30th April 2005: The promised consolidation of non-banking finance companies (NBFCs) may hint at an interesting possibility: a merger of HDFC with HDFC Bank. In the policy, the RBI has said that new guidelines will be framed for M&As between private sector banks and NBFCs. While this has scuttled possible plans of NBFCs lobbying to convert themselves into banks, the proposal could be aimed at a much bigger play in the financial services sector.
In the past, the merger of some NBFCs with banks had not gone down well with the regulator, as the banks which acquired NBFCs were saddled with bad assets at the end of the exercise. Now with clear guidelines for such mergers to be put in place, mortgage financing firm HDFC — which is technically an NBFC — could be a potential candidate for a merger with HDFC Bank, the private bank it promoted. HDFC, India’s largest home loan entity, is categorised as an NBFC.
Analysts think that a merger of this scale would make more sense once the government clears the legislation that would pave the way for lower reserve requirements like CRR and SLR. The central bank may favour such mergers, but is unlikely to give regulatory forbearance to the merged entity. The policy says the guidelines would cover the process of merger proposal, determination of swap ratios, disclosures, norms for buying/selling of shares by promoters before and during the merger and the board’s involvement in the process. The banking sector regulator has also signaled its intent to move ahead to ensure consolidation among private sector banks, in tune with ownership norms and FDI in them, unveiled on February 28.