Fincare SFB being a bank was the main attraction for the merger, says Sanjay Agarwal, MD and CEO, AU Small Finance Bank. Joined by Rajeev Yadav, MD and CEO, Fincare SFB and Divya Sehgal, partner, True North, a key private equity investor in Fincare, the three address certain critical aspects of the AU SFB – Fincare SFB merger. Edited excerpts:
When the bank is well capitalised what is the need to bring in ₹700 crores as a condition precedent in the deal?
Divya Sehgal: Before the merger conversations happened, Fincare was on an IPO path. As the merger conversations got initiated and have now been consummated amongst the two banks, we’ve informed the capital markets regulator that this (merger) has happened and we are now on a pathway of applying to the RBI in the next 30 days for the merger. While we are doing this, we want to make sure that Fincare’s business growth stays on the pathway that it currently is on, because we don’t have full clarity on the merger timelines. It is important that as the shareholders of Fincare, we provide clarity for the business. IPO at this point is on the backburner with a movement towards the merger.
Do you feel valuations could have been better if not for Covid and the de-rating that happened in early 2023?
Rajeev Yadav: This is a strategic merger and with or without Covid valuations would have been the same. Valuation is an outcome of the market.
Are you happy with what you’re getting?
Yadav: Absolutely. Whatever is the right price and the right trade, it is there. It’s a strategic merger and not about the valuation or an exit for an investor or any other reason.
In most of the acquisitions where banks have acquired MFI with no prior experience in the business, the initial years have been challenging. What was the rationale when you were looking at Fincare?
Sanjay Agarwal: It’s a bank entity which is going to be merged with us. This is well-regulated and well-governed. Some of the examples you’ve given are that NBFC is acquired by banks. It’s a different governance structure and regulations. Also, it is not that we are getting merged only for the microfinance business. It is complimentary in all aspects. They are in the South, we are in the North. They are predominantly a microfinance player, we are predominantly secured, lenders. One more very important thing is that sizes are very attractive. This merger is not too large or too small. Just about 20 per cent of us. They have 10,000 people in the MFI segment and will not have any kind of issue because they will run their shop. Cultural integration or human integration won’t be so challenging. Being a bank was the topmost reason for the deal getting done.
Sehgal: Perhaps as the oldest investor in the microfinance space I’d say we genuinely believe it’s one of the most attractive industry segments. It’s a very large market where you are servicing the underbanked or unbanked at the base of the pyramid. The customer is fundamentally underwritable. This segment generates a return on assets above 20 per cent. What is critical here is execution and the quality of the team delivering it. While it is thought of as unsecured loans, it’s a very small ticket and well-distributed business.
The market has been giving AU top valuations because you were till now a non-MFI SFB. Isn’t that getting challenged?
Agarwal: We are here to build business and I strongly believe that whoever likes us, is because of our understanding of business and execution. We have done well till now in our core vehicle and small business loans businesses. Markets like us because we deal in semi-urban and rural areas; give and recover loans money from there. It’s not about the product; it’s about how you understand those markets. I know microfinance business is not an easy business. But I think we need to back the team and I strongly believe that we are backing the right team.
You’re not worried that the stock market hasn’t taken the news well yet?
Agarwal: Our job is to build business and prove to everybody that what we are doing is good for all stakeholders and customers. We want to leave the judgment to the people, whether they like it or not like it. But in the end, I know that we will prove our decision right.
Will AU be the brand that will remain?
Agarwal: Since Fincare is getting merged into AU, we will keep AU as the brand. We will use Fincare as and when we need it.