HDFC Ltd (NSE: HDFC) and HDFC Bank Ltd (NSE: HDFCBANK) are two financial behemoths, and recently they have announced a merger where HDFC Bank, a 28-year old organization has offered a deal to acquire its parent HDFC, a 45-year old company.
In Today's article let's look at what prompted this merger, what are the benefits for the stakeholder, what are the downsides, and more...!!!
The Event
HDFC Ltd is an NBFC that started out in 1977 with the goal to change people's behavior. Back in the day, taking loans to buy/build a house was considered to be a foreign concept. It was at that time when HDFC Ltd convinced a certain D.B. Remedios to take out a loan of ₹35,000 to build a ₹70,000 home in Mumbai and thus began HDFC’s journey. From then it was no looking back for the NBFC, within a few years their loan portfolio crossed the ₹100 crore mark.
Fast-forward to the 1990s, public banks were lacking the efficiency and people wanted a fresh banking experience, hence enter HDFC Bank Ltd, Deepak Parekh, Chairman of HDFC convinced Aditya Puri who was at that time heading Citibank Malaysia, to head the newly formed HDFC Bank Ltd.
Ideally, regulations prefer NBFC, since they aren't tied to various laws and it makes their lending process more smooth.
However, this all changed with the fall of the IL&FS crisis, where NBFC just pressed the accelerator, and never took it off which obviously led them to a place where they couldn't pay their creditors back because they just focused on growth.
Following this RBI put out a regulatory framework for NBFCs which more or less brought them at par with a bank. Given the diminishing difference between a bank and NBFC, management of both HDFC and HDFC Bank saw no point in running a bank and another almost bank-like organization.
But this is not the only reason...
The Benefits
Now banks have access to something called CASA deposits, which is nothing but what salaried and business people called Saving account and current account. This money is dirt cheap, as they have to pay us only around 4% interest and they can lend this money as a loan, and pocket the difference.
But NBFC on the other side doesn't have this, their cost of borrowing is around 6% which lowers their margin.
Also, in HDFC Bank's case, their home loan constitutes only about 11% of their loan book, the ideal share of a private bank should be around 25%. Post this merger, home loans will be around 33% of the loan book.
And now you see why the merger of the two entities makes sense and how it will benefit all the stakeholders, but now let's look at the downside...
The Downside
HDFC Bank has always been not very big on infrastructure loans, since taking these loans comes with a lot of risks too. But a recent press release by HDFC Bank, says - "It will also enable underwriting of larger ticket loans, including infrastructure loans -- an urgent need of the country"
Also, there are a lot of regulatory approvals to be taken for a merger of this magnitude ($60 billion), after all the merged entity will be only behind SBI (26%) in terms of market share (15%).
Conclusion
This merger was long due, everything looks good on paper and it seems the synergies will work in favor of all the stakeholders, but a lot of merger fails on account of difference in culture, people, systems, and many more. The deal is likely to take 14-18 months to conclude, let us see how this pans out.
A quick question - Why this article talks about home loans share in particular?
Do let us know your thoughts on the above topic in the comment section and let a healthy conversation begin.
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Disclaimer
The above information is to spread financial literacy. We are not SEBI registered financial advisors, kindly consult your financial advisor before making any investment decision.
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