HDFC merger will alter credit mix in banking

Mumbai: The merger of HDFC with HDFC Bank will change the composition of credit in the banking sector and increase share of home loans to a fifth of all bank credit. The merger will also open the fixed deposit market for non-banking finance companies (NBFCs) and increase their headroom to raise funds.
According to HDFC’s annual report for FY22, the corporation has loans from banks and financial institutions amounting to nearly Rs 1.4 lakh crore. It also has fixed deposits of Rs 1.6 lakh crore. Post-merger, HDFC’s borrowing from banks will turn into an interbank loan, which is not counted as part of bank credit. This would result in bank lending to NBFCs, which was around Rs 10.8 lakh crore as of end March 2022, shrinking by almost 10%.
While bank credit to NBFCs will fall, the banking sector’s exposure to housing will go up from Rs 17 lakh crore to over Rs 21.4 lakh crore after HDFC Bank absorbs the Rs 4.3-lakh-crore individual loan book of the parent HDFC.
The change in the composition of credit will increase the scope for finance companies to raise funds. According to industry sources, HDFC accounts for nearly 70% of the fixed deposit mobilisation by NBFCs. Besides this, Bajaj Finance is the second-largest mobiliser of FDs, with a deposit book of Rs 30,800 crore as of end-March 2022.
There is a large pool of agents who distribute HDFC’s FDs. These are expected to shift to other finance companies. Also, banks that are close to their NBFC sector exposure limit due to loans to HDFC will have more headroom to lend to NBFCs.
The proposal to merge HDFC with HDFC Bank has been granted ‘no objection’ by the NSE, the BSE, the Pension Fund Regulatory and Development Authority, and the Reserve Bank of India. The merger is now awaiting approval from the Competition Commission of India, following which it will have to be approved by the National Company Law Tribunal.