A key reason for deciding in favour of merging HDFC Ltd with HDFC Bank now is the reduced regulatory gap between a non-banking financial company (NBFC) and a bank.

In the last three years, the Reserve Bank of India (RBI) has issued a host of guidelines trying to harmonise the financial infrastructure of both banks and NBFCs. Going by HDFC Ltd’s size, it would have been categorised as an upper layer NBFC and have regulatory regime closer to that of banks.

HDFC Ltd is the largest housing finance company, which is also classified as an NBFC.

Though NBFCs do not maintain cash reserve ratio (CRR) or statutory liquidity ratio (SLR), they need to maintain liquidity against the next 30 days outflow on a rolling basis.

The RBI has proposed a scale-based regulation for NBFCs and HDFC Ltd would get categorised as a core financial solutions system similar to the core banking system for banks and a risk-based internal audit.

“These measures have considerably reduced the regulatory arbitrage between a bank and a housing finance company,” HDFC chairman Deepak Parekh said.

The strategic rationale for the proposed merger is the reduced gap in liquidity requirements between a bank and an NBFC. The SLR and CRR for banks was 27%, which has now been reduced to 22% (18% SLR and 4% CRR).

Interest rates are more favourable today as compared to earlier years. Banks have an option to invest in priority sector lending certificates to meet PSL requirements as against direct lending to agriculture and MSME in the past.

“With RERA and the IBC, real estate is seeing an increased level of transparency.  Mortgage customers can have access to a range of financial products under one roof,” HDFC vice chairman Keki Mistry told reporters.

While HDFC Ltd has been floating the idea of a merger with its subsidiary years back, Parekh said it had to wait for the regulatory environment to be conducive. The merger makes sense provided there is no loss of value for shareholders, he had then said.

 As per the RBI’s proposals last year, NBFCs in the upper layer will have to comply with common equity Tier 1 capital regulations like commercial banks. They need to maintain a 9% CET1 ratio. They will also have to comply with large exposure framework and listing regulations.

 Earlier, HDFC Bank managing director and CEO Aditya Puri was not keen in the merger between the parent and the son. He exited in October 2020 and was succeeded by Sashidhar Jagdishan.

 The merger will give HDFC access to cheaper cost of funds through public deposits of HDFC Bank.

 The merged entity will have a balance sheet of Rs 17.87 lakh crore and a combined market cap of Rs 12.8 lakhh crore. It will enable HDFC Bank to undertake larger underwriting at scale.