The take over of Bharat Financial Inclusion Ltd (BFIL) by IndusInd Bank Ltd (IBL) is indicative of the potential in rural banking and microfinance model which now appears to have attained a viable and dependable model for financial inclusion.

As the merged entity will have over 3,600 branches and outlets, IndusInd Bank will have an increased outreach with 1,400 MFI outlets and 6.8 million borrowers as per the data available.

The combined customer base of the both entities will be 16.3million. The net worth will be ₹23,921 crore while the total assets will be worth ₹2,00,820 crore. Both enjoy a comfortable Capital to Risk Weighted Assets Ratio (CRAR) at 16.18 per cent for IBL and 31.8 per cent for BIFL.

IBL is expected to get more focussed approach to rural banking as it will transfer the employees and operations of BFIL into a wholly-owned captive Business Correspondent subsidiary.

For BFIL, formerly SKS Microfinance Ltd, it's a short-cut to become a bank. As observed by its Managing Director and Chief Executive Officer MR Rao, the clients of BFIL will now get benefits of a 'universal bank'. In 2015, BFIL had missed the bus to become a small finance bank as Reserve Bank of India (RBI) did not issue a license to it. Now, with the current merger, it has in fact become a bank through the alternative route.

The cost of funds has been coming down for BFIL in the recent past allowing the micro lender to charge the lowest interest rate among the NBFC-MFIs (Monetary Financial Institutions). It can now look forward for more stable and low-cost of funds as part of IndusInd Bank.

End of a journey

While the deal can be described as a trend-setter in rural banking, for BFIL, it will be end of a bumpy road if one takes into consideration its journey as the first MFI in the country to go public. It was the peak of success of SKS which was started as a NGO by Vikram Akula, who became a poster boy of MFI sector later, and others.

Even before the celebration of a its successful IPO could end, a biggest-ever microfinance crisis enveloped SKS and other MFIs due to allegations of harassment of clients by recovery agents in Andhra Pradesh and high interest rates by MFIs.

The AP Regulation of Money Lending Act 2010 and subsequent shrinking of the MFI sector were the biggest crises that SKS went through.

Incidentally, today was the seventh anniversary of the Andhra Pradesh MFI Act, which created mayhem among the MFIs but brought the much-needed protection of the poor borrowers into the focus.

The Act pruned the sector and RBI chipped in with a new NBFC-MFI regulatory regime for MFIs. This had brought back the credibility and viability of the MFI model.

SKS withstood the impact of the AP Regulation of Money Lending Act 2010 and subsequent shrinking of the MFI sector. But it had survived and staged a comeback by a slew of measures aimed at cost-optimsation, better corporate governance and self-regulation.

With the current merger, the microfinance model is on the threshold of a new journey. With corporate lending coming under cloud due to non-performing assets (NPAs) and the dependability of micro-loans with about 99 per cent repayment rate, others players will surely be watchful. If proves successful, this may trigger more deals.