Private equity (PE) fund True North Capital is in advanced talks to buy a 26% stake in Fedbank Financial Services (Fedfina) for Rs400 crore, two people in the know said. Fedfina, a non-banking finance company (NBFC) fully owned by Federal Bank Ltd, offers mostly home loans, auto loans and gold loans.

The transaction is expected to conclude within a few weeks, said the first person, on condition of anonymity. ICICI Securities is advising Federal Bank on the transaction, he added.

Fedfina’s loan portfolio as on 31 March 2017 was Rs962 crore against Rs611 crore as on 31 March 2016. Profit after tax for the year ended 31 March 2017 increased to Rs22.53 crore from Rs12.25 crore in the previous year.

According to the Federal Bank annual report, Fedfina posted Rs134.6 crore revenue in 2016-17 against Rs89.4 crore the previous year. Calls and text messages made to Shyam Srinivasan, managing director and chief executive officer at Federal Bank went unanswered while spokespersons at True North and ICICI Securities declined to comment.

True North Managers Llp, previously known as India Value Fund Advisors, is an active investor in NBFCs. It bought a majority stake in Mumbai-based Home First Finance Co. India Pvt. Ltd for about $100 million (Rs667 crore) last year.

The housing finance company was co-founded in 2010 by former MphasiS Ltd chairman Jaithirth Rao and former Citibank consumer banking head P.S. Jayakumar. It provides loans of Rs1-30 lakh, mostly to first-time homebuyers. True North has a strong presence in the financial services space through investments in other NBFCs—Magma Fincorp Ltd and small finance bank Fincare Ltd. True North, which has launched five investment funds with a combined corpus of $2 billion, is currently investing out of Fund V which has a corpus of $700 million.

At a time when banks have started reducing their loan disbursements in the backdrop of rising bad loans, NBFCs see a high growth opportunity in India.

“Financial services have been and will continue to be an area of focus for PE investments," said Kaushal Shah, executive director and head—financial services, Kotak Investment Banking. However, with significant PE investments in NBFCs, investors are looking for niche and differentiated stories where their investment can make a difference, he added.

Early this month, ChrysCapital Advisors Llp acquired a significant minority stake in Thirumeni Finance Pvt. Ltd, a Bengaluru-based NBFC that operates under the name Varthana and specializes in providing debt financing to affordable private schools, for Rs350 crore.

“Changing demographics and low credit penetration have made NBFCs attractive... Higher margins and falling interest rates have boosted consumption and therefore borrowings. This makes NBFCs an attractive investment target for PE firms as they ride the credit-fuelled consumption boom," said an August 2017 PwC-Assocham report.

Last week, Special situations investor SSG Capital Management bought nearly 47% stake in Shapoorji Pallonji Finance Pvt. Ltd (SPFPL), an NBFC which is part of the Shapoorji Pallonji group. Global PE firm Lone Star will jointly invest Rs2,600 crore with RattanIndia Group to launch a non-banking financial company (NBFC) RattanIndia Finance, it said last week.

Coupled with lower cost, a focused approach on limited credit products and strong underlying risk management capabilities help NBFCs to not only underwrite credit to a targeted set of customers but also to control bad debts, making them one of the attractive sectors for PE funding, according to the PwC report Fuelling NBFCs through Private Capital.

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