Explained: The main reasons behind the merger of HDFC and HDFC Bank

The long-speculated merger of mortgage player HDFC Ltd and the largest private sector HDFC Bank is finally taking place. The bank offers retail as well as wholesale products whereas HDFC Ltd is into home loans. The main reasons for the merger listed by HDFC Bank are the following:

Building a housing loan portfolio under the banking platform

The merger of the two giants would allow the HDFC Group to build a highly competitive housing loan portfolio under the banking platform. Currently, HDFC Bank sells the home loans of HDFC Ltd and earns a fee. “The Proposed Transaction shall enable HDFC Bank to build its housing loan portfolio and enhance its existing customer base,” says the bank.

Access to low-cost funds

HDFC Bank, which is India's largest private sector bank, has a large base of over 6.8 crore customers. The bank platform will provide a well-diversified low-cost funding base especially current and savings accounts or CASA. The bank will be able to offer more competitive housing products.

Creating a large balance sheet

The merger will create a large balance sheet of Rs 25.61 lakh crore, which is now closer to the country’s largest bank — the State Bank of India with Rs 45.34 lakh crore. The HDFC Bank was already the country’s second-largest bank. ICICI Bank has a balance sheet size of Rs 17.74 lakh crore as of March 31, 2021.

”The merged banking entity would benefit from a larger balance sheet and net worth which would allow underwriting of larger ticket loans and also enable a greater flow of credit into the Indian economy,” the bank said in its statement.

Huge cross-selling opportunity

HDFC Ltd comes with dedicated 445 offices of service centres across the country, which will be used to cross-sell the entire suite of banking products. The mortgage provider has a trained staff to do only home loans, which will provide an edge to the merged entity in the market.

Reduction in unsecured loans

The proposed merger will result in reducing the bank’s exposure to unsecured loans. While the exposure was not high, the bank was growing its credit card and personal loans in an aggressive way because of the higher yield. The merged entity will not only reduce the unsecured loan exposure but also provide headroom to underwrite more loans.

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