‘HDFC deal will raise profitability’
MUMBAI: Deepak Parekh, chairman of Housing Development Finance Corp. (HDFC) Ltd, comments about the reasons behind exploring the mega-merger of the mortgage financier with India’s largest private lender, HDFC Bank Ltd, and what the merger will mean for the entities. Edited excerpts:
Why did you merge?
The discussion started 6-8 weeks ago. Guidelines for NBFCs had come. Liquidity ratio came recently—LCR— which is indirectly SLR (statutory liquidity ratio), CRR (cash reserve ratio) on HFCs (home finance companies). Non-performing asset (NPA) classification was another. RBI has synchronized NPA classification with banks.
Indirectly, they have also subjected NBFCs to CRR and SLR because of LCR. Also, scale-based regulation was coming into effect. Our size is above ₹50,000 crore. The regulation was akin to a bank, such as risk-based internal audit and risk-weightages were high for mortgage loans.
Given the liquidity in the system, low interest rates, we have seen the highest number of loan applications in March —nearly 86,000 individual loan applications worth ₹35,000 crore. So, our scale was becoming larger, and thus, LCR was going to impact profitability. Also, any investment in a bank has to be taken out of tier-I capital. HDFC Bank has not raised capital in three years.
Next year, they will raise capital, then we will have to bring down our equity below 20%, or we have to borrow or put in equity.
From the bank’s standpoint, they were keen on their personal loans and auto loans. Their retail portfolio has a tenor of only 1.2 years.
Every year, the bank has to not only lend the same amount but a higher amount to show growth in the retail segment. Every bank has mortgages in the retail book. So, this was another thing the bank wanted. After the merger, the tenor for loans will go up from 14 months to six years.
Analysts are saying the deal is value-accretive for HDFC and not for HDFC Bank.
The bank is getting a product they don’t have, a product that will increase profitability significantly. They have the reach but don’t have this product. We can give 70,000 -80,000 cases every month. Our disbursements next year will go higher. Now they are 15,000-20,000 each month. That much lucrative asset is getting added. For the bank, it is good. We have written to RBI for forbearance. Analysts are saying if you put 22% of CRR, SLR, it’s negative for bank. We have discussed this with RBI. Our letter is under consideration.
How many of your employees will be affected?
Ninety-five percent of employees are not affected. Only the departmental heads will be impacted. We have committed to our employees that nobody will be asked to go. Departmental heads include the human resource head, chief financial officer and company secretary.
What if RBI doesn’t agree?
We have not thought of it. We can’t jump the gun.
What about raising capital?
We are not going to do anything before 15 months are over.