KOLKATA: Edelweiss Financial Services and Srei InfrastructureNSE 3.92 % are exploring possibilities of a merger with private-sector lender Lakshmi Vilas BankNSE -1.17 % even though Indiabulls Housing Finance appears to be leading the race at present, a person familiar with the matter told ET.
Three other non-banking finance companies (NBFC), including a couple of south-based financiers, have also entered the fray in the past two days and made the M&A race more intense and competitive, said the source.
The Chennai-based bank has been evaluating the merger option as it needs to augment long-term capital. Reserve Bank of India (RBI) rules allow mergers between a bank and an NBFC, provided shareholders with more than 5% holding after the exercise comply with the ‘fit and proper’ criterion.
To meet its immediate capital needs, Lakshmi Vilas has floated a qualified institutional placement without detailing the size. This is part of the bank’s .`2,000-crore capital raising plan which has seen tepid response so far.
The bank has been facing losses with spiraling bad loans. Its capital adequacy ratio fell to 7.57% at the end of December last year, against 9.67% three months ago.
It has mandated Srei Capital Market, a wholly-owned arm of Srei Infrastructure, to manage the issue. Srei has confirmed the development, but it did not comment on a potential merger.
People familiar with the M&A talks at Lakshmi Vilas said that the bank is looking for synergies with the prospective candidate as the primary criterion. Merger with a bank that has a large low-cost deposit base would help NBFCs, reducing their cost of funds.
“Banks have an advantage of cost of funds but after you factor in the SLR, CRR, priority sector and deposit gathering costs, the difference between a same size bank and an NBFC is about 100-150 bps. This can be made up by NBFCs through innovation, more focused customer offerings and cost efficiencies. So, both bank and NBFC models have room for growth and adequate profitability,” said Rashesh Shah, chairman, Edelweiss Group. He did not comment on the merger issue, terming it as market speculation.
Edelweiss, IndiabullsNSE -1.15 % Housing and Srei Infrastrcuture had applied for universal banking licenses in 2013, when RBI offered them to Bandhan and IDFC.