In May, 2021, a top-level review meeting took place at HDFC Bank’s Worli corporate office, which was attended by Managing Director and Chief Executive Officer Sashidhar Jagdishan and Chief Financial Officer Srinivasan Vaidyanathan.
The agenda was to assess the merger of the parent Housing Development Finance Corporation (HDFC) with the bank. “Srini gave a very detailed presentation. All numbers were evaluated. At the end of the meeting, everyone was convinced that time is right,” said a person who was part of the meeting, on strict condition of anonymity.
The meeting gave an in-principle go-ahead to take up the proposal with the parent. The larger consensus was that conditions for the merger are more conducive now compared to what it was five years back. Everyone in the room was bullish about the prospects of adding the parent’s huge home loan business to the bank’s portfolio. Till now, HDFC Bank had only a small mortgage book. It was largely passing the referrals to the parent.
A merger would give the lender a gala entry into the lucrative market of housing finance. Once it happens, the merged entity will have a home loan book of Rs 7.3 lakh crore, surpassing State Bank of India’s Rs 6.4 lakh crore as of March 2023.
But nothing moved in the desired pace.
It took another six months since the May meeting for the lender to move with a proposal to the parent in November 2021 and, again, later in February 2022. “The immediate push for the merger came from the bank, and not the parent,” the said the person.
HDFC Bank insiders say compared with the previous boss of the bank, Aditya Puri, his successor Sashidhar Jagdishan was more lenient to the idea of merger. Puri exited the bank in October 2020 and Jagdishan took charge as the new chief. “The change in leadership made it easier for the parent to proceed with the merger. At least that’s what the talk is,” said the insider.
Then there are other factors as well.
Finally, on April 4, 2022, HDFC and HDFC Bank announced the decision to merge. As per the plan, HDFC will acquire a 41 percent stake in HDFC Bank through the merger.
HDFC liked the idea too...
For the parent too, the decision made immense sense at this point for two key reasons.
In his first ever exclusive media interview post the merger announcement, Deepak Parekh told Moneycontrol that NBFC business was getting tougher due to tightening of the RBI regulations. “The constraint is that the RBI, over the last few years, removed the arbitrage between a bank and an NBFC,” he said.
Parekh was right.
Over the years, the RBI had brought in bank-like regulations for India’s big non-banks. Under the new multi-tier structure for NBFCs (based on their asset size and systemic importance), bigger NBFCs were treated at par with banks on capital, regulatory scrutiny, and treatment of assets, which made operations even more expensive for this class of companies.
HDFC, with an over Rs 5-lakh-crore loan book, logically fell in the upper layer which meant it will be monitored, inspected, now regulated akin to a bank, whereas the incentives in NBFC business were less.
“So all these regulations… NPAs is the worst. I tell you. If a person is four months in arrears and he pays two months instalment, under NHB (National Housing Bank) we took him out of NPA, because he is below 90 days,” Parekh said in that interview.
“Under the banking regulation, if he is four months arrear and if he pays 3 months, he is still an NPA. We have assets as security. But still RBI brought these regulations. So, the RBI is going to regulate big NBFCs like the banks,” Parekh added.
Cost concerns
It was not only about regulatory arbitrage and treatment. Parekh also highlighted the rising cost of funds for the NBFCs compared with banks. Particularly, housing finance companies had to maintain a larger base of resources to fuel the growth in India’s booming housing sector.
“The 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. So, we also have to be careful that we will be able to raise the resources we need for disbursements five years from now,” Parekh said.
To be sure, compared with other mid-sized and smaller rivals, HDFC with its huge asset size, didn’t have any immediate problems in terms of funding or operations.
But no one could predict the scenario in future, Parekh said.
“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,” said Parekh.
Then comes the RBI relief
Even when the merger plan was decided, concerns lingered on two major counts - the treatment of subsidiaries and lack of clarity with respect to the priority sector lending or PSL, which made banks mandatory to lend 40 percent of their loans to economically weaker sections in the economy. But the RBI issued two important clarifications soon that alleviated much of these concerns.
On 21 April, the bank informed stock exchanges that the RBI allowed HDFC Bank or HDFC Limited to increase the shareholding in HDFC Life and HDFC ERGO to more than 50 percent.
Investors were worried that the bank may be asked to cut stakes in key subsidiaries such as HDFC Life. Here, the RBI has clarified that investments including subsidiaries and associates of HDFC Limited are allowed to continue as investments of HDFC Bank.
The parent company had earlier held a majority stake in HDFC Life at 50.14 percent in September 2020. To comply with the RBI guidelines of 50 percent limit, the stake was cut to 49.99 percent in December 2020, 49.88 in December 2021 and to 48.65 percent in March 2023. After the RBI clarification, HDFC increased the stake in HDFC Life to 50.33 percent and made it a subsidiary.
The second relief was with respect to PSL. The RBI clarified that HDFC Bank can calculate the adjusted net bank credit considering one-third of the outstanding loans of HDFC Limited as on the effective date of the amalgamation for the first year. The remaining two-thirds of the portfolio of HDFC Limited can be considered over a period of the next two years equally, the RBI said.
This meant HDFC Bank will have around three years to comply with PSL norms. In fact, the PSL requirement kicks in only 12 months after the effective date of the merger, according to the bank. If HDFC Bank (the combined entity) had to meet this on day one of the merger, it would have been a big jolt. But with the RBI clarification, that worry was gone.
The regulator, however, clarified that HDFC Bank will have to continue with extant requirements of CRR, SLR and LCR from the effective date of merger without exceptions. But, the bank, it is learned, is comfortable on all these parameters.
A new era begins
With all the hurdles away, HDFC-HDFC Bank merger will become a reality, come July 1, going by the as-yet-tentative date. The merged entity will be a behemoth in the Indian banking industry only second to the State Bank of India with a combined loan book of around Rs 22 lakh crore and deposits of around Rs 19 lakh crore. The combined entity will have a market cap of around Rs 14.5 lakh crore.
HDFC Bank, which has 28 percent of its loan book in retail and 26 percent in corporate, can have the advantage of HDFC’s home loan clients joining the bank’s clientele.
Besides, it also gives opportunities in cross-selling of different products in the unsecured loan segment, insurance, credit cards to HDFC’s existing customers.
What next? On the technology front and people integration, big challenges are unlikely as both sides began preparations months ago. The biggest challenge for the bank post-merger is to integrate the HDFC culture in its operations on the housing finance business - something Parekh has highlighted more than once.
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