HDFC-HDFC Bank mega merger: 45 years on, the homemakers check in

“After 45 years of housing finance and nine million homes provided to Indians, we had to find a home for ourselves. We have found it within our own family and in our own bank,” said Deepak Parekh, chairman-HDFC Ltd while announcing the long speculated merger with its offspring, the 28-year-old HDFC Bank.

The “we” that Parekh referred to is a many-million-strong family, and includes the housing finance company’s employees, shareholders, and customers. It’s said that anything more than two is a crowd, but a lack of togetherness will not be an issue, Parekh made that clear upfront: “This is a merger of equals.”

It must truly have been an emotional moment for Parekh. Fifty-five years ago, Hasmukh Thakordas Parekh set up HDFC Ltd, which went on to become a marquee name in India Inc. His nephew — the Parekh of our times — had the foresight to set up HDFC Bank when the first set of private bank licences were issued in the early 1990s.

Come to think of it: What would HDFC Ltd’s fate have been had Parekh not set up a bank. It would have been “just a very successful home-loan vendor.” And, it might have been on the lookout to enter a bigger league, like many other non-bank financial companies (NBFCs).

For, it’s hard to find another instance of a mono-line business entity (HDFC Ltd) morphing into a financial conglomerate anywhere in the world during this period. Yes, you had a GE Capital and Jack Welch, but that’s history. Even as comparable mergers go, the HDFC Ltd-HDFC Bank deal is far removed from the ICICI-ICICI Bank merger in 2001, basically an exit route for the parent whose business model was well beyond its expiry date.

Incidentally, it was H T Parekh who took ICICI to dizzying heights during the era of development financial institutions (DFIs) — he was chairman and managing director from 1972-1976.

“Look at the talent pool he created. While Aditya Puri and his A-team made HDFC Bank what it is today, what if Parekh had made a wrong call? Many private banks from the 1990s had hit more than an air-pocket,” says a senior banker close to Parekh.

Another senior banker said: “The culture that Parekh fostered at HDFC Ltd is also familial. If you have stayed on for the first five years, it’s most likely you would also retire from there”. And off the top of the mind, it’s Keki Mistry and Renu Karnad Sood who fit such a profile.

 

The other newsmaker is the Reserve Bank of India (RBI) Governor Shaktikanta Das.

There’s nothing in the regulatory architecture that was a barrier to the HDFC Ltd-HDFC Bank transaction. Yes, there is the issue of forbearance on the reserve front — the cash reserve ratio, statutory liquidity ratio and priority sector targets — for the new entity. (That said, the effective date of the merger is well into the future as the nod of a host of financial sector regulators is awaited).

It’s well known that in the past, the central bank was not inclined to bless HDFC Ltd-HDFC Bank with relaxations. In the case of ICICI Ltd-ICICI Bank and later at IDBI Ltd-IDBI Bank (2005), exemptions were in order as they were transitioning from DFIs.

Parekh said the central bank’s view has been sought, but it would be safe to assume that he would have got some level of comfort from the RBI before the deal was made public. This opens the door for other NBFCs seeking to become a bank.

And here it would not be out of place to speculate that the central bank may be relatively okay to grandfather such transitions. While the RBI’s Internal Working Group (IWG) to ‘Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks’ did not explicitly say so, “it’s now logical to read into the HDFC Ltd-HDFC Bank transaction and say the central bank will be accommodative,” said a senior banker.

The RBI appears to have moved away from its stated position that banks can’t spawn subsidiaries. The to-be merged entity will have scores of them. Then, you also have the IWG’s stance that the non-operative financial holding company (NOFHC) should continue to be the preferred structure for all new licences to be issued for universal banks. But the NOFHC may be mandatory only in cases where the individual promoters, promoting entities and converting entities have other group entities. Is this also up for a review now?

All said, the first working day of the new financial year has been eventful.

Parekh said the last two nights were sleepless. He will be relaxed now.