Bharat Financial Inclusion close to finalizing a buyer

Mumbai: Bharat Financial Inclusion Ltd, India’s first listed micro lender, is close to finalizing a buyer in what could be an all-stock deal, two persons aware of the matter said.

Credit Suisse, the investment bank appointed by Bharat Financial, formerly known as SKS Microfinance Ltd, is in the final stages of discussion with the two potential buyers, IndusInd Bank Ltd and RBL Bank Ltd, and a deal is likely to be announced within the month, the two said on condition of anonymity.

The deal will likely be an all-stock transaction. The swap ratio being considered is one share of IndusInd Bank for 1.75 shares of Bharat Financial; for RBL, the proposed swap ratio is 2:1, said one of the two people.

Talk about Bharat Financial looking for a buyer has been doing the rounds for several months, pushing up its share prices sharply. On Thursday, Bharat Financial shares closed at Rs945.8, down 0.53% from a day ago, valuing the company at Rs13,064 crore. The stock hit Rs966 on Tuesday, a level last seen on 12 November 2010. “We do not intend to respond to market speculation. However, as informed earlier, the company has been exploring various options from time to time,” a spokesperson for Bharat Financial said in an emailed statement.

IndusInd Bank’s spokesperson did not respond to emails and calls. Credit Suisse declined to comment. An RBL spokesperson said in an email that the bank does not have any “interest” in the transaction.

Bharat Financial is a widely held company and any sale proposal will have to be presented by the board to shareholders for approval. Morgan Stanley Mauritius Co. Ltd holds a 6.74% stake, while East Bridge Capital Master Fund Ltd, Mathews India Fund, Amansa Holding Pvt. Ltd and BNP Paribas Arbitrage own close to 3% each. Bharat Financial has 1,408 branches and employs 15,284 people. With 6.8 million customers, it has a loan book of Rs10,971 crore.

The proposed sale comes at a time when Bharat Financial is facing stiff competition from banks, both universal and small finance banks.

Microfinanciers, who give small loans to the unbanked poor and self-employed, low-income earners, are at a disadvantage because their interest charges and spreads are capped, and a single borrower cannot take loans from more than two institutions. No such restrictions are placed on banks. The invalidation of high-value notes last year, which dented the cash economy, made life harder for microfinance firms.

Bharat Financial, for instance, reported a gross bad loan ratio of 6% at the end of June compared to 0.1% a year earlier, as borrowers failed to repay loans. In the April-June quarter, it wrote off Rs176 crore worth of loans, and posted a loss of Rs37 crore compared to a profit of Rs236 crore a year ago.

The note ban pushed up credit costs for the microfinance industry to 5-8% in the current financial year compared to 1% the previous year, said Supreeta Nijjar, vice-president at rating company ICRA Ltd.

This led Bharat Financial to evaluate three options—continue as an independent entity, offer a strategic stake to a bank, or be taken over by another bank completely.

“They are considering a complete stake sale now,” said the second of the two people cited earlier. The firm has finalized plan to sell the entire stake, this person added.

Reserve Bank of India norms allow banks to buy a stake of up to 10% in a microfinancier or fully acquire it.

“Acquiring a microfinancier will allow a mid-sized bank to acquire the operational machinery that may not have been set up by it. Also, 10-15% of microfinance customers are upwardly mobile,” said Jindal Haria, associate director, financial institutions, India Ratings and Research. “The only thing that needs to be seen is how the bank will manage the credit risk that comes along with such acquisition.”