According to the information given to the stock exchanges, India’s largest housing company HDFC will merge with its subsidiary HDFC Bank. HDFC Bank is the largest private sector bank in the country by value. This merger will happen through an amalgamation scheme.
Prima facie, this merger will be between two companies of equal weight and will be beneficial for both the companies from the perspective of market share, balance sheet strength and cost synergies. This will also open the way for foreign institutional investors to buy shares in HDFC Bank, but it needs to be kept in mind that both the companies will have to comply with many regulatory provisions regarding this merger. On which both these companies will also have to pay a big price.
These regulatory provisions include provisions relating to cash reserve ratio, statutory liquidity ratio and priority sector lending. Both these companies will also have to pay a price for complying with these rules. Let’s take a look at them.
SLR Rules
Explain that SLR is called ‘Statutory Liquidity Ratio’ in Hindi and ‘Statutory Liquidity Ratio’ in English. SLR is that part of the deposits with the banks, which they are required to keep with them before issuing loans against their deposits. SLR can be in any form like cash, gold reserves, government securities with banks.
As per RBI norms, under SLR, banks have to invest 18 per cent of NDTL (Net Time and Demand Liabilities) in government bonds. Apart from this, banks and non-banking financial companies (NBFCs) have to maintain high quality liquid assets under the liquidity coverage ratio.
Analysts believe that the post-merger company will have to raise capital from the market or maintain continuous additional liquidity on its balance sheet to comply with these statutory provisions. Analysts estimate that Rs 60,000 to 70,000 crore may have to be raised for this. However, the managements of both the companies have expressed confidence in meeting the regulatory requirements.
It is important to note that about 35 per cent of HDFC’s borrowings are in the form of retail deposits. These will also be included for computing the regulatory ratio post merger. In a management call, HDFC Chairman KK Mistry has said that both CRR and SLR have been cut in the recent past. In such a situation, it will be easier for the merged company to comply with the rules related to CRR and SLR than before.
Priority Sector Lending Rule
It is worth noting that another rule is that of priority sector lending. Which all banks have to follow. Under this, banks have been ordered to compulsorily distribute a certain part of their total borrowings in these areas to encourage the development of such areas by the central bank. This is called Priority Sector Lending (PSL). Under this, banks have to give 40 percent of their net lending to agriculture and allied sectors, small businessmen, affordable housing and other sectors under the priority sector. Is.
Let us inform that the loan book of the company formed after the merger will be Rs 18 lakh crore, of which 27 percent will be home loan. HDFC’s large book will be merged with HDFC Bank, thereby reducing the share of priority sector loans in the bank’s borrowings and HDFC Bank will have to make separate provisions to comply with these rules post this merger.
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Bank’s Managing Director and Chief Executive Officer Shashidhar Jagadeesan says that after this merger, the bank will have to initially opt for the purchase of Priority Sector Lending Certificate (PSLC) to ensure compliance with these rules. He also said that we have made arrangements to follow the priority sector lending rules. On this basis, both these companies have appealed to the regulator to give them time to comply with these rules. Now it has to be seen whether RBI will extend the timeline to ensure compliance with these rules!
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