HDFC Merger | HDFC-HDFC Bank merger: What does it mean for depositors and borrowers?

On April 4, 2022, mortgage lender HDFC Ltd announced that it will merge with HDFC Bank. This merger is yet to be approved by the Reserve Bank of India (RBI). Customers, be it 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 hardly be any changes for customers of the bank. However, the same cannot be said about customers of the home loan lender, HDFC Ltd.

Here is a look at how borrowers and depositors of HDFC Ltd are likely to be impacted once the merger is approved and goes through.

(It is important to note that there will be no immediate impact on customers of HDFC Ltd as the merger is yet to be approved by the RBI. However, impact, if any, will be felt once the merger is approved and executed- probably after 18 months.)

If you are a depositor of HDFC Ltd

Individuals having fixed deposits (FD) with HDFC Ltd should first check whether their FD investment is done via auto-renewal or not. Under automatic renewal, the FD is automatically renewed for the same tenure at the prevailing interest rate applicable to them on the date of maturity. In case of no auto-renewal mandate, the maturity amount of the FD is credited into the FD holder bank account on maturity date.

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

Here is why this matters.

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

However, the interest rate of HDFC Bank has typically been lower than the interest rate offered by HDFC Ltd. For instance, if you invest in an FD for below Rs 2 crore for a tenure of 66 months with HDFC Ltd, then you will get an annual interest rate of 6.55% (interest rate effective from February 23, 2022) (paid quarterly). However, for the same tenor, HDFC Bank is offering only 5.60%. Even for senior citizens, compared to the special interest rate of 6.35% that HDFC Bank is offering, HDFC Ltd is offering a better rate of 6.8%. There is a similar difference across various tenures. Therefore, if you renew your FD with the bank the rate that you will get is likely to be lower than what you would have got with HDFC Ltd.

HDFC Ltd pays additional interest rate of 0.05% p.a. on Individual deposits placed/renewed through the online deposit system and auto-renewed deposits. Once you renew your FDs after maturity you are likely to lose this benefit as HDFC Bank at present does not have such an offer for its FD investors.

Nevertheless, there will be significant benefit in terms of enhanced safety of the deposits once customers renew their FDs as it will be a deposit with a bank. This will be safer because the deposits and interest earned will be insured under the Deposits Insurance and Credit Guarantee Corporation (DICGC) for maximum up to Rs 5 lakh.

Recurring deposits of HDFC Ltd are likely to be allowed to run till maturity with existing rate and terms. At the time of maturity, the customers with RDs with no auto-renewal option will get the maturity amount credited to their bank accounts and customers with auto-renewal RDs will get an option upon maturity to renew and continue the same with HDFC Bank.

Existing borrowers of HDFC Ltd

If you have taken a home loan or any other loan from HDFC Ltd, then 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 charged on your home loan will be revised.

There will be more transparency in interest rate changes for floating rate loan borrowers. It is imperative to note that effective 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 repo rate, government of India’s 3-month treasury bill, government of India’s 6-month treasury bill or any other market-linked benchmark published by Financial Benchmarks India Pvt Ltd (FBIL).

However, as an NBFC, HDFC Ltd is not mandated by the RBI to link their interest rate to an external benchmark. Thus, once the merger goes through it is likely that interest rate on your existing loans will be reset to an external benchmark.

Banks especially the ones with large CASA (Current Account and Saving Account) deposits enjoy lower cost of funds. Therefore, after the merger, the bank may be able to offer more competitive lower rates to home loan borrowers.

Currently, as per the HDFC Ltd website, individuals having credit score of 750 and above will get home loan at an interest rate of 6.70%. However, if the credit score is below that threshold, then for women 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 others, the interest rate will be in the range of 6.80% to 7.30%.

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

Thus, once the merger goes through it may happen that interest rate on your home loan will undergo revision.

Further, HDFC Bank may ask some HDFC Ltd 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. This may happen to make sure that the auto-debit of home loan EMIs continue easily post the merger.

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