HDFC Bank, the country’s largest private lender, is set to merge with HDFC Ltd (Housing Development Finance Corporation Ltd), to create a financial services conglomerate, the companies announced on Monday. The proposed merger would allow HDFC Bank to expand its housing loan portfolio and enhance its existing customer base. The merger is expected to be completed by the second or third quarter of FY24.

In a statement, the companies said their boards believed the merger would create long-term value for all stakeholders. The combined entity would also give impetus to the government’s vision of ‘housing for all’.

“The proposed transaction would create significant value for various stakeholders, including respective shareholders, customers (and) employees, as the combined business would benefit from increased scale, a comprehensive product offering, a balance sheet, resilience and the ability to generate synergies across revenue opportunities,” HDFC said in an exchange filing.

After the merger, HDFC Bank will be 100% owned by public shareholders, while existing HDFC shareholders will own 41% of HDFC Bank. Subsidiaries and associates of HDFC will transition to HDFC Bank.

After the merger, there will be a combined customer base of HDFC Bank and HDFC and they will be offered a number of financial products – savings accounts, mortgages or home loans, life insurance, general insurance, health insurance, credit cards, investment products and personal loans. “The merger will benefit both entities. This would create the scale and the necessary synergies, and would restore the luster to the actions of the group. However, the profitability of the merged entity could suffer as the cost of borrowing for HDFC will increase while the book yield will decrease. While there are certainly cost synergies from the merger, it may take time for market share to grow. It would still be necessary for the management to prove the interest of the merger through operational performance, ”explains a banking analyst on condition of anonymity.

Here are five things to know about the merger:

Home loan products: The proposed merger will enable HDFC Bank to offer more competitive housing loans. Additionally, HDFC is a major player in housing loans to middle and low income groups as part of the government’s affordable housing initiatives. For these categories, access to housing finance would be further enhanced through the low-cost funds available to HDFC Bank.

Competitive housing products: HDFC Bank has a large base of over 68 million customers. With the merger, the banking platform will be able to provide a diversified funding base at low cost, in particular through its base of current and savings accounts (CASA). Thus, the bank will be able to offer its customers more competitive housing products.

Big balance sheet: The proposed merger would increase the size of the combined entity’s balance sheet, which would also allow it to underwrite large loans, “including infrastructure loans”, adds a banking analyst who did not wish to be named. It would also allow a greater flow of credit into the Indian economy.

Cross-sell opportunity: HDFC has about 445 offices or service centers across the country. These offices could now be used for cross-selling the entire banking product portfolio.

Reduction of unsecured loans: The proposed merger will reduce the bank’s exposure to unsecured loans. The bank was aggressively increasing its credit cards and personal loans because these segments offer higher yield.