The Reserve Bank of India (RBI) has allowed HDFC Bank Ltd and Housing Development Finance Corp Ltd (HDFC) selective regulatory relief to smooth out the merger between the two organisations, set to conclude by July this year.
The central bank has permitted the bank to meet priority sector lending requirements in a staggered fashion over three years, HDFC Bank said in an exchange notification on Friday.
These requirements, which include lending to weaker segments of the economy, are linked to an organisation's loan book.
At the end of the first year after the merger, the combined entity will need to include one-third of HDFC's loan book to calculate the amount of priority sector lending required.
Priority sector lending on the remaining part of the loan book would need to be met over the next two years, HDFC Bank said in the statement.
However, immediately after the merger, the combined entity, which will be called HDFC Bank, will need to comply with requirements to hold a certain level of cash reserve ratio, statutory liquidity ratio and liquidity coverage ratio on the entire merged balance sheet.
Earlier this week, Reuters reported that the bank and the housing financier had raised adequate liquidity to meet these requirements from the start.
Investments and associates of HDFC will be allowed to continue as investments of the combined HDFC Bank although the bank will need to exit a few select ventures over time.
However, the RBI said that before the merger closes, HDFC Bank or HDFC can increase their shareholding to more than 50% in HDFC Life Insurance Co Ltd and HDFC ERGO General Insurance.
But HDFC Bank has two years to both exit HDFC's investment in HDFC Education and Development Services and reduce its stake in HDFC Credila Financial Services to 10%.
As per norms applicable to the banks, HDFC Bank will have to transition all HDFC's retail and small business borrowers to an external benchmark, like the repo rate, within six months of the merger.
Housing finance companies have greater flexibility than banks in providing loans against shares. The RBI has allowed HDFC Bank to allow existing loans against shares within the HDFC portfolio to continue until maturity, the notification said.
A few key issues still await clarity from the RBI, the bank's management said at an analyst call on Friday.
The merged entity will be seeking clarity on whether HDFC's borrowings, including those from banks, will be allowed to continue till maturity, said the bank's CFO Srinivasan Vaidyanathan on the call.
HDFC, as a non-bank lender, is allowed to borrow from banks but HDFC Bank is not allowed to borrow from other banks.
Clarity is also needed on loans given by HDFC for land and to core investment companies, he said.
