INTRODUCTION
On April 4, 2022, HDFC Ltd, a prominent mortgage lender, announced its intention to merge with HDFC Bank. This merger, which is contingent upon various statutory and regulatory approvals, including those from the Competition Commission of India (CCI), the National Company Law Tribunal (NCLT), and relevant authorities, as well as the consent of shareholders and creditors of both companies.
HDFC Ltd, recognized as India’s leading housing finance company, boasts unrivaled expertise, expansive relationships, and significant scale in the housing sector. In contrast, HDFC Bank holds a dominant position in the private sector banking industry, with a vast customer base of over 68 million individuals, 6,342 branches, and a comprehensive portfolio of credit, liability, and distribution services. If the merger proceeds, the resultant entity will possess a combined asset base of approximately Rupees 18 lakh crores.
HDFC Ltd. and HDFC Bank Merger: Examining Potential Concerns of Dominance and Abuse
Abuse of dominance occurs when a dominant enterprise, operating within a relevant market, engages in activities aimed at eliminating or deterring competition, thereby hindering potential new entrants. To establish an abuse of dominance, three key elements must be present: a dominant undertaking, a relevant market, and anti-competitive conduct.
- Market Relevance
Determining the dominance of an enterprise, such as HDFC Bank in this case, necessitates an assessment within the confines of the relevant market. In the case of Shri Pravahan Mohanty v. HDFC Bank Limited, the Competition Commission of India (CCI) emphasized the significance of identifying the relevant product market in determining a dominant position.
As per Section 2(t) of the Act, a ‘relevant product market’ encompasses all products or services that consumers perceive as interchangeable or substitutable based on factors such as product characteristics, prices, and intended use. Based on the criteria outlined in Section 2(t) of the Act, the relevant markets in question are the ‘market for retail loans by banking institutions’ and the ‘market for housing loans.’
- HDFC Bank: An Illustrative Example of Dominant Market Position
The concept of “dominant position” as defined under Section 4(2) of the Act is characterized by the strength enjoyed by an enterprise in the relevant market in India, allowing it to operate independently of prevailing competitive forces or exert influence in its favor over competitors, consumers, or the relevant market. To ascertain the dominant position of an enterprise, the Competition Commission of India (CCI) may consider factors outlined in Section 19(4) of the Act, such as market share, economic power, and entry barriers.
Under Section 19(4)(d) of the Act, an enterprise’s economic power is a pertinent factor in determining dominance. In previous cases like Servier and Michelin, the European Commission identified an undertaking’s economic performance and profitability as evidence of dominance. In the case of HDFC Bank, its remarkable financial performance is noteworthy, as it recorded the highest profit among all banks in India (both public and private sector combined) in the financial year 2022 (FY 22), with approximately 38,150 Crore. Notably, the profitability of an entity has been considered by the European Commission, as seen in the Intel case, when determining dominance.
Furthermore, HDFC Bank demonstrates substantial financial strength, as confirmed by a study conducted by Standard and Poor, a renowned global rating agency. The study revealed that HDFC Bank possesses significant capital buffers, an impressive tier 1 capital ratio, and a range of assets surpassing its industry competitors. These factors attest to the strong financial position currently enjoyed by HDFC Bank.
Additionally, the link-up or merger between two entities can also contribute to dominance. In the France Télécom case, the EU General Court ruled that the link-up between France Télécom and Wanadoo provided advantages over competitors and contributed to dominance. Similarly, the merger between HDFC Limited and HDFC Bank would offer strategic benefits in the housing loan segment, further bolstering HDFC Bank’s dominant position. In the event that the CCI finds that the factor of “link-up” is not explicitly covered in any clauses of Section 19(4), it may be considered under Section 19(4)(m), which allows the authority to contemplate any other relevant factor if the situation demands.
Considering the cumulative impact of these factors, HDFC Bank can be recognized as a dominant player in the relevant market.
CCI’s Concern: The Potential for Abuse Raises Alarms
Abuse of dominant position arises when an enterprise exploits its dominance in one relevant market to establish or safeguard dominance in another market. Even if an enterprise is not dominant in a specific market, it can still employ its dominant position to influence competition in that market, thus constituting an abuse of dominance. This assumes a connection between the dominant position and the abusive conduct, which is typically absent when conduct in a separate market affects that distinct market.
The merger between HDFC Limited and HDFC Bank will bring about significant changes in the credit landscape of the banking sector, with home loans constituting approximately one-fifth of the total bank credit. As a result of the merger, HDFC Bank will have the opportunity to expand its housing loan portfolio. The housing loan market is poised for substantial growth, driven by advancements in the real estate sector, which offers a stable and secured asset class with appealing risk-adjusted returns. This expansion will augment HDFC Bank’s balance sheet and enable it to underwrite large-ticket loans in the housing loan segment.
Despite being a banking giant, HDFC Bank currently holds a meager 2% market share in the home loans market. However, with the merger, the bank will gain a unique advantage by leveraging its extensive network of branches in rural and semi-urban areas (accounting for approximately 50% of its branches). Additionally, HDFC Bank possesses a substantial pool of low-cost funds, and by leveraging the expertise of HDFC Limited, it can offer housing loan products at more competitive rates compared to its rivals. HDFC Limited is already a significant player in home loans for middle and low-income groups, particularly through the government’s affordable housing initiatives. By tapping into this market segment, HDFC Bank, through the merger, may wield its dominance to penetrate the housing loan market, potentially impacting competitors adversely.
Furthermore, the merger will not only solidify HDFC Bank’s position in the housing loan segment but also expand its customer base. Studies have revealed that 70% of HDFC Limited’s customers do not have a banking relationship with HDFC Bank. However, through the merger, HDFC Bank will be able to cross-sell its banking products to HDFC Limited’s customers, ultimately strengthening its customer base at the expense of other competitors.
These factors raise concerns for the CCI regarding the potential for abuse resulting from the merger between HDFC Limited and HDFC Bank. It highlights the possibility of HDFC Bank leveraging its dominant position to enter the housing loan market and impact the entire market to the detriment of other competitors. Additionally, the expansion of HDFC Bank’s customer base through cross-selling adds to these concerns.
Conclusion and Future Outlook
As per RBI data, retail loans have become the primary driver of loan market growth, experiencing a yearly increase of 14%, while corporate loans have seen a decline of 4% annually. In light of this trend, regulatory bodies like the Competition Commission of India (CCI) should exercise increased vigilance in identifying and addressing anti-competitive practices within this expanding market. The ongoing merger between HDFC Limited and HDFC Bank is currently pending CCI approval. During the deliberation process, the CCI must conduct an impact-based assessment considering the potential effects of the merger. Given that both HDFC Limited and HDFC Bank hold significant positions in the housing loan and banking sectors respectively, the merger of these two industry giants is expected to have significant ramifications. It is crucial for the CCI to exercise caution and identify any potential market disruptions or adverse impacts to ensure the stability and safety of the market.
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