HDFC Bank to merge with HDFC Ltd.

5 min readApr 5, 2022

HDFC Ltd, India’s largest non-banking financial corporation (NBFC), is slated to merge with HDFC Bank, India’s largest private sector lender. According to some sources, the merger will create India’s third-largest firm and aid HDFC Bank in consolidating its banking position. The HDFC-HDFC Bank combination will be India’s largest corporate merger, coming only days after Axis Bank acquired Citibank’s consumer banking operations in the country.

The combination is still awaiting permission from the RBI, CCI, SEBI, NCLT, stock exchanges, and a number of other regulatory bodies.

HDFC has approached the RBI to request that the Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), and Priority Sector Lending be phased in (PSL).

The combined market valuation of HDFC Ltd and HDFC Bank surpassed that of TCS on April 4, 2022, indicating that the merger could result in the country’s second-most valuable corporation. At the end of the intraday trading session at 03:30 PM on April 4, 2022, HDFC Bank’s shares closed 9.83 percent higher, while HDFC Ltd’s shares concluded 9.12 percent higher.

What should shareholders be aware of?

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.

After the merger, what will happen to HDFC branches?

All HDFC locations around the country would be able to offer mortgage services after the merger is completed, and HDFC Bank will hold all HDFC subsidiaries.

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.

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 barriers than there were three years ago.

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. In addition to this, 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. In these circumstances, it made more sense for HDFC to convert into a bank or merge into an in-house bank.

The SLR rates have been drastically reduced to 22%. This means that the bank has 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. NBFCs are now mandated to provide a liquidity coverage ratio and maintain liquidity against the following 30 days of outflow on a rolling basis.

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. With enhanced transparency under RERA and Insolvency & Bankruptcy Code, mortgage customers can access diverse services and products under one roof.

Banks can now invest in priority sector lending certificates for reserve requirements against direct lending.

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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