Two weeks after announcing the merger of Bandhan Bank with Gruh Finance, in which Housing Development and Finance Corporation has a 57.83% stake, Bandhan Bank CEO Chandrashekar Ghosh spent a day and a half in Ahmedabad last week, at the headquarters of Gruh Finance, meeting the top management. Today, he is in Singapore meeting institutional shareholders, explaining how the merged entity will be able to create value.
Mr Ghosh flew down to Ahmedabad for the Vibrant Gujarat Summit last weekend but spent most of his time in meeting the senior people at Gruh. He assured them that there would be no interference from Bandhan and, in fact, Bandhan will use Gruh as a special business unit keeping its character and operations intact.
He said he was looking forward to leveraging Gruh’s home loans expertise through its branches in the east and eventually in all the 1,000 branches across India. It may be recalled that on 7th January, the boards of Gruh, HDFC and Bandhan announced that HDFC has decided to sell its 57.83% stake in Gruh to Bandhan in a share swap deal.
One of the reasons behind the deal was that the long-term viability of finance companies is in doubt, unless they were backed by banks. “During the October-November liquidity crisis, even Gruh had a problem. Lenders were asking for ridiculous rates for short term lending and because HDFC was the parent company, Gruh could get cheaper money,” says a senior HDFC official. “If Gruh does not have the HDFC tag, then the cost of money would be much higher.”
Following the merger, the shares of both Bandhan and Gruh fell after several institutional investors sold because they believed that had invested in a high quality mortgage lender (Gruh) and did not want to be saddled with the shares of a bank, especially a bank that is involved mainly in microfinance. Of course, it is also a fact that Gruh was also one of the most richly-valued finance companies in the world; the pre-merger price was expensive.
An HDFC board member said that when Bandhan proposed a merger with Gruh, the board thought that it was a good fit. “We have many foreign institutional investors who are fine with the merger. They feel that the banking structure is better in the long run for Gruh. International Finance Corporation and GIC (Singapore’s sovereign wealth fund) have large stakes in Gruh. The IFC CEO said we would like to do more with Bandhan. GIC has approached RBI to increase its stake to 10%. There is a lot of interest from multilateral agencies because of the microfinance business in Bandhan. Cost of funds for Gruh unit will be lower in Bandhan.”
HDFC will end up holding 15.44% of Bandhan, post-merger. If the RBI does not allow HDFC the permission to hold that stake, “they will surely give us permission to hold 9.9% and we will have to place 5.44%,” says a source in HDFC. Gruh shareholders have also been asking why not merge with HDFC. The merger will hardly move the needle for us, said the HDFC board member quoted earlier. "To acquire a book of Rs20,000 crore is small for us, for which we would have to go through a difficult and time-consuming merger process.” Finally, some retail shareholders have asked why not offer some cash along with the shares? Well, Bandhan does not have cash to spare. In fact, HDFC had initially proposed that Bandhan pays HDFC in cash for the 5.44% stake so that it could go to RBI with an approval for the 9.9% holding. But this was a no-go for Bandhan.