Bank merger Case

The proposed $40bn merger between Indias biggest private sector bank and mortgage provider has been driven by tighter regulation of the countrys shadow banking sector, according to the executive spearheading the deal. The merger of HDFC Bank and Housing Development Financing Corporation (HDFC) would be the largest in the countrys history and create a financial services behemoth. The combined company would have an asset base of $340bn, according to Fitch Ratings, double the size of its closest rival ICICI Bank. Deepak Parekh, chair of HDFC, said the deal was partly motivated by regulations that will come into force in October for large non-bank financial companies after a series of collapses in the sector wiped out the savings of millions of depositors. Shadow banks will be subjected to similar rules as state-owned and commercial lenders, including having to meet more stringent liquidity requirements. In anticipation of that we had to take a call, Parekh told the Financial Times in an interview, adding that the deal was necessary for both sides. The merger will immediately expand HDFC Banks mortgage portfolio and enable it to sell more home loans as the company looks to take advantage of Indias post-pandemic recovery. Parekh said demand was rising as families upgraded to larger homes after being cooped up in lockdown, adding that HDFC had received 83,000 loan applications in March, far more than the 65,000-70,000 monthly average. The bank would also be able to borrow more, he said, as a number of Indian lenders had hit a ceiling in terms of how much they could loan to HDFC. Many lenders to us have reached their mandatory lending limit...the sources were drying up, he said. As part of HDFC Bank, HDFCs housing finance business could also benefit from the lenders access to cheaper capital. This would allow the company to issue more loans on homes as well as large infrastructure projects, which the more conservative HDFC has not previously done. Analysts said the merger could trigger a series of deals in the countrys banking sector, as competitors hunt for acquisitions to close the gap with HDFC Bank. But they also warned that regulators may block the deal owing to concerns such as the integration of HDFCs insurance subsidiaries. The group owns 48 per cent of HDFC Life, its life insurance business, but HDFC Bank would either become a majority shareholder or limit its stake to less than 30 per cent after the merger, said Parekh. Well take the necessary measures, he said. So we may have to buy 2 per cent from the market, if they allow us. I dont think its a major issue. However, his assurances have not convinced all investors or analysts. HDFC Bank shares shot up 10 per cent to Rs1,722 ($22.56) after the merger was announced on April 4 but have since fallen 15 per cent to close at Rs1,464 on Wednesday, the last day of trading before markets were shut for public holidays. This merger aint going to be easy with the Reserve Bank of India, said Ajay Mahajan, chief executive at Care Ratings. Regulations around creating a new bank from existing businesses had become very structured and slightly onerous. Recommended News in-depthIndian business & finance From the archive: Indias shadow banking crisis raises spectre of contagion Its not going to be so easy as the news made it first appear, he added. HDFC Bank will also have to manage an expanded balance sheet that could be a drag on profitability, Macquarie noted, because the company will have to invest in low risk, low returns assets to meet capital buffer requirements and government targets for financing the agriculture sector. Nonetheless, Parekh was optimistic about Indias economic growth, even after the RBI warned this month that inflation was rising faster than expected and signalled future interest rate rises. I think the Indian economy is very strong, I always have arguments with these rating agencies, he said, adding that the countrys triple B negative sovereign rating was too low. I said, You people dont understand India, look at the progress India has made in 10 years. Get alerts on HDFC Bank Ltd when a new story is published Get alerts Copyright The Financial Times Limited 2022. All rights reserved. Reuse this content(opens in new window)CommentsJump to comments section Latest on HDFC Bank Ltd Due Diligence How to make 20 times your money in private equity Premium.

Answer the following

1. How do you think the merger will affect the economy?

2. What precautions must be taken for such a merger?

3. What is the main motive of such a kind of merger?

4. What are the main challenges of such a merger?