HDFC-HDFC Bank merger: Why RBI clarification comes as a relief for the banking giant

HDFC Bank, post its merger, will get close control of all subsidiaries much like its rival conglomerates like ICICI Bank.

The country’s largest private sector lender, HDFC Bank, recently said that it has received some clarifications from the banking regulator with respect to its proposed merger with the Housing Development Finance Corporation (HDFC). These clarifications were given after the bank sought certain relaxations from the Reserve Bank of India (RBI) to make the process of merger smooth. The merger is expected to take effect by July this year.

A quick look at the clarifications shows HDFC Bank has received relief in certain major areas. The biggest relief is in relation to the priority sector lending (PSL) norms. Under the rules, a banking entity needs to lend 40 percent of the adjusted net bank credit to the so-called priority sector or economically weaker sections such as agriculture, micro-enterprises and other economically weaker sections.

If HDFC Bank (the combined entity) had to meet this on day 1 of the merger, it would have been a big jolt. But now, the RBI has 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 means 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.

In short, this will be a significant reduction in cost. The second big clarification is on the treatment of investments in subsidiaries. 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 RBI has permitted HDFC Bank or HDFC Limited to increase the shareholding to more than 50 percent in HDFC Life Insurance Company and HDFC ERGO General Insurance Company. This is another major good news for the bank and investors. HDFC, as on March 2023, already has 49 percent stake in HDFC Life.

The parent company had earlier held a majority stake in HDFC Life at 50.14 percent in September 2020. To comply with 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. Logically, the bank can now hike the stake in HDFC Life to over 50 percent, which may happen eventually.

Further, the RBI has permitted HDFC Bank to continue holding HDFC’s stake in HDFC Education and Development Services Private Limited, engaged in operating three education schools, for a period of two years from the effective date and HDFC Credila Financial Services Limited, subject to the shareholding being brought down to 10 percent within two years from the effective date.

In simple terms, what this all means is that HDFC Bank, post its merger, will get close control of all subsidiaries much like its rival conglomerates like ICICI Bank. One of the major concerns of investors in the run-up to the merger was the likely treatment of subsidiaries. With the RBI clarification, that worry is gone.

The not-so-good part of the clarification is that all the mandatory reserve requirements such as CRR (cash reserve ratio), SLR (statutory liquidity ratio) and LCR (liquidity coverage ratio) will be set in on the first day of the merger. But, considering the larger reliefs on PSL and subsidiary treatment, this will likely be a lesser worry for the combined entity.