HDFC Bank to merge with HDFC Ltd.

India’s largest non-banking financial company (NBFC) HDFC Ltd is set to merge into its subsidiary HDFC Bank, the country’s largest private sector lender. According to a few reports, the merger will create India’s third-largest company in India and help HDFC Bank consolidate its position in the banking industry. The HDFC- HDFC Bank merger will be the largest corporate merger in India; this comes just days after Axis Bank took over Citibank’s consumer business in India.

The merger is subject to pending approvals from RBI, CCI, SEBI, NCLT, stock exchanges, and several other regulatory authorities.

HDFC has approached RBI, seeking a phased-in approach for the Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), and Priority Sector Lending (PSL).

On April 4, 2022, HDFC Ltd and HDFC Bank’s combined market capitalization surpassed that of TCS, indicating that the merger may become the second-most valued company in the country. HDFC Bank’s shares closed 9.83% higher while HDFC Ltd share price closed 9.12% higher at the end of the intraday trading session at 03:30 PM on April 4, 2022. 

What should the shareholders know?

Following are the key takeaways for HDFC Ltd and HDFC Bank shareholders:

• The merger will take 12-18 months to complete and will result in HDFC shareholders owning a 41% stake in HDFC Bank.
• HDFC Bank currently has a 21% promoter holding. Post the merger, HDFC Bank will be 100% owned by shareholders, and there will be no promoter holding.
• For every 25 shares of HDFC Ltd, shareholders will get 42 shares of HDFC Bank.
• The shareholders of both entities will benefit from the low cost of funding, larger balance sheet, synergies across revenue opportunities, and cross-selling of products.

What happens to HDFC branches after the merger?

After the successful execution of the merger, all HDFC branches in the country will be able to offer mortgage services, and all HDFC subsidiaries will be owned by HDFC Bank. 

Why the merger?

Reports of the HDFC-HDFC Bank merger have been doing rounds since 2015, when Deepak Parekh said that the merger would be done when the time was right.

1. The adverse impacts of COVID-19 on the Indian economy seem to wear off. The economy is recovering, and the regulatory changes over the last three years have played an important role in smoothening the merger. There are fewer regulatory barriers blocking mergers than there were three years ago. Ever since the onset of COVID-19, there have been large infusions of liquidity by the RBI in addition to prevailing attractive interest rates.
2. NBFCs have been under microscopic scrutiny by the RBI since the IL&FS and DHFL crises. RBI mandated that NBFCs with an asset base of over Rs 50,000 crore must convert into a commercial bank. Since HDFC Ltd’s asset base is worth much more than Rs 50,000 crore, it made more sense for them to merge into a banking institution. 
3. RBI’s NPA recognition norms are now almost the same for banks and NBFCs, wherein a loan unserviced for over 90 days must be classified as an NPA. There is no special treatment that an NBFC like HDFC Ltd enjoys when it comes to treatment of NPAs. In these circumstances, it made more sense for HDFC to convert into a bank or merge into an in-house bank. 
4. The SLR rates have been drastically reduced to 22%. SLR is a certain percentage of the total deposits that deposit-taking NBFCs and banks are legally bound to maintain in the banks. With a reduction in the SLR rates banks now have to keep a lesser deposit amount in liquid cash. In addition to this, the gap between liquidity requirements of a bank and an NBFC has reduced over the years. So there are not many differences. NBFCs are now mandated to provide a liquidity coverage ratio and maintain liquidity against the following 30 days of outflow on a rolling basis. 
5. The spur of affordable housing and the real estate market gaining momentum adds to the need for HDFC Bank to claim its share of the real estate mortgage pie. Banks and financial institutions expect a boom in credit disbursal in the real estate industry. This makes it crucial for both HDFC and HDFC Bank to capitalize on this opportunity and expand their loan book by merging together. With enhanced transparency under RERA and Insolvency & Bankruptcy Code, mortgage customers can access diverse services and products under one roof.
6. Banks can now invest in priority sector lending certificates for reserve requirements against direct lending.

All of these rationals came together at the right time and formed a conducive environment for the merger to get a go-ahead from the board.

How will the merger benefit the merged entity?

The proposed merger is slated to result in an array of benefits according to the officials. Some of them include:

Reducing HDFC Bank’s exposure to unsecured loans

The merger will bring together HDFC Ltd’s expertise in housing finance and HDFC Bank’s expertise in scaling, distributing, and servicing the loan.

Cross-selling opportunities

The amalgamated entity will be able to cross-sell banking and housing finance products to its existing and new customers. Both the entities will be able to use their respective strengths to their advantage, increasing profitability.

Low-cost funding for HDFC Ltd

The NBFC, upon merger with HDFC Bank, will be able to access well-diversified low-cost funding in addition to the 68 million customers of HDFC Bank. This will also give the merged entity an advantage over its peers in the banking industry.

HDFC Bank will build a home loan portfolio

The housing market is set to boom with Government initiatives to support affordable housing for all, RERA and infrastructure developments. The credit-strapped market is looking for credit, and the housing loan market can benefit heavily from this. The merger with HDFC Ltd will give HDFC Bank access to building a sizable home loan portfolio, which will increase the size of their overall loan books. HDFC Bank’s existing 68 million customers will be able to seek home loans post the merger seamlessly.

Large-ticket loans

The merger is set to create a balance sheet of Rs 25.61 lakh crore, the second-highest after SBI. Thanks to their large balance sheet, the merged entity will be able to underwrite large-ticket loans. This will give them access to a select clientele who trusts HDFC Bank and wants to get a large-size home loan.

Expedite Priority Sector Lending (PSL)

This would also allow the merged entity to increase the lending to priority sectors, as stipulated by the Government. This would include lending to agriculture, MSMEs, housing, education, renewable energy, etc.

FII interest

HDFC Ltd VC and CEO Keki Mistry said that the merger has the potential to attract a 7-8% increase in participation from foreign investors.

Diversity of assets

The merged entity will enhance the diversity of its assets and will reduce the incumbent single product risk.

The takeaway

The merger is likely to happen in the second or the third quarter of FY24, subject to all approvals. It will add value to both the customers and the entities’ shareholders. However, there are massive regulatory costs that both companies will have to assess carefully moving forward.

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Research Analyst: Bavadharini KS