Deepak Parekh Has A Plan B For HDFC-HDFC Bank Merger If Hurdles Emerge
There are ways in which CRR, SLR requirements can be complied with, Deepak Parekh tells BQ Prime's Menaka Doshi in an interview.
There are ways to mitigate the liquidity and reserve requirements for the HDFC-HDFC Bank merged entity if the Reserve Bank of India doesn't extend time concessions, according to Deepak Parekh. "There is a Plan B," the chairman of Housing Development Finance Corp. Ltd. said in an interview to BQ Prime's Menaka Doshi.
One of the key concerns investors in HDFC Bank Ltd. have had about its proposed merger with parent HDFC Ltd. is the additional provisions the bank would have to make post merger to meet SLR, CRR and priority sector lending on the expanded book. A Macquarie report estimated "HDFC Bank will have an excess SLR/CRR asset requirement of ~Rs 700-800 billion and will also need an incremental ~Rs 900 billion agriculture portfolio (based on 18% of borrowings) to meet PSL norms. These low-yielding portfolios could be a drag on merged entity P&L."
To mitigate this, HDFC has sought time concessions from the RBI, though such concessions are uncommon for the regulator to grant.
If the concessions are not granted, there are ways in which to reduce the burden of the additional funding required to meet the norms, Parekh said.
"For example, the RBI came out with a policy saying that if you borrow 7-year+ money, it doesn't attract SLR. We have a fair amount of 7-year money borrowed, we can still borrow 10-year money. So in the next one year, we could do 3-4 issues of Rs 10,000 crore each."
This, Parekh said, could possibly bring down the potential incremental burden "significantly", possibly by 50%. "I have seen the numbers, it's manageable. The bank also has surplus government securities in its books."
We can also sell loans, Parekh added.
At the time of the merger announcement, the management of the companies had said that they had requested for a 2-3 year time period to meet the regulatory ratio requirements on the expanded book.
"We feel the RBI will be accommodative and give us time to comply and grandfather our assets and liabilities for some time. We will do whatever is necessary so that more borrowing isn't necessary, by using different methods," Parekh said.
HDFC Bank CEO Sashidhar Jagdishan had earlier told BQ Prime that SLR and CRR requirements "should not be a drag." "I think both institutions have enough excesses, which could qualify for that."
'Too Big To Grow'
Commenting on whether concerns over growth prompted the merger, Parekh said that earlier investors worried about "too big to fail", but now they worry about "too big to grow".
This will not be a worry for the merged entities, he said.
"We will show how to grow. Today, only 2,000 HDFC Bank branches distributes mortgages. They have 6,000 branches and they're going to open them all up."
"We're still growing. We are confident we will be able to hold our growth rates post merger," he said.
The New Competitive Scenario
The merger, which will create a formidable number 2 in the banking sector, could prompt more consolidation in the sector, Parekh said.
"Smaller banks can merge with larger banks, NBFCs can merge with larger banks. The upper layer of NBFCs, if they have regulations like a bank, then the arbitrage between an NBFC and a bank disappears."
Parekh said large NBFCs will have to find a way to grow if the flexibility over banks goes away. He added that the decision to merge now was also based on the RBI potentially coming up with new regulations for large NBFCs.
Under the RBI’s scale-based regulatory framework introduced in October last year, NBFCs with assets greater than Rs 50,000 crore will have to face regulations similar to banks.
"This could be the beginning of securitisation in India, where large NBFCs will be willing to sell their assets to a bank and get cash, to come below the Rs 50,000 crore figure. This could be a model in India. If the government doesn't want larger NBFCs in India, then they will have to sell their loans to existing banks or smaller players," he said.
Watch the full interview here:
Edited excerpts from the interview:
Let me talk about the HDFC-HDFC Bank deal. You have answered several questions ever since the announcement. I won’t get you to repeat them. I just want to know if there is any update on the regulatory approvals. You had many conversations with a variety of regulators, but most importantly with the RBI.
The latest is that the first thing we have to do is get the CCI (Competition Commission of India) approval. Although, the bank doesn't do mortgages, we don't do any banking activity. So, there's no overlap. But still, the application is that thick, and it's still not submitted. There are 20 lawyers working on it because each subsidiary has to be seen and we hope to submit it by the end of this month, or in the first week of June, and they may take two to three months because it's a straightforward case, there is no monopoly and separate businesses, but still, it is under preparation, believe it or not. I was aghast to see why does it take so long? This room is used by 20 lawyers every day. With RBI, we are in dialogue. They have asked us several questions. What is our government security holding today, things like that, we are having a constant dialogue, every second day our people and RBI are meeting. So, it is actively looked at by the RBI. It is a work in progress, and I have not seen any glitches or hitches or anything so far. It is an exchange of information and basically, they have said we support it. Now, we have to see the details.
So, you are confident that some of the time concessions that you have asked for, from the Reserve Bank of India, will be granted to you in the merger?
We hope so because you know, say certain things that we can't sell in a hurry, if we are being asked to sell a company in a hurry, so you know then the value will get depressed.
Even on the CRR, SLR side?
We have asked for time. We have not got any exemptions; we have asked for time. Now, take for instance, why did we do it now? One is SLR, CRR which was over 30% has come down to 22, now it is 22.5. There is adequate liquidity in the market. Even in PSL earlier, what if we would have merged five years ago, you would have to borrow money to do the PSL, whatever we borrow again there is SLR, CRR, it is a double whammy and then we have to lend to MSMEs and agriculture. Today, they have simplified it so much that you can buy certificates and there the loss to you is 1-1.5%, 0.5-1.5% range and you don't even part with the money. So, you don't have to borrow more or put more SLR, it becomes simpler. So, RBI in their internal workings report, which has been publicised, the first point they have said is large NBFCs must become commercial banks.
Have they expressed any yes, no, maybe, to your request for time concessions?
No, they say it's under review at the moment.
As yet though their response or their questions do not suggest that they might be averse to the time concessions that you have asked for. Have you got any response on what happens to the holding of a variety of financial services subsidiaries like the asset manager or the insurance companies?
Our application to Reserve Bank is very clear. Other banks also have insurance and asset management and private equity. So, we have said that please allow the bank to have the same as other banks have it and when the RBI decides that the equity holding in an insurance should be X and not Y, we will comply with it as others will comply.
I don't think the market was surprised at all by your merger announcement because this is something that has been discussed for almost a decade now, as you pointed out. Well, it may be the timing game and I think that no one had any inkling that you would do it now, but I think this has been discussed, on paper it's been discussed, you know in the past. The response has been, well, tepid is maybe the best word I can use for it. Now, of course, I know that stock prices of all financial companies have reacted to FIIs pulling out, but it has also been the case that there is some skepticism of how this merger will go through, what the final shape will look like. At that point, you all had said that maybe we didn't explain this merger in detail enough. You have since been on roadshows I understand. What is the feedback that you have got?
Feedback is positive. Shashi has just left last night for a 10-day roadshow in the U.S. and Europe. He has just come back from Singapore.
Any feedback on modifications? Any suggestions on maybe why don't you look at it this way or look at it that way?
No. We have to explain to them what are the benefits, why would it be a no-brainer. It is a merger of two equals. It is a no-brainer because we can get lower cost money, and housing can really be a significant part of our retail loan, and for the bank today the duration of the retail loan is only 14 months. So, every 14 months, they have to replace it and show growth, now it becomes six years average. So, you know it's a no-brainer. It's absolutely (a) no-brainer.
So, there is absolutely no specific feedback you have gotten from shareholders, large institutional shareholders?
Feedback is, you know earlier, they used to say 'too big to fail', which was very common language. All of you used it—'too big to fail'. Now, the common lingo is 'too big to grow'. Now, we will show you how to grow. You know, just one point, today only 2,000 branches of HDFC Bank distribute mortgages. They have 6,000 branches; they are going to open up all 6,000 branches. We have got the highest loan applications ever received in the month of March—84,000 individuals with 2,000 branches of the bank and ours 600 odd branches. Housing is on a real uptick, please trust me. Rs 34,000 crore is the value of one month's loan applications, retail not wholesale. It has been Rs 20,000 crore, it's gone up so much in one month. Fine, it may settle down at 30-25, but that's fine, and with a lower rate of interest, we can really increase our exposure in mortgages. I am very confident that we would be the biggest mortgage lender in India.
So, I think there were two concerns with regards to the merger. One being that it could potentially depress for about a year or two, the financial ratios or the return ratios for HDFC Bank, given how the situation pans out on SLR, CRR lending, and the second was of course that is this merger being driven by a 'too big to grow' sort of mindset or fear, that at this point both institutions have hit their limit in terms of growth and the best way to beat that is to come together?
I don’t think so, we are still growing. We are still growing.
You are confident post-merger you will be able to maintain these growth rates?
We are very confident we will be able to. We are opening 1,000 branches, more branches for the liability side because we need liabilities, if we get business. So, you have to give us time. This is the biggest merger; it takes time in one year to transition, and you have to have trust and faith in us that we are capable of doing it and capable of showing good results at the end of it.
Okay, so, at least 12 to 18 months to close it and then another year or two thereafter for full integration?
Take, for instance, the capital required by the bank. The bank will not need more capital for some years, because we have surplus capital, and our capital adequacy ratio is higher than the bank. So, you know there are certain benefits.
That’s if your expectations on SLR, CRR, etc., go through, and if they don't go through and the RBI says 'No', is there a Plan B?
There is a Plan B. We wouldn’t do this without a Plan B.
Yes. So, I figured out, you wouldn't do this without a Plan B.
Plan B is that we will be willing to comply with whatever RBI has to say. We will have no choice.
That’s not a Plan B, that's a no-choice situation.
But then, that is a no-choice. We have to abide by the regulator.
If the RBI says, 'We are sorry, we would love to give you these concessions, but we can't do that'?
It is not a concession.
Yes, time concession, I have specified that. If the RBI says, 'No', what's the Plan B?
Plan B, we will have to comply with the regulations.
That’s not a plan, that's required regulatory.
So, you know, there are other ways of meeting SLR and CRR regulation requirements, like Reserve Bank itself has come out with some policy in the past that if you borrow 7-year or 7-year+ money, it doesn't attract SLRs. We have (a) fair amount of 7-year money borrowed and we can still borrow 10-year money even now. We borrowed 10-year money last month and it was oversubscribed, twice Rs 10,000 crore, we could get Rs 20,000 crore from the pension funds and provident funds. So, we could do in the next one year 3-4 issues of Rs 10,000 crore, and these are all, you know, we have it in our mind what we have to do.
But this would bring down your incremental CRR requirements by how much?
Those numbers you have to ask Keki about that. I have seen the numbers, they are manageable.
Will it bring down the potential burden, if RBI doesn't give you a time concession, there are mechanisms like this that would bring down your incremental burden, at least by more than 50%, 'significantly' means that usually?
Significantly. We have government security already with us, X amount, plus we have 7-year+ bonds.
I am looking at a Macquarie estimate which says that HDFC Bank will have an excess SLR, CRR asset requirement of roughly Rs 700-800 billion.
The bank also has surpluses, surplus government securities in their books.
You are saying that this requirement for SLR,CRR, without getting into specific numbers, could be cut down by more than half, if you were to undertake those steps you have just spoken about.
All that I am saying is that we have taken adequate care and we feel that the Reserve Bank will be accommodative and give us time to be fully compliant and grandfather our assets for some time, assets and liabilities. That's all I am saying. We will have to make alternate plans, which we have in mind what we can do. I can sell one lakh loans to four banks. There are different ways of doing it, journalists don't understand it.
So, that's why we are asking. I am not assuming.
Can’t I sell my loans?
So, you are saying your Plan B will allow you to not need to make these additional CRR, SLR requirements?
It will be required to the minimum. We will do whatever is necessary so that more borrowing is not necessary, by using different methods.
So, that puts paid to some extent to the concerns that, at least for the first year or year-and-a-half after the merger, the ratios for HDFC Bank would have come down because of these additional requirements. That's your response to those who are concerned as shareholders. Why have you not articulated this more? Because, as you pointed out in previous interviews, this is a related party transaction, it will require majority of minority, you will need shareholders to support this and if they know all of this, then they are likely to support it more.
We cannot do it tomorrow. We have to wait for the RBI nod.
So, post that, you will make it clear to them. My final question on the deal had to do with how you see the coming together of HDFC and HDFC Bank change the competitive landscape for the same reasons that you are merging today, and the size that you will represent as a merged entity. This may spark off consolidation, you think, within the industry?
There will be consolidation, there has to be consolidation. Smaller banks may merge with larger banks, some NBFCs can merge with banks. The upper layer of NBFCs above Rs 50,000 crore, if they have regulation which is like a bank, then it is difficult, the arbitrage between an NBFC, and an NBFC and a bank disappears. An NBFC had a lot of freedom and flexibility which goes away if you are a bank, and so if that goes away, then large NBFCs will have to find a way on how to survive or how to grow with the same regulations, maybe SLR, PSL and all that, then it will be difficult to sustain. We have heard and the press reports have said that in October they are going to come up with new regulations for large NBFCs. So, this was also in anticipation of that decision. Will RBI give banking license to industrial groups? Now, I cannot answer that question.
Yes, and I think that's where I find it a little confusing to read what the regulator wants because some of the largest NBFCs are industrial groups owned NBFCs, and so, if they cannot either get a banking license on their own or merge with an entity that allows them to become a bank, then where does this regulation move them?
I personally feel that this could be the beginning of securitisation in India, where large NBFCs would be willing to sell their assets to a bank and get cash, so come down below the 50,000 limit. That could be one possibility. This could be a model in India, where if the government and the Reserve Bank do not want to have larger NBFCs, then they will have to sell their loans to existing banks or existing smaller players.