This article has been written by Shivam Agrawal pursuing Remote freelancing and profile building program and edited by Shashwat Kaushik.

This article has been published by Sneha Mahawar.

Introduction

HDFC Ltd. and HDFC Bank began their operations in 2014. An existing agreement of sale of home loans binds them, whereby HDFC Ltd. is the seller of a portion of its home loans and HDFC Bank is the buyer/purchaser. Such home loans are entitled to be sold every quarter. 

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In April 2022, the Board of Housing Finance Firm Housing Development Finance Corporation Limited (HDFC Ltd.) approved the merger of HDFC Bank and its subsidiaries. This announcement led to a rise in the share prices of both HDFC Bank Ltd. and HDFC Ltd. by Rs 1650 and Rs 2680, respectively. 

The completion of approvals and transactions of statutory authorities, regulations, shareholders, and creditors under the applicable laws is yet to be completed as a result of the merger. Due to the complexity of regulatory permissions, 15 to 18 months were anticipated to be needed to complete this merger deal. 

Brief details of the merger 

This merger has major implications for the financial sector because of its transactional strategy. HDFC Ltd. will be merged with India’s largest private bank. The former has assets under management (AUM) worth 5.3 trillion and a market cap of Rs. 4.45 trillion and the latter has a market cap of Rs. 8.35 trillion. After the merger, HDFC Bank will have a net worth of Rs. 3.3 trillion and will have distribution leverage in urban, semi-urban, and rural areas. The shareholders of the Housing Corporation (HDFC Ltd.) will have ownership of 41% of the bank. 

Benefits of this merger 

The benefits of this merger are:

  1. The merger will help reduce the proportion of unsecured loans provided by HDFC Bank. 
  2. The merger will be useful and will benefit both HDFC Ltd. and HDFC Bank. The combination of both will strengthen the bank due to the addition of the dominant position of the former in the sector of housing finance. It will further improve the scalability, distribution, and cross-selling of banking and housing finance products. 
  3. The share prices have increased since this merger was announced. This clearly shows that the public is interested in this merger. Ultimately, it will help earn profits for the company.
  4. In 2018, the RBI pushed non-banking financial companies (NBFC) to operate as banks due to the Infrastructure Leasing and Financial Services (IL&FS) crisis. This merger will therefore give it an advantage over the increasing competition. 
  5. NBFCs require a new sales turnover of 50 crores every year, which becomes a challenge. Through this merger, HDFC Bank’s housing loan portfolio will be strengthened. The bank will also gain a strong footing in the real estate market, which provides low-risk and secured assets. 
  6. This merger will result in increased scalability, standard and comprehensive product offerings, and resiliency in the balance sheet, revenue, and operating and underwriting opportunities. 
  7. The home loan percentage of HDFC Bank increased to 33%, which was 11% earlier. This would result in the bank being placed in second place among the largest banks in India. 

Optimisation of costs due to merger 

The merger will result in reductions in loan pricing costs, operation costs, and the operation costs of establishments. However, this will take 4-5 years. As a startup, the initial 2-3 years might be a bit of a struggle to balance the finances in view of the low margin on housing finance. The merger will also lead to an increase in statutory reserves. 

The demand for credit will drastically increase in the coming years. The merger of NBFCs and banks will provide surplus credit and benefits to both. This will further result in the companies getting cheaper franchises and funds. 

Merger benefits to shareholders 

The shareholders of HDFC Bank will get bank trade premiums as a result of this merger. The asset quality will be further increased and protected due to the massive loan base of HDFC Ltd. The merger will additionally increase scalability and lower the cost of funds, which will encourage a splurge in the entry of mortgage businesses. The process of loan servicing will be transferred to the bank, and the existing shareholders will benefit from the increased share prices. The existing shareholders post-merger will have 41% ownership of the merged entity. Every shareholder of HFDC Ltd. after the merger will get 42 shares in HDFC Bank. He will get such shares for every 25 shares in HDFC Ltd. held by him. 

Depositors view of this merger

There are two types of fixed deposits in the Housing Finance Corporation, i.e. HDFC Ltd. They are:

  1. Automatic renewal 
  2. Non-automatic renewal 

In automatic renewal, the fixed deposits are automatically renewed on the date of maturity for the same period of time. The rate of interest depends on the kind chosen, whether fixed or floating. On the other hand, in non-automatic renewal, the amount on maturity is paid to the payee’s bank account. 

Changes that occur in lieu of merger

Individuals having an automatic renewable fixed deposit with the Housing Finance Corporation, i.e., HDFC Ltd., can withdraw or renew their fixed deposits with the merged HDFC Bank at the available rate of interest. It is important to note that the rate of interest offered by HDFC Bank is lower than that of the corporation. 

In case a person invests in fixed deposits for a period and tenure of 66 months and the principal amount is below Rs. 2 crore, the corporation, i.e., HDFC Ltd., offers the rate of interest at 6.55%. On the other hand, HDFC Bank offers a 5.6% rate of interest for the same term and tenure. For senior citizens investing in fixed deposits for a 66 months tenure, where the principal amount is below Rs. 2 crore, the bank offers a 6.80% rate of interest and a 6.35% rate of interest. The corporation offers a 0.05% rate of interest over the existing interest rate in case an individual renews his fixed deposit through online automatic renewal. 

Thus, HDFC Bank offers a lower rate of interest as compared to the Corporation vis-a-vis HDFC Ltd. However, in terms of safety concerns, the bank provides better safety for deposits and interests under the DIGC (Deposits Insurance and Credit Guarantee Corporation). 

Borrowers view of this merger 

In respect of the borrowers, it will not impact the terms and conditions of the existing loans taken by the borrowers from the corporation. In the event that a person takes a loan from the corporation, the terms and conditions of the loan will remain as they are. Post-merger of the corporation and the bank, there will be a revision in the rate of interest on home loans. The

The bank gives home loans at a 6.70% rate of interest to those with a credit score of 750 and 6.80% to 7.30% to those with a credit score below the threshold limit. For borrowers who are women, the rate of interest is 6.70% provided by the bank to those with a credit score of 750 and 6.75% to 7.25% for those with a credit score below the threshold. 

Once the merger is completely done, HDFC Bank might release a notification to customers for mandatory updates to their KYC and NACH. It will result in auto-debit installments of EMIs on home loans.

Merged entity in the Morgan Stanley Capital International (MSCI) index 

The Morgan Stanley Capital International India Index is an indicator of the proper and sound functioning of the Indian capital market. Foreign investors use the MSCI Index India to invest their funds in the international market. Through this MSCI Index, they get to learn about the stable and volatile nature of the share prices in detail. In simple words, this index helps foreign investors invest in Indian shares directly, depending on the weight of stocks on the index. It ensures the total number of funds in which a foreign investor may invest. The infrastructural sector of India has extremely strong opportunities for growth in the next few decades, and it will ultimately help in the growth and development of the financial sector as well. The housing sector will mostly benefit. With the growth in infrastructure and finance, the merger entities will also experience massive growth in positive aspects. Thus, the MSCI Index will include the merged entities. 

Conclusion

Through this article, we learned everything about why a merger is happening between HDFC Bank and HDFC Ltd. in the first place and its benefits, impact on shareholders, depositors, and borrowers, along with financial benefits leading to cost optimisation. We also learned about the certainty of the merged entities in the MSCI Index. We additionally witnessed the impact of mergers on companies and the benefits arising therefrom. The merger will attain success through market growth for the company, shareholder interest, and overall growth.

References

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