Bandhan Bank & GRUH Finance Merger

30 August 2023
3 min read
Bandhan Bank & GRUH Finance Merger
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In a momentous move, Bandhan Bank, India's youngest listed bank, and GRUH Finance, a housing finance subsidiary of HDFC, unveiled their merger plans in 2018, captivating the financial landscape.

This blog delves into the motivations behind this union, the challenges that tested Bandhan Bank's mettle, the synergies that arose from the consolidation, the impact of the merger, and the beneficiaries who reaped the rewards.

Why Bandhan Bank & GRUH Finance Merged?

For Bandhan Bank, a fresh entrant to the stock market in 2018, regulatory requirements mandated a reduction in its promoter shareholding. In response, the bank sought a merger partner, leading to the selection of GRUH Finance, renowned for its expertise in the housing finance sector.

The merger, effective from January 1, 2019, hinged on securing regulatory approvals. The share exchange ratio was decided at 568:1000, which means shareholders of GRUH Finance would receive 568 shares of Bandhan Bank for every 1000 shares that they hold of GRUH Finance.

Bandhan Bank’s and GRUH Finance’s Market Stances Pre-Merger

  • Investor concerns arose as Bandhan Bank's promoters were required to reduce their stake from 82% to 40% within three years.

  • The market perceived this significant reduction in promoter holding as a potential challenge to the bank's stability and ability to maintain control.

  • This uncertainty and market apprehension negatively impacted the bank's share price, raising questions about its ability to overcome underlying challenges effectively.

  • GRUH Finance experienced a significant decline in share price due to market sentiment suggesting that the merger might not deliver sufficient benefits to its well-established niche in the housing finance sector.

Synergistic Advantages of the Merger

Some noteworthy advantages of the merger include-

1. Complementary Expertise

Bandhan Bank's focus on microlending in Eastern India aligns well with GRUH Finance's specialization in lending to low-income and economically weaker sections in Western India.

This combination allows the merged entity to diversify its product portfolio and tap into the underpenetrated affordable housing market.

2. Geographical Expansion

GRUH Finance's strong presence in states like Maharashtra and Gujarat provides Bandhan Bank with access to the Western markets, mitigating geographical concentration risks and expanding the bank's footprint.

3. Regulatory Compliance

The merger enables Bandhan Bank to meet the Reserve Bank of India's (RBI) mandate to reduce promoter shareholding to around 61%, thereby avoiding regulatory consequences such as restricted branch expansion and frozen remuneration for the bank's CEO.

4. Strengthened Position

The consolidation enhances Bandhan Bank's microlending and housing finance portfolio, improving its Return on Equity (RoE) and bolstering its position in the affordable housing and low-income segments.

Consequences and Beneficiaries of the Merger

The share exchange ratio was decided at 568:1000, which means shareholders of GRUH Finance will receive 568 shares of Bandhan Bank for every 1000 shares that they hold of GRUH Finance.

1. Bandhan Bank

The merger helps Bandhan Bank comply with regulatory requirements and diversify its offerings while expanding its reach into Western India's housing finance market.

2. GRUH Finance

By becoming part of a pan-India financial inclusion platform, GRUH Finance gains exposure to one of the largest microfinance markets globally, strengthening its position and growth potential.

3. HDFC Ltd.

As the promoter of GRUH Finance, HDFC benefits strategically by selling an asset (GRUH Finance) and gaining exposure to Bandhan Bank, aligning with its objectives and enhancing its suite of financial services.

Conclusion

The merger between Bandhan Bank and GRUH Finance represents a strategic move driven by regulatory requirements and the pursuit of synergistic advantages.

Despite initial concerns, the consolidation presents long-term prospects for both entities, diversifying their product offerings and strengthening Bandhan Bank's presence in the affordable housing and low-income segments.

Additionally, HDFC Ltd. stands to benefit from this merger, given its position as the promoter of GRUH Finance, which aligns with its strategic objectives and enhances its suite of financial services.

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.

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