The Merger

When the RBI last opened the license window for Banking in 2013, many large NBFC’s chose to look the other way. They weighed in on the prospect of conducting business under ‘lighter’ regulation and the financial cushion it offered. They will have had a near rude awakening yesterday with the merger of HDFC bank with its parent HDFC at a swap for the investors and the promoters.

While the synergies and advantages of this merger have been well articulated in the press since yesterday a few salient points need special mention:

1.?????Template

By creating India’s 2nd largest bank with a balance sheet of nearly Rs 18 Lakh Crore, this merger will most certainly set a template to build financial institutions of the future that would wish to be part of ‘too big to fail’ category. It will drive strategy boards of banks and select large NBFC’s into a huddle to contemplate their template of growth. As a country India is yet underbanked inspite of JAM initiatives of the government. Large banks with their financial muscle and smaller well-regulated banks with their local reach will help the country’s banking penetration. India needs some more large banks with sound deposits and bankable loan books to achieve this. This merger template could be the beginning of something big.

2.?????Regulation is enabling creation of a robust banking system

The impact of this mega merger will resonate with the larger financial space in India. The ecosystem will clearly get the message that large finance NBFC’s will have absolutely no regulatory advantage and arbitrage over a bank. Further, banks have low borrowing costs compared to a NBFC. NBFC’s on the other hand must rely on composite fund-raising from external markets or from banks at a higher cost. The arbitrage that was available earlier has now disappeared under the new edit. Over time large NBFC’s may eventually get converted into?banks. As an incremental dynamic regulation, RBI would possibly consider revised guidelines for bank license participation because shareholding of many big NBFCs is with large corporations. Till such time the existing regulation could force a couple of more amalgamations. Large financial institutions of scale are needed in India to manage growth and the larger macros on the monetary side.

3.?????The future is scale banking

The idea of de-globalisation was on the boil and the Ukraine war has opened the wound further. Fractured supply chains, overdependence on a single source, increased economic independence / nationalism were some pointers of the pandemic that have been amplified further by the war in Europe. Economic sanctions and counter sanctions come into play. The first infrastructure that comes under shelling is the financial infrastructure. Vested currencies start looking at destroying stored values of other currencies and vice-versa. Payment systems are deliberately choked. Large banks find a way to manoeuvre this better than the smaller ones. Work arounds are selectively possible. They also become iconic because of their muscle and expansion into countries that have considerable trade and remittance exposure with India.

Banking will see a lot of interesting developments and in 5 years from now we will possibly see an infrastructure that was never imagined earlier. This space is going to provide a lot of opportunities for every stakeholder in the ecosystem. The congruence of scale, improved governance and technology could well set the template for modern banking in India the years to come.