IndusInd Bank announced the takeover of micro finance lender Bharat Financial Inclusion Ltd in Mumbai on Saturday.

Chairman of the bank, R. Seshasayee, said the two boards met independently this morning and decided to go ahead.

It would help develop reach and would be a strong partnership. The two institutions had worked together for many years and were, therefore, comfortable with each other's people and culture, he said.

P.H. Ravikumar, Chairman of Bharat Financial, said they believed margins were available only in two segments -- the lower middle-class and the poverty line segments.

He drew attention to the irony that today was the seventh anniversary of the infamous Andhra Pradesh MFI Act, which created mayhem among MFIs.

Ramesh Sobti, Managing Director, IndusInd Bank, said Bharat Financial Inclusion would remain a wholly-owned subsidiary after the takeover. He assured that there would be no loss of jobs.

There would be plenty of synergies. The cost of funds would come down by 3 to 4 percentage points immediately.

Asked if they would pass on the benefit to customers, Sobti replied in the affirmative.

While not saying how much, he said we could soon see cuts and they wanted to lead the industry there.

He recalled that Bharat Financial had breached the 20 per cent floor in interest rates and had brought down rates below that.

Sobti said an additional reason for retaining the wholly-owned subsidiary model was that the model had regulatory approval and precedent.

Secondly, they did not want to disturb the cost structure and ethos of the existing organisation.

Swap ratio

Sobti mentioned that the swap ratio had been decided at 639 shares of IndusInd Bank for every 1,000 shares of Bharat Financial.

This worked out to a 15 per cent premium over the current market price of Bharat Financial. He said the premium had been decided taking into account the immediate benefits.

The entire portfolio of Bharat Financial would qualify as priority sector loan for the bank.

Secondly, the risk weight would drop to 75 per cent from 100 per cent because the portfolio would now be housed under the umbrella of a bank

Thirdly, there would be an immediate drop in the cost of funds for Bharat Financial, to the tune of 3 to 4 percentage points.

Bharat Financial has a portfolio of Rs 9,500 crore, which is growing at 50 per cent.

IndusInd Bank's microfinance portfolio is about Rs 2,900 crore.

After the merger, the MFI portfolio would account for about 7 per cent of the total loan book of the bank.

Sobti said this proportion may come down since other parts of the bank's loan book were also growing fast.

M.R.Rao, MD and CEO of Bharat FInancial Inclusion, said that the employees of the company were excited about the merger and the potential it offered.

A snap poll conducted among 4600 frontline loan officers of the company had revealed that an overwhelming number had felt that the merger was good for the company, staff and customers.

He said the company was now ready to scale up and move from being a monoline microcredit lender to becoming a full fledged financial inclusion company. The products that it would offer would now be wider on the assets side but also increase its options on the liabilities side.

R.Seshasayee, said that the merger did not happen overnight but was the result of a 'long courtship' and that they had been dating seriously for many months. He said that the perception that microcredit was highly risky was not borne out by the experience of both lenders. They had learned how to manage those risks, he said.

Mr Sobti expected the entire merger process which involves a number of regulatory approvals to be completed in the course of the next 10 months.