The collapse of regulatory arbitrage between banks and non-banking financial companies (NBFCs) is the trigger for the HDFC-HDFC Bank merger, the leadership team of HDFC said on Monday. The mortgage major has sought time from the Reserve Bank of India (RBI) to comply with cash reserve ratio (CRR) and statutory liquidity ratio (SLR) norms on its existing balance sheet, they added. Edited excerpts:
Why is the merger being proposed now?
Deepak Parekh: The merger is a coming together of equals. Customers of both HDFC and the bank will be the biggest beneficiaries. However, over the last few years, there have been certain regulatory changes for banks and NBFCs which have considerably reduced the barriers for a potential merger. The last three years have seen a host of guidelines issued by the RBI for harmonising the regulations between banks and NBFCs. These have included guidelines such as large NBFCs should be converted into commercial banks, particularly those over Rs 50,000 crore asset base; NPA classification which was different before RBI has now made the same NPA guidelines for banks, housing finance companies and NBFCs. NBFCs are now required under the RBI regulations to maintain liquidity against the next 30 days’ outflows on a rolling basis. Scale-based regulations for NBFCs have been introduced by the RBI where we would be recognised as a large organisation in the upper layer of NBFCs, and the upper layer will have a much closer and stricter regulatory requirement. Another factor is that the RBI has asked NBFCs to follow core financial solutions like banks, which are following core banking systems and risk-based internal audit. These measures have considerably reduced the regulatory arbitrage which was there between a bank and an NBFC.
Atanu Chakraborty: The NBFCs’ regulatory trajectory has been coming closer to the banks. That makes this deal that much easier in terms of the overall risk requirements that the regulator puts in for the financial institutions in terms of the requirements of CRR, SLR and other requirements which have been converging over the last few years and have now come fairly close to each other.
How are CRR and SLR requirements to be managed?
Parekh: The strategic rationale for the proposed merger is as follows: the reduced gap in liquidity requirements between the bank and the NBFC, the SLR and CRR for banks has now been reduced to 22% – 18% for SLR and 4% for CRR – from 27%. Interest rates are more favourable today than in earlier years. Banks have an option to invest in priority sector lending certificates to meet PSL requirements as against direct lending to agriculture and MSME as in the past…In our letter to the RBI we have said two things. One is, please give us some time to be compliant on our existing assets of HDFC Ltd for a specific period of two-three years, but all new loans will be compliant with the SLR-CRR regulations. This is also one of the requests made to RBI to give us time for PSL because we don’t have MSME loans, we don’t have agriculture loans in our books. Yes, we have a large amount of affordable housing loans, but not these. Under the LCR, we carry some amount of liquidity ourselves. For the retail deposits we take we anyway have to provide SLR. We’ve not yet done a number of how much it will be, what will be the shortfall, what RBI will permit, how long we will have to be compliant on grandfathering of assets and liabilities. These are open questions that depend on how RBI responds to our letter…We have a letter from RBI and that says our proposal is under consideration.
Keki Mistry: To my mind, interest rates will go higher, but they will not go back to what you saw pre-Covid. In the past when we had evaluated the merger, the interest rates in that period were significantly higher than what it would be even if you assume that there are one or two rate hikes on the way.
Sashidhar Jagdishan: As per the last reported numbers, HDFC had roughly Rs 4.4 trillion of liabilities, including borrowings. Embedded in that particular borrowing, they had some infrastructure bonds of about Rs 80,000 crore now which was then Rs 75,000 crore. That isn’t required to qualify for any of the reserve requirements. The approximate amount, at 22% math, comes to anywhere between Rs 90,000 and Rs 100,000 crore. If you look at the excess we have, not just from a regulatory requirement perspective, but from the capital cushion point of view, the number probably is already there.
Parekh: We would rather use the money that we have for lending to the economy, for mortgages and other purposes, and that is more accretive to the society and the economy because we have to increase the credit growth. If you want a higher GDP growth rate in India, you have to disburse more money and if you invest in SLR-CRR, it’s not going to do it to that extent.