Much Awaited Arranged Marriage – HDFC and HDFC Bank!


And it’s finally happening! Much awaited merger between HDFC Ltd. and HDFC bank is on the table. HDFC Ltd. will merge into HDFC bank and the former will cease to exist. Mr. Deepak Parekh, Chairman of HDFC Ltd, while addressing the shareholders in his emotional speech described it as – “In a sense, it is like the son taking over his father’s business when he grows older.” 

Just to set the context (and to all those who till now didn’t know what was the difference between HDFC Ltd. and HDFC bank :P), HDFC Ltd. is a non-banking financial corporation (NBFC) while HDFC Bank operates as a commercial bank. 

Initially, there existed various differences between an NBFC and a bank in terms of regulations, which provided NBFC an edge over a bank. NBFCs grew at a rapid pace during that phase and prioritized growth over anything else.

But soon after the IL&FS crisis (which was an NBFC crisis), RBI tightened regulations for NBFCs, which over time decreased the flexibility of NBFCs over a bank. 

Therefore there hardly existed any significant difference between a bank and an NBFC. 

And the same was realized by the management of the HDFC and HDFC bank, therefore this merger. 

In the words of Mr. Deepak Parekh – “Over the last few years, various regulations for banks and NBFCs have been harmonized, thereby enabling the potential merger.”

The merger of HDFC-HDFC Bank will be a two-step process wherein HDFC Investments Ltd and HDFC Holdings Ltd, wholly-owned subsidiaries of HDFC, will be merged with and into HDFC. In the 2nd step, HDFC will then be merged with HDFC Bank. 

Post the merger, HDFC shareholders will hold 41% of the bank, and HDFC bank will be 100% owned by public shareholders. 

This mega-merger will come with its own set of advantages and disadvantages. 

Let’s explore the positive side first. 

The Positives

  • HDFC Ltd has a massive housing loan book. Banks love home loans as they are comparatively secured with the house itself as a mortgage. However, HDFC bank couldn’t participate in the housing loan growth as HDFC was in this line of business already. All they could do is sell these loans to HDFC ltd. and earn a nominal fee. Below graph shows the number of housing loans assigned by HDFC bank to HDFC:

You might be thinking but what’s the problem, as anyways HDFC is riding the housing loan growth story. But it’s not actually the case. See, banks accept deposits at a low rate of interest (around 4% for HDFC bank) through savings and current accounts and lend these deposits at a higher rate, thus the spread earned is high. But in the case of HDFC, although it can accept deposits, it was doing so at a higher rate of interest of around 6%. Thus the interest charged from the borrowers was even higher, making its loan non-competitive with peers like Kotak Mahindra bank. If HDFC bank could have done this, the story would have been on the flipside. But now due to a merger, this can actually happen. 

  • Further, 70% of the HDFC customers do not bank with HDFC bank accounts. Now the merger will enable it to cross-sell HDFC bank products to HDFC customers, further leading to growth. 
  • Also, HDFC used to distribute its loan through a network of just 445 branches and still is the market leader in the housing loan segment. Post the merger, loan disbursement will happen through 6,300+ existing branches of HDFC bank! Just think of the extent of reach and disbursements 🙂 
  • And the last one, as the combined capital base of the entity, will improve as a whole, HDFC bank would undertake lending to infra projects and other high yield loans, which earlier was limited. 
  • While HDFC Bank will continue to be the second-largest lender in the country after State Bank of India, its size following the merger would be twice that of ICICI Bank, the third-largest lender.

Let’s move on to some of the negatives.

The Negatives

  • As we know, banks need to maintain a certain % of deposits as Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR). Now, as the deposit base of HDFC bank will increase by a major deposit amount, the reserve requirements will be higher. In a recent note by Mr. Deepak Parekh, “The bank has requested the Reserve Bank for a phased-in approach in respect of SLR and CRR, priority sector lending and grandfathering of certain assets and liabilities and in respect of some of its subsidiaries. These requests are under consideration by the RBI in terms of their letter to the bank dated April 1, 2022,”
  • It is no hidden fact that HDFC bank servers are not functioning at an optimal manner resulting in major tech disruptions. Due to this, it was recently under a ban from RBI too from issuing new digital services. Post the merger with such a huge customer base, catering to their needs would be a difficult task. 
  • Further recent news came that banks should not be allowed to hold more than 20% in an insurance company. But post the merger, HDFC bank will hold a stake of more than 20% in HDFC life, therefore it might be required to sell its stake in the same. However this rule has still not received RBI acceptance. 
  • And last from the shareholder’s point of view – post the merger, the combined entity will have 14% weightage in the NIFTY 50 index. However, A weightage of greater than 10 percent is a problem for actively managed mutual funds as according to norms laid down by the market regulator SEBI, a single stock exposure is capped at 10 percent. This might attract a sell-off and reduce exposure to HDFC Bank. 

The entire process, including getting approvals from shareholders of HDFC and HDFC Bank respectively, Reserve Bank of India (RBI), stock exchanges, Securities and Exchange Board of India (SEBI), and other regulatory approvals will take 15-18 months. Till all the approvals are in place, both HDFC Ltd and HDFC Bank will operate as separate entities.

Combined entity will have the following operational parameters: 

That’s it! Ufffff!! 

Do let us know your thoughts on this mega merger 🙂

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