HDFC-HDFC Bank merger: what does it mean for depositors and borrowers?

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On April 4, 2022, mortgage lender HDFC Ltd announced that it would merge with HDFC Bank. This merger still needs to be approved by the Reserve Bank of India (RBI). Customers, whether borrowers or depositors, of both entities would be curious to know how they will be impacted.

Since the proposed merged entity will be known as HDFC Bank, there will be virtually no change for the bank’s customers. However, the same cannot be said for the clients of the home lender, HDFC Ltd.

Here is an overview of how borrowers and depositors of HDFC Ltd are likely to be affected once the merger is approved and completed.

(It is important to note that there will be no immediate impact on customers of HDFC Ltd as the merger has not yet been cleared by the RBI. However, the impact, if any, will be feel once the merger is approved and executed – probably after 18 months.)

If you are an HDFC Ltd depositor

Individuals with Fixed Deposits (FD) with HDFC Ltd should first check whether their FD investment is auto-renewing or not. Under auto-renewal, FDs automatically renew for the same term at the prevailing interest rate applicable to them on the maturity date. In the absence of an automatic renewal mandate, the amount at maturity of the FD is credited to the bank account of the holder of the FD on the due date.

So, if the FD deposit is without an auto-renewing mandate, then at the time of maturity, the maturity amount will be credited to your bank account.

Here’s why this matters.

For those who have made FD deposits with HDFC Ltd with an auto-renewing mandate, at maturity they will likely be offered the option to withdraw the money or renew the deposits with HDFC Bank at the rate of prevailing interest offered by the Bank.

However, HDFC Bank’s interest rate is usually lower than the interest rate offered by HDFC Ltd. 6.55% annual interest rate (interest rate in effect from February 23, 2022) (paid quarterly). However, for the same duration, HDFC Bank offers only 5.60%. Even for the elderly, compared to the special interest rate of 6.35% offered by HDFC Bank, HDFC Ltd offers a better rate of 6.8%. There is a similar difference between the different mandates. Therefore, if you renew your FD with the bank, the rate you will likely get will be lower than what you would have gotten with HDFC Ltd.

HDFC Ltd pays an additional interest rate of 0.05% per annum on individual deposits placed/renewed through the online deposit system and auto-renewed deposits. Once you renew your FDs after maturity, you may lose this benefit as HDFC Bank currently does not offer such an offer for its FD investors.

Nonetheless, there will be a significant benefit in terms of increased deposit security once customers renew their FDs as it will be a deposit with a bank. It will be safer as the deposits and interest earned will be insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) for a maximum of Rs 5 lakh.

HDFC Ltd recurring deposits are likely to be allowed to run to maturity with the existing rate and terms. At maturity, customers with DRs without an auto-renewing option will receive the amount at maturity credited to their bank accounts and customers with auto-renewing DRs will have an option at maturity to renew and continue the same with HDFC Bank.

Existing Borrowers from HDFC Ltd

If you have taken out a home loan or any other loan from HDFC Ltd, it is likely that there will be no impact on the terms and conditions of your loan. However, once the merger is approved, it is likely that the interest rate applied to your home loan will be revised.

There will be more transparency in interest rate changes for variable rate borrowers. It is imperative to note that from October 2019, banks are required to link the interest rates of all floating rate retail loans to an external benchmark. The external benchmark may be the Repo Rate, Government of India 3 Month Treasury Bill, Government of India 6 Month Treasury Bill or any other market related benchmark published by Financial Benchmarks India Pvt Ltd ( FBIL).

However, as an NBFC, HDFC Ltd is not mandated by the RBI to link its interest rate to an external benchmark. So, once the merger is done, it is likely that the interest rate on your existing loans will reset to an external benchmark.

Banks, especially those with large CASA deposits (checking account and savings account), benefit from a lower cost of funds. Therefore, after the merger, the bank might be able to offer lower rates that are more competitive to home borrowers.

Currently, according to the HDFC Ltd website, people with a credit score of 750 and above will get a home loan at an interest rate of 6.70%. However, if the credit score is below this threshold, then for female borrowers for home loans up to Rs 30 lakh, the interest rate will be charged in the range of 6.75% to 7.25%. For the others, the interest rate will be around 6.80% to 7.30%.

On the other hand, the SBI regular term home loan charges 6.65% for a CIBIL score of 800 and above. If the credit score is between 750 and 799, the interest rate will be 6.75%. Women borrowers are offered a concession of 0.05% subject to a minimum EBR of 6.65%. Another discount of 0.05% is available for salaried account holders.

Thus, once the merger is completed, it may happen that the interest rate of your mortgage is revised.

In addition, HDFC Bank may request certain customers of HDFC Ltd to update their KYC information, while it may also request certain customers, especially those who pay installments using post-dated checks, to submit a new NACH mandate. This can happen to ensure that the direct debit of home loan EMIs continues easily after the merger.

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