The country's largest lender, HDFC Bank, has sought the Reserve Bank of India (RBI)’s permission to retain all its subsidiaries and those of parent HDFC Ltd in the current form after their merger takes effect, according to people familiar with the development.
However, the banking regulator has expressed some concerns on the nature of businesses done by two subsidiaries - HDFC Credila and HDB Financial Services - since these are businesses that can be done within the bank.
Credila is a subsidiary of HDFC Ltd, while HDB Financial is under the bank. Credila is in the business of education loans, while HDB Financial is primarily engaged in personal loans, business loans and auto loans.
If the RBI doesn’t permit the bank to retain these two subsidiaries, the bank will seek a glide path from the regulator to pare down stake in HDFC Credila and HDB Financial Services, one of the people quoted above said. These holdings will be then monetised to reinvest in other businesses that are allowed by the regulator, the person said.
The sources declined to be named, citing the sensitivity of the matter. HDFC Bank declined to comment for this story.
To be sure, the RBI is yet to give a final opinion on the matter.
HDFC twins have close to a dozen subsidiaries, including HDFC Credila and HDB Financial Services, that are in the lending business. Other subsidiaries of HDFC include HDFC Life, HDFC Pension, HDFC Mutual Fund, HDFC ergo, HDFC Property Fund and HDFC Edu.
Bank may get a glide path
According to the people quoted above, the RBI is not averse to giving HDFC Bank a glide path to pare holding in Credila and HDB Financial after the merger if the regulator concludes that continuation of these two units in the current form is not possible, said the second person quoted above.
The glide path will apply to only those subsidiaries where the bank cannot continue business, said the person quoted above.
“The RBI will give the bank a direction and the bank is open - whether it is Credila or HDB - to monetise stake over a period of time. Both will have the same kind of issue,” the person said.
However, given a choice, HDFC Bank is keen to continue with all subsidiaries as it is, the person added. This has been communicated to the regulator.
“If they (RBI) say continue, the bank will continue, if they say don’t continue, they will give a glide path. The bank will pare it down. All other subsidiaries they are okay to keep below the bank," the person said.
Level playing field sought
As for other subsidiaries, which are not directly into the bank’s business, such as mutual fund and insurance subsidiaries, the bank will seek a level playing field with the regulator, said one of the persons quoted above.
HDFC Bank’s rivals, including State Bank of India, Kotak Mahindra Bank, ICICI Bank, are allowed to keep insurance and asset management subsidiaries below the bank. HDFC Bank may cite these cases as example to make a case to retain other subsidiaries in insurance and asset management etc.
As per the plan, HDFC will acquire 41 percent stake in HDFC Bank through the transformational merger. Every 25 shares held by HDFC shareholders will fetch them 42 shares of the bank. The merger created an entity that will have a market-cap of Rs 12.8 lakh crore and a balance sheet of Rs 17.9 lakh crore. It will take around 15-18 months for HDFC group to get all necessary regulatory approvals for the merger.
In an exclusive conversation with the media after the announcement, Deepak Parekh, the veteran banker who built the iconic mortgage lender over four decades, spoke to Moneycontrol on April 5 where he explained why the company decided to merge with the bank now and what are the challenges ahead on culture integration.
Parekh said one of the reasons why HDFC chose to merge with the bank was increasingly tighter RBI regulations on the NBFC sector which has largely eliminated the regulatory arbitrage available to such companies earlier. Also, it is not easy for NBFCs to raise large sums of money for business, Parekh said. Hence, it made sense at this juncture for HDFC to merge with the bank, Parekh added.