The bank has not given any exceptions to HDFC to comply with the mandatory liquidity requirement; however, the central bank has allowed the entity to raise its stake in the insurance subsidies to above 50.
RBI Allows HDFC Bank To Hike Stake In Insurance Entities
What does this mean for HDFC? Well, there is relief on some fronts but no exemptions granted on other fronts. really a mix pack. What’s coming from Arbia in terms of the relief that was sought for the $40 billion merger between HDFC and HDFC Bank? First, on the priority sector lending requirement.
Now some leeway has been granted where the RBI has said that for the first year, you only consider one third of your portfolio as of the effective date of merger for calculating the PSL, and then the remaining two-thirds of the portfolio of HDFC Limited can be considered over the next two years, so you can spread the requirement over the next two years.
That is the first one. The other very important one where HDFC had sought an exemption was in meeting the liquidity reserve requirements. There are two of these: the first is the SLR, which is the percentage of deposits that banks invest in government bonds.
Now that is slightly lower when compared to banks, so HDFC Limited would have held a lower percentage of SLR compared to banks. There’s no exemption that has been granted on that front as far as the cash reserve ratio is concerned, which banks do maintain, but, you know, housing finance companies don’t really do it as per regulatory norms. Again, no exemption has been granted, so on the effective date of the merger, both the SLR and crr requirements will have to be met by HDFC as a combined entity, taking into account the large portfolio of HDFC Limited as well.
The important relief that has come in is HDFC Limited’s investments in its insurance subsidiaries, where RBI has permitted HDFC or HDFC Bank because ultimately these subsidiaries are going to be housed under the merged entity, so RBI has permitted them to hold their stake in excess of 50, but there are two other subsidiaries, for instance, HDFC Limited’s whole stake in HDFC Credula and HDFC Education and Development Services, which operates in education schools. Etc., where it is said the shareholding will have to be brought down to 10 in the next two years, so again, some exemptions are being granted for them to meet these requirements.
There are certain other exemptions that are being granted when it comes to loans, again because of the differential interest rates between the bank and HDFC Limited. And then lastly, in terms of income recognition, that is, you know, what kind of provision do you set against bad loans, etc.?
That will have to be aligned, but again, let me reiterate that the merger was announced one year ago, so there’s been ample time for HDFC, you know, while it was waiting for these releases from RBI to sort of balance its books, so it shouldn’t come as a huge negative.
We’re also being given the understanding from our sources within the banks that they’re well placed as far as meeting these liquidity requirements is concerned, so we’ll hear more from them later in the year. It doesn’t seem to be a big shocker at all.
