Funding is the main challenge HDFC Bank faces after the $40-billion amalgamation with its parent HDFC Ltd, made apparent with the drive the country’s largest private sector bank is making to expand its branch network and mobilise deposits.

While addressing shareholders on Friday, HDFC managing director and CEO Sashidhar Jagdishan flagged funding as a risk the lender faces.

“As you know, the risks of the merger is the funding part of it,” Jagdishan said at the lender’s maiden annual general meeting (AGM) after the merger came into effect from 1 July.

HDFC Bank has failed to get all the forbearance it had sought from the Reserve Bank of India (RBI) on the liabilities front. The RBI refused to provide any exemptions on cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements on the deposits that come from HDFC, which was a deposit-taking entity.

Besides, HDFC Bank may be impacted with the RBI, in its bi-monthly monetary policy on 10 August, announcing that banks will have to hold an incremental CRR of 10% on increase in deposits between May 19 and July 28, with effect from the fortnight starting 12 August. The move, aimed at absorbing surplus liquidity, will withdraw nearly Rs 1 trillion from the banking system. The RBI will review this measure before 8 September, ahead of the Indian festive season, when currency in circulation typically increases and banking liquidity declines.

“HDFC Bank appears more sensitive to the incremental CRR requirement as it would have bloated NDTL (net demand and time liabilities) post its merger with parent HDFC Limited. The bank could have around Rs 5 trillion additional NDTL on 1 July 2023, the effective date of merger. Our broad calculations suggest 5 basis points impact on net interest margin for Q2FY24 for the merged entity assuming the incremental CRR requirement remains effective as announced till 28 July,” ICICI Securities said in a note.

The pressure on HDFC Bank to mobilise deposits at a large scale has been expressed by several analysts. Suresh Ganapathy, head of financial services research in India at Macquarie Group Ltd.’s brokerage unit, has said that HDFC Bank could try to mobilise 20% of incremental deposits every year for the next three to four years. 

Jagdishan, however, is confident that the bank will be able to surmount the funding challenge. He said that the merger and the timing made sense because of the advantages that it offers and pointed out that the staff is “excited” to take on the funding challenge.

“I think time will tell but we’re extremely confident at the way that we have grown over the last 10 years, there is no reason why we will not be able to surmount the challenges and even grab the opportunity to grow similarly over the next many years,” he said.

The bank has sought shareholders’ approval to raise up to Rs 50,000 crore from bond issuances going ahead and will be active on this front as part of its liabilities management, Jagdishan said.

Earlier, he had written to the employees about the bank’s huge prospects post-merger. “The pace at which we aim to grow - we could be creating a new HDFC Bank every 4 years,” he said.

The bank’s plan is to add 1,500 branches every year rolling over a longer period of time to reach out to the expanding middle class and upper segment of the country.

 Merger with HDFC is all set to impact the bank’s net interest margins (NIMs) because of the higher proportion of the low-interest yielding housing loans which get added, Jagdishan said, adding that the same will be visible from the results for the September quarter itself. The mortgage book of HDFC carries a lower spread.

However, the housing loans also present advantages in terms of better repayment ratios which lower the credit costs on such advances, Jagdishan said.

“We operate within a range of 4-4.4% (of NIM) over multiple businesses and interest rate cycles. It is also dependent on the business mix, but this is largely the kind of NIMs that we will operate in,” Jagdishan said. 

The bank is confident of getting the profitability or the returns back to historical levels in up to 18 months, he added.

“It’s been always a philosophy that we will not compromise growth for profitability,” Jagdishan said.

The bank chief also had a word about the staff. Employees’ satisfaction and organisational culture are priorities for the bank management and the board, said Jagdishan. Incidentally, some issues of misbehaviour by staff have been flagged on social media, including a loud shouting by a senior employee to a subordinate for not meeting business targets. 

Jagdishan promised to publish employee satisfaction survey results along with the annual report from next year.

More than 7% of the bank’s overall spending is towards technology, Jagdishan said.

He, however, said that more security features may lead to some inconvenience.

Jagdishan said a request for approval has been made to the RBI for inducting erstwhile HDFC’s chief financial officer V Srinivasa Ranjan to the board.

Shares of HDFC Bank closed Friday 1.05% down at Rs 1,619.05 apiece on the BSE as against a 0.56% correction on the benchmark.