HDFC-HDFC Bank Merger: Deepak Parekh On Plan B If Regulatory Concessions Are Denied

There are ways to mitigate the liquidity and reserve requirements for the HDFC-HDFC Bank merged entity if the Reserve Bank of India doesn’t extend time concessions, according to Deepak Parekh. “There is a Plan B,” the chairman of Housing Development Finance Corp. Ltd. said in an interview to BQ Prime’s Menaka Doshi.

One of the key concerns investors in HDFC Bank Ltd. have had about its proposed merger with parent HDFC Ltd. is the additional provisions the bank would have to make post merger to meet SLR, CRR and priority sector lending on the expanded book. A Macquarie report estimated “HDFC Bank will have an excess SLR/CRR asset requirement of ~Rs 700-800 billion and will also need an incremental ~Rs 900 billion agriculture portfolio (based on 18% of borrowings) to meet PSL norms. These low-yielding portfolios could be a drag on merged entity P&L.”

To mitigate this, HDFC has sought time concessions from the RBI, though such concessions are uncommon for the regulator to grant.

If the concessions are not granted, there are ways in which to reduce the burden of the additional funding required to meet the norms, Parekh said.

“For example, the RBI came out with a policy saying that if you borrow 7-year+ money, it doesn’t attract SLR. We have a fair amount of 7-year money borrowed, we can still borrow 10-year money. So in the next one year, we could do 3-4 issues of Rs 10,000 crore each.”

This, Parekh said, could possibly bring down the potential incremental burden “significantly”, possibly by 50%. “I have seen the numbers, it’s manageable. The bank also has surplus government securities in its books.”

We can also sell loans, Parekh added.

At the time of the merger announcement, the management of the companies had said that they had requested for a 2-3 year time period to meet the regulatory ratio requirements on the expanded book.

“We feel the RBI will be accommodative and give us time to comply and grandfather our assets and liabilities for some time. We will do whatever is necessary so that more borrowing isn’t necessary, by using different methods,” Parekh said.

HDFC Bank CEO Sashidhar Jagdishan had earlier told BQ Prime that SLR and CRR requirements “should not be a drag.” “I think both institutions have enough excesses, which could qualify for that.”

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