RBI allows HDFC Bank to hike stake in HDFC Life, HDFC ERGO to more than 50%

Also read: HDFC to complete its merger with HDFC Bank by July

This is part of the clarifications provided by the Reserve Bank of India (RBI) for the merger of HDFC and HDFC Ltd, according to the filing.

Also, the central bank has allowed HDFC Bank to calculate the adjusted net bank credit considering one-third of the outstanding loans of HDFC Limited as on the effective date of the merger for the first year, the bank said.

Further, the remaining two-thirds of the portfolio of HDFC Limited can be considered over a period of next two years equally, said the bank.

But how will this impact the merged company?

According to RBI regulations, 40 percent of a bank’s total lending portfolio should be towards PSL. Out of the 40 percent, 18 percent should be towards agriculture.

Given that RBI has allowed hdfc bank to spread over the PSL liability across three years, experts said that this a positive move for the bank as it will have time to work on the portfolio and divide it across three years.

"HDFC Bank will get about 3 years to completely comply with these norms. This is positive for the bank as it can divide its lending portfolio across three year" said Aditya Shah, a financial and banking analyst.

Experts also said that since fulfilling the PSL requirement will take time, there could be a possible marginal profit growth.

"Assuming PSL requirements would kick in only in fiscal year (FY) 2024-25, PSL cost would reduce from Rs 20 billion to Rs 5 billion implying a core profit after tax (PAT) upgrade of 2 percent," said a banking analyst.

Increasing stake in subsidiary

The apex bank, in 2021, in its guidelines for non-banking financial companies (NBFC) and housing finance company (HFC) said that a HFC parent company cannot hold a stake of more than 50 percent in its life insurance subsidiary.

"The maximum equity contribution such an HFC can hold in the JV Company will normally be 50 percent of the paid-up capital of the insurance company," RBI said in the guideline.

HDFC Ltd, as of March 2023, holds 48.65 percent stake in HDFC Life, its life insurance subsidiary. The parent company held a majority stake in HDFC Life at 50.14 percent in September 2020. After RBI guidelines, it started reducing its stake in HDFC Life from 49.88 percent in December 2021 to 48.65 percent in March 2023.

Experts said that in line with the permission of increased holding in its subsidiaries by the RBI, now the merged company will have almost all subsidiaries within itself.

One could assume that the parent company’s stake in HDFC Life could increase to 51 percent. This could impact the stock price by Rs 3-4 on its trading price of around Rs1925,” said the bank analyst mentioned above.

"HDFC Bank can even increase its stake in HDFC Credila. It will have all the subsidiaries within itself just like its closest private sector competitor, ICICI Bank. The hangover for subsidiaries gets removed. A large part of the de-rating of HDFC Life was due to the uncertainty of the merger. This goes away now," Shah said.

The regulator also clarified that HDFC Bank shall continue to comply with extant requirements of CRR, SLR and LCR from the Effective Date without exceptions.

The merger of HDFC and HDFC Bank has been in the news for a while. In fact, back in 2015, Deepak Parekh, the chairman of the country’s leading mortgage company, had said his firm could consider a merger with HDFC Bank provided circumstances were in favour.

Also read: HDFC-HDFC Bank merger to lead to bigger growth opportunity; will not take executive role, says Keki Mistry

Termed as the biggest transaction in India’s corporate history, HDFC Bank on April 4 last year agreed to take over the biggest housing finance company in a deal valued at about $40 billion, creating a financial services titan. The proposed entity will have a combined asset base of around Rs 18 lakh crore.