HDFC twins' merger: RBI awaits more data to decide on dispensation request

The Reserve Bank of India (RBI) is yet to grant dispensations for the proposed merger of Housing Development Finance Corporation (HDFC) with HDFC Bank, even though the banking regulator has issued a no-objection letter to the lender. According to top RBI sources, the central bank will have to look at more data before deciding whether the relaxations sought by India’s largest private sector lender can be granted.

HDFC Bank had requested the RBI to allow it to adopt a phased approach to meet key regulatory requirements relating to the statutory liquidity ratio (SLR), cash reserve ratio (CRR), priority sector lending (PSL), grandfathering of certain assets and liabilities and in respect of some subsidiaries. The bank had written to the RBI, asking for 2-3 years to be compliant with such requirements in the case of existing assets of HDFC Ltd.

At present, HDFC, being a non-banking financial company, does not have to comply with the CRR, SLR and priority sector obligations like banks.

On Monday, the lender informed the exchanges that it had received the ‘no-objection’ letter from the RBI for the proposed composite scheme of amalgamation for the merger of HDFC Investments Limited and HDFC Holdings Limited (wholly owned subsidiaries of HDFC) with HDFC, and HDFC with HDFC Bank.

“Dispensations will be based on further details that are required…Data is still being collected,” a top central banking source told Business Standard. “That decision (on dispensations) will be taken at an appropriate time,” the source added, indicating that the no-objection to the deal was sans the approvals for dispensations.

An email sent to HDFC Bank seeking comment on the issue of regulatory dispensation remained unanswered till the time of going to the press.

On April 4, HDFC Bank agreed to take over the biggest domestic mortgage lender in a deal valued at about $40 billion (Rs 3 trillion), creating a financial services titan. The proposed entity will have a combined asset base of around Rs 18 trillion. The merger is expected to be completed by the second or third quarter of FY24, subject to regulatory approvals.

Commenting on the RBI’s no-objection to the merger, Suresh Ganapathy, associate director at Macquarie Capital Securities, said one positive was that the RBI had approved the structure in a simple format without needing a holding company structure or merger/demerger etc.

HDFC Bank had also written to the RBI to permit it to hold a 50 per cent stake in HDFC Life, the life insurance subsidiary of HDFC Ltd, which will become the bank’s subsidiary after the merger. According to norms, banks can either have above 50 per cent or 30 per cent stake in a life insurance venture. Currently, HDFC Ltd holds around 48 per cent in HDFC Life, 50 per cent in HDFC Ergo General Insurance, and 52.60 per cent in HDFC Asset Management Company.

HDFC Bank, which owns 95 per cent in HDB Financial Services, would love to have it as its subsidiary but will follow the RBI’s guidance on what needs to be done on that issue, the bank mangement had said while announcing the merger.

The making of a banking behemoth

April 4 

• Boards of HDFC and HDFC Bank announce that the mortgage financier will merge with the bank

• HDFC Bank seeks several dispensations from RBI regarding the merger; these are under consideration

July 3

• The stock exchanges give approval to the proposed merger

July 4

• RBI gives no-objection to the transaction, subject to certain conditions