HDFC borrowers will benefit from transparent rate regime: Analysts

The merger of HDFC Ltd with HDFC Bank has been announced. Assuming it gets the regulators’ nod, it could be another 12-18 months before the process is completed. After the merger, the entity left standing will be HDFC Bank.

Lower rates for depositors

A deposit is a contract between the depositor and the institution taking the deposit.

“The terms and conditions of a deposit can’t be changed during its tenure. Hence, the interest rates and other terms for existing deposits will remain unchanged until maturity,” says Adhil Shetty, chief executive officer (CEO), BankBazaar. Hence, the merger will not affect existing depositors.

Once the existing deposits mature, the customers of the merged entity will have to accept the rates being offered by HDFC Bank (they can always look for better rates outside their bank).

“In all likelihood, the rates offered by HDFC Bank will be lower than what customers got from HDFC Ltd,” says Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India-registered investment advisor.

Non-banking finance companies (NBFCs) usually offer higher rates than banks to attract deposits — a major source of funding for them. Even currently, the rate HDFC Bank offers on deposits of less than Rs 2 crore is 5.45 per cent (tenure 3 years 1 day).

HDFC Ltd offers 6.25 per cent (special deposit rate, annual, and cumulative options) on a 33-month deposit.         

Home loan rates may fall marginally

Since the merged entity will be a bank, some experts are of the view that it will be in a position to offer home loans at lower rates.

“Banks have access to low-cost funding in the form of current account savings account (CASA) deposits. HDFC Bank has the highest CASA balance in the industry,” says Aditya Mishra, director-home loan desk, 4B Networks.

Other experts believe the home loan rates offered by the merged entity may not be much lower. “HDFC Ltd’s rates are already among the lowest. Most of the times, the rate it offers is around 15-20 basis points above the lowest rate within the industry. So, there isn’t much room for rates to decline,” says Shetty.

The real difference could come at the higher end of the rate spectrum.

“Since HDFC Ltd is an NBFC, the maximum interest it can charge can be quite high. After the merger, the rates at the higher end will fall considerably, so that the range offered by the merged entity is closer to what other banks offer,” says Shetty.

While banks have access to CASA deposits, they also have to meet cash reserve ratio and statutory liquidity ratio norms.

“Due to this, a bank may not have too much of a cost (of fund) advantage over a top-tier NBFC like HDFC Ltd. Hence, the merged entity’s home loan rate may not be much lower than HDFC Ltd’s,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

The current customers of HDFC Ltd will move from an NBFC to a bank. “Banks offer floating home loans whose interest rate is linked to an external benchmark, like the repo rate. This is a far more transparent rate-setting mechanism than what housing finance companies offer,” says Raghaw.    

The two entities have strong distribution arms — HDFC Sales and HDB Financial Services.

“The combining of these two entities will result in a very strong distribution arm for the merged entity,” says Mishra.

Finally, both depositors and home loan depositors should avoid any knee-jerk reaction to this development. The merger could take a year or more.

“Borrowers and depositors should act, if at all, only once the contours of the new entity become clearer,” says Dhawan.

WHEN TWO BECOME ONE: PROS & CONS

• The merged entity, being a bank, may offer a lower deposit rate than HDFC, an NBFC
• The merged entity’s home loan rates may be marginally lower (since the rates offered by HDFC are already competitive)
• HDFC customers will gain from coming under a more transparent interest rate-setting regime (linked to an external benchmark)
• Another positive for home loan borrowers is that banks don’t charge a prepayment penalty