HDFC Bank has requested the Reserve Bank of India (RBI) to allow it to adopt a phased approach in meeting key regulatory requirements after its merger with Housing Development and Finance Corp. Ltd (HDFC).
The requirements include the statutory liquidity ratio (SLR), or the percentage of deposits that banks have to invest in government bonds, and the cash reserve ratio (CRR), or the portion of deposits that banks must hold in liquid cash.
SLR is now 18 percent and CRR 4 percent.
The country’s largest private sector bank by asset size has also requested the regulator time to allow it to “grandfather” certain assets and liabilities of HDFC. Grandfathering is essentially exemption from a new regulation that may be introduced for a particular sector.
“The bank has requested Reserve Bank for a phased-in approach in respect of SLR and CRR, priority sector lending and grandfathering of certain assets and liabilities and in respect of some of its subsidiaries. These requests are under consideration by the RBI in terms of their letter to the bank dated April 1, 2022,” HDFC Chairman Deepak Parekh said.
In a surprise move on April 4, the HDFC twins announced a long-anticipated merger between HDFC, India’s biggest home loan provider, and HDFC Bank, its most valuable lender.
After the completion of the transaction, HDFC will acquire a 41 percent stake in HDFC Bank and all subsidiaries of the housing financier will be owned by the latter.
Parekh said the rationale behind the merger included less onerous SLR and CCR requirements, a favourable interest rate regime, increased transparency in the realty sector, and giving mortgage customers access to a wider range of services.
“The merger makes the combined entity strong enough not only to counter competition but make the mortgage offering even more competitive,” Parekh said.
Parekh said it will take at least 12-18 months for the merger process to be completed given the need for multiple regulatory approvals.
Asked whether the bank’s subsidiary HDB Financial Services will continue to operate as a standalone unit, HDFC Bank MD and CEO Sashidhar Jagdishan said the bank would like to maintain it as a separate entity, “but if regulatory prescription suggests that we have to have an alternative thought process, we will comply.”
Jagadishan said that with the merger, the share of mortgage loans in HDFC Bank’s overall advances will increase. The bank will also be able to meet its priority sector lending target by focusing on affordable housing.
The bank has 15,000 business correspondents presently and with the addition of five more partners, will be able to expand its services to a larger number of customers.
The potential for cross-selling products to HDFC customers and lower cost of funds for the mortgage business will also be in favour of the bank, the management said.
In terms of asset quality, the merger will have minimal impact on the bank; retail bad loans will fall and non-performing assets (NPAs) extended to corporate customers may rise, Jagadishan told Moneycontrol.
He reckoned that the NPA ratio would be around 1.3 percent to 1.5 percent. As of December- end, the lender’s gross NPA ratio was 1.26 percent.
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