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HDFC Bank-HDFC Merger: What Borrowers & Depositors Need to Know

HDFC Bank-HDFC Merger: What Borrowers & Depositors Need to Know

Written by Sanjay Kumar

The merger between Housing Development Finance Corporation (HDFC) Bank and HDFC Ltd. is set to become effective starting July 1, following the board meetings of both organizations scheduled for June 30. As a result, the trading of HDFC Ltd shares will stop from July 13. Subsequently, all branches of HDFC Bank will progressively begin offering mortgage loans.

The upcoming merger between Housing Development Finance Corporation (HDFC) Bank and HDFC Ltd., set to take place next month for $40 billion, has garnered significant attention. While the merger is expected to have minimal impact on HDFC Bank customers, home loan borrowers of HDFC Ltd. may experience certain changes in their borrowing terms.

Transition to EBLR:

Following the merger, the combined entity will operate under the name HDFC Bank and be subject to regulations governed by the Reserve Bank of India (RBI). Previously, HDFC Ltd. operated as a Non-Banking Finance Company (NBFC) and set its own benchmarks for interest rates. However, with the transition to EBLR, home loan interest rates will be tied to an external benchmark rate determined by the RBI. This move aims to enhance transparency and responsiveness to market developments.

Benefits for Borrowers:

The shift to EBLR is expected to bring greater transparency and accountability to the loan pricing system. Borrowers may benefit if the bank decides to lower home loan interest rates in accordance with the EBLR. However, it is important to note that the bank’s decision will depend on existing agreements with customers. While there is no guarantee that rates will be reduced, the potential for lower interest rates after the merger is a possibility.

Determining the External Benchmark:

The external benchmark rate, upon which the interest rates will be based, may include RBI’s repo rate, 3-month treasury bill, 6-month treasury bill, or any other criteria specified by the Financial Benchmarks India Pvt Ltd (FBIL). Once the merger is finalized, the interest rates on HDFC’s home loans will be adjusted in accordance with the EBLR.

Loan Terms and Conditions:

While changes in interest rates are a possibility, it is unlikely that the current loan terms and conditions will be affected by the merger. Borrowers will continue to make their Equated Monthly Installments (EMIs) as per the existing repayment schedule. However, whether the new rules will apply solely to new customers or also extend to existing customers will be determined by the management after the merger.

Impact on Loan Tenure:

In the event that interest rates decrease due to the transition to EBLR, the tenure of home loan borrowers may be shortened. The extent of this reduction will depend on the magnitude of the decline in home loan rates. Kamal Aggarwal, Senior Advisor at Singhani & Co LLP, highlighted that borrowers may experience a decrease in loan tenure if interest rates decrease after the migration.

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