Private lender IndusInd Bank, backed by billionaire Hinduja brothers, is in acquisition talks with Bharat Financial Inclusion Ltd.
"The management has been exploring strategic alternatives, and engaging in discussions from time to time with various parties, including Bharat Financial, as and when required," IndusInd said in an exchange filing on Thursday.
The bank also added that the management has been authorised to evaluate strategic opportunities for business expansion.
According to media reports, IndusInd could announce the purchase in April.
In early trade, shares of Bharat Financial rose 0.6 per cent to Rs 844.45, valuing the company at $1.7 billion.
As per the reports, the merger ratio is likely to be 10:7, wherein shareholders will get seven shares of IndusInd Bank for every 10 shares of Bharat Financial. In its clarification to bourses on Thursday, BF said it had been exploring various options but termed the media reports as "speculative".
Speculation regarding a deal between the two has been on for many months now and some reports had said the Hinduja Group-promoted bank may be looking at buying a minority stake in BFI. But of late the buzz has shifted to takeover. There have been a slew of deals between private sector lenders and MFIs as the former eye to expand their network in the hinterland which will help them meet the priority sector lending mandates and offer cross-sell opportunities.
In a note on Wednesday, Australian brokerage Macquarie had said such a merger was positive from a medium-term perspective for the bank but flagged execution as the key given the stress on MFI's books. A merger can enhance IndusInd's return on assets by up to 0.25 per cent and make it among the highest in the industry, it said.
BFI already has a business correspondent relationship with IndusInd in Karnataka for many years now. The then SKS had a tumultuous time four years ago as it first faced a repayment crisis in its largest market of Andhra Pradesh and a corporate battle over leadership which ended with the exit of founder Vikram Akula.
If the merger fructifies, it will be the third deal for IndusInd Bank, after Deutsche Bank's credit card portfolio in 2011 and RBS' diamond financing book in 2015. Other banks, including IDFC Bank, Kotak and RBL, have either acquired or taken minority stakes in MFIs in past 18 months.