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Insurance firms, banks rush to invest in small finance banks

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Small finance banks (SFBs) seem to have become the favourite of the season. In a majority of the proposed SFBs, insurance firms have picked up stakes. Banks and mutual funds, too, have been investing in SFBs.
One of the reasons that financial institutions are betting on is the potential synergy in distributing financial products in the rural and semi-urban markets, say experts.

At Ujjivan, which got listed on stock exchanges a few months ago, insurance companies hold 9.75% stake as on September 30, 2016. Insurance companies which picked up stake include HDFC Standard Life Insurance, Bajaj Allianz Life Insurance, Birla Sun Life Insurance, Max Life Insurance and Shriram Life Insurance.

“SFBs can be a potential channel to reach out rural customers. Also, we see it as a good investment opportunity going forward,” said the executive of an insurance firm.
At Suryoday Microfinance, which plans to start operations by the middle of January, HDFC Holding and HDFC Life Insurance hold a combined stake a close to four%, said R Baskar Babu, chief executive of Suryoday Micro Finance. The bank plans to start operations with around five branches and scale it up to around 30 by March 2017. IDFC Bank, too, has picked up 4.99% stake in the proposed bank.

“From a strategic point of view, collaboration with banks and insurance companies will be useful in the long term. Majority of our loans, around 50% of our portfolio, has to be less than Rs 25 lakh. For the remaining portfolio, we may not like to write the portfolio in our books. So, the bank can be a sourcing partner. As we start, we’ll think of other ways of collaborating,” said Babu.

“Insurance and mutual fund companies are proactive in investing in small finance banks. There are two reasons: one, from the investment perspective, and second from the point of view of future collaboration in the bankassurance model,” added Babu.

Disha Microfin, which will apply for a final banking licence in January 2017, too, is in talks with insurance companies for raising funds.

“We are in the final stages of closing deals for fundraising. Insurance companies are investing in almost all small finance companies. There are synergies in business requirement. There will be investors from the insurance sector in our bank, too,” said Rajeev Yadav, CEO of Disha Microfin.

Varanasi-based Utkarsh Micro Finance has already signed a deal with Ratnakar Bank for close to 10% stake in the proposed bank. This apart, ICICI Prudential will hold a little less than five%, while HDFC Life Insurance and Shriram Life Insurance, too, will hold close to five% stake each in the proposed bank, said Govind Singh, managing director of Utkarsh Micro Finance. This apart, HDFC Ergo will hold a small stake in the proposed bank, he added.

“We have got a good response from insurance and banks in our last round of fundraising. As a bank, we can play a bigger role in the financial space compared to MFIs (microfinance institutes).

We can sell a lot of insurance products, too, which is difficult for NBFC MFIs. Also, as a bank, we can have varied business activity and client base,” said Singh. Uttkarsh plans to start operations this month.

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