India’s largest private sector bank HDFC Bank and mortgage lender HDFC Ltd. announced a mega-merger on Monday. The amalgamation expects to tap the rising demand for credit. In one of the grandest mergers in the financial sector, HDFC Bank will be 100% owned by the public shareholder, while the existing shareholders of HDFC Ltd. will possess a 41% stake in HDFC Bank.
The terms of the share swap are such that shareholders of HDFC Ltd. will receive 42 shares of HDFC Bank for every 25 shares they hold in HDFC Ltd.
As far as customers are concerned, HDFC Ltd.’s customers will become the bank’s customers as well. As for the employees, HDFC Bank plans to absorb and retain all the employees.
Both the entities being from the same house and sharing similar conservative ideologies makes the merger relatively easy.
RBI also will be happy to see this merger, as it wants NBFCs to be tightly regulated. Given its merger with a bank and the Basel III norms for capital adequacy in place, the NPA (non-performing-assets) books will be monitored very closely.
This merger will be a win-win deal for both of them as post-merger, the mortgage lender, HDFC Ltd., gets access to HDFC Bank’s CASA (current and savings accounts) deposits and lower-cost funds. For the mortgage lending business, the capital cost will come down. As the capital cost comes down, it will automatically have the ability to lend at a better rate. For HDFC Bank, home loan customers can become bank customers.
More NBFCs may seek to merge with a bank shortly. So, in some ways, HDFC Ltd. may be a precursor to what happens in the state-run banking space, where the government has said it reduces the number of public sector banks.
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