with the entity's announcement, and the listed AU SFB's scrip closed 3.43 per cent down at Rs 666.10 on the BSE. The stock had hit a low of Rs 630.90 in the morning before recouping the losses but closed in the red.

Reacting to concerns among investors, Agarwal said the intent behind the deal is to build a stronger business and exuded confidence that the two managements will be able to justify the decision eventually.

Fincare's managing director and chief executive Rajeev Yadav will officiate as deputy CEO of AU SFB post the merger, while AU SFB's executive director Uttam Tibrewal will also be made the deputy CEO.

The decision to infuse Rs 700 crore into Fincare has been taken in order to fuel the continuing growth requirements of the business, its nominee director Divya Sehgal said, stressing that the amount is more or less the same it wanted to raise via the IPO for the growth requirements of the business.

He said the IPO plans will now go on the back burner and the thrust will be on getting this deal through, Sehgal said, adding that the Rs 700 crore fund infusion will be done after it gets a nod from RBI and the Competition Commission of India.

Fincare's stock of gross non-performing assets stood at 1.6 per cent of the over Rs 10,541 crore book, while the recast loans are under Rs 20 crore, officials said.

The GNPA ratio of the merged entity on a proforma basis is 1.8 per cent.

After the merger, the Fincare brand will gradually get diluted and the businesses will operate under a single brand of AU SFB, officials said.

In a joint press conference, managements of both the entities said they do not anticipate challenges on the integration front as nearly 15,000 staffers, including 10,000 in the MFI vertical, will become AU SFB staffers.

Speaking on the network, an official explained that a bulk of Fincare's 136 branches are in South and East India while AU SFB's focus is on North and West India. Similarly, AU SFB focuses on vehicle loans and commercial lending, while a bulk of Fincare's book is MFI.

Agarwal said AU SFB had looked at a deal with an unnamed non-bank lender as well but the entity saw a greater sense in merging with a well-governed bank like itself.

Replying to a question on whether this should be seen as a stepping stone for AU SFB turning into a universal lender, Agarwal said everything is possible but was quick to add that at this point of time, it wants to focus on one thing at a time.

AU SFB wants to make itself more stronger and complete, Agarwal added, stressing that the deal helps it achieve the two.

Universal (bank) is an outcome not a destination, he said, adding that if the regulator agrees for it, AU SFB would like to climb to that stage as well.