The Reserve Bank of India (RBI) has granted HDFC Bank several exemptions to smoothen its merger with Housing Development Finance Corp., but none on the critical reserve and liquidity ratios: the combined entity must adhere to them from Day One.
Banks are mandated to lend 40% of their loans as measured in terms of adjusted net bank credit (ANBC) to so-called priority sectors such as agriculture, housing and micro, small, and medium enterprises (MSMEs). ANBC is the net bank credit plus investments made by banks in non-SLR bonds. In an exchange notification, HDFC Bank said it had been informed that the combined entity must include one-third of HDFC’s loan book to calculate the priority sector lending (PSL) required at the end of the first year after the merger. Priority sector requirements on the rest of HDFC’s loan book can be met over the next two years.
In a call with investors, HDFC Bank’s chief financial officer Srinivasan Vaidyanathan exuded confidence about meeting this requirement. “Doing priority sector lending through the organic route will be our priority. We target to reach 165,000 villages by March 2024 and 200,000 villages by March 2025. We need to have this kind of reach to meet that growth,” he said.
Analysts said the exemption on PSL is a big positive for the bank.
“Assuming PSL requirements would kick in only in FY25, PSL cost would reduce from ₹20 billion to ₹5 billion, implying a core PAT upgrade of 2%,” Prabhudas Lilladher said in a report.
However, there is no relaxation on the timeline for meeting cash reserve ratio (CRR), liquidity coverage ratio (LCR) and statutory liquidity ratio (SLR), and the merged entity will have to meet these ratios from the outset. HDFC Bank and HDFC plan to complete their merger by July.
