Typically, mergers are pursued to either gain domain expertise, geographic footprint or for strategic advantages. Rarely do we see two entities, big or small, marrying each other just to comply with regulatory diktats. It’s an even rarer occurrence if the sector happens to be banking. But on Monday, the country’s youngest lender Bandhan Bank announced the acquisition of HDFC-promoted Gruh Finance in an all share-swap deal.

Evidently, the move is to pare Bandhan promoter’s stake from 82.28 per cent to 40 per cent. As per RBI norms, any newly licenced banks have to reduce their non-operating financial holding company’s stake to 40 per cent within three years after commencing operations, and further down to 20 and 15 per cent within 10 and 12 years respectively. 

Bandhan breached the first threshold last August and given its unsuccessful attempts to trim stake, RBI penalised it withdrawing general permission to open new branches, besides freezing MD & CEO Chandrasekhara Ghosh’s remuneration till further notice. The merger helps Bandhan reduce promoter stake from 82.2 per cent to 61 per cent, though this won’t reduce it to 40 per cent as required by RBI. However, experts believe it creates one of the largest rural and semi-urban lending platforms, and helps both diversify their portfolios and geographic presence. 

Though this was an outcome based on necessity, analysts say the combined entity will integrate reasonably well, since both Bandhan and Gruh have similar core values, business ethics and are committed to financial inclusion.

While the merger provides an opportunity for Bandhan to build pan-India affordable housing loans portfolio, for Gruh, it helps continue its mission of serving the underbanked. Gruh gives affordable housing loans and operates largely in rural and semi-urban Gujarat and Maharashtra, which together account for over 63 per cent of its outstanding portfolio as on June, 2018.

In the past, Bandhan explored several options including foraying into other businesses and a secondary issuance of shares. But the latter was blocked by Sebi norms, which dictate a one-year lock-in period after listing. Bandhan entered the capital markets in March, 2018. While its earlier proposal to acquire PNB Housing Finance didn’t work out, the bank weighed options to dissolve the holding company structure. It has a three-layered structure comprising Bandhan Financial Services holding 100 per cent in Bandhan Financial Holdings — the non-operative financial holding company which holds 82.28 per cent of Bandhan Bank.