Bharat Fin's acquisition will boost profitability & margins from Day 1: Romesh Sobti, IndusInd Bank
"I can tell you that from day one, it's accretive to my net interest margin, RoA, RoE, and capital."
The Bharat Financial purchase follows IndusInd's acquisition of Deutsche Bank's credit card business in 2011, The Royal Bank of Scotland's diamond and jewellery business in 2015 and IL&FS Securities Services earlier this year. In an interview with Joel Rebello, after the completion of the latest transaction, Sobti explains the rationale behind and benefits of the latest transaction that gives the target company the revenue stability of formal lending.
Why did you buy Bharat Financial, especially when you had your own portfolio in place?
They are number one, clearly a leader. They have very good governance levels, excellent risk management, and very conservative provisioning norms. They are the only player in the industry that provides up to 60 days (on advances) and it gives us a huge head-start in terms of branches and priority-sector business. If you do it, you do it with the number one. The rationale was the experience, knowledge and domain leadership.
But there are question marks on the operating costs in micro finance?
I will give you a piece of statistics.The bank's cost to income ratio is 45%. Bharat Financial's normalised cost to income ratio is 35%. It's a very well run, frugally built organisation. It runs its cost structures very well. That's why it's being made into a subsidiary to sustain the work culture and cost structure.They are more cost efficient than the banks.
You also mentioned that the blended credit cost is less than 1%
Bharat Financial's credit cost trend since its IPO has stuck to almost 0% and even after demonetisation, it is back to less than 1%, and fully provided. It was at 14% at the peak of the Andhra crisis and has now come back to below 1%. And demonetisation was a one-off incident. Our own book was 10 basis points. And they run it better than we do.
What will be the impact on your profitability and margins?
I can tell you that from day one, it's accretive to my net interest margin, RoA, RoE, and capital. Everything will go up from day one. And the cost to income ratio, blended, will slightly fall. That's why it took so long to find the right valuation.
How long it took exactly from the time you started talks?
It has taken nine to 10 months of engagement, if not more. Then you had this little period of demonetisation. The talks started before demonetisation. You don't do transactions like this in a volatile period but the engagement continued. We were in touch. The engagement lasted approximately 12 months. But we stuck around because we believe in this business... This business has proven its worth, is accretive to us, has a very good management team and excellent field staff, and is well capitalised and profitable.
There is also this question of political influence in micro finance...
Micro-finance institutions (MFIs) have seen some political influence but banks have not seen. Why did all the MFIs seek bank licences? To get regulatory protection. But that is a thing of the past. MFIs were more susceptible to influence of that nature, banks were not.