How India's HDFC Bank ascension to global top-five may stir competition in the sector

HDFC Bank merged with mortgage lender HDFC on July 1 and become the fourth-largest bank in the world

Following the merger, HDFC Bank has more than 120 million customers, over 8,000 branches and roughly177,000 employees. AFP
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A mega-merger in India that has created one of the world's largest banks marks a milestone for the country's banking sector, industry experts have said.

At the same time, the move will intensify competition between lenders in Asia's third-largest economy, they added.

India's biggest private lender HDFC Bank merged with mortgage issuer Housing Development Finance Corporation on July 1.

The merged entity becomes the fourth-largest bank in the world, valued at $172 billion. This is the first time an Indian bank has ranked among the world's most valuable lenders.

“This is a very significant development that indicates the rising strength of the Indian financial system on the world economic map,” said Jyoti Prakash Gadia, managing director of investment bank Resurgent India.

“The merger will create a situation of healthy competition among the top public and private sector banks in India,” said Mr Gadia.

“Private entities like HDFC Bank are comparatively more nimble-footed and faster to innovate and adapt to change”.

However, “public sector banks will also need to go in for reforms to stay competitive”, he added.

Following the tie-up, HDFC Bank now has more than 120 million customers, over 8,000 branches and roughly 177,000 employees.

In terms of market capitalisation, it towers above its nearest rivals, the State Bank of India (SBI) and private lender ICICI Bank, which are valued at $62 billion and $79 billion, respectively, according to data from Bloomberg News.

The figures show that HDFC outpaces its four largest competitors in the country in terms of deposit growth. Investor confidence is also high, with the bank's riskiest convertible bonds performing better than its global peers, according to Bloomberg.

These metrics could be set to improve, analysts said.

HDFC's new status “elevates the bank's reputation”, making it more attractive to global investors, and “fostering increased confidence in the Indian banking sector as a whole”, said Ameet Venkeshwar, chief business officer at LoanTap, an online lending platform.

“For India's banking sector, the merger signifies a shift in the landscape,” he added.

“The emergence of a private sector bank that surpasses nationalised banks like the SBI in size and value reflects the growing prominence of private institutions in the country.”

Analysts believe that the banking sector could be set for further mergers.

“This development could spur other banks and financial institutions to explore similar opportunities for consolidation or strategic partnerships to remain competitive and expand their market presence,” said Mr Venkeshwar.

For the merged HDFC entity, having its combined pool of customers from the bank and from the mortgage lender creates enormous scope for growth, by offering new home loan products to its clients with its bank accounts, and getting its home loan customers to open up bank accounts.

The merger provides a “strategic advantage” to the bank, according to Prashant Bhonsle, founder of Kuhoo FinTech.

“This merger provides them with an opportunity to underwrite large ticket size loans inclusive of the infrastructure portfolio,” said Mr Bhonsle.

“The merged entity not only now has access to the larger customer base but will also be able to provide customers with varied products and services along with competitive pricing.”

As it shakes up the banking sector, this will ultimately benefit the consumer, he added.

HDFC Bank's shares hit record highs following the merger.

“The merger of HDFC and HDFC Bank is expected to have a positive impact on the bank,” said Abhishek Jain, head of research at Arihant Capital Markets.

“It will create synergies in terms of cost-saving efficiency and cross-selling opportunities. Additionally, the merger is anticipated to result in lower costs for the HDFC book in the future, further enhancing the bank's overall performance and profitability.”

The move can also help further bolster India's banking sector, according to Mr Jain.

“This merger will provide more power to the Indian banking sector in terms of balance sheet strength and customer base, contributing to its overall growth and influence,” he said.

The move comes as the country's banking sector is becoming more robust, experts said, although non-performing assets remain a concern.

The burden of bad debt has plagued Indian lenders for years. But authorities in recent years have taken steps to lower the ratio of non-performing loans and clean up banks' balance sheets.

“The outlook for India's banking sector is highly positive in both the near term and the long term,” said Mr Jain.

“Despite tougher regulations, there has been a significant improvement in asset quality. The banking sector has emerged relatively unscathed from the impact of the Covid-19 pandemic.”

He added that strong corporate and rural demand in the world's most populous country, “coupled with a robust balance sheet post the clean-up phase, contribute to the optimistic outlook for the sector”.

Mr Gadia agreed that HDFC's merger comes as the outlook for the sector has brightened.

“Cautious lending, supported by government policies during the pandemic, better handling of NPAs, and a favourable interest spread has led to improved profitability of banks in general,” he said.

“The banking sector is expected to do well, provided the banks continue to operate effectively while avoiding reckless lending in risky projects and financial frauds.”

However, some risks remain.

“While new opportunities to grow are emerging, the banking sector continues to face the challenges of potential NPAs in the retail and MSME [micro, small and medium enterprises] sector and comparatively high operational costs,” said Mr Gadia.

“An adverse interest rate cycle can also impact the currently high net interest margins.”

Analysts say that India's population of more than 1.4 billion, young demographic, and push for financial inclusion are all factors that can support growth in the banking sector – and HDFC has placed itself in a prime position to capitalise on this.

The Indian banking system “has been moving towards fee-based income for some time, given their focus on maximising risk adjusted returns on capital”, said Vivek Iyer, partner at Grant Thornton Bharat.

For a bank to maximise this fee-based income, “[a] large scale is extremely imperative”, he said.

With HDFC's merger creating one of the largest financial institutions in the world, this allows it to achieve “a scale that would be needed for an Indian bank, given the role that India is expected to play in the larger global world order, while maximising risk adjusted returns on capital”, Mr Iyer said.

Nadiya Sarguroh, a principal associate at MZM Legal, said HDFC will certainly profit from the merger, but it could see India “racing towards a monopolistic credit economy”.

“This fast track button threatens other large ticket banks in India putting many competitive banks on the back foot,” she said.

However, many are hopeful that the merger could ultimately bring wider benefits to the Indian economy.

“As a result of the merger, HDFC Bank is set to yield bigger loans for infrastructure development, expanded availability of cost-effective housing loans and reduced interest rates for prospective homeowners,” said Ashish Kukreja, founder and chief executive of, an Indian real estate brokerage.

“Developers may enjoy lower interest rates and more favourable terms,” he added.

“This may lead to the construction of more houses to meet India's growing housing demand.”

Updated: July 10, 2023, 6:05 AM