HDFC Bank Merger Opens Up Rs 1.5 Lakh Crore Bank Limit for NBFCs

Strategic Insights -

The merger of Housing Development Finance Corporation into HDFC Bank has created a significant bank limit of around Rs 1.5 lakh crore available for other non-banking financial companies (NBFCs) and housing financiers. This development is seen as positive for NBFCs with a strong track record and reliable ownership, as they can now access funds at comparable costs to their erstwhile peers. Analysts have noted that this increased potential for NBFCs to raise money from banks at comparable costs is particularly positive for Bajaj Finance and its housing finance subsidiary, Bajaj Housing Finance.

Key Takeaways:

  • The HDFC Bank merger has created a bank limit of Rs 1.5 lakh crore available for NBFCs and housing financiers.
  • The RBI's regulatory guidelines restrict banks from having exposure beyond 20 per cent of their Tier 1 capital in a single NBFC and 25 per cent in one NBFC group.
  • HDFC Ltd had borrowings totaling USD 69.14 billion as of 31 March 2023, with approximately 23 per cent or USD 15.9 billion comprised of term loans from banks.
  • This exposure of HDFC Ltd to the financial system no longer falls under the NBFC/HFC classification.
  • The change may not directly reduce the cost of funds but leads to an increased potential for NBFCs to raise money from banks at comparable costs.
  • Bajaj Finance's strong liability franchise, AAA rating, prudent asset-liability management, and solid track record make it a prime beneficiary of this development.
  • Experts believe that this change will provide easier access to funds for NBFCs with proven ownership and a reliable track record.
  • Gagan Singla, Managing Director at BlinkX, highlights that demand for NBFC paper is already higher than supply, a trend that is likely to intensify after the HDFC merger.
  • Top NBFCs utilise commercial papers for 6-10 per cent of their borrowings, and the heightened demand for borrowings with relatively higher interest rates is expected to persist.
  • Subsidiaries like Shriram Housing Finance, Chola Home Loans, and Sundaram Home Finance may actively engage in lending, leveraging the increased capital availability from their parent companies.

Statistics:

  • HDFC Ltd had borrowings totaling USD 69.14 billion as of 31 March 2023.
  • Approximately 23 per cent of HDFC Ltd's borrowings, equivalent to USD 15.9 billion or Rs 1.5 lakh crore, comprised term loans from banks.
  • Bajaj Finance's liability mix includes 30 per cent from bank lines.
  • Cholamandalam's liability mix stands at 49 per cent, while Shriram Finance's stands at 24 per cent.
  • Non-convertible debentures constitute a significant portion of liability mixes for these institutions.

Sources:

  • Global Data Point
  • Reserve Bank of India (RBI)
  • HDFC Ltd
  • Nomura (foreign brokerage firm)
  • BlinkX (venture by JM Financial)