Housing Development Finance Corporation (HDFC), the entity that had become synonymous with housing loans in the country even before Indians dreamt of liberalisation, would become a part of history when it merges with its own offshoot HDFC Bank in the next year and a half.
Though HDFC chairman Deepak Parekh described the merger as the son taking over the business of the father, it indicates much deeper systemic changes in the Indian financial sector which forced both the HDFC entities to dust off a merger proposal that was discussed and discarded two years ago.
Many entities operated as non-banking finance companies because this model would subject them to lighter RBI regulations as compared to regular banks.
Typically, NBFCs were not required to make regulatory provisions such as cash reserve ratio and statutory liquidity ratio and were not subjected to stringent reporting compliances for non-performing assets, etc. They, therefore, preferred to operate as non-banking companies in spite of the higher cost of funds.
However, after Infrastructure Leasing & Financial Services (IL&FS), one of the largest non-banking companies, turned bankrupt, the Reserve Bank of India started tightening norms for NBFCs to bring them on par with banks, leaving little incentive for large NBFCs to operate independently. After the merger, the combined entity can access low-cost deposits for financing the ever-growing demand for housing loans.
The combined entity will be a financial giant with a loan book of Rs.17.9 lakh crore — more than double that of the second-largest private lender ICICI Bank. After the merger, the combined entity’s loan book would be Rs.8.64 lakh crore less than India’s largest lender State Bank of India (SBI) which lent Rs.26.64 trillion at the end of December 2021.
While the merger is subject to RBI’s approval of HDFC’s request for staggered compliances, the central bank should ensure that changing regulatory dynamics do not rob the vibrancy of the Indian financial sector and do not make an average Indian’s dream of owning a house a mere dream.
