HDFC, HDFC Bank say merger idea still premature

Amid speculation of a possible merger of Housing Development Finance Corporation (HDFC) and HDFC Bank, in which the former has 22.5 per cent stake, senior officials of both entities have termed such an idea premature.

Speculation in this regard had gained momentum after the Reserve Bank of India (RBI) said banks didn't have to maintain cash reserve ratio (CRR) and statutory liquidity ratio (SLR) for funds raised through long-term bonds to fund infrastructure and affordable housing. The regulator also allowed banks exemption from meeting priority sector lending (PSL) targets on such funds.

While answering shareholder queries on the merger at HDFC's annual general meeting on Monday, Chairman Deepak Parekh dismissed any immediate move on this front. "The board of directors of both companies have met, but the merger proposal hasn't been considered yet. As a result, it will be too premature to say anything."

Since HDFC is a non-banking finance company, CRR, SLR and PSL targets are applicable to it. However, if it goes for a merger, the merged entity will have to adhere to regulatory requirements on these fronts.

Though RBI has granted forbearance to banks, the norms are applicable to future funds, not to existing books. This is seen as a hurdle to a merger.

Paresh Sukthankar, deputy managing director of HDFC Bank, said, "There is no discussion at this point. The reserve requirement was a major hurdle (for the merger), but we have to see if the new guidelines address this. We are reviewing the circular. It will probably require clarifications. At this point, there is no plan for a merger."

Keki Mistry, managing director and chief executive of HDFC, said "theoretically", HDFC had excess capital in case the merger happened, but added "it is too premature to talk about it yet".

Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services LLP and a senior advisor on financial services at E&Y India, said, "RBI's move makes a very good case for a merger between HDFC and HDFC Bank. On the one hand, the bank will be creating long-term liabilities for lending to the infrastructure segment, which is affordable housing in this case. On the other, it will bring in capital efficiency. A merger will also ensure the merged entity is able to meet many banking guidelines such as the one pertaining to promoter shareholding."

RBI norms say promoters shouldn't hold more than 10 per cent stake in banks. Except ICICI Bank, the promoter holdings in all new-generation private sector lenders are higher than that prescribed by the regulator. In the guidelines for the entry of new private banks, released last year, promoter holding was capped at 15 per cent.

WEIGHING THE OPTIONS
Pros & cons of a merger between HDFC and HDFC Bank