“Either HDFC or HDFC Bank can increase their stake above 50% before the effective date of the merger,” HDFC Bank CFO Srinivasan Vaidyanathan told investors in a conference call. “There are no guidelines whether this has to be through fresh infusion of funds or purchase of shares from the market.”
On April 4, 2022, HDFC and HDFC Bank proposed to merge to create a financial services behemoth with nearly Rs 13 lakh crore in market valuation, ending decades of speculation on their eventual union. The bank had made certain forbearance requests to the Reserve Bank of India (RBI) on meeting statutory liquidity ratio (SLR) and cash reserve ratio (CRR) norms ahead of the merger.
Making the cut
SLR pertains to the percentage of deposits banks invest in government bonds, and liquidity coverage ratio (LCR) pertains to the holding of highly liquid and quality assets that may be liquidated to meet immediate cash outflow requirements.
CRR, on the other hand, is the portion of deposits that banks must hold in liquid cash. Banks need to hold 4.5% liquidity as CRR while 18% as SLR.
Although HDFC Bank had sought some relaxation in deadlines for meeting these norms, the country’s most-valued lender is expected to comfortably meet these requirements. The bank has been ramping up its investment book that expanded 13.4% on-year to Rs 5.17 lakh crore as on March 31. Of this, Rs 4.4 lakh crore was in government securities.
According to HDFC Bank’s internal estimates, the merger would lead to SLR-CRR requirements of an additional Rs 70,000 crore, along with an incremental Rs 1.75 lakh crore to meet priority sector lending (PSL) norms.
The RBI has permitted the bank to meet priority sector lending requirements in a staggered fashion over three years, the bank said in an exchange notification.
PSL requirement on one-third of the outstanding loans of HDFC Bank will have to be met on the effective merger date. The remaining two-thirds of the portfolio will be considered over the next two years after the merger.
“On the priority sector lending the RBI has given us a relaxed timeline,” said Vaidyanathan. “For example, if the effective date for the merger is September 2023, we will get up to September 2024 to meet 1/3rd of the requirement, which will be backward looking based on the adjusted net bank credit of one year earlier from the effective date, which in this case will be September 2022 and it will change month on month subsequently.”
The bank is expected to meet the lending norms organically by expanding its rural reach.
“We want to build our priority sector loans organically as much as possible,” said Vaidyanathan. “Our aim is to reach 200,000 villages by March 2024 from 165,000 in March 2023 and reach small and marginal farmers and do rural credit.”
Investments as usual
Investments, including those of subsidiaries and associates of HDFC, are allowed to continue as investments of HDFC Bank.
The RBI has also permitted HDFC to hold its stake in HDFC Education and Development Services for a period of two years from the effective date. Similarly, HDFC can hold its stake in HDFC Credila Financial Services, subject to the shareholding being brought down to 10% within two years.
HDFC Bank will also be required to do a one-time mapping of all HDFC borrowers for benchmarks and spreads. All retail, MSME, and other floating rate loans sanctioned by HDFC would need to be linked to an appropriate benchmark within six months from the effective date.
