Why HDFC Merger Is Beneficial for Macro Economy, Shareholders

The transaction intends to create a large balance sheet that would allow greater flow of credit into the economy.

The mega merger of HDFC twins – HDFC and HDFC Bank – promises to be a win-win scenario for both these companies, shareholders as well as the economy.

(Photo: IANS)

The mega merger of HDFC twins – HDFC and HDFC Bank – promises to be a win-win scenario for both these companies, shareholders as well as the economy.

The proposed transaction intends to create a large balance sheet and net-worth that would allow greater flow of credit into the economy.

It will also enable underwriting of larger ticket loans, including infrastructure loans, an urgent need of the country.

The merger is expected to enable seamless delivery of home loans and leverage on the large base of over 68 million customers of HDFC Bank and inter alia improve the pace of credit growth.

Explaining the benefits of the merger on the economy, HDFC Chairman Deepak Parekh said that a larger balance sheet and capital base will allow greater flow of credit into the economy.

"It will enable underwriting of larger ticket loans, including infrastructure, which is an urgent need of the country," he said after the announcement of the merger.

Access to housing finance for this category (low and middle income group) would improve further on account of the low cost funds available with HDFC Bank.

Besides, a larger balance sheet will also facilitate the flow of a larger quantum of credit into the priority sector, including agriculture.

'Merger Will Mitigate Single Product Risk'

For the shareholders of both the entities, Parekh said the mortgage business has immense potential and hence the merger will help the group enhance its market share consequent to further leveraging on the distribution network of HDFC Bank.

"The merger will mitigate single product risk while at the same time enhance the diversity of assets for the combined entity," Parekh said.

He cited that under the bank structure, the features of the mortgage product can be enhanced in terms of product design.

Parekh said that subject to RBI and other regulatory approvals, material subsidiaries and associate companies of HDFC will continue to be owned by HDFC Bank.

"This will facilitate more efficient cross selling of banking and financial service products, including insurance and mutual funds. The value of HDFC will not be depressed by the holding company discount in so far as it relates to the shares of the bank," Parekh added.