It was back in 2015 when the Reserve Bank of India opened the doors for small finance banks, granting licenses to 10 entities to start such financial institutions, in a move to expand financial services to the underserved.
The idea behind SFBs was that they could provide basic banking services, including deposits and loans, but to underserved and unserved sections like small and marginal farmers, micro and small businesses and unorganised workers. Today there are 12 SFBs in the country.
In first signs of consolidation in this space, AU Small Finance Bank, which was among the 10 entities to get the SFB license in 2015, and its rival Fincare Small Finance Bank are set to merge in an all stock deal. The board of directors of both the banks have approved the deal but the deal would need other approvals from the shareholders of the two entities from RBI and also the Competition Commission of India.
Contours of the deal
Once the deal gets all the required approvals, Fincare SFB shall merge into AU SFB. This is an all stock deal, where shareholders of Fincare SFB will receive 579 shares in AU SFB for every 2,000 shares held in Fincare SFB. All employees of Fincare SFB will become a part of AU SFB.
Prior to the completion of the merger, Fincare SFB promoter Fincare Business Services shall infuse Rs 700 crore into the SFB.
Rajeev Yadav, the MD and CEO of Fincare SFB, will be appointed as the deputy CEO of AU SFB post-merger. He will continue to lead the Fincare unit of AU SFB and will be an invitee to the board meetings of AU SFB. He will report to AU SFB's MD and CEO Sanjay Agarwal and the two will jointly lead the IT and digital unit of AU SFB to ensure smooth IT integration.
Divya Sehgal, who is a nominee director on Fincare SFB's board, will join AU SFB's board. Separately, Uttam Tiberwal, currently executive director at AU SFB, will be elevated as ED and deputy CEO in the merged entity.
Size and Scale
According to latest data published by Bengaluru-based Fincare, the SFB reported total income of Rs 727 crore and a net profit of Rs 121.74 crore in the July-September 2023 quarter. Its gross advances stood at Rs 10,541 crore. It has 1,292 touchpoints, over 53 lakh customers and more than 14,800 employees.
In contrast, Jaipur-headquartered AU SFB reported total income of Rs 2,956.51 crore and a net profit of Rs 401.83 crore. Its gross advances stood at Rs 65,029 crore and had a net worth of Rs 11,763 crore as of September 30. The bank has 1,042 touchpoints, over 44.3 lakh customers and 28,523 employees.
The merged entity will have more than 98 lakh customers, more than 43,000 employees, and 2,334 touchpoints across 25 states and union territories.
Rationale for the deal
AU SFB said the merger aids diversification of its portfolio with addition of rural, inclusion focused microfinance, mortgages, and gold loan businesses of Fincare SFB, bolstering its financial inclusion charter with a focus on micro entrepreneurs and small enterprises. The deal will also help AU get a larger play in southern states.
The merged entity will leverage Fincare SFB’s distribution network in rural and semi-urban and AU SFB’s strong product and digital capabilities to grow its deposits and lending franchise, it added.
"This strategic merger capitalizes on our complementary geographic footprint and product offerings, enabling us to create a truly pan-India retail banking franchise. We anticipate compelling synergies, particularly in deposits, technology, and scale-driven efficiencies over time, which will benefit our customers and shareholders," said R.B. Verma, chairman of AU SFB.
Rajeev Yadav, the MD and CEO of Fincare SFB, said the proposed merger will create a "lot of synergies." "Our customers stand to gain from the merger, with expanded presence and a full suite of products that cater to their specific requirements," he said.
AU SFB shares declined close to 9 per cent on Monday morning before recovering. They were still down around 4 per cent in afternoon trade at Rs 662.30.