RBI's change in norms for NBFCs led to HDFC- HDFC Bank merger, says Deepak Parekh

Deepak Parekh

The Reserve Bank of India (RBI) supported the HDFC-HDFC Bank merger through guidance during the process, but afforded no regulatory relaxations, according to former Chairman of HDFC Ltd and veteran banker Deepak Parekh.

Parekh was speaking at an interaction with ex-ICICI Bank MD and CEO Chanda Kochhar’s podcast on YouTube titled 'Deepak Parekh on Finance, Banking & Building India | Journey Unscripted with Chanda Kochhar'. The episode with Parekh marks the 10th edition of the podcast.

“The central bank didn’t offer any regulatory relaxations, but they helped us in the sense, navigate, and go through the process,” Parekh said.

HDFC Ltd and HDFC Bank completed the merger on July 1, 2023. Sharing a moment not shared in public before, he said, “ICICI started HDFC, why don’t you come back home? That was your offer before we merged with the bank.”

He credited the RBI with nudging large non-banking financial companies (NBFCs) like HDFC toward consolidation. “They classified NBFCs into ‘large.’ Now, ‘large’ was Rs 50,000 crore and above, we were already Rs 5 lakh crore,” he said.

On Bimal Jalan and turning down the RBI offer

When asked if he remembered any standout interactions with RBI Governors, Parekh recalled his rapport with Bimal Jalan, calling him “an ICICI person and a friend.” Jalan often urged him to join the public sector, saying, “Come, join the public sector as a CEO,” and even went as far as offering him leadership roles in vacant banks. At one point, Jalan even suggested he join the Reserve Bank itself.

“But I’ve never said this to anyone,” Parekh admitted.

Yet, he never took the plunge. “We were growing. I was enjoying myself. We had phases where we started new ventures such as life, asset management, non-life, private equity. So many things happening simultaneously. So I was quite happy and content.”

Stock market – retail investor

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Bank deposit and lending

He said retail deposit accretion was low and that more money was going into the capital markets and into SIPs. “I think consumption is also high. The new generation is not concerned about saving, they are confident about themselves and their future. Banks deposit will not grow. Then how will banks lend?” he said.

Parekh said that in the last six months, the market had been so tight that banks were not lending. The resulting liquidity crisis saw the new RBI governor Sanjay Malhotra bring the CRR (Cash Reserve Ratio) down. The RBI has also resorted to open market operations on a regular basis to pump money into the system because if banks don't lend, GDP won't grow, he added.

He also felt that this was the right time to gradually bring down the SLR (Statutory Liquidity Ratio) and give more money to the banks because deposits are not likely to increase overnight. Banks feel it easier to lend retail. Retail lending had become a large part of a bank portfolio, he said.

Long term funding not available

Parekh also expressed. Concern over the non-availability of long-term finance. Citing the example of airports, he said no one was willing to fund such projects and that the regulator and banks would have to sit together and see how to fulfil the demand for loans. The CASA ratio (expand), which was high, had been coming down because people had become more educated and not keeping money in those accounts, he said.

Affordable housing

On affordable housing, Parekh said that most developers are financially disincentivised from building small, budget homes. “Builders find it easy to build larger flats and sell, rather than build 400 sq ft flats. There’s more trouble, more cost also. Financially, they are not motivated to build small homes,” he said.

He suggested that the government must step in with clear incentives. “If you do a large housing project, you must do one affordable,” he proposed, drawing a parallel with India’s former shipbuilding policies that linked foreign purchases to local orders.

Insurance: “Mis-selling has spoiled it”

Commenting on the growth of the insurance sector, Deepak Parekh pointed out, “Penetration is just 4 percent of GDP, which means there’s huge potential. But it has remained at 4 percent for a long time.”

He attributed this stagnation largely to poor awareness and rampant mis-selling.

“It’s the least understood product. Mis-selling by banks has spoiled it. The commission is massive. I get letters from customers saying, ’I’m 75 years old and I bought a 30-year policy,’” he said.

Parekh also called for policy support to boost insurance adoption. “Some tax benefits in life insurance must come, because it’s about the family’s future, family safety,” he said.