HDFC-HDFC Bank Merger: Parekh Expects Fair, Judicious Regulatory Response

The chairman of India’s largest mortgage financier HDFC Ltd said on Tuesday that he expected various regulators to take a fair and judicious view on the company’s proposed merger with HDFC Bank, and asked all stakeholders to be patient.

HDFC patriarch Deepak Parekh said that after 45 glorious years of providing homes to millions of customers, the time was right for HDFC to find a new home.

“At this juncture, we are awaiting regulatory guidance on the path forward. We remain respectful of all our regulators and are confident that the outcome will be judicious and fair at a systemic level,” Parekh said in his note to the shareholders of HDFC in its annual report.

In April, HDFC and HDFC Bank announced plans for an all-stock merger deal, for which all the regulatory approvals were expected in 15-18 months.

HDFC Bank has requested the Reserve Bank of India (RBI) for more time to meet several regulatory requirements like the cash reserve ratio (CRR), statutory liquidity ratio (SLR), and priority-sector lending targets.

HDFC had a loan book of Rs 5.7 trillion as on March 31, 2022. Banks have to maintain a CRR of 4.5 per cent and SLR of 18 per cent. In addition, commercial banks have to extend 40 per cent of their loans to sectors which are classified as priority sectors. And within the priority sector, 18 per cent of the adjusted net bank credit (of the previous fiscal) needs to be extended to the farm sector. For HDFC Bank, meeting all these regulatory requirements from the day one of the merger, given the loan book size of HDFC, would be extremely challenging. This is the reason the lender has asked for a glide path to fulfil the regulatory obligation.

“My only ask of our stakeholders is for your patience as we navigate through the complexities of this transaction. More than ever before, we need your trust and support,” he said, adding that the optimum path to scale up housing finance was to be housed within a banking structure. The pool of resources for lending will be significantly larger and at lower costs.

“From a regulatory perspective, it is prudent for all large providers of housing finance to operate on a level playing field, with the same rules. Globally too, the scale of mortgage assets is exponentially larger in banks compared to non-banking financial entities,” he said.

Commenting on the Indian housing finance market, he said the country should be able to double the size of its home loan market to around $600 billion in the next five years.

“This would coincide with the period when India attains its much-aspired goal of becoming a $5-trillion economy. Despite the doubling of housing loans, India’s mortgage penetration would still remain low at an estimated 13 per cent of GDP,” he said.

Parekh said that in order to take India’s mortgage-to-GDP ratio to cross 20 per cent, housing loans would have to grow exponentially in decades to come.

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