The story so far: Mortgage lender HDFC Ltd. and India’s largest private sector bank HDFC Bank on Monday announced a mega merger.
The amalgamation will create a financial behemoth that is expected to better tap the rising demand for credit.
Under the terms of the deal, which is one of the biggest in the Indian financial sector, HDFC Bank will be 100% owned by public shareholders, while existing shareholders of HDFC Ltd. will own 41% stake in HDFC Bank.
THE GIST
Mortgage lender HDFC Ltd. and India’s largest private sector bank HDFC Bank on Monday announced a mega merger. Under the terms of the deal, HDFC Bank will be 100% owned by public shareholders, while existing shareholders of HDFC Ltd. will own 41% stake in HDFC Bank.
Post-merger, the mortgage lending business gets access to HDFC Bank’s CASA (current and savings accounts) deposits, which are lower cost funds. For HDFC Bank, every home loan customer can be tapped to become a bank customer.
The regulatory framework of the NBFC (non-banking financial company) industry has been moving closer to harmonise with the banking sector’s regulatory framework. If you are a large NBFC, it makes more sense to be merged with a bank because banks are more tightly regulated and have far more oversight of the RBI.
What are the terms of the merger?
The two companies have announced that their respective boards have approved the amalgamation. Subsequently, the merger has to go through a series of regulatory approvals.
It also has to get approval from shareholders of both companies. At this moment what has been announced by the two entities is that its an all-share deal, so there’s no cash transaction involved.
The terms of the share swap are such that shareholders of HDFC Ltd. will receive 42 shares of HDFC Bank for every 25 shares they hold in HDFC Ltd.
Post-merger HDFC Ltd. will no longer be a separate mortgage lender, it will get folded into the bank. The bank, which is the offspring of HDFC Ltd. and the older legacy entity, is the one which is acquiring the mortgage lender. With its acquisition of the mortgage lender, it also acquires all its subsidiaries, which includes a general insurance company, a life insurance company, and an asset management company.
What happens to existing customers and employees?
As far as customers are concerned, HDFC Ltd.’s customers will become the bank’s customers as well. As for employees, HDFC Bank is planning to absorb and retain all the employees.
Neither of the entities are very heavy on employee numbers and have been fairly conservative in their employee sizes.
At the press conference to announce the merger, HDFC chairman Deepak Parekh specifically said that the employees of HDFC Ltd. will become part of the bank.
Is it worth going through this exercise, which is going to take about 18 months or so to fructify? What is the rationale for it?
Every merger, when it involves two entities, takes a certain amount of time. But because both these entities are of the same house or group, this will not be too much of a challenge for them. As both HDFC Ltd. and HDFC Bank have largely had a fairly conservative lending culture, both reasonably customer-friendly, customer-centric, culturally, there wouldn’t be a big challenge. The integration part of it would only be a matter of ensuring that everything is seamless and smooth, getting the books mapped on to each other, the IT systems merging with each other and so on.
From a perspective of the rationale for the merger, Mr. Parekh said a few things, one of which was that in recent years, the evolution of the regulatory framework for the NBFC (non-banking financial company) industry has been gradually moving closer, to harmonise with the banking sector’s regulatory framework. Earlier, NBFCs had a fairly different and a far more loose sort of framework for lending and deposits. This led to issues in the industry with some NBFCs struggling and going under or being taken over by others. The Reserve Bank of India has over the years been tightening the regulatory structures for the NBFC industry. Mr. Parekh specified that the regulatory environment has been harmonised to the point where it makes sense, and the RBI too is likely to be happy. If you are a large NBFC with the sort of size that say HDFC Ltd. has, it makes more sense for it to be merged with a bank because the banks are much more tightly regulated and have far more oversight of the RBI.
As Basel III norms for capital adequacy are in place, the NPA (non-performing asset) book is very closely monitored. Even from a regulatory perspective, the RBI is unlikely to be unhappy to see this merger going through because it wants NBFCs to be tightly regulated. And if you are a part of a bank, you will be better regulated.
What is in it for HDFC Ltd. and HDFC Bank?
Post-merger, the mortgage lender, HDFC Ltd., gets access to HDFC Bank’s CASA (current and savings accounts) deposits, which are lower cost funds. For the mortgage lending business, the capital cost will come down. As the capital cost comes down, automatically it will have the ability to lend at a finer rate. For HDFC Bank, every home loan customer can be tapped to become a bank customer.
Was there any pressure or immediate requirement for the merger?
The competition in the housing finance space has increased, say from 30 years ago, when HDFC Ltd. was one among a handful of housing finance entities. Now entities providing loans for housing have gone up substantially. The larger ones are LIC Housing Finance, PNB Housing, Bank of Baroda Housing etc. SBI too has a housing business. Banks have also been lending through subsidiaries — Canfin Homes is Canara Bank’s housing finance subsidiary. So, in a sense for HDFC, it makes sense that HDFC Ltd. and HDFC Bank are under the same roof because if you are lending from a banking perspective, it makes it easier for your cost of funds to come down as your balance sheet size grows. When you are raising capital, your cost of capital also comes down.
For HDFC Bank, it’s about getting access to a large base of customers for cross-selling purposes. For HDFC Ltd., or the mortgage lending business, it’s primarily about the lower cost of capital.
Does a larger balance sheet help in terms of the NPA situation?
As far as HDFC Bank is concerned, bad loans are not a major pressure point because it has been a conservative lender compared to competitors. They have always shied away from big ticket lending to corporates. Most of their lending is to retail borrowers. As for HDFC Ltd., there might have been some pressure on home loans during the pandemic but based on what they have disclosed so far, it is not a major pressure point either. Also, the merger with the bank sort of helps alleviate any upcoming pressure.
Will the lending pattern change?
Infrastructure lending has been a serious problem in India. With the government making it clear that there is need for funding the infrastructure segment, we will have to wait and see whether the merged entity has the expertise to lend to infrastructure projects, which is a risky proposition. They do have a large volume of funds, and if they see specific opportunities with good entrepreneurs and good government projects, they may go for it.
What will be the impact of this deal?
It’s possible that we might see more NBFCs seeking to merge with banks. There is already talk of the number of banks coming down. So in some ways, HDFC Bank’s merger with HDFC Ltd. may be a precursor to what is going to happen in the state-run banking space, where the government has said it is going to reduce the number of public sector banks.
