Small Finance Banks May Switch On Merger And Acquisition Mode

Small finance banks, established within the last decade, may consider mergers with competitors, non-bank lenders, or fintech firms to swiftly achieve economies of scale and broaden their product offerings.

AU Small Finance Bank's acquisition of Fincare Small Finance Bank is seen as a potential catalyst for others to explore similar opportunities. Industry leaders suggest that larger balance sheets resulting from such mergers could position these banks more competitively against major rivals, particularly in attracting public deposits.

The ongoing trend of back-to-back mergers in the small finance banking sector, exemplified by Slice's acquisition of North East Small Finance Bank, indicates regulatory support for such deals.

While awaiting regulatory approval, the AU-Fincare deal is anticipated to grant AU Small Finance Bank entry into the microfinance sector, filling a void in its product portfolio and strengthening its presence in southern India.

The small finance banks' pursuit of larger balance sheets aligns with the goal of obtaining a universal banking license after five to six years of operation, allowing for greater flexibility in capital allocation and lending activities.

Despite meeting the minimum eligibility criteria for a universal bank license, the size, scale, and service quality required for such licensing remain essential considerations. Crisil data reveals a 29 per cent compounded annual growth rate in small finance banks' assets under management between FY18 and FY23.

The strategic aspect of mergers in this sector extends beyond numerical considerations, focusing on the pursuit of various benefits and strategic options. The initial objective of small finance banks, primarily awarded to microfinance lenders, was to offer savings instruments to the underserved population.

With 12 small finance banks currently operating in India, eight of them have roots in microfinance. Industry experts express optimism about the potential for a greater number of small finance banks to thrive in the unbanked and underbanked space, emphasising that successful mergers will be driven by strategic thinking and the realisation of various derived benefits.