Possible merger between AU Small Finance and Fincare SFB: What is at stake for investors?

U Small Finance Bank is reportedly in preliminary discussions to acquire Fincare Small Finance Bank, a bank specializing in microfinance, in what may be the first deal in the small finance banking sector.

In this podcast, Businessline’s Hamsini Karthik highlights several key aspects of this potential acquisition.

The takeover discussions can be characterized as exploratory discussions; valuations or specific conditions are not discussed at this early stage. AU Small Finance Bank is a major player in the industry with a loan book of ₹58,421 Crore (as on March 31, 2023) and a history that is more related to Non-Banking Finance Companies (NBFCs) than Microfinance Institutions (MFIs).

Read: AU Small Finance exploring acquisition of Fincare SFB

AU’s interest in acquiring Fincare is attributed to the higher returns and profitability that microfinance portfolios can offer due to unsecured loans and flexible pricing. Additionally, Fincare’s strong presence in southern markets could help AU diversify its geographical risk and tap into regions with potentially better asset quality. This acquisition could solve two important problems for AU in one fell swoop.

Read: AU Small Finance Bank aims to reach 10 lakh cards in force by year-end: MD

In terms of investor impact, the deal could result in some dilution of AU shareholders’ equity, depending on the valuation and terms. However, the long-term benefits of consolidation and improved financial stability may outweigh investors’ short-term concerns.

The podcast also addresses the broader consolidation trend in the small finance banking sector. The industry is highly fragmented, with a few large players and a large number of smaller banks. The consolidation is seen as a positive step to strengthen the industry and address challenges faced by individual banks, including regulatory capital requirements and private equity investors seeking an exit. Listen in.