MUMBAI: The amalgamation of HDFC with HDFC Bank on Monday might have come as a surprise to many, but such a merger had been on the cards for some years now. What led to the merger happening now was a reduction in the cost of funds, regulatory gap between NBFCs and banks narrowing, apart from RBI encouraging NBFCs with assets above Rs 50,000 crore to convert into banks.
Take the repo rate, the rate at which RBI lends to banks. In March 2015, this was 7.5% against 4% currently. Even as some analysts expect the RBI to increase the repo rate by a cumulative 50-75 bps this fiscal (FY23), the rates are still considered favourable than they were in the past. NPA norms applicable to banks will become applicable to NBFCs.
The statutory liquidity and cash reserve ratios have also dropped to 22% currently – 18% SLR and 4% CRR – from 27% earlier, which makes it less of a drag on the profit and loss account. To be sure, an analyst at Macquarie estimates the merged entity or bank would have an excess requirement of around Rs 70,000-Rs 80,000 crore as CRR/SLR requirement.
One more reason for the merger, is the ability of banks to purchase priority sector loan certificates, which have grown in to a Rs 5.5 lakh crore market in the past six years. PSL implies 40% of total loans must flow to sectors such as agri, within which 8% must be for small marginal farmers, MSME, socially weaker sections, etc.
Banks found it tough many a times to meet the sub targets and as a penalty had to buy Rural Infrastructure Development Fund bonds which bore a cost of 0.75-2%. Since 2016 RBI floated PSLC platform. This obviated making fresh loans and holding only PSL Certificates (PLSCs) for a trading fee. HDFC Bank will partly use this platform to meet its Priority Sector Lending (PSL) requirements.
Also, 70% of HDFC Bank’s over 6.8 crore customers don’t have mortgages from HDFC Limited.
The merger allows the combined entity to seamlessly provide this product. The proposed transaction will also reduce HDFC Bank’s proportion of exposure to unsecured loans.