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The Bharat Financial deal will help improve margins: Ramesh Sobti, IndusInd Bank

There are always values in the two businesses and then there are values which are created after the merger through synergy.

, ET Bureau|
Updated: Sep 12, 2017, 08.40 AM IST
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 The cost of funds for the micro finance entity is higher, which immediately dips and creates value.
The cost of funds for the micro finance entity is higher, which immediately dips and creates value.
The acquisition of Bharat Financial Inclusion will help IndusInd strengthen its micro-lending business and open up opportunities to serve more than six million customers. The decision to buy BFI is based on a calculated strategy, IndusInd Bank chief executive Romesh Sobti tells Pratik Bhakta & Atmadip Ray in an exclusive interview.

Edited excerpts:


The deal has been delayed by almost a year...

It is not exactly a year but certainly close to around seven to eight months.There was a valuation settlement in the interim to keep the shareholders on both sides happy. There was also a little bit of problem because of demonetisation. That is why we have got this exclusivity and confidentiality arrangement when there will be no talks with anybody else. Then there would be a few weeks of due diligence.

Could we expect this to happen by the end of this quarter?

It is difficult to forecast the exact timeframe, but I believe it will take more time and then there is a protocol that has to be followed and it is expected to go on into the next quarter.

Then is the calendar year a more likely timeline?

Yes, the definitive agreement could happen earlier. Then of course there is the need for board approvals, regulatory approvals, and a whole roadmap.Subject to these, the timeline would be decided.

What will be there for shareholders of both companies?

First, the benefit will be the improving margins because the cost of funds for the bank is 100 bps lower. Then, there will be a share swap. Therefore, the shareholders of the micro-finance company will become shareholders of the bank. So, any value addition to the business goes to the shareholders of both sides. Virtually overnight, BFI becomes a bank along with all the benefits. Then they will get the regulatory umbrella. On the bank's side, we will get the Priority Sector Lending portfolio. We are already PSL surplus but through this deal, we will be able to fulfill the sub-segments of PSL as well.

How did you reach the valuation?

Valuation is what each of the two parties guess and the point always is what is in it for us. There are always values in the two businesses and then there are values which are created after the merger through synergy. All those factors need to be factored in.

The cost of funds for the micro finance entity is higher, which immediately dips and creates value.Then there are other advantages like lower risk weightages as a bank. On the other side, there are benefits of a large client base for cross-selling. Savings products are already being introduced to the micro finance sector. These factors have to be looked into from both sides. Also, Bharat Financial has handled demonetisation pretty well. So, now the books should cause very little concern.

What would be the kind of dilution for IndusInd in this case?

That will depend on the share swap ratio which will be decided only at the level of the board.

Are you paying a premium for Bharat Financial?

I think the synergies are underestimated. There is a vast network of branches, millions of customers on both sides, and we have experimented with savings products with very promising results.There are also wealth products like insurance and micro-insurance products. There are benefits on both sides and they are underestimated.

Would different customer profiles come in the way of articulated synergies?

We have been doing micro-finance business now for almost six years.We have undertaken various partnership models on micro finance.We have 1.8 million customers already in the bank to whom we are already cross selling. It is already a part of our DNA, and all these have shown very promising results.We already have vehicle loan customers, diamond financing customers and even MFI customers.The challenge is to know the domain and have the skills to manage the domain. Since we have done it for the last so many years, it is no new business to us.

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