How HDFC-HDFC Bank Merger May Impact Home Loan Borrowers

Post-merger, HDFC will become India’s second-largest financial institution by assets after the country’s top lender, State Bank of India (SBI).

HDFC is currently offering 8.50% p.a. interest rates on home loans.

The merger between Housing Development Finance Corporation (HDFC) Bank and HDFC Ltd. is set to take place next month for an amount of $40 billion. With this, HDFC will become India’s second-largest financial institution by assets after the country’s top lender, State Bank of India (SBI). This merger will have a minimum impact on HDFC Bank customers. However, home loan borrowers of HDFC Ltd. are likely to be impacted after this change. HDFC is currently offering 8.50% p.a. interest rates on home loans, according to the website of HDFC Ltd.

After the merger, the whole entity will be known as HDFC Bank. Thus, it will become a banking entity that will be regulated according to the external benchmarks which are decided by the Reserve Bank of India (RBI). Previously, HDFC Ltd. used to come under the Non-Banking Finance Companies (NBFCs) that are excluded from such regulations. They used to have their own benchmarks according to which they specified their own interest rates. Now, post-merger they will have to have to follow the External Benchmark Lending Rate (EBLR), which RBI decides.

“The transition to EBLR means that loan interest rates will now be tied to an external benchmark rate, making them more transparent and responsive to market developments,” said Kaushal Agarwal, Chairman of The Guardians Real Estate Advisory, in an interaction with Economic Times. This will be a good thing for borrowers because it will increase transparency and accountability in the loan pricing system, added Agarwal.

The external benchmarks can be RBI’s repo rate, 3-month treasury bill, 6-month treasury bill or any other criteria for the market that is published by the Financial Benchmarks India Pvt Ltd (FBIL). Once the merger is done, the interest on the home loans of HDFC will be altered according to the EBLR.

After the merger, if the bank decides to lower home loan interest rates as per EBLR, then it will benefit borrowers of HDFC. However, there is no guarantee that the bank will follow this route. It will depend on the already-specified agreements of the customer on the deal.

However, the current loan terms and conditions are unlikely to change. The payment of EMIs will be done according to the current repayment schedule.

Whether the new rules will apply only to new customers or previous customers as well will be decided by the management after the merger.

“If the interest rate goes down due to migration to EBLR, the tenure of home loan borrowers will reduce. The quantum will depend upon how much there is a reduction in home loan rates," said Kamal Aggarwal, Senior Advisor, Singhani & Co LLP to the media.