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The Reserve Bank of India (RBI) has given HDFC Bank three years to comply with the priority sector lending norms (PSL) following its merger with HDFC Ltd (HDFC), though no relaxation is allowed for abiding by the cash reserve ratio and statutory liquidity ratio rules.
According to RBI norms, commercial banks need to extend 40 per cent of the adjusted net bank credit (ANBC) of the previous year towards the priority sector.
The RBI has allowed HDFC Bank to consider a third of the outstanding HDFC loans in the first year of the merger. The remaining two-thirds of the portfolio of HDFC will be considered over the next two years equally. Effectively, HDFC Bank has to comply with the first year’s target, one year after the effective date of the merger. “The requirement for PSL (complying with priority sector lending norms) kicks in 12 months later,” Srinivasan Vaidyanathan, HDFC Bank’s chief financial officer (CFO), said in a call with analysts.
In a stock exchange filing, HDFC Bank said the RBI communications were received by the bank on April 20, 2023. Last week, Vaidyanathan said the merger is likely to come into effect from July this year.
“Assuming PSL requirements would kick in only in FY25, the PSL cost would reduce from Rs 2,000 crore to Rs 500 crore, implying a core PAT (profit after tax) upgrade of 2 per cent,” said Gaurav Jani, research analyst from broking firm Prabhudas Lilladher.
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While more time was given to comply with PSL norms, the same was not granted for meeting the cash reserve ratio (CRR)/statutory liquidity ratio (SLR) norms.
HDFC Bank has to set aside 4.5 per cent of HDFC’s assets as CRR and 18 per cent as SLR after the merger. CRR/SLR norms are not applicable for NBFCs. HDFC Bank sounded confident on meeting the norms as it holds excess SLR on the books.
“In the bank, the requirement is 4.5 per cent for CRR and 18 per cent for SLR; we normally are excess on that. If you look at our investment portfolio, as of March 2023, the SLR is in excess of 24-25 per cent. If you correspondingly look at LCR (liquidity coverage ratio), it is about 115 per cent,” Vaidyanathan said.
Some analysts estimated HDFC Bank would need Rs 1 trillion for meeting the CRR/SLR norms.
“We shall have better clarity when we have the results of HDFC Ltd on the approximate amount of funds needed to comply with this regulation. The impact of this regulation is unlikely to be a painful one,” Kotak Securities said in a note.
While allowing the second-largest private sector lender to continue to hold HDFC’s stake in insurance joint ventures, the regulator granted it to increase its stake to over 50 per cent in these JVs before the effective date of the merger.
At present, HDFC has a 48 per cent stake in HDFC Life Insurance and 50 per cent in HDFC Ergo.
Separately, the markets regulator -- Securities and Exchange Board of India -- has allowed ownership change of HDFC Mutual Fund, from HDFC to HDFC Bank. HDFC has a 52.6 per cent stake in the mutual fund arm.
The RBI has also said that HDFC Bank can continue to hold HDFC’s stake in HDFC Education and Development Services, engaged in operating three education schools. However, HDFC Bank has to divest its stake fully in two years from the merger effective date.
HDFC Bank has been also allowed to hold HDFC’s stake HDFC Credila Financial Services – a firm that extends study loans -- but it will have to cut the stake to 10 per cent within two years. Furthermore, Credila, which has a loan portfolio of Rs 10,000 crore, is not allowed to onboard new customers.
HDFC Education and HDFC Credila – both are 100% subsidiaries of HDFC.
On interest rate benchmarks, the RBI said one-time mapping of all borrowers of HDFC would need to be done by HDFC Bank for benchmark and spreads. “All retail, MSME and other floating rate loans sanctioned by HDFC Limited would be linked to appropriate benchmark within six months from the effective date,” the communication said.
The current book of HDFC Bank consists of 45 per cent of fixed rate loans. After the merger, the book would be around 33 per cent fixed rate and the balance would be floating.
On loan against shares, the banking regulator said on the basis of the list submitted by HDFC, the RBI has permitted loan against shares for promoter contribution in excess of Rs 20 lakh to individuals, to continue until its existing duration/maturity.
“The response of the RBI in respect of some other requests is awaited and expected to be received in due course,” Vaidyanathan said.
HDFC Bank said it would engage with the RBI for certain clarifications on the communication and would also approach the regulator with the “crystalised” amounts of liabilities as of the effective date.
