AU Small Finance Bank is said to be in preliminary talks to acquire the business of Fincare Small Finance Bank. According to highly placed sources, the development is quite recent, and discussions are at nascent stages.

If talks fructify, it would be the first deal in the small finance bank space symbolising consolidation in the industry.

AU is the largest SFB with a loan book of ₹58,421 crore as on March 31, 2023, while Fincare is the seventh largest small finance bank with a loan book of ₹8,700 crore as on March 31, 2023. Around 60 per cent of Fincare’s assets are microfinance loans and the bank is said to have strong presence in the south Indian market. Fincare refiled its IPO documents in May and is waiting for a go-ahead from SEBI.

Deal advantages

Sources in know say AU SFB has been exploring markets such as Andhra Pradesh, Telangana, Karnataka and Kerala for expansion. “Organic diversification may take a long time for the bank and acquiring a lender with dominance in these market makes sense,” said a highly placed source who didn’t want to be named.

According to another industry source, adding high-yielding MFI portfolio would help boost AU SFB’s profitability. At 5.7 per cent net interest margin and yield of 13.4 per cent in June FY24 quarter, AU’s profitability is 200-300 basis points lower than its peers.

Operating predominantly in secured loan products such as home loans, vehicle loans and gold loans, thickly populated by large banks, “MFI portfolio offer top quartile yields and could help AU remedy the situation,” said the person quoted above.

Emails sent to Fincare SFBs remained unanswered till press time. “This news is speculative in nature. The bank, in the normal course of its business, explores various opportunities including tie-ups and partnership, strategic Investments, portfolio buyouts etc.,” said a spokesperson for AU SFB.

Fincare Business Servicers Limited, promoter of Fincare SFB, holds over 75 per cent stake in the SFB. Formerly known as Disha Microfin Private Limited, it was incorporated in 2007. Three years later, private equity major True North picked up majority stake in the company. In 2015, it received SFB license and commenced its operations as Fincare Small Finance Bank in 2017. AU Financiers (India) Limited was the only non-MFI lender to receive bank licence in the 2015 round of SFB licences.