RBI has given its nod for the big merger of HDFC with HDFC bank thus paving the way for the creation of another banking mammoth after SBI! 

“We are the pioneer of Housing Finance in India. Because Dreams, Growth and Progress begin at home” says HDFC in their website. Brainchild of Hasmukhbhai T Parekh HDFC has come a long way since its inception in 1977. Overcoming numerous obstacles from a infant incipient start up to India’s leading provider of Housing finance. Hasmukhbhai was indeed ahead of his time. After he retired from the top position of then leading term lending institution Industrial Credit and Investment Corporation of India, ICICI,he thought of establishing India’s first Housing Finance company at the age of 66.Extraordinaryachievements always start with unconventional thoughts. Why can’t Indians have a home of their own with the help of bank finance/housing co finance he will ask himself. Thus in 1977 HDFC was established and rest is history. The first of its kind in the country HDFC started its journey without any Govt assistance. And over a span of less than 50 years it became a role model not only in India but for the entire Asiatic region.

Similarly HDFC bank was incorporated on 30.8.1994 by HDFC limited the first branch was inaugurated by then Finance Minister Sh Manmohan Singh in 1995.The bank was also listed in same year.Mergers and acquisition are not uncommon in Indian Banking space. This has been happening at regular intervals in both private and public sectors. Mergers have mostly happened in the past when a weak bank or a small payer is merged with a strong bank or a big player.HDFC and HDFC bank have decided to merge to have synergies. In the process they are going to become a banking behemoth in the days to come only next to State Bank of India in terns of size of business and assets value. However, in terms of market capitalization at 14.05 trillion it will be only next to Reliance Industry (18.02 trillion) as per as per the M-cap data as pn 4th April The market capitalization of HDFC bank alone was 4th most valuable company in India and HDFC alone is above State Bank of India. In terms of profit at 56578 crores it will be second only to Reliance Industry(57729 crores) for trailing 12 months.

Both HDFC and HDFC bank have appeared in the banking space of India much later;HDFC in 1977 and HDFC Bank in 1995.Many of the leading financial institutions have been doing business for over 100 years.

PNB since 1895, BOI and Canara Bank since 1906 Bank of Baroda since 1908, Indian Bank since 1907 and so on. What HDFC bank has been able to achieve in less than 30 years others have not been to do in more than 100 years.

Although the proposed merger will have issues from the regulator angle on account of the heavy weight subsidiaries; especially the insurance products selling ones. Besides the cost of funds for the combined entity is likely to go up marginally on account of the shadow bank’s dependance on relatively costly funds, for they don’t have access to cheap funds in the form of SB and CA.The stock price which went up by over 10 percent immediately following the announcement could not hold the following day. There will be other integration issues such as HR and technology. But the fact remains that the coming together of the parent company HDFC and their offspring the HDFC bank is going to make history. The branch network will cross the 700 mark, over 9 million H/Customers will be added to the bank. Cross selling will break all its record. The asset size post-merger will be over 27.24 trillion only next to SBI’s 45 trillion.

Even as it will be another SBI in the making the peers, especially the other PSBs and small private banks will feel the heat. In fact SBI is too big to get affected.Bnaking history tells us it is the nationalized banks who have lost their market share to the extent of 30 percent in as many years to the new generation private bank including HDFC bank.SBI’s share has by and large maintained, marginally down at times by 2 percent. They have been able to maintain their share around 23 percent. With HDFC bank in every city, town and bigger village the nationalized banks will have to prepare themselves for another round of stiff competition from HDFC bank in the new avtar.

Now question arises why HDFC brand could sell so effectively and in less than 5 decades they are where they are. One of the major reasons perhaps could be the consistency in people at the helm and consistency of policy; formulation and implementation. This is also visible in SBI,the only public sector bank where corporate governance is visible and there is a consistency in their policy initiative PSBs it may not be possible to have MD/CEO  at the helm for ten years or so. But to have a musical chair kind of arrangement at the top-level decision-making forum the organization suffers.

( Disclaimer: views expressed are personal )