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Opinion
Andy Mukherjee


A MERGER THAT WILL LEAVE INDIA’S BANKS GASPING

The country’s financial industry is set for two major disruptions. The coming
together of HDFC Bank with HDFC, the parent institution, is one of them.

Mega-merger.

Photographer: Dhiraj Singh/Bloomberg
By

Andy Mukherjee

+Follow
July 5, 2023 at 10:00 PM GMT


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Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies
and financial services in Asia. Previously, he worked for Reuters, the Straits
Times and Bloomberg News. @andymukherjee70
+ Get alerts forAndy Mukherjee


When the remaking of India’s socialist financial landscape began in 1993, very
few people believed in the project — some of the 40 applications to set up
new private-sector banks were so frivolous that they were written on postcards. 

Three decades later, things are far more serious. Finance in the most-populous
nation is moving into a higher gear. Of the two big changes expected this year,
one has just occurred and created a juggernaut bigger than Morgan Stanley. The
other splash may see the birth of India’s own Ant Group Co., a digital-lending
powerhouse being set up by the country’s wealthiest tycoon.

More from
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Nigel Farage’s Coutts Crusade Is a Distraction

These disruptions are taking place on the strength of a much larger consuming
class that finance has helped create along the way. But is it big enough to
sustain the industry’s latest makeover? The test will come in the deposits
market. 

Among the more serious aspirants for a banking license in 1993 — one that didn’t
send in its application on a postcard — was Housing Development Finance Corp.,
then a 16-year-old specialist mortgage lender in a country where the culture of
debt-financed homeownership was still in its infancy. After nearly three decades
of spectacular growth, HDFC Bank Ltd. finally swallowed up its parent, HDFC, on
July 1. The combined entity, as HDFC investors’ stakes are swapped for shares in
the bank over the next few days, will have a market value of $173 billion.




What’s more, the juggernaut is showing no sign of slowing down. To sustain its
20% pace of annual asset expansion, the bank will need stable funding. Suresh
Ganapathy, head of financial services research in India at Macquarie Group
Ltd.’s brokerage unit, estimates that the newly bulked-up HDFC Bank will
go after as much as 20% of the banking system’s incremental deposits over the
next three to four years. This could be highly destabilizing, at a time when the
overall industry is gasping for liquidity. 

India’s extreme income inequality has an impact on banking. Individual savings,
which account for three-fifths of deposits, are heavily skewed toward top
earners. At the bottom of the pyramid, there are practically no savings. But
this rather narrow affluent class is currently grappling with a post-pandemic
surge in inflation and trying to protect its living standards with debt. Higher
interest rates, however, mean paying more to lenders for mortgages and other
consumer credit. What’s left of the surplus at the family level is going into
mutual funds in search of better returns — and only then entering the banking
system. As a result, the liquidity sources for banks have become more
institutional and retail deposits are stagnant, a point that Mumbai-based
analyst Harsh Vardhan, a former Bain & Co. partner, made recently.

The data show this shift: As much as 12.5% of the incremental deposit growth
this fiscal year is coming from a money-market instrument. The share of the
so-called certificates of deposit was just 6.4% two years ago, according to
India Ratings & Research. With credit growth outpacing deposits by 3 percentage
points, the unit of Fitch Group expects increased competition among banks to
grow their resource-mobilization franchise.

That contest is bound to become keener as HDFC Bank looks for low-cost, sticky
deposits to fund the loan book it has inherited from HDFC. That's the whole
point of this marriage. The shock waves that emanated from the sudden 2018
collapse of IL&FS Group, a prominent Mumbai-based infrastructure financier,
toppled several institutions and made it clear that shadow banks with
a concentrated exposure to one industry — real estate, in the case of HDFC
— would be safer as banks. That way, they wouldn’t have to depend on fickle
wholesale funding. Access to state-insured retail deposits and the central
bank’s emergency liquidity lines made the HDFC-HDFC Bank merger a compelling
proposition. 




This year’s other big development in Indian finance is a demerger — a spinoff.
In May, shareholders of Reliance Industries Ltd., the country’s most
valuable conglomerate, approved splitting a new consumer-finance unit  into a
separate company with its own stock-market listing soon.

When it comes to acquiring new borrowers at a low cost, tycoon Mukesh Ambani’s
Jio Financial Services Ltd. will have a ready cachet of more than 400 million
subscribers of his dominant telecom business. Additionally, Reliance operates
India’s largest retail chain, and has ambitious plans to compete against the
likes of Unilever Plc in general merchandise trade, where the No. 1 ingredient
for a successful mom-and-pop store is credit for working capital. Ambani’s
low-income customers may also need financing for Jio Bharat, a sub-1,000-rupee
($12) phone he’s launching this week for beta trials with unlimited voice calls
and 14 gigabytes of data for 123 rupees a month. The device can also stream
videos from Reliance’s JioCinema and make payments. With good execution, Jio
Financial will be a panopticon, with a near-complete view of Indian consumers’
(and merchants’) spending and ordering behavior. 




Thus, the overall banking system will face twin challenges. On the liability
side of their balance sheet, lenders will have to fight for deposits against a
bank growing so fast that the market believes it to be worth more than Morgan
Stanley, HSBC Holdings Plc or Citigroup Inc. On the asset side, lending models
that run on limited credit-bureau data will have to take on Jio Financial’s
superior, Ant Group-style pricing engine.

Whether the industry can digest the two near-simultaneous disruptions will
ultimately depend on the growth of India’s middle class. For clues, watch
the deposits market. A deeper reservoir of household savings will show that
incomes are percolating beyond a narrow elite, making more of the country’s 1.4
billion people creditworthy. A shallow pool will mean otherwise.

More from Bloomberg Opinion: 

 * You Aced the Stress Test. Now Raise More Capital: Paul J. Davies
 * India’s Banks Have It All, Except Caution: Andy Mukherjee
 * How Ambani Will Use Finance to Tighten DNA Loop: Andy Mukherjee

Want more Bloomberg Opinion? Terminal readers head to OPIN <GO>. Or you can
subscribe to our daily newsletter.

This column does not necessarily reflect the opinion of the editorial board or
Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Ruth Pollard at rpollard2@bloomberg.net



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