The largest private sector lender shares in India, HDFC Bank, fell around 12 percent since the announcement of the merger of the development of the Finance Corporation (HDFC) housing and bank on April 4.

To start, why does HDFC join a bank?

According to the Chairperson of HDFC Deepak Parekh, one of the reasons for the merger is a non-bank tightening RBI regulation that has made money for difficult NBFCs. Also, the regulation arbitration for NBFC compared to banks has disappeared due to tightening regulations by the central bank, Parekh said.

The combined entity will have a market close of 12.8 lakh crore rs and balance sheets of 17.87 lakh crore. The merger will allow HDFC bank to carry out greater emission guarantees on a scale.

HDFC Bank, based on Mandiri, has a total progress of Rs 12.7 Lakh Crore while HDFC has Rs 5.25 lakh Crore. Of the total book, HDFC has 77 percent of loans in the individual loan category. HDFC Bank, which has 28 percent of its loan book in retail and 26 percent in the company, can have the advantage of HDFC home loan clients who join bank customers.

Mergers, guided by parents, are expected to be completed in the second or third quarter of Finance 2024.

Why does the stock price fall after the merger?

Analysts said that the market was too happy on the announcement day of the merger, but gradually some concerns were maintained which resulted in stock prices.

Here are the reasons for the fall of the share price of HDFC Bank:

One, concern about other HDFC subsidiaries: Analysts said that despite the negative impact was short term, there were concerns between investors regarding the regulations on other HDFC subsidiaries such as HDFC Life and others. “The merger can weaken the subsidiary. For example, they may have to sell several shares. So, uncertainty still exists whether HDFC will be able to increase its subsidiary,” added Yuvraj Choudhary, analyst, Anand Rathi shares and stock brokers.

Two, the ability to maintain SLR: According to research reports published by the Systematix Institutional Equities, currently, HDFC needs to hold a ratio of statutory liquidity (SLR) at 13 percent of public deposits, where post-mergers will increase by 18 percent of the demand and time liabilities ( NDTL). “There are concerns related to SLR requirements and the extent to which new entities will be able to maintain the same thing,” Choudhury said. This can also cause worries between investors, analysts said.

Three, the need to store the Cash Reserve (CRR) ratio. HDFC does not have the ratio of previous cash reserves, and thus, against the Nile CRR balance in HDFC, the joint entity will be asked to hold CRR at 4 percent of the NDTL, stating a systematic institutional equity report. Requirements for higher compulsory reserve ratios will encourage funding costs. According to analysts, this is also the point of concern between investors, which ultimately leads to a decline in stock prices.

Four, the ability to build PSL: Analysts say that in addition to CRR and SLR, skeptical investors about how new entities will be able to build priority sector loans (PSL) against the portfolio and how much it costs. In addition, the Cash-to-income ratio (C / I) HDFC Ltd is around 8 percent, while HDFC Bank is around 37 percent. For combined entities, the C / I ratio is likely to decrease to around 32-34 percent, the research report said. The C / I ratio is the main financial measure that shows the cost of the company as a proportion of its income. Most are used to measure bank efficiency.

Five, too big for mutual funds: Analysts also said some investors were afraid of the joint entity would be too large for mutual funds. “Because they can cross the 10 percent threshold in many mutual fund schemes, the possibility of these funds can sell these shares. While the agreement will still take around 18 months to resolve it, investors have come out to anticipate,” said Vijay Singhania, Chair, Tradeesmart, stock trading platform.