AU Small Finance Bank is reportedly in preliminary talks to acquire Fincare Small Finance Bank, a microfinance-focused bank, potentially marking the first deal in the small finance bank sector.

In this podcast, businessline’s Hamsini Karthik sheds light on several key aspects of this potential acquisition.

The acquisition talks are characterised as exploratory, with no valuations or concrete terms discussed at this early stage. AU Small Finance Bank is a significant player in the industry, with a loan book of ₹58,421 crore (as of March 31, 2023) and a history rooted in non-banking financial companies (NBFCs) rather than microfinance institutions (MFIs).

Read: AU Small Finance eyes Fincare SFB for acquisition

AU’s interest in acquiring Fincare is attributed to the higher yields 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 geographic risk and tap into regions with potentially better asset quality. This acquisition could address two significant issues for AU in one move.

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

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

The podcast also touches on the broader trend of consolidation in the small finance bank sector. The industry is highly fragmented, with a few major players and a multitude of smaller banks. Consolidation is seen as a positive step to strengthen the industry and address the challenges faced by individual banks, including regulatory capital requirements and private equity investors seeking exits. Listen in.