YES Bank eyes acquisition of microfinance company in FY24

With the microfinance field recovering from asset quality issues and achieving healthy growth since the middle of FY22, banks are once again watching the sector closely. The last to join the race is Yes bank.

In an exclusive interview with business line, Prashant Kumar, Managing Director and CEO of YES Bank, said the bank has initiated due diligence on a few non-bank microfinance financial firms (NBFC-MFIs). “We have started to explore and due diligence on some assets in the last two or three months,” he said, adding that the bank may close a deal this fiscal year.

For YES Bank, the acquisition of an MFI is expected to solve two problems at once – meeting the requirements for priority sector loans (PSL); and entry into the high-yield asset book. “There is one sub-category (of PSL) – small and marginal farmers – where we are not hitting the target. We are trying to solve this problem both organically and inorganically,” Kumar explained.

“Basically, this will take care of the resistance on the PSL and we will have a high yielding asset class. Currently we do not have such a portfolio.”

Why a microfinance institution?

To put things in context, MFI loans are classified as unsecured and the interest rate charged by banks can range between 17 and 24 percent, which translates to total returns of over 12 percent.

For banks, the implications for their profitability or net interest margin (NIM) could be significant. RBL BankAnd IDFC First BankAnd Kotak Mahindra Bank They have an 8-10 percent exposure to MFI loans, which has helped them consistently outperform their peers in terms of net income by 5 percent. IndusInd Bank has more than 10 percent exposure to MFI loans.

YES Bank has been exploring loans for MFIs for almost a year. “Last year, that was the intention. But after raising money recently, we are in a better position to go for the actual deal,” Kumar said.

A week ago, there were news reports that the bank might be in an exploratory discussion with Spandana Sphoorty Financial, the second largest microfinance institution with assets of Rs 8,511 crore in FY23. When asked if YES Bank was looking to acquire such large institutions Size, Kumar replied that size wasn’t quite the consideration. “Size doesn’t help anyone. We look for those opportunities where there is the ability to scale.”