Why should you go through a merger at this point in time?
Both of us have been evaluating the pros and cons of a possible merger for the mutual benefit of both institutions. The merger is coming together of equals. Over the past two years, there have been regulatory changes for banks and NBFCs, considerably reducing the barriers for a potential merger. The past three years have seen a host of guidelines issued by the RBI on harmonising regulations between banks and NBFCs. These include guidelines such as those where large NBFCs need conversion into commercial banks, particularly those with more than ₹50,000 crore of asset bases. NPA classification has been harmonised, NBFCs are now required to provide liquidity coverage ratio, scale-based regulation has been introduced where the upper layer of NBFCs will have much stricter regulatory watch. These measures have considerably reduced the risk arbitrage that was there between a bank and an NBFC.
Is the liquidity coverage ratio (LCR) a big negative for NBFCs?
The LCR requirements are a big drain on us – they are as bad as CRR & SLR. And all of this is in the aftermath of IL&FS. All NBFCs have to keep whatever their maturities are there in the next 30 days in a separate bank account. We have to take all our loan repayments, bond repayments, deposit repayments, estimated disbursements – all in one account and put it in a liquid fund that gives us 2%.
What is the rationale behind the merger?
The strategic rationale for the proposed merger includes SLR CRR for banks, which was 27% and has now been reduced to 22% (18% for SLR and 4% for CRR). Interest rates are more favourable today than in earlier years. Banks have an option to invest in priority sector lending certificates, to meet the PSL requirements. The merger makes the combined entity strong enough, not only to counter competition but also to make the mortgage offering more competitive. The funding challenges both in quantum and cost will be minimised by the combined entity.