Exclusive | HDFC Bank top brass batted for merger with HDFC as early as November

HDFC Bank took the initiative for the mega merger with parent Housing Development Finance Corporation (HDFC) as early as November 2021 approaching the latter with a proposal. This was after a top-level review meeting at HDFC Bank in May 2021 on the matter, according to persons in the know.

The persons quoted above declined to be named citing sensitivity of the matter. HDFC Bank declined to comment for this story.

In the May review meeting, the HDFC Bank management evaluated the potential benefits of the merger and decided to go ahead with the idea, one of the persons quoted above said. Also, in the meeting, it was assessed that the conditions for the merger are more conducive now compared to five years ago.

The May 2021 review meeting was held at the Worli corporate office of the bank and was attended by Managing Director Sashidhar Jagdishan and Chief Financial Officer Srinivasan Vaidyanathan, said the person.

“After analysing a presentation on the potential benefits of the merger, the HDFC Bank top brass concluded that a merger will help the bank to capture the booming mortgage lending market,” the person added.

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.

“Regulatory conditions were also assessed including that of mandatory reserve requirements, priority sector lending and in terms of valuation,” said the second person quoted above.

After the proposal in November, the plan gained momentum in February 2022 when the bank again approached the parent seeking to speed up the process. Finally, the merger was announced on April 4.

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.

The timing of the announcement came as a surprise to most analysts.

Announcing the merger, HDFC Chairman Deepak Parekh had called it a merger of equals and attributed tight RBI regulations on non-banking finance companies (NBFCs) as a major reason for the merger.

In an exclusive conversation with Moneycontrol after the announcement, Parekh, the veteran banker who built the iconic mortgage lender over four decades, had said that it makes sense for the mortgage lender to merge with the bank considering the absence of any regulatory arbitrage for non-banks due to RBI tightening of rules.

In the conversation, Parekh elaborated on how the tight RBI regulations have impacted the NBFC industry. Parekh cited rules on NPA (non-performing assets) and  liquidity coverage ratio as examples. Also, the cost of money for NBFCs is on the rise, he said.

“We had to have a larger base of resources with our growth. Indian debt market is not developed yet. For NBFCs to raise large sums of money is not easy and financial sector, home finance, home demand is increasing by leaps and bounds,” Parekh had said.

“So, we also have to be careful that we will be able to raise the resources we need for disbursements five years from now. See, today we are very comfortable, tomorrow we will be very comfortable, two years later we are very comfortable but what about the future as the business keeps growing? Housing demand is not going to stop in India for next 50 years,” he added.

The HDFC-HDFC Bank merger is expected to be completed 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 merging the bank, the resultant entity will emerge as a powerhouse in the Indian banking industry.

The RBI has been encouraging large NBFCs to convert into banks, after the shadow lending space was shaken by the IL&FS crisis in 2018.