India’s home-loan market is set for a dramatic change in the coming years as the country’s biggest housing finance company folds into a bank. HDFC Ltd is set to merge with HDFC Bank Ltd in 12-18 months, subject to regulatory approval. HDFC’s market share in overall housing loans was 31 percent in FY21, second only to State Bank of India (SBI), the largest bank in the country.

HDFC’s amalgamation into HDFC Bank would do three key things to the housing loan market. Firstly, the obvious outcome would be a reduction in the market share of housing finance companies (HFC) and a concurrent increase in that of the banking sector. Secondly, it would impact the growth and margins of HFCs as the heft of a large balance sheet coupled with access to low-cost borrowing would be tough to compete with. Lastly, HFCs may be driven towards riskier developer loans, which come with asset quality risks.

As such the top five lenders (both banks and HFCs) account for 80 percent of the market. Within HFCs, being the largest, HDFC Ltd had nearly half the market share. Therefore, after the HDFC’s merger, HFCs would account for just about a quarter of the housing loan market.

Also, Read | HDFC-HDFC Bank Merger: It was only a question of when says TT Srinivasaraghavan 

“Your cost of funds is a key component. HDFC, even before the merger, had the advantage of a large balance sheet, so their borrowing cost was low and they were more competitive. If they turn into a bank, they will gain more because of (the low) cost of funds,” said Prakash Agarwal, director and head of financial institutions at India Ratings and Research. He, too, expects the going to get tougher for HFCs.

This will hurt lenders such as LIC Housing Finance Ltd, PNB Housing Finance Ltd, and perhaps even some banks. As such, HFCs have witnessed pressure on their loan growth after the pandemic.