The first priority of Fincare Small Finance Bank (SFB) would be to complete its proposed merger with AU SFB, but the lender also has a “Plan B” of going ahead with its initial public offering (IPO) — which was already approved by Sebi in September — if regulatory approvals do not come for the proposed merger, Fincare SFB MD, CEO Rajeev Yadav told Piyush Shukla in an interaction. Excerpts:
At a time, when Fincare’s business is growing, what is the rationale for the merger?
It is a good bank-good bank merger. A merger between two good banks can happen for pure strategic and synergy reasons, where the two companies’ shareholders, management teams, employees, and the customers can derive strategic values out of taking that call. Given that market conditions are right, we could have gone further and executed the IPO for which we already have the approval now.
Having said that, for us, when this opportunity came, we applied our mind and looked at it from a bigger picture perspective. There was a feeling that a lot of the customers and stakeholders stand to gain more if these two strong institutions, which operate in different geographies with different strengths and products, different team capabilities, can come together and make a very strong, larger, small finance bank. It is always a tough decision for somebody to say we are doing well and let’s still merge. But fundamentally, if we think of it very practically, this is a good joint thinking that both the banks have executed.
Will IPO still be a possibility?
The correct position is that the merger proposal that has been signed off by the two Boards, will right now be put up to the shareholders for approval of the two banks. And post the shareholder approval, it has to go to the regulator and CCI for their approval. There’s a lot of approvals which are still pending and therefore, theoretically, if some approval does not come through, then the two banks will have to continue to operate as they were operating at a different time.
So till we get the approvals, we cannot assume merger is a certainty. But having said that, what we are seeing right now is it looks as if this is a preferred path. We are trying to work through this process of approval and we will not be pursuing actively the IPO path at this point of time. If a few months later, for whatever reason, if the approval does not come through, then we will pick up the IPO. Our preferred path, at this point of time, is clearly the bank merger.
Is the deal fairly valued according to your view?
I would think so. I think this has been done under conditions where performance of a bank was absolutely fine. And therefore, in some sense, it is a truly well negotiated, closed out deal in terms of pricing. My take and a lot of people’s take is that this is very correct valuation, given all the benchmarks out there.
Fincare must infuse Rs 700 crore into merged AU SFB entity. Why the fresh infusion?
This was more thought out in the context that the bank needed capital, as it was going to go down the IPO path of Rs 625-Rs 700 crore at this point of time. If you’re putting the IPO process on the back burner, then we need to ensure that the voters of the shareholding companies are committing themselves to putting this capital. And so it was agreed as part of this discussion on the merger, that additional capital should be committed by the shareholders, by the holding company of Fincare SFB, and that is what they have done.
Will you join the merged entity’s Board of Directors?
Right now, I will be a permanent invitee to the Board meetings. And really, the destination of this journey has to be, in some sense, taking up a Board position.
What would be the merged entity’s NIM?
Our NIMs have typically been in the 10% plus range. And maybe we can put a rigid math on the asset and then you can complete calculation but I don’t know the precise number of the combined pro forma.
Any guidance on credit cost post merger?
Generally, for a microfinance debt model bank, typically operates at about 1.5% to 2% of the credit cost…overall, I think credit cost would improve only from hereon.
