BALANCING ACT

After a challenging year post-merger, HDFC Bank looks poised for a strategic path forward

- MANOJIT SAHA

For over a decade, HDFC Bank consistently outperformed industry growth rates in both deposits and advances, maintaining impeccable asset quality. Amid a landscape where other banks struggled with soaring non-performing assets (NPAs), HDFC Bank thrived, eventually surpassing ICICI Bank to become the largest private sector lender in India. Its net interest margin (NIM) remained stable in the range of 4.1-4.4 per cent.

However, in the year since mortgage financier Housing Development and Finance Corporation (HDFC) merged with the bank on July 1, 2023, the dynamics have shifted.

After the merger, HDFC Bank's loan book increased by over ₹6 trillion to ₹22.5 trillion, while deposits rose by ₹1.5 trillion to ₹20.64 trillion. HDFC was a deposit-taking non-banking financial company. The integration led to an unusual scenario where the bank's deposits were lower than its loan book, pushing the credit deposit ratio above 100 per cent, in contrast to the banking sector's average of 75.5 per cent at the time of the merger. The timing of the merger didn't help either. HDFC Bank had thought it would be able to replace HDFC's high cost borrowings by low-cost deposits. However, after the merger was announced in early April 2022, the interest rate environment shifted adversely. The Reserve Bank of India (RBI) started raising interest rates following the Russian invasion of Ukraine to control inflation. Between May 2022 and February 2023, the policy repo rate was increased by 250 basis points to 6.5 per cent, significantly altering HDFC Bank's cost dynamics.