Private equity-backed debt financier Northern Arc Capital Ltd, today announced that it has entered into an agreement to acquire Chennai-based microfinance business of S.M.I.L.E. Microfinance Ltd through a slump sale.
“The acquisition will help us target the next billion in the rural finance business, by offering small ticket loans through a digital and data-led platform,” Northern Arc said in a statement without disclosing the financial details of the transaction.
The transaction will involve the takeover of the microfinance portfolio of S.M.I.L.E., along with its network of nearly 150 branches catering to over 200,000 customers. Around 850 employees of S.M.I.L.E. will move to the rolls of the Northern Arc group upon the consummation of the transaction, it added.
The acquisition is subject to the completion of a standard set of conditions precedent that are typical in such transactions.
Operating since 2005, S.M.I.L.E. microfinance was registered as a non-banking financial company (NBFC) in 2006 offering small and micro loans to poor women essentially for use in their small businesses or other income-generating activities. It operates across seven states with an outstanding portfolio of around Rs 475.80 crore, as on March end 2021.
US fund manager Developing World Markets (DWM), through DWM Investments (Cyprus) Ltd, is the majority shareholder at 66.64% as per its annual report for FY21. The promoter and founding family owned 18.57% as on March last year.
In 2010, DWM had committed equity investment of Rs 50 crore in S.M.I.L.E. for the controlling stake and completed the fund infusion in three tranches by March 2011.
S.M.I.L.E. microfinance incurred a net loss of Rs 8.65 crore in FY21 as against a net profit of Rs 12.44 crore in FY20.
Around 2014-15, the microlender was embattled in a dispute between DWM and the founding family. It has been in talks with potential buyers to provide an exit to DWM and the founder since 2017.
“The acquisition is a critical step in the strategic direction that we wish to pursue. We will leverage our existing capabilities across sector expertise, technology and data to build a high-quality business that focuses on customer centricity and best in-class processes…we intend to take advantage of their rural penetration and long-standing customer relationships to build and scale this business quickly,” said Kshama Fernandes, MD and CEO at Northern Arc.
Mid-last year, Northern Arc Capital (formerly IFMR Capital Finance), also Chennai-based, had filed for an initial public offering (IPO).
Northern Arc Capital’s IPO will issue fresh equity shares of up to Rs 300 crore and do an offer for sale (OFS) of up to 36.52 million equity shares by shareholders and promoters.
Since inception in 2009, the Northern Arc Group has enabled financing for Originator Partners who have impacted over 54 million lives across India, of which more than 42 million were women.
The debt lender has raised close to about Rs 1 trillion in financing for customers.
As of March 31, 2021, through its originator partners, it has a credit exposure across 657 districts in 28 states and seven union territories. The Northern Arc Group has recently entered the retail finance business through two segments – rural finance and secured MSME finance.
S.M.I.L.E.’s microfinance business will capitalise on Northern Arc’s capabilities across domain know-how, decade long underwriting track record, technology, data, and analytics. It will be based on a phygital model – sourcing and assessment will be largely driven through technology which will be substantively backed by physical collection presence and infrastructure, the statement added.
Northern Arc is backed by investors including LeapFrog, IIFL, Accion, Augusta Investments (known as Affirma Capital), Dvara Trust, Eight Roads and Japanese bank Sumitomo Mitsui Banking Corporation (SMBC), which made its latest investment in September last year.
Over the past more than a year, Northern Arc Capital has attracted debt financing from many global development finance institutions (DFIs) and impact investors including the US International Development Finance Corporation, Asian Development Bank, Calvert Impact Capital, and Dutch development Bank FMO.
