Exclusive | HDFC Bank asks parent to cut exposure to certain loans before merger

India’s largest private sector lender HDFC Bank is said to have asked its parent Housing Development Finance Corporation (HDFC) to cut exposure to a certain category of loans that are not permitted for banks under Reserve Bank of India (RBI) regulations.

These are mostly short-term loans that include certain corporate loans and loans to developers. It is estimated that the value of this chunk of loans will be around Rs 20,000-25,000 crore on HDFC's book at present, part of which will get extinguished over the next few quarters.

Even then, it is estimated that HDFC will have less than approximately Rs 10,000 crore such loans on its books prior to the merger.

“The bank has asked HDFC to pare down exposure to all such loans that aren’t compliant with RBI rules for banks. They have time to do it in the next 15 months or so before the merger take effect,” said a person familiar with the development.

The person declined to be named citing the sensitivity of the matter. HDFC Bank didn’t respond to a query from Moneycontrol on this issue.

HDFC and HDFC Bank announced the decision to merge on April 4. As per the plan, HDFC will acquire 41 percent stake in HDFC Bank through the merger.

HDFC chairman Deepak Parekh called it a merger of equals. Every 25 shares held by HDFC shareholders will fetch them 42 shares of the bank. The merger will create an entity that will have a market cap of Rs 12.8 lakh crore and a balance sheet of Rs 17.9 lakh crores.

The announcement came as a surprise to most analysts. Markets cheered the decision.

In an exclusive conversation with the media after the announcement, Parekh, the veteran banker who built the iconic mortgage lender over four decades, explained to Moneycontrol on April 5 why the company decided to merge with the bank and the challenges on culture integration.

HDFC is the largest mortgage lender in India, whereas HDFC Bank is the largest private lender in terms of assets. The bank, however, has only a relatively small presence in the housing loan market compared with rivals.

The HDFC-HDFC Bank merger is expected by the second or third quarter of FY24. HDFC too had said the proposed transaction will enable HDFC Bank to build its housing loan portfolio and enhance its customer base.

HDFC and HDFC Bank merger has been in the news for a while. In fact, back in 2015, Parekh had said his firm could consider a merger with HDFC Bank provided circumstances were in favour. But, the wait for the merger got longer with the parent putting the idea on the backburner. Parekh had said that the merger makes sense provided there is no loss of value for shareholders.

With the parent finally joining up with the bank, the resultant entity will emerge as a powerhouse in the Indian banking industry.

HDFC is awaiting regulatory guidance on the path forward for its mega merger with HDFC Bank and needs shareholders’ trust and support “more than ever before” at this juncture, Parekh said in the company’s annual report.

“We have at length, already articulated the rationale for the proposed merger, which takes cognisance of the future growth potential of the country, the evolving macro environment and changes in the regulatory architecture,” he added.