HDFC-HDFC Bank merger has been in the making for a long time now

Representative image.

On April 4 morning, housing finance giant HDFC (Housing Development Financial Corporation) announced that it will merge with its associate company HDFC Bank. The merger scheme is in two stages. In the first stage, HDFC's two subsidiaries — HDFC Investments Limited and HDFC Holdings Limited — will merge with HDFC. In the second stage, HDFC will merge with HDFC Bank. Even before the merger, HDFC Bank was the second largest company in terms of assets, next to State Bank of India which has total assets of Rs 48 trillion (as of December 2021). After the merger, HDFC Bank narrows the gap as the company’s total assets will be Rs 25.6 trillion.

The HDFC-HDFC Bank merger marks yet another merger of a parent financial institution with its subsidiary commercial bank. In 1994, the Indian government allowed licences of new private banks. Of the 10 awarded bank licences, four were awarded to existing financial institutions — ICICI, HDFC, IDBI, and UTI. While the government promoted the three institutions of ICICI, IDBI, and UTI, HDFC was a private institution. IDBI, and ICICI were for financing development at a wholesale level, and UTI and HDFC catered to the retail sector. Accordingly, these institutions set up banks under their respective names: ICICI Bank, IDBI Bank, HDFC Bank, and UTI Bank. Another development institution – IDFC – also followed this strategy, and opened IDFC Bank in 2014.

The history of these four banks (we don’t include IDFC in this article) has been interesting. ICICI Bank, which was the most aggressive of the four banks, made rapid progress, and soon overshadowed the parent ICICI. Post-1991 reforms, the development financial institutions found it tough to function as the subsidised low-cost deposits from the government were not readily available. Thus, it made sense to merge the parent ICICI with the ICICI Bank in 2002.

In the case of IDBI, and UTI, both faced financial troubles. UTI faced a major crisis in 2001. The UTI assets were bifurcated into two entities — Structured Undertaking of UTI (SUUTI) and UTI Mutual Fund. The UTI Bank was under SUUTI, and the undertaking has gradually lowered its stake in the bank. In 2007, UTI Bank underwent a major change, and became Axis Bank.

The parent IDBI, which was also struggling, merged with IDBI Bank in 2005. However, the experience of IDBI Bank has been very different from ICICI Bank. The IDBI Bank has continued to struggle with high NPAs, and was taken over by LIC in 2019. The IDBI Bank started as a new private sector bank. After its merger with IDBI, it became a nationalised bank, and after LIC took over, it has again become a private bank.

For HDFC and HDFC Bank the journey has been very different. Unlike the three financial institutions discussed above, HDFC is doing well, and there is no immediate need for a merger or an image change.

Tamal Bandyopadhyay has chronicled the history of HDFC Bank in two excellent books. From this it is clear that the merger issue has come up in the past, but it did not progress due to differences over valuation (and personality). HDFC Bank, under Aditya Puri, had gradually overtaken HDFC in terms of size, and wanted a valuation favouring the bank. The parent, however, thought otherwise, and suggested that without the support of HDFC group, the bank would not have made much progress.

In a way, the question of merger was not really ‘if’ but ‘when’ the merger would take place. There is a strong synergy in the two entities as both cater to the retail market. The merger document filed with the stock exchanges lists some of these synergies. Given HDFC’s expertise in the home loan segment, HDFC Bank will gain from the skills, technology, and widely-developed network of 445 branches. While HDFC Bank has access to low cost deposits, HDFC’s rural housing network and affordable housing lending will help the bank in priority sector lending. Deepak Parekh, Chairman of HDFC Limited, commented that the “merger is of equals”. He added that the housing finance business is poised to grow due to the ‘implementation of RERA (Real Estate Regulatory Authority), infrastructure status to the housing sector, government initiatives like affordable housing for all, amongst others’.

The HDFC-HDFC Bank merger announcement has been in the making for a long time now. Bandyopadhyay tweeted that “No surprise. For past one decade the financial sector had been waiting for it. Merger of @HomeLoansByHDFC with @HDFC_Bank. The inevitable has happened.”

The Indian consumer-banking business has grown over the years, and has a bright future leading the HDFC group to agree to this merger. However, one can’t miss the irony of Indian consumer banking. On one hand Indian private banks see a bright future in consumer banking, on the other foreign banks are exiting the consumer banking business. Citigroup, one the world’s largest banks have sold its consumer banking business to Axis Bank. Citigroup is not alone as several other foreign banks have either exited or downsized banking business in India. A deeper analysis is needed to understand these differences in strategies of the two bank groups.

Amol Agrawal is faculty at Ahmedabad University.

Views are personal and do not represent the stand of this publication.