Gruh Finance, the HDFC group’s affordable housing finance arm, will merge with Kolkata-based Bandhan Bank, helping the latter’s promoters to reduce stake in tune with regulatory norms.

The proposed merger will also avoid the potential of conflict of interest for HDFC to grow its affordable housing loan portfolio.

“The business models of Gruh and Bandhan Bank are not very different, and there are a lot of synergies. Effectively, the net interest margin for the merged entity should come down to 8.6-8.8 per cent,” said Kajal Gandhi, banking analyst with ICICI Securities.

After the merger, the shareholding of Bandhan Financial Holdings in Bandhan Bank would reduce from 82.3 per cent to 61 per cent.

Asked when the promoter’s stake would go down to 40 per cent, as required by the norms, Bandhan Bank Managing Director and Chief Executive Officer Shekhar Ghosh said, “This merger is a strategic decision and we have just started. It is not only about dilution. We have a good plan that will help shareholders and bring value addition.”

He did not disclose a timeline or method for bringing down stake to 40 per cent.

The Reserve Bank of India had imposed penalties on the bank after it missed a deadline in September to bring the promoting entity’s (owned by Ghosh) stake, in line with bank-ownership rules. The RBI froze any further increases in Ghosh’s pay and withdrew the bank’s right to open new branches without seeking approval.

The board of directors of Bandhan Bank and Gruh approved the merger, which would be subject to regulatory and shareholder approvals.

After the merger, HDFC will have about a 15 per cent stake in the Bandhan Bank. This is more than what Reserve Bank of India’s rules permit investor to hold stake in bank.

Referring to HDFC stake in Bandhan Bank, HDFC Chairman Deepak Parekh said, “NBFCs are allowed to hold 9.9 per cent stake. With this merger, our holding in Bandhan will be a little under 15 per cent, we will request the Reserve Bank of India (RBI) to let us keep the stake or we will need to sell the remaining. Even 9.9 per cent requires the RBI approval but up to five per cent is automatic.”

On whether HDFC can hold stake in two banks, he said for HDFC, Bandhan is a financial investment. The company held 4.5 per cent stake in RBL Bank when it started. So the merger is subject to the RBI approvals and we will request the RBI, Parekh added.

After the merger, Bandhan Bank would have outstanding loan book of Rs 50,036 crore. This is based on pro-forma financials as of September 30, 2018. The loan book would consist of micro loans (58 per cent), retail home loans (28 per cent), and other loans (14 per cent).

Combined distribution network would comprise 4,182 banking outlets and 476 ATMs across 34 states and union territories of India. A merged entity would have more than 31,000 employees serving about 15 million customers across the country.

The merger would help Bandhan Bank achieve product and geographic diversification while improving penetration in its core customer segment. Gruh will get access to a wider distribution network, a larger customer base and low cost deposit base of Bandhan Bank, Ghosh said.