HDFC Bank, India's largest private sector lender is expected to complete its merger with its parent, Housing Development Finance Corporation Ltd (HDFC), by July this year. "We think, from a timing point of view, that June or July, possibly July, is where we think the timeframe is, as we speak, given where we are on various things," HDFC Bank's Chief Financial Officer, Srinivasan Vaidyanathan told during an analyst call held on April 15, 2023.

Now, the question is how this merger will impact borrowers. The proposed merged entity will be known as HDFC Bank. As far as the existing HDFC Bank customers are concerned, there will hardly be any changes. However, when it comes to the biggest private home loan lender HDFC, its borrowers will be impacted.

ET Wealth Online decodes how home loan borrowers of HDFC are likely to be impacted once the merger is done.

FOR EXISTING HDFC HOME LOAN BORROWERS

HOW WILL IT IMPACT HDFC HOME LOAN BORROWERS?

The home loan portfolio of HDFC, a housing finance company, will move to HDFC Bank, a banking entity. How home loans are benchmarked differs from bank to non-banking finance companies (NBFCs). From October 2019, banks are required to link interest rates on all floating-rate retail loans to an external benchmark. 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).

On the other hand, NBFCs do not have to link their retail loans to an external benchmark. So, once the merger is done, the interest rates of home loans of HDFC will be linked to an external benchmark, within six months.

"The transition from Benchmark Prime Lending Rate (BPLR) to External Benchmark Lending Rate (EBLR) represents a substantial change in the lending structure for banks in India. As you may be aware, BPLR is an internal benchmark rate determined by individual banks depending on a variety of parameters, whereas EBLR is an external benchmark rate determined by the Reserve Bank of India (RBI). 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. 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," said Kaushal Agarwal, Chairman, The Guardians Real Estate Advisory.

FASTER TRANSMISSION OF REPO RATE GOING FORWARD

"Most of the time, the lending entity is slow in transmitting the loan rates when there is a drop in repo rate as the loan rates are not directly linked to EBLR. As per the central bank, banks have to offer EBLR which can be repo-based linked rates. Whenever RBI will reduce the repo rates the whole benefit will get passed to borrowers," said Amar Ranu, Head, of Investment Products & Advisory, Anand Rathi Shares & Stock.

HDFC HOME LOAN TERMS AND CONDITIONS

Existing loan terms and conditions are unlikely to change, and borrowers will continue to pay their EMIs according to their current repayment schedules, Ranu explained.

HDFC BANK-HDFC MERGER: WILL HOME LOAN INTEREST RATES GO DOWN?

Banks, especially the ones with large CASA (Current Account and Saving Account) deposits, enjoy lower costs of funds. "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," said Kamal Aggarwal, Senior Advisor, Singhania & Co LLP.

Post-merger, if the bank reduces interest rates of home loans or offers other benefits, then existing HDFC home loan borrowers may benefit from the merger of the HDFC twins. "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

However, there is no guarantee that the bank will follow this route. "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," said Agarwal.

DO HDFC HOME LOAN CUSTOMERS HAVE TO SIGN A NEW BANK MANDATE FOR EMIS POST-MERGER?

Answering this, Ankit Jain, Partner, Ved Jain & Associates, "At this stage, it is not clear whether a new bank mandate would be required. I expect that HDFC Bank would want to minimize the inconvenience to their borrowers and find a way to continue debiting EMIs without the need for the new mandate.”

WILL HDFC HOME LOAN BORROWERS HAVE TO SHOW TWO ENTITIES WHILE CLAIMING INCOME TAX BENEFITS?

Experts want more clarity on this. According to Jain, "Since the loan is being merged to HDFC Bank and not being transferred from one lender to another, HDFC Bank should be able to issue a certificate detailing the total amount paid as principal and interest during the whole financial year. That single certificate would be enough to claim a deduction for the payment of principal and interest while filing the tax return."

"This is only a temporary position, and the combined entity will eventually submit a consolidated statement, making it easier for borrowers to claim tax benefits," Agarwal advised.

While Kamal Aggarwal said, "Since, two separate legal entities with separate PAN would merge into one. So, the borrowers would have to show separate details only."

Further, HDFC Bank may ask some HDFC customers to update their KYC details while it may also ask some customers, especially those paying instalments using post-dated cheques, to submit a new NACH mandate. "It is likely that there could be NACH mandate changes involved in the process, at least for some customers, as well as post dated cheques may have to be given in favour of HDFC Bank," said Vishal Dhawan, a CFP and founder of Plan Ahead Wealth Advisors. This would also ensure that the auto-debit of home loan EMIs of borrowers continue easily post the merger.

HDFC BANK-HDFC MERGER: WILL IT IMPACT THE HOME LOANS OF HDFC BANK?

At present, HDFC Ltd sells loans through HDFC Bank. "Currently, a commission is being charged for cross-selling which results in GST implications as well. Going forward, there might not be such requirements and hence the GST cost could also be saved," said Kamal Aggarwal.

Finally, the HDFC Bank-HDFC Ltd merger will mean several changes for existing customers. "But the changes are expected to be staggered," said Adhil Shetty, CEO, BankBazaar.com.