The Reserve Bank of India encouraged Housing Development Finance Corporation (HDFC) and HDFC Bank to go for a merger in anticipation of stringent guidelines to regulate large non-banking finance companies (NBFCs), Deepak Parekh, the Chairman of the mortgage lender said.
“We knew that the Reserve Bank of India was coming out with new guidelines for large NBFCs. Half a dozen companies collapsed in the last 3-4 years — big ones,” Parekh said at an event in Kolkata earlier this week.
“… we knew that they (guidelines) were going to be announced, and they (RBI) encouraged us that it is better if we merge because they are bringing bank-like considerations for large NBFCs,” said Parekh. “...we had disadvantages of being an NBFC and no advantage of a bank.”
The RBI has been tightening vigilance on systemically important NBFCs, bringing their regulation on par with that of commercial banks to ring-fence the system. The collapse of infrastructure behemoth Infrastructure Leasing & Financial Services (IL&FS) in 2018 and subsequent failures of leading NBFCs like Reliance Capital, Dewan Housing Finance Corp and SREI have prompted the RBI to tighten its scrutiny on shadow lenders.
On April 19, this year, the central bank issued detailed guidelines on regulatory restrictions for NBFCs aligning their lending and disclosure rules for large NBFCs with banks.
Under the new norms, large NBFCs must not have an exposure higher than 20 percent of its capital base to any entity, and its board can approve an additional 5 percent exposure limit to take it to 25 percent, the RBI said in its circular. Unless sanctioned by the board, NBFCs in the middle and upper layers may not grant loans of Rs 5 crore and above to their directors or relatives of directors. These directions were effective from October 1.
A few days before these norms were released, HDFC Bank on April 4 had agreed to take over the biggest domestic mortgage lender in a deal valued at about $40 billion, creating a financial services titan. HDFC will acquire 41 percent stake in HDFC Bank through the transformational merger. The deal is termed as the biggest transaction in India’s corporate history.
Also read: Regulatory, tech challenges will test HDFC Bank’s top brass during merger, say experts
The proposed entity will have a combined asset base of around Rs 18 lakh crore. The merger is expected to be completed by the second or third quarter of FY24, subject to regulatory approvals.
The deal has got in-principle approval from the stock exchanges, RBI, Securities and Exchange Board of India, Pension Fund Regulatory and Development Authority (PFRDA) and Competition Commission of India (CCI).
Parekh said at the event that although the merger will add value to all stakeholders, the key challenge is about integrating the two entities.
“The task (about the HDFC-HDFC Bank merger) is how to do the integration; integration is the big issue because there are two companies whose cultures, systems, technologies are different,” said Parekh.
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