HDFC has been building reserves which, combined with the surplus the HDFC Bank maintains on its regulatory ratios, should help the lender meet the ratios at the time of the merger.

The RBI, in a clarification on April 20, asked HDFC Bank to comply with CRR, SLR and LCR from the time of the merger, without any exception.

“Normally, we carry excess on that. SLR is about 24-25 per cent and LCR is about 115 per cent. It will also be determined by…HDFC has not published Q4 results, they have been on path for building more reserves,” said CFO Srinivasan Vaidyanathan in an investor call.

Amalgamation. NCLT approves merger of HDFC with HDFC Bank 

The RBI allowed the bank to hold HDFC’s loans against shares portfolio till maturity, with Vaidyanathan saying that the portfolio was around ₹5,000 crore as of December, of which, ₹2,000 crore was individual loans and the remaining to core investment companies.

Further, there is still clarity awaited on certain issues such as loans for acquisition and development of land, lending to CICs (core investment companies), projects under implementation are other aspects, guidelines which are not applicable to HFCs but not to banks, and reclassification of HDFC’s long-term bonds as the bank’s bonds.

“Another aspect is there are immovable properties which are rented by HDFC or are vacant, and we need to deal with that to continue because they are part of the properties that we acquire,” he said.

Read: What’s in it for HDFC shareholders in India’s biggest merger deal 

With respect to meeting priority sector lending (PSL) targets, the bank has received some relaxation to recognise only one-third of the merged portfolio by September 2024, and another one-third each in subsequent years.

Vaidyanathan said the goal is to build the PSL book organically, and the bank will be on a lookout to accelerate book building and undertake “certain other strategies”, given that “small and marginal farmers and micro credit is scarce and there will be some cost”.

“There are limitations and then you go to alternatives such as IBPCs (inter-bank participation certificate), buy from somebody else, or on-lending/co-lending is an alternative, which also we embrace. We are into PSLC (priority sector lending certificates), we do PTCs (pass through certificates), and last is RIDF (Rural Infrastructure Development Fund),” he said, adding that the mix will depend on the cost and availability of each alternative.

The private sector lender will need to undertake one-to-one mapping and offer incoming customers the choice to benchmark their loans to MCLR or an external rate plus the bank spread with six months. The rates will be competitive to avoid HDFC’s customers getting their loans refinanced elsewhere with the aim of maintaining and building the HDFC relationships, Vaidyanathan said.

At present, 42-45 per cent of the bank’s loan portfolio is fixed rate and floating rate MCLR linked is about 6 per cent. The total book will expand three times post the merger, with the entire of HDFC’s book expected to be floating rate.

Provisioning requirements for the bank are expected to rise in the coming quarters as effective from the date of the merger, the bank will also need to determine the provisioning requirements as per IGAAP for the merged book.

“That is part of day one reckoning, we follow bank’s model on determining provisions. We’ll have to determine reserves vs what IGAAP assessment of what requirements on reserves are, that is harmonisation and IGAAP formuation process,” said Vaidyanathan.

Cross-selling of products

Both companies have not yet started cross-selling of products to each other’s customers, as expanding and increasing penetration is an objective for the group “post the merger not before”, he said, adding that the integration team is drawing out plans to start executing this post merger.

HDFC Bank filed papers for the merger with SEBI at the end of March. Once cleared, the bank will then approach mutual fund holders. Till all the approvals are received, the bank will have to approach the NCLT every 30 days for an extension.

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