HDFC-HDFC Bank Merger: It was only a question of when, says TT Srinivasaraghavan 

TT Srinivasaraghavan, NBFC space veteran and former MD of Sundaram Finance

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TT Srinivasaraghavan has spent four decades in Non-Banking Financial Companies (NBFCs), including 18 years as managing director of Chennai-based Sundaram Finance. He continues to serve on the board of Sundaram Finance.

He is the one credited with the GQP (Growth, Quality and Profitability) philosophy in the NBFC space. Steady and profitable growth over a long period, as opposed to rapid and aggressive expansion, was his business model. In the last 12 months, he has also been on the advisory panel of the Reserve Bank of India (RBI).

In this free-wheeling interview with Moneycontrol at his house in Chennai on April 5, Srinivasaraghavan shared his thoughts on the merger between the Housing Development Finance Corporation (HDFC), India’s No. 1 housing financier, and HDFC Bank, the biggest private sector bank by asset size, and its implications for the banking and NBFC sectors. Edited Excerpts:

It is often said that small is beautiful. How do you see this merger between HDFC and HDFC Bank?

No doubt, it is a transformational event for the banking industry. There are economies of scale that the merger brings. Cross-sell opportunity (mutual funds / insurance/ mortgage loans) is seen by many as one of the drivers for the merger. But I have a slightly different view. The cross-sell concept, I believe, has been overhyped internationally and domestically.  It is unlikely that the cross-sell would have been a prime driver for the merger. Even without the merger, that opportunity would have existed.

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What could be the reason then?

I could see some reasons beyond the cross-sell opportunity for this merger. Given their size, there is no great advantage in continuing as an NBFC. HDFC, as an NBFC, does not have access to current account and savings bank account money that the bank has. The relative advantage of remaining as an NBFC is diminishing at that scale. Someday it would have come to a point as to how much they would have been able to leverage through term debt as the lenders would have hit their ‘per-borrower’ ceiling. Now as a bank, HDFC Bank would have access to an endless retail franchise. On the liabilities side, it gives them serious clout.

Do you see any other factors that could have triggered the long-speculated-on merger?

It’s no surprise that the merger has taken place. It has been on the cards for a long while. It was only a question of when it would happen. One of the reasons could have been that of management succession. Many of their top management personnel are around 70 and the question of succession in HDFC would have been an issue. This way, they would have access to a larger pool of managerial talent.

Also Read | As HDFC twins join up, experts decode merger gains for investors, depositors and borrowers

What is the implication of the merger on the NBFC sector as a whole?

As for its impact on the NBFC sector ... HDFC is in a completely different league. I think it would not make a big difference in the NBFC space, especially for the small and mid-sized players. For HDFC Bank, it is a massive portfolio addition. The opportunity to target mortgage loan customers is big. They now have huge distribution reach and the muscle power to go and fight State Bank of India (SBI) in the mortgage loan space. With this, the banking landscape has changed dramatically.

What do you see as a major challenge in this merger exercise?

As with all large mergers, cultural integration will be a challenge. Sometimes, too big a size is not easy to manage. The top management may not always have a feel of the ‘on the ground’ customer experience. There is also a possibility of the customers of HDFC being compromised. Also, as you get bigger, pressure to perform better will be higher. Size will build its own pressure.

In the unfolding context, what is the relevance of NBFCs?

NBFCs have played a phenomenal role in bringing the un-served and under-served into the credit mainstream. If you go back in history to the nationalisation of banks, financial inclusion (although such a terminology did not exist back then) was the real intent behind the move. Fifty years later, all we have done is found new jargon (financial inclusion) but we are still talking about the need to cater to the underserved segment. There is still a long way to go as far as financial inclusion is concerned, and that’s where the relevance of NBFCs comes in.

Also Read | HDFC’s merger will light up action in the Indian financial services sector (MC Pro)

Banks are indeed large and formidable competitors, but that does not mean that there is no room for anybody else. In fact, I have long believed that this is a model of collaboration rather than confrontation where the banks are wholesalers and NBFCs are retailers. Co-lending, priority sector on-lending and business correspondents are all prime examples of the wholesaler-retailer equation.

It is about understanding these businesses, understanding the opportunities and risks associated with these businesses, and very often this requires ground-level knowledge and expertise. NBFCs have traditionally played this role and will continue to do so in the years to come. No doubt, technology will play a major role in helping navigate some of these complexities and progressively become a significant enabler for lenders and borrowers alike. However, the decades-long expertise that NBFCs have developed in financing micro, small and medium enterprises (MSMEs) is, to my mind, quite unparalleled.

The level of in-depth understanding that NBFCs have, based on the relationships they have built and cultivated over a long period, their expertise in being able to assess credit, their ability to reach out to their customers in a timely fashion, including giving them forbearance during their times of stress, place them in a unique position that cannot be replaced by technology, nor can they be replaced by large banks because the knowledge that is required to assess, lend and thereafter collect from these segments is indeed a specialised skill, built in many cases, over generations.

In my view, the role that NBFCs have played will not only continue but will evolve into newer opportunities and newer areas.

Also Read | HDFC–HDFC Bank merger – What’s in it for shareholders? (MC Pro)

What could be your advice for smaller NBFCs?

NBFCs have a unique model that is not easily replicable.  Many of the smaller NBFCs are still family-owned and family-managed and often three or even four generations of knowledge, relationships, expertise have been built up, which no amount of artificial intelligence (AI) or machine learning can substitute. Technology is certainly a great support, a great enabler, but in this uniquely diverse landscape with its varied tapestries, it is, in my view, well-nigh impossible to build models that will answer every situation. There are things that only NBFCs can do, and they should continue to do what they do best.