RBI draft circular on overlapping businesses poses valuation challenges for HDB Financial: Macquarie

India's largest private sector lender, HDFC Bank, may consider reducing its stake in HDB Financial Services to below 20% or segregating the products between both entities if the draft RBI circular regarding the overlap of similar businesses is implemented, according to an analysis by Macquarie Capital.

While HDFC Bank could merge HDB Financial Services with itself, Macquarie believes that the bank may not pursue this option due to the operational changes associated with asset-liability mismatches and other reserve requirements mandated by the RBI. Currently, HDFC Bank owns 94.4% of HDB.

The RBI recently released a draft circular outlining forms of business and prudential regulations on investments. This circular clearly states that multiple group entities within the bank will not be allowed to conduct similar businesses and that there should be no overlap in lending activities between banks and group entities.

"Assuming this circular is implemented without considering the different characteristics of the borrower segments that these entities cater to, then decisions will need to be made regarding the segregation of products between entities," said Suresh Ganapathy, Head of Financial Services Research at Macquarie Capital, in a note. ​