HDFC twins merger: Deepak Parekh foresees cross selling, m-cap gain benefits

HDFC Chairman Deepak Parekh on Monday said that the housing finance company's merger with HDFC Bank is positive for the economy.

"It is positive for the economy. You need large bank in India. The RBI is encouraging NBFCs to become banks....there are limited advantage to be a NBFC because of reduced regulatory arbitrage," said Parekh.

The merger will take 15-18 months to complete because of various approvals required from regulators of securities, insurance and banking sector.

There will be market cap gains for the merged entity. Today, HDFC Bank enjoys a market cap of Rs 9.08 lakh crore, which is next to biggies like Reliance Industries and Tata Consultancy Services (TCS). HDFC Ltd has a market cap of Rs 4.82 lakh crore.

The merged entity has also requested RBI for a phased-in approach in respect of meeting Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR) and priority sector regulations. SLR is a minimum percentage of deposits mobilised from public that a bank has to keep in liquid cash and other government securities for easy liquidity and also safety of depositors' money.

In its letter to RBI, the HDFC Group has asked for some time (2-3 years) for complying with the regulations on the existing assets. "But all new loans will be complied with the SLR and CRR (from day one of the merger)," said Parekh.

The merger will also mitigate single product risk and at the same time enhance the diversity of assets of the combined entity.

The merged HDFC entity has to increase its stake in the insurance arm to beyond 50 per cent. The group currently has 48 per cent stake in the life insurance subsidiary. The RBI will either allow a relaxation or direct the merged entity to increase its stake from 48 to 50 per cent.

HDFC says that the proposed transaction is to create a large balance sheet and net worth that would allow greater flow of credit into the economy. "It will also enable underwriting of larger ticket loans, including infrastructure loans -- an urgent need of the country," it said.

The merger will create a large balance sheet of Rs 25.61 lakh crore, which will be closer to the Rs 45.34-lakh crore balance sheet of country's largest bank State Bank of India (SBI).