HDFC, HDFC Bank Merger Unlocks Rs 1.5 Tn Gift For NBFCs Like Bajaj Finance & Jio Financial

Following the merger of Housing Development Finance Corporation (HDFC) into HDFC Bank, analysts have noted that a significant bank limit of around Rs 1.5 lakh crore is now available for other non-banking financial companies (NBFCs) and housing financiers. 

As per the regulatory guidelines from the Reserve Bank of India (RBI), banks are restricted from having exposure beyond 20 per cent of their Tier 1 capital in a single NBFC and 25 per cent in one NBFC group.

As of 31 March 2023, HDFC Ltd had borrowings totaling USD 69.14 billion. Out of this, approximately 23 per cent, equivalent to USD 15.9 billion or Rs 1.5 lakh crore, comprised term loans from banks. Analysts have noted that this exposure of HDFC Ltd to the financial system no longer falls under the NBFC/HFC classification.

While this change may not directly reduce the cost of funds, it does lead to an increased potential for NBFCs to raise money from banks at comparable costs. This development is seen as particularly positive for Bajaj Finance and its housing finance subsidiary, Bajaj Housing Finance, according to foreign brokerage firm Nomura. The firm highlighted Bajaj Finance's strong liability franchise, AAA rating, prudent asset-liability management, and solid track record as factors that could lead to improved funding terms.

Experts believe that this change will provide easier access to funds for NBFCs with proven ownership and a reliable track record. The distinction is drawn between entities with dependable promoters that banks can rely on, especially in case of contingencies. Ownership stability and credibility play a crucial role in attracting bank funding.

Currently, Bajaj Finance's liability mix includes 30 percent from bank lines, while Cholamandalam's stands at 49 per cent and Shriram Finance's at 24 per cent. Additionally, non-convertible debentures constitute a significant portion of liability mixes for these institutions.

Gagan Singla, Managing Director at BlinkX, a venture by JM Financial, highlights that demand for NBFC paper is already higher than supply, a trend that is likely to intensify after the HDFC merger. As top NBFCs utilise commercial papers for 6-10 percent of their borrowings, the heightened demand for borrowings with relatively higher interest rates is expected to persist.

This development could encourage subsidiaries like Shriram Housing Finance, Chola Home Loans, and Sundaram Home Finance to actively engage in lending, leveraging the increased capital availability from their parent companies.