MUMBAI: The RBI has paved the way for the country’s largest banking merger by allowing some regulatory relief to HDFC and HDFC Bank.
The main impact for HDFC customers is that home loans will have to be linked to an external benchmark (most likely the repo rate) within six months. Currently, HDFC home loans are linked to the corporation’s retail prime lending rate (RPLR).
The RBI’s leeway relates to priority sector loans and investments in insurance arms. The RBI, however, gave no relief (to the merged entity) in meeting cash reserve and statutory liquidity ratio norms, HDFC Bank said in an exchange filing on Friday. The merger is expected to be concluded by July.
HDFC Mutual Fund also said on Friday in an exchange filing that Sebi has granted it final approval for change in sponsor from HDFC to HDFC Bank.
HDFC Bank CFO Srinivasan Vaidyanathan said that all incoming loans from HDFC will be floating rate linked to a PLR. “We will do a mapping of interest rates and make an offer to customers where they can choose between rate that is a spread over the external benchmark rate or the marginal cost of lending rate (MCLR),” he said.
While the merged entity has been allowed to retain the insurance arms as subsidiaries, it will have to find buyers for most of its stake in HDFC Education and student loan firm HDFC Credila — currently held by HDFC. These arms won’t be able to onboard borrowers after the merger until the bank brings shareholding down to 10%. This is in keeping with RBI’s regulatory stance that banks cannot promote companies in other sectors and lending activity must be done within the bank.
The central bank has permitted the lender to meet priority sector lending norms over three years. The RBI has allowed HDFC Bank to consider one-third of outstanding loans of HDFC as on the effective date of the merger for the first year. The remaining two-thirds of HDFC’s portfolio shall be considered equally over the next two years. Had the concession not come, HDFC Bank would have found it a significant challenge to step up priority sector advances and would have had to buy these advances or certificates, failing which it might have defaulted in meeting the norms.
On investments, the RBI has permitted HDFC Bank or HDFC to increase the shareholding to more than 50% in HDFC Life and HDFC Ergo before the merger date. Currently, HDFC Bank does not hold any stake in the insurers. Additionally, HDFC Bank can continue to hold HDFC’s stake in HDFC Education, which operates three schools, for two years after the merger.
As the RBI has not made any exceptions in cash reserve ratio (CRR) and statutory liquidity ratio (SLR) norms, HDFC Bank will continue to comply with extant requirements of CRR, SLR, and liquidity coverage ratio (LCR) from the merger date without exceptions.