By: Tapamoy Ghose
HDFC Ltd, a mortgage lender, announced a merger with HDFC Bank on April 4, 2022. According to HDFC Bank, the merger is subject to various statutory and regulatory approvals, including those from the Competition Commission of India (CCI), the National Company Law Tribunal (NCLT), other applicable authorities, and the companies’ respective shareholders and creditors.
HDFC Ltd is India’s leading housing finance company, with unparalleled relationships, scale, and underwriting expertise in the housing sector. On the other hand, with over 68 million customers, 6,342 branches, and an entire portfolio of credit, liability, and distribution offerings, HDFC Bank is the leading private sector bank with a deep customer base developed over multiple decades. After this merger, the proposed entity will have a total asset base of approximately Rupees 18 lakh crores.
HDFC LTD. AND HDFC BANK: AN OMINOUS COCKTAIL OF ABUSE OF DOMINANCE
When an enterprise, which is already in a dominant position in a relevant market, engages in activities to eliminate other competitors or discourage future competitors from entering the market, it is referred to as abuse of dominance. Three elements are required to establish an abuse of dominance: a dominant undertaking, a relevant market, and an anti-competitive conduct.
- Relevant Market
The dominance of an enterprise (in this case, HDFC Bank) can only be determined within the boundaries of the relevant market. The CCI held in Shri Pravahan Mohanty v. HDFC Bank Limited that identifying the relevant product market is critical when determining a dominant position.
According to Section 2(t) of the Act, a ‘relevant product market’ includes all products or services that the consumer considers interchangeable or substitutable due to the characteristics of the products or services, their prices, and intended use. Based on substitutes and other factors mentioned in Section 2(t) of the Act, the relevant markets are the ‘market for retail loans by banking institutions’ and the ‘market for housing loans.’
- HDFC Bank: A Classic Case of Dominance
Explanation (a) below Sec. 4(2) defines “dominant position” as “a position of strength enjoyed by an enterprise in the relevant market in India that enables it to operate independently of competitive forces prevailing in the relevant market; or affect its competitors, consumers, or the relevant market in its favour.” To determine an enterprise’s dominant position, the Commission may consider the factors set out in Section 19(4) of the Act: market share, economic power or entry barrier etc.
The entity’s economic power is a factor of dominance under S. 19(4)(d) of the Act. An undertaking’s economic performance may be a factor indicating dominance. The EU Commission in Servier considered Servier’s substantial ‘economic rents’ to be direct evidence of its dominance. Following the same, in cases such as Michelin, an entity’s financial power and profitability have been held to be a factor of dominance. Coming to the profitability aspect, in the financial year of 2022 (FY 22), HDFC bank recorded a profit of nearly 38150 Crore, the highest of all the banks in India (public sector banks and private sector banks combined). It must be noted that, in the past, in the EU, the Commission has based the finding of dominance on the profitability of the entity, notably in Intel.
Moving to the financial strength of the entity, HDFC Bank scores high again. A study by Standard and Poor, a renowned global rating agency, showed that the Bank poses ample capital buffer and tier 1 capital ratio, as well as an array of assets superior to any other competitors in the industry. This is an indication of the strong financial strength which HDFC currently enjoys.
Last but not least, link-up between two entities can also be a factor of dominance. The EU General Court ruled in France Télécom that Wanadoo’s ‘link-up’ with France Télécom (HDFC Limited and HDFC Bank in our context) gave it such advantages over its competitors that it contributed to its dominance. Similarly, the link-up between HDFC Limited and HDFC Bank would provide certain strategic benefits to HDFC Bank in the housing loan segment (which would be substantiated in the following section), thereby contributing to dominance. If the CCI is apprehensive that ‘link-up’ as a factor is not covered under any clauses in S. 19(4), they can read the same under S. 19(4)(m), as it enables the authority to consider any other factor if the situation requires.
All these cumulative factors taken together, HDFC Bank, can be regarded to be a dominant player in the relevant market.
POTENTIAL FOR ABUSE: A CONCERN FOR THE CCI
Abuse of dominant position occurs when an enterprise uses its dominant position in one relevant market to enter or protect a dominant position in another relevant market. The enterprise may be dominant in one market but not in another, but it uses its dominance to influence competition in the latter. That behaviour in the non-dominated market is an abuse of its dominant market position. It assumes a link between the dominant position and the abusive behaviour, which is not usually present when conduct in a market distinct from the dominated market affects the distinct market.
The merger of HDFC Limited and HDFC Bank will alter credit composition in the banking sector, increasing home loans to one-fifth of total bank credit. HDFC Bank will be able to expand its housing loan portfolio due to the impugned merger. The housing loan market is on the verge of a strong upswing, bolstered by advents of the real estate sector, offering a stable, secured asset class with very attractive risk-adapted returns. This will increase HDFC Bank’s balance sheet size, allowing it to underwrite large ticket-size loans in the housing loan segment.
Despite being a Banking giant, HDFC Bank had a minuscule market share of 2% in the market for home loans. That is set to change now as the merger will provide HDFC Bank with a unique opportunity to leverage its network of branches in rural and semi-urban markets (approximately 50% of the branches are situated in these areas). The Bank has a vast pool of low-cost funds available, and by utilizing the expertise of HDFC Limited, it will be able to offer housing loan products at a much lesser rate than its competitors. Under the government’s affordable housing initiatives, HDFC Limited is a significant player in home loans to middle and low-income groups. With the merger, HDFC Bank could tap into such a market and offer cheaper home loans, utilizing the pool of low-cost funds. This will be a classic case of HDFC Bank leveraging its dominance to enter the housing loan market with the aid of the merger. This could point to HDFC Bank’s potential ability to impact the entire housing loan market to the detriment of other competitors.
Not only would the merger enable HDFC Bank to cement its position in the housing loan segment, but it would expand the Bank’s customer base also. Studies have shown that 70% of the customers of HDFC Limited do does not have a banking relationship with HDFC Bank. However, with the help of the merger, the bank would now be able to cross-sell its banking product to the customers of HDFC Limited as well, which will strengthen its customer base eventually, at the expense of other competitors.
CONCLUSION AND THE WAY FORWARD
According to RBI data, retail loans are the primary source of loan growth for the loan market, increasing 14 % yearly, while corporate loans decreased 4 % annually. Market regulators like the Competition Commission of India (CCI) should be more vigilant in detecting anti-competitive conduct in such growing market. The impugned merger is currently awaiting the approval of the CCI. While deliberating whether the merger should be approved, CCI must undertake an impact-based assessment. HDFC Limited was a giant in the housing loan industry, and so is HDFC Bank in the banking sector. When two giants merge, ripples will be there, and CCI should be cautious enough to identify them so that the market is safe.
(Tapamoy Ghose is a law undergraduate pursuing from National University of Advanced Legal Studies, Kochi. He may be contacted via mail at email@example.com).
Cite as: Tapamoy Ghose, ‘HDFC Bank and HDFC Ltd Merger: A Competition Law Scrutiny’ (The Rmlnlu Law Review Blog, 07 October 2022) <https://rmlnlulawreview.com/2022/10/07/hdfcbankmerger/>date of access.