On April 4, the board of directors of mortgage lender Housing Development Finance Corporation (HDFC) approved the merger of its wholly-owned subsidiaries Housing Development Finance Corporation Investments Limited and Housing Development Finance Corporation Holdings Limited with Housing Development Finance Corporation Bank Limited.
According to a filing with the stock exchanges by Housing Development Finance Corporation Bank, the transformational merger will result in HDFC acquiring a 41% stake in the bank.
The Chairman of HDFC Limited describes the merger as a “merger of equals.”
“This is a merger of equals. We believe that the housing finance business is poised to grow in leaps and bounds due to the implementation of RERA, infrastructure status to the housing sector, government initiatives like affordable housing for all, amongst others,” Chairman of Housing Development Finance Corporation Limited, Deepak Parekh, stated.
In addition, he stated, “The resulting larger balance sheet would allow underwriting of large-ticket infrastructure loans, accelerate the pace of credit growth in the economy, boost affordable housing and increase the quantum of credit to the priority sector, including credit to the agriculture sector.”
Chairman states how the HDFC merger would be beneficial for lenders
The HDFC-HDFC Bank merger will reduce the risk of a single product failure and increase the combined entity’s asset diversity. According to Deepak Parekh, who spoke at a press conference, the combined entity will be able to offer mortgage products more seamlessly than the current assignment route.
According to Deepak Parekh, regulatory changes in the last three years have reduced merger barriers. He added that the merger makes the combined entity’s mortgage offering even more competitive.
Moreover, Chairman Deepak Parekh further said, “Merger will mitigate single product risk, enhance the diversity of assets of the combined entity. The combined entity will be in a position to offer mortgage products seamlessly vs the current assignment route. Housing Development Finance Corporation will continue on an as-is basis until the merger. Post effective date of the merger, all Housing Development Finance Corporation branches and offices will continue to offer mortgages.”
In addition, Parekh said, “Only after obtaining all regulatory approvals will the merger become effective. Post-closing, HDFC Bank will be 100% owned by public shareholders. Shareholders of HDFC Ltd will own a 41% stake in Housing Development Finance Corporation Bank post-merger. Customers of Housing Development Finance Corporation and Housing Development Finance Corporation Bank will be the biggest beneficiaries.”
Meanwhile, according to Deepakh Parekh, who spoke at the press conference, the process will take 12-18 months due to numerous approvals. The RBI does not allow officials over the age of 75 to serve on the Board.
Keki will have a year or year-and-a-half off so he can be a director on the Board of Directors or do whatever Shashi wants. Keki Mistry does not want to be a full-time executive, but she can serve on the Board of Directors, according to Parekh.
HDFC Vice-Chairman and CEO Keki Mistry echoed Parekh in the same breath. “This merger will make HDFC Bank a large lender even by global standards. It will make more room for FII holding in HDFC Bank.”
Following the transaction, HDFC CEO Keki Mistry sees potential for 7% more room for international investors. He added that after the merger, there could be a 7-8 per cent increase in foreign holdings in the combined entity.
Mistry went on to say that once regulatory approval is received, the merger will go into effect at the approved ratio. Even by global standards, the HDFC-HDFC Bank merger will make Housing Development Finance Corporation Bank a large lender.
“HDFC is now required to maintain the liquidity ratio. Regulatory changes have reduced the barriers to mergers over the years. Housing Development Finance Corporation Bank will be 100 per cent owned by shareholders. NBFCs now needed to move towards core banking solutions platform, like banks.”
“HDFC and HDFC Bank to continue to operate independently, till the merger date. Cross-selling of banking products will be possible for Housing Development Finance Corporation Customers. All associates and subsidiaries of Housing Development Finance Corporation Ltd will subsequently be owned by HDFC Bank. Post-merger, Housing Development Finance Corporation Bank will become one of the largest banks in the world,” Mistry said.
He stated that the combined entity’s foreign holdings could increase by 7-8 per cent after the merger.
By the second or third quarter of FY24, the HDFC-HDFC Bank merger should be complete. The Proposed Transaction, according to HDFC, will allow the bank to expand its housing loan portfolio and expand its existing customer base.
Former SBI chairman Rajnish Kumar said in a CNBC TV18 interview that the merger benefitted Housing Development Finance Corporation Ltd by lowering the cost of borrowing. “When the cost comes down the combined entity gains in terms of cost efficiencies and it is value accretive for both the shareholders of Housing Development Finance Corporation and HDFC Bank,”
The merger of Housing Development Finance Corporation and Housing Development Finance Corporation Bank has been in the news for some time. In fact, Housing Development Finance Corporation Chairman Deepak Parekh stated in 2015 that his company would consider merging with Housing Development Finance Corporation Bank if the circumstances were favourable.
However, due to the parent’s decision to put the merger on hold, the wait for the merger grew longer. According to Parekh, the merger makes sense as long as shareholders do not lose value.
The resultant entity will emerge as a powerhouse in the Indian banking industry, with the parent finally merging the bank.
Moreover, following the IL&FS crisis in 2018, the RBI proposed that large NBFCs convert into banks, and this merger is the result of that proposal. Housing Development Finance Corporation is the largest mortgage lender in India, and Housing Development Finance Corporation Bank is the country’s largest private bank.
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