For merger, HDFC Bank to raise ₹2.7 trillion

2.2-2.3 trillion of HDFC Ltd’s loans come from various banks, which must be paid off on the first day of the merger. This comes from deposits and bonds. Apart from that, at least 50,000 crore would also be raised from deposits, meeting the regulatory liquidity ratio (SLR) and capital adequacy requirements (CAR), the first person said.

Financing Shortage

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Financing Shortage

Indian rules prohibit banks from having loans on their balance sheets from another bank, prompting HDFC Bank to raise funds to repay the loans taken out by the home lender’s parent company. HDFC Ltd, a non-banking financial company (NBFC), borrowed from other banks to provide loans to home buyers. But after the merger with HDFC Bank, such loans cannot remain on the bank’s balance sheet. from around At least 5 trillion loans on the books of HDFC Ltd 2.2 trillion come from various banks.

“This must be paid off in full on the day the merger takes place. This one 2.2-2.3 trillion should come from long-term public deposits (FDs, term deposits, etc.) and from bonds with maturities over three years,” said Ashutosh K. Mishra, head of research-institutional equity at Ashika Stock Broking .

In addition, HDFC Bank will provide an additional 50,000 crore to fund its DSLR and other capital requirements, the people said on condition of anonymity. SLR is the minimum percentage of deposits that a commercial bank must hold in the form of liquid cash, gold or other securities.

Also, 50,000 crore is to be raised from long-term public deposits and bonds. Therefore, HDFC Bank has requested an easing of the SLR and CAR (Capital Adequacy Ratio) calculation. A period of up to three years should be sufficient for the merged entity to increase the total 2.7-2.8 trillion for paying off the loans on HDFC Ltd’s books and meeting the SLR requirement,” Mishra said.

“The interest rate offered on bonds will determine how much time it takes HDFC Bank to raise funds to meet SLR needs and pay off HDFC Ltd’s loans,” he added.

Emails sent to spokespersons for HDFC Group and HDFC Bank received no response.

HDFC has written to the Reserve Bank of India requesting an exemption from the SLR requirement and allowing the merged entity to meet liquidity requirements in phases. However, the regulator has yet to respond to the bank, the people said.

Banks must maintain an SLR of 18% at all times and have a uniform SLR of 25% of the total of their demand and time obligations as of the last Friday of the second half of a month, according to the Banking Regulation Act, 1949.

To attract public deposits, HDFC Bank is rapidly expanding its branch network. The bank has added 725 branches since last year, bringing the total network strength to 6,378.

“In terms of the distribution expansion (front-end), we added 36 branches during the quarter, and 250 more are in various stages of readiness to be rolled out,” chief financial officer Srinivasan Vaidyanathan told investors on July 21, after the announcement of the quarterly financial results of June. HDFC Bank has deposits of more than 16 trillion currently.

“HDFC Bank is looking at a total public deposit base of over 20 trillion immediately after the merger. Additionally, 1.5-2 trillion would come from bonds, part of which will come from the new fundraising planned for the merger,” said one of the two individuals mentioned above.

HDFC Bank recently decided to finance low-cost housing through medium to long-term bond issuance. This may partially reduce the need for the bank to withdraw funds from public deposits to meet regulatory liquidity and reserves requirements.

The bank’s deposits increased by 19.2% year-on-year to 16.04 trillion during the June quarter. Private deposits increased by about 50,000 crore in the quarter, up 19% from a year earlier. The bank’s solvency ratio is 18.1%.

About two decades ago, when ICICI Ltd merged with ICICI Bank Ltd, an exemption from SLR compliance was granted by RBI.

HDFC’s proposed merger with HDFC Bank has increased SLR requirements as the merged entity’s balance sheet size will be much larger than what the standalone bank has now.

Announcing the merger on April 4, Sashidhar Jagdishan, general manager of HDFC Bank, said: “We also plan to step up our collection efforts in the run-up to the merger.”

The RBI has issued a declaration of no objection for the proposed merger of HDFC and HDFC Bank. The Securities and Exchange Board of India (Sebi) has also approved in principle the merger of several entities of the HDFC Group as part of the mega merger.

HDFC Bank has also requested RBI to relax lending standards for priority sectors and to grant certain assets and liabilities. These are under consideration by the RBI.

Upon completion of the merger, HDFC Ltd will acquire a 41% stake in HDFC Bank, and all of the residential lender’s subsidiaries will be owned by the latter. It will take approximately 12-18 months for the ongoing merger process to be completed.

Gopika Gopakumar contributed to the story.

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