Editorial: Big becomes bigger
The merger of mortgage firm HDFC Ltd with its progeny HDFC Bank, the biggest merger in India’s corporate history, signals consolidation in the private banking and NBFC space and also demonstrates the success of regulatory changes over the past few years. It is a win-win situation as the combined and bigger balance sheet also means that the country’s largest private bank can undertake lending to big projects in sectors such as infrastructure. The merged entity, the second biggest corporate conglomerate after Reliance Industries Limited (RIL), has created a banking behemoth with a market capitalisation of Rs 14 lakh crore. HDFC Ltd is India’s largest housing finance company with a market cap of Rs 4.85 lakh crore while HDFC Bank is the largest private sector bank by assets with Rs 9.17 lakh crore market cap. The managements of both entities had all along maintained that a merger was possible if regulatory hurdles were sorted out and if the move is beneficial to all stakeholders. Since it was set up in 1994, HDFC Bank has overshadowed its parent company in terms of growth and performance and has been the market’s favourite. Overall, HDFC being largely a wholesale financier is relatively more exposed to volatility in interest rates and liquidity than HDFC Bank. The amalgamation will give foreign investors more headroom to invest in HDFC Bank. Over the last few years, regulatory developments and reforms, including higher regulatory standards for the NBFCs (Non-Banking Financial Companies), narrowing the gap with the banking regulatory framework, reduction in statutory liquidity ratio (SLR) rates, deepening of affordable housing bond market and creation and deepening of Priority Sector Lending Certificates market, have created a conducive environment for amalgamation of the two entities.
A merged entity will have a more sustainable and favourable funding profile and is expected to make the mortgage offering more competitive. The consolidation was in the making for a long time. Some experts caution that despite the synergies on cost and capital front, the merger won’t be a smooth ride. Since only part of HDFC’s loans is towards affordable housing, the merged entity will have to allocate funds for cash reserve ratio (CRR) and SLR on the remaining portfolio. This could adversely impact margins and profits. However, with benefits outweighing the cost, the merger can be a win-win situation for both entities. The costs of the merger have been brought down by the recent streamlining of reporting and delinquency provisioning rules for NBFCs and banks. HDFC’s exposure to affordable housing and micro-lending makes it easier for its loan book to sit within the development finance requirements of HDFC Bank. Both NBFCs and commercial banks will have to examine the inorganic route as the economy recovers from the pandemic. More such merger announcements cannot be ruled out in the coming months.
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