The collapse of regulatory arbitrage between banks and non-bank financial companies (NBFCs) is the trigger for the HDFC-HDFC Bank merger, HDFC’s management team said on Monday. The Big Mortgage has requested time from the Reserve Bank of India (RBI) to comply with the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) standards on its existing balance sheet, they added. Edited excerpts:
Why is the merger being proposed now?
Deepak Parek: The merger is a rapprochement between equals. HDFC and bank customers will be the main beneficiaries. However, in recent years, some regulatory changes for banks and NBFCs have significantly lowered the barriers to a potential merger. Over the past three years, a host of guidelines have been issued by the RBI to harmonize regulations between banks and NBFCs. These have included directives such as large NBFCs should be converted to commercial banks, especially those with over Rs 50,000 crore in assets; The NPA classification, which was different before RBI, has now established the same NPA guidelines for banks, housing finance companies and NBFCs. NBFCs are now required under RBI regulations to maintain liquidity against cash outflows for the next 30 days on a rolling basis. Ladder based regulations for NBFCs have been introduced by the RBI where we would be recognized as a large organization in the top layer of NBFCs, and the top layer will have a much narrower and stricter regulatory requirement. Another factor is that the RBI has required NBFCs to follow basic financial solutions like banks, which follow basic banking systems and risk-based internal audit. These measures significantly reduced the regulatory arbitrage that existed between a bank and an NBFC.
Atanu Chakraborty: The regulatory trajectory of NBFCs is getting closer to banks. This makes this deal much easier in terms of the overall risk requirements that the regulator imposes on financial institutions in terms of CRR, SLR and other requirements which have converged over the past few years and are now quite close. to one another.
How to manage CRR and SLR requirements?
Park: The strategic rationale for the proposed merger is as follows: the narrowed gap in liquidity needs between the bank and NBFC, SLR and CRR for banks has now been reduced to 22% – 18% for SLR and 4% for CRR – from 27%%. Interest rates are more favorable today than before. Banks have the option to invest in priority sector loan certificates to meet PSL requirements as opposed to direct lending to agriculture and MSMEs as in the past… In our letter to the RBI, we said two things. The first is, please give us some time to comply with our existing HDFC Ltd assets for a specific period of two to three years, but all new loans will comply with SLR-CRR regulations. This is also one of the requests made to RBI to give us time for PSL because we don’t have MSME loans, we don’t have agricultural loans on our books. Yes, we have a large amount of affordable housing loans, but not these. As part of the LCR, we hold a certain amount of cash ourselves. For the retail deposits we take, we have to provide SLR anyway. We have not yet determined how much it will be, what the shortfall will be, what RBI will allow, how long we will have to grandfather the assets and liabilities. These are open questions depending on how RBI responds to our letter… We have a letter from RBI indicating that our proposal is under consideration.
Keki Mistry: In my view, interest rates will go up, but they won’t go back to what you saw before Covid. In the past, when we evaluated the merger, interest rates during this period were considerably higher than they would be, even if you assume that there are one or two rate hikes in the works.
Sashidhar Jagdishan: According to the latest reported figures, HDFC had around Rs 4.4 trillion in debt including borrowings. Embedded in this particular loan, they had infrastructure bonds of around Rs 80,000 crore now, which was then Rs 75,000 crore. This is not necessary to qualify for one of the reserve requirements. The approximate amount, at 22% in mathematics, is between Rs 90,000 and Rs 100,000 crore. If you look at the surplus that we have, not just from a regulatory requirements perspective, but from a capital cushion perspective, the number is probably already there.
Park: We would rather use the money we have for lending to the economy, for mortgages and for other purposes, and it’s more accretive to society and the economy because we need to increase credit growth. If you want a higher GDP growth rate in India, you have to shell out more money and if you invest in SLR-CRR, it won’t make it that bad.