Got a Home Loan from HDFC? How Does the HDFC-HDFC Bank Merger Affect You?

You have a home loan from HDFC? In April 2022, it was announced that HDFC will merge into HDFC Bank. You may ask, aren’t these the same? No. HDFC and HDFC Bank are different entities. HDFC is a housing finance company (HFC) and is the promoter of HDFC bank, the bank. If you are still confused, it is because the lines are so blurred.

HDFC Bank does not give out home loans. If you enter an HDFC bank branch looking for a home loan, you will be sold home loan from HDFC. HDFC Bank earns commission on deal closure. And you make loan repayments to HDFC subsequently, perhaps from your HDFC Bank savings account.

What happens to your home loan with HDFC? Now, HDFC will merge into HDFC Bank and your home loan will get transferred from HDFC to HDFC Bank. How does that impact you? Let’s find out.

HDFC Has Greater Flexibility Than HDFC Bank in Pricing Home Loans

Your home loan interest rate = Benchmark interest rate + Credit spread. The credit spread is usually constant and depends on your credit profile (credit score, repayment ability etc.). Good credit profile implies low credit spread. Therefore, as the benchmark interest rate changes, the loan interest rate also changes.

Now, the loan benchmark can of 2 types.

  1. Internal (The bank decides the value based on a formula. Linked to the bank’s cost of funds.)
  2. External (The bank has no control)

For banks, the home loan interest must be linked to an external benchmark (Repo rate, 3-month or 6-month Treasury bill yields etc.). A benchmark over which the bank has no control.

By the way, this is an evolution. If you have followed this space, we have moved from Base Prime Lending Rate (BPLR) → Base Rate → Marginal Cost of Funds based lending Rate (MCLR) → External benchmark. BPLR, Base Rate and MCLR were all internal benchmarks. While each regime change was an improvement over its predecessor, nothing beats external benchmarking in terms of transparency.

Therefore, since the home loans by banks are linked to an external benchmark (say RBI repo rate), the home loan interest rate goes up and down with the change in repo rate. Quite transparent.

No such compulsion for HFCs/NBFCs. For instance, HDFC does not need to link home loans to an external benchmark. It uses Retail Prime Lending Rate (RPLR), an internal benchmark. Even if the interest rates are going down in the economy, it can keep the RPLR same and may not reduce RPLR proportionately. To ward off competitive pressures for new loans, HDFC can keep the RPLR constant but reduce the spread for new borrowers. Thus, the old borrowers continue to pay a higher rate while new borrowers pay a lower rate. Well, that’s not fair. If the old borrowers don’t notice, HDFC (housing finance company) continues to rake moolah at the cost of unsuspecting borrowers. If you notice and reach out to the lender, this is what you must do. I reproduce an excerpt below.

So, you must pay HDFC a fee to change the spread. Had this home loan been with a bank, the interest rate will change for both old and new borrowers as soon as the external benchmark is changed (maximum reset period is 3 months).

All HDFC Loans Will Be Transferred to HDFC Bank

Since all the loans post the merger will be transferred to HDFC bank and the bank must use an external benchmark, your home loan will move to a more transparent regime. Positive news for HDFC home loan borrowers.

We do not yet know what HDFC Bank will choose as the external benchmark. It is possible that your loan interest rate will be kept constant. Essentially, the bank will adjust the loan spread to keep the final interest rate constant. You have no control over this except that you can refinance your loan with a different lender if you get a raw deal.

But yes, once your loan has migrated to HDFC bank, your loan interest rate will thereafter become quite transparent.

However, don’t rejoice too soon. This merger requires many approvals (RBI, SEBI, IRDA, NCLT etc.) and can easily take 12-18 months.

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