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In a letter to shareholders in its annual report for 2021-22, India's private lender HDFC Bank's chief executive officer (CEO) Sashidhar Jagdishan explained the reasons and the timing of the proposed merger with housing finance company HDFC Ltd, subject to various regulatory approvals and will take effect in about 15 to 18 months.

Why the merger with HDFC?

"Quite simply, this is an opportunity we cannot afford to miss. Home loans are an emotional product and bring with them a host of accelerated benefits for the Bank. Price corrections in the property market have seen inventories come down. Also, rising incomes mean that home loan EMIs have come down as a percentage of a person’s income. All this means that housing is going to be a huge growth opportunity and one of the key drivers of India’s GDP over the next decade," Jagdishan said.

Further, only 2% of HDFC Bank's customers source their home loans through the bank, while 5% do it from other institutions. And about 70% of HDFC Ltd.’s customers do not bank with them. 

“All these give us an idea about the size of the opportunity. The long tenor nature of home loans provides resiliency to the balance sheet. With the advantage of a lower cost of funds and the phenomenal distribution muscle that we have built, it is imperative that we seize this opportunity," he added.

HDFC Bank-HDFC merger: Why now?

“There have been other favourable factors too. In the last few years, the regulatory arbitrage between banks and NBFCs has come down substantially. Today reserve requirements have come down to about 22% from 26%. The increase in priority sector lending that we need to do, due to the merger, is possible now with our own increased focus on MSMEs, the affordable housing loans that we can do and the well-developed PSL certificate market. All this means that on the day of the merger there may not be any need to raise further funds to meet reserve requirements. The addition of the home mortgages portfolio on our Balance Sheet makes it more diversified and robust," as per Jagdishan.

The enhanced capital position of the Bank post the merger also means that they can take bigger exposures in leading corporates and power the country’s infrastructure build out. The key focus area for the bank to absorb this growth opportunity is to secure enhanced liabilities to fund future growth," he added.

 

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