hdfc: RBI had questions about the home loan agreement between HDFC and HDFC Bank

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The Reserve Bank of India had raised questions about an agreement on the origination and transaction of home loans between mortgage lender Housing Development Finance Corp and its banking unit, and this may have been one of the reasons for their merger, have said three people familiar with the matter.

The regulator had raised the issue of the unique agreement between

and HDFC Bank over a period because it believed the arrangement was not good for the industry from a structural standpoint as well as a risk standpoint, said the three people who did not want to be identified.

“The RBI was getting uncomfortable with the arrangement,” one said. “There could have been other considerations like regulatory convergence between NBFCs and banks, but the arrangement couldn’t have lasted long once the regulator started questioning it. Better to end it before the regulator takes action.”

HDFC Bank makes loans to the parent company at a fee of 1.10% and it has the right to buy 70% of the loans it has issued. Until now, except for one year, the bank redeemed 70% each year. The bank pays 75 basis points to HDFC for servicing the loans bought back from the parent company.

The arrangement is similar for other banks with which HDFC has links where the companies are small compared to HDFC Bank. But banks like

and do not redeem their full limit.

Some executives said regulatory issues were not the trigger for the merger.

“As this loan buyout is a related party transaction, the RBI is looking at it more than usual,” said an HDFC executive who did not wish to be identified. “Every year there is a meeting with large conglomerates with substantial amounts of financial services firms. This meeting also includes other regulators like Sebi, IRDAI and PFRDA. Three people from HDFC have always attended these annual meetings which began with a business presentation and followed by questions about related party transactions.There were never any questions or red flags raised by RBI about this arrangement.

HDFC did not respond to an email seeking comment.

HDFC and HDFC Bank proposed in April to merge to create a financial services giant worth nearly ₹13 lakh crore, ending nearly two decades of speculation.

HDFC Bank said market opportunity was the main reason for the merger. “This presents significant cross-selling opportunities, especially as 70% of HDFC Ltd customers do not do business with HDFC Bank. In addition, approximately 5% of HDFC Bank customers take out home loans from other sources,” he said in a statement.

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