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The HDFC Bank

The Sensex has risen ! And the recent merger of HDFC with the HDFC bank appears to be the herald which has given the market sentiment a big boost. With this, the capitalization of India’s lead private sector bank is now nearly Rs 32 trillion, still a long way to SBI’s capitalization at Rs 55 trillion, but double the size of its closest private sector competitor, the ICICI Bank which stands at Rs 16 trillion. On the whole this consolidation of banks – in both the public and the private sectors augurs well for the Indian economy, and the recent RBI report also suggests that for the first time in the course of a decade the NPAs have come down in real terms, and the new accounting norms have ensured that the ‘window dressing’ in which banks often indulged to give their balance sheets look respectable, is no longer possible.
The growth of the HDFC bank is also the story of India’s economic liberalization.  While the holding company was set up in 1977, the Bank itself came into existence in August 1994 when the RBI allowed the establishment of banks in the private sector. It started its first commercial operations as a scheduled bank in January 1995. By February 2000, it had acquired the Times Bank Ltd, and in 2008, the Centurion Bank of Punjab was also part of HDFC. Centurion Bank of Punjab was itself an amalgam of four banks : the Indian operations of Bank of Muscat in 2003, the Bank of Punjab in 2005 and the Lord Krishna Bank in 2007.
The merger of the promoter entity and the Bank had been on the cards for quite some time. The banks principal investors were always keen that it sell home loans to complete the suit of retail products, but HDFC had initial reservations about the duplication of business, as also the higher regulatory costs  in the form of SLR (statutory Liquidity Reserve ), PSL (priority sector lending ) and CRR (cash Reserve Ratio). As per the extant guidelines for scheduled banks , forty percent of the banks loans must flow into agriculture, MSME sector, affordable housing and financial inclusion for those at the bottom of the pyramid. But what has tilted the scale for the merger is that the arbitrage between NBFCs in housing and banks is no longer valid : the new RBI guidelines are scale based, and the asset classification norms for banks and non-banks are the same now. Now that the policy was favourable, it made every sense for the HDFC to consolidate its operations, leverage the technology for financial transactions and  emerge as the  top weight in the benchmarks for the BSE and  NSE indices.