How HDFC, HDFC bank merger will affect home loans

Banking giant HDFC Bank’s merger with its parent Housing Development Finance Corporation Ltd is likely to be complete by the end of this month. The proposed new entity will be called HDFC bank. One of the questions that has arisen since this announcement was made is what would happen to the home loans once the merger is done.

The loans of HDFC bank, country’s biggest private sector lender, will mostly remain unaffected. However, changes could take place for the borrowers of HDFC, which is also India’s biggest private home loan lender, as per a report in the Economic Times.

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All floating rate retail loans, including home loans, are linked to an external benchmark for a bank, like the HDFC Bank. The external benchmark can be the RBI’s repo rate, 3-month treasury bill, 6-month treasury bill or any other market-linked benchmark published by Financial Benchmarks India Pvt Ltd (FBIL).

Non-banking entities like the HDFC need not to link their loans to any external benchmark.

The merger of HDFC with HDFC Bank would mean that the home loans will now get linked to external benchmarks.

This, according to the quote of Kaushal Agarwal, Chairman, The Guardians Real Estate Advisory to the Economic Times, would mean “that loan interest rates will now be tied to an external benchmark rate, making them more transparent and responsive to market developments. This is a good thing for borrowers because it increases transparency and accountability in the loan pricing system and guarantees that the benefits of rate reductions are passed on to them in a timely and efficient manner."

So, will the rates go down?

"HDFC Bank would be in a position to borrow more money at lower interest rates and hence might pass on the benefit to the customers. It would be a management decision if the benefit is extended only to the new customers or even to the old ones," Kamal Aggarwal, Senior Advisor, Singhania & Co LLP, told the publication.

"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," added Agarwal.

Agarwal, however, also says that there is no guarantee that the merger would translate into good news for the borrowers.

Will terms and conditions change?

“The quantum (of interest rate reduction) will be determined by the exact terms and conditions of each customer's loan. In general, bank mergers have resulted in greater product offerings and customer service, which may help borrowers indirectly," Agarwal was quoted as saying in the report.

“Existing loan terms and conditions are unlikely to change, and borrowers will continue to pay their EMIs according to their current repayment schedules,” Amar Ranu, Head of Investment Products & Advisory, Anand Rathi Shares & Stock, told the publication.