HDFC -HDFC Bank Merger To Shake Up Sector Dynamics: Fitch
Moneylife Digital Team 12 April 2022
The recently announced merger between India's second-largest lender, HDFC Bank Ltd, and its shareholder HDFC Ltd, the country's largest housing finance company, may have long-term implications for the nation's banking and non-bank financial institution (NBFI) sectors, says Fitch Ratings.
In a report, the rating agency says, "The proposed merger could redefine the competitive landscape for banks, and increase the prominence of mergers and acquisitions (M&A) among banks seeking to close market-share gap with the merged HDFC Bank. It could also influence the evolution of the NBFI sector, particularly for large entities that have nurtured banking ambitions amid tightening sector regulations."
Indian banks intermediate roughly 60% of system credit, but face stiff competition as the market is fragmented and products are fairly homogenous. Three rounds of State bank mergers since 2017 have led to some consolidation but with limited impact on pricing power.
Fitch says it believes that the proposed merger of the HDFC entities and the recently announced acquisition of Citibank India's consumer business by Axis Bank Ltd could encourage banks to turn to mergers & acquisitions (M&A). 
"Large NBFIs could be acquisition targets, given their higher-margin products, large pools of priority-sector customers and loans, and potential cross-selling opportunities. However, the regulatory attitude towards such acquisitions will be an important factor in their success," it added.
The combined HDFC entity will have an asset base of US$340 billion, nearly half the size of the largest bank, State Bank of India (SBI), and double its nearest competitor, ICICI Bank Ltd.
It will account for nearly 14% of system loans and 9% of system deposits, a roughly 300bps (basis points) jump in loan market share and about 100bps for deposits from the stand-alone HDFC Bank. The all-stock merger will take between 12 and18 months to complete, subject to regulatory approvals.
According to Fitch, both entities stand to gain from the deal. "HDFC Bank will gain about 500 new branches, improve its operating efficiency as HDFC's cost and income ratio is 10% versus the bank's 36%, and diversify its loan book, as the bulk of the loans will be mortgages. HDFC will benefit from greater liquidity and a gradual shift to lower-cost deposits to support a more competitive offering in the large-ticket housing space. It will also be able to expand in affordable-housing financing, underpinned by the combined distribution network."
The harmonisation of NBFI regulations with that of banks over the past few years may have played a role in the merger decision. Tighter regulations amid some high-profile NBFI defaults should ensure stronger risk and governance standards and narrow the regulatory arbitrage between NBFIs and banks. 
However, Fitch says, the trend will continue to drive greater costs which will weigh on profitability. "Higher capital requirements, stricter norms for non-performing loans and the introduction of a liquidity coverage ratio, risk-based internal audits and core financial-service solutions, imply further increases in the cost of doing business for NBFIs," it added.
The Reserve Bank of India (RBI) had previously put forth the idea of converting large systemically important NBFIs into banks, but this was not made into a policy. 
The merger between HDFC and HDFC Bank could serve as a template for entities keen to explore this route, Fitch says, adding, "Large corporate-backed NBFIs, particularly ones with commoditised product segments, such as consumer and housing finance that face tough competition from banks, may find that the franchise and funding benefits from a bank merger may offset the costs. However, the central bank has been wary of allowing greater corporate ownership of banks due to the risk of conflict of interest."
However, non-banks that are either small or in niche non-urban segments may find a bank merger or conversion less attractive. "Many still serve market segments and customers with legitimate but informal income sources, which may not meet the documentation requirements of a bank," Fitch concludes.
2 months ago
I am relieved to read the comments of Nadkarni and Godbole. My own limited experience with HDFC Bank is identical. I found its working chaotic and service poor. Public sector banks have better processes, procedures and even service.
2 months ago
I fully endorse views of Mr. Nadkarni, as far as HDFC Bank is concerned. The staff at all levels behaves arrogantly. What to speak of small customers, even corporate customers are not given any importance. Fed up with customer service, an institution shifted en mass salary accounts of its employees (running into around 100) but there was not even a murmur from bank, which let it go!
2 months ago
I am a customer of both these entities (HDFC & HDFC Bank for over two decades and have experienced decreasing level of services from both, particularly the Bank over past 40+ months.

The shortfalls in service over a this 40+ months as experienced by me can be categorized as : 60% - Systems issues (glaring ones), 20% People related and 20% Procedure related. None of the issues can be attributed to Covid pandemic related factors. Worst when these were documented with all supporting artefacts (including screenshots, screen videos etc.) the response from Bank (at the senior management level) was extremely delayed, not adhering to its own policy of customer grievance handling and common sense. There was a distinct arrogance and blatant denial of errors and issues faced. This was experience in spite of being a customer for two decades at the highest category (called Imperia Banking). Clearly the technology strength and customer focus that the Bank talks about so often is a myth.

Under the light of this, I am concerned about the level of customer service this single monolith entity will provide to customers. It will be much more powerful and will give no importance to customer service. For past week, I have been reading great praise for HDFC in this magazine as well as in other print media, however, having experienced the issues, I do not feel optimistic from a customer point of view.
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