Merger with HDFC: A mixed bag for HDFC Bank from RBI on forbearance requests

The RBI has refused to make any exceptions on cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements as sought by HDFC Bank, while it has allowed some leeway on the priority sector lending (PSL) and investments front.

HDFC Bank's chief financial officer Srinivasan Vaidyanathan informed investors that the bank already carries excess investments in government securities at around 24-25 per cent. (Image: Reuters)

In a mixed bag for HDFC Bank ahead of the parent HDFC's merger with itself, the Reserve Bank of India has declined to make exceptions on certain aspects, and has offered some leeway on others.

The country's largest private sector lender, which is aiming to conclude the merger with the home finance major by July, had written to the central bank seeking certain forbearances after announcing the USD 40-billion merger in April last year.

In an exchange filing this evening, HDFC Bank said it received a response from RBI on Thursday and also said that there are a few pending issues.

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The RBI has refused to make any exceptions on cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements as sought by HDFC Bank, while it has allowed some leeway on the priority sector lending (PSL) and investments front.

HDFC Bank shall continue to comply with extant requirements of CRR, SLR and LCR (liquidity coverage ratio) from the effective date of merger without exceptions, the lender said, quoting from the RBI letter. CRR is the percentage of deposits which a commercial bank like HDFC Bank has to park with the central bank for which it does not earn any interest, while SLR is a percentage of deposits which are mandated to be invested in government securities. A non-bank lender is exempt from the same requirements and HDFC Bank had sought leeways on compliance for liabilities that come from HDFC.

Meanwhile, HDFC in a filing stated that market regulator Securities and Exchange Board of India (Sebi) has approved the proposed change of controlling stake in HDFC AMC to HDFC Bank as part of the scheme of amalgamation.

Sebi vide its letter dated April 21, 2023, to HDFC Asset Management Company Limited (HDFC AMC), a subsidiary of HDFC Limited and the asset management company of HDFC Mutual Fund (HDFC MF), has granted its approval for the proposed change in control of HDFC AMC, HDFC Ltd said.

HDFC Bank's chief financial officer Srinivasan Vaidyanathan informed investors that the bank already carries excess investments in government securities at around 24-25 per cent as against the 18 per cent requirement, hinting that the impact of the move will be minimal.

On PSL, Vaidyanathan said it has received a relaxation from the RBI, where it has been told that the adjusted net bank credit may be calculated considering one-third of the outstanding loans of HDFC as on the effective date of the amalgamation for the first year, and the remaining two-thirds of the portfolio of HDFC shall be considered over a period of next two years equally.

Under the PSL norms, commercial banks are required to devote over 40 per cent of their overall advances to areas marked as priority sectors for the emancipation of certain marginalized sections of society, whereas a non-bank lender like HDFC does not have to comply with such mandates.

The RBI has also allowed for the investments including subsidiaries and associates of HDFC to continue as investments of HDFC Bank, the letter said, adding HDFC Bank or HDFC can increase shareholding in HDFC Life Insurance Company and HDFC ERGO General Insurance Company to over 50 per cent prior to the effective date of the merger.

HDFC Bank can continue holding HDFC's stake in HDFC Education and Development Services, which operates three education schools having 4,000 students, for a period of two years from the effective date, it said.

In the case of HDFC Credila Financial Services, the higher education financier having a book of over Rs 10,000 crore and owned fully by HDFC at present, HDFC Bank will have to reduce its holding to 10 per cent in two years and stop onboarding new customers.

The bank said it will engage with the RBI for certain clarifications on the letter received on Thursday, and also approach RBI with the crystalised amounts of the liabilities as of the effective date, the letter said. As a bulk of HDFC customers are under the prime lending rate set by the home financier, HDFC Bank will conduct an ?one time mapping? of all borrowers of HDFC for benchmark and spreads.

"All retail, MSME and other floating rate loans sanctioned by HDFC Limited would be linked to appropriate benchmarks within six months from the effective date," it said. RBI has also permitted loan against shares for promoter contribution/in excess of Rs 20 lakh to the individuals, to continue for its existing duration/maturity, HDFC Bank said.

Apart from that, asset classification of accounts in the books of HDFC Bank will be as per the norms applicable to banks, it said. The HDFC Bank scrip gained 0.11 per cent to close at Rs 1,673.80 a piece on the BSE on Friday.

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