What is HDFC Credila?

HDFC Credila, now known as Credila is a non-banking finance company that provides education loans for students who want to pursue their higher education in India and abroad. The company partners with students and their families to curate the most suitable loans with a tax benefit under Section 80(E) of the Income Tax Act India and prepayment and foreclosure options.  

More than 2,100 institutes partner with HDFC Credila, which extends beyond thousands of institutions across more than 35 countries. The HDFC Credila education loans can be used to pay for tuition, living, and travel as well as any other expenses such as books, laboratory fees, and laptops.

Introduction to HDFC Bank and Credila’s Relationship

  • The HDFC group was a major financial network that included HDFC Bank and HDFC Credila, which were closely connected to each other and were formed by HDFC Limited which was started in 1977 to fulfill India’s housing needs. 
  • HDFC Credila, a subsidiary of HDFC Limited is in the education loan business arm which provides education loans for students to pursue their education in India and abroad. 
  • In the beginning, HDFC Limited had 90 percent of the share in HDFC Credila and controlled 90 percent of the company.
  • HDFC brought all its banking and financial services together under one company, after merging with HDFC Limited with HDFC Bank in July 2023.
  • Later, the Reserve Bank of India told HDFC that its stake in HDFC Credila had to be narrowed to 10 percent within two years to avoid over-reliance on non-banking financial activities. 
  • Hence, HDFC sold 90 percent of its stake to a private equity consortium of BPEA EQT and ChrysCapital retaining a 9.99% non-controlling interest. 
  • Now, after selling, HDFC Bank can nominate one non-executive director on Credila’s board and have some preemptive rights. 
    The new stakeholders now manage Credila mostly. 

Why is HDFC Bank Reducing its Stake in Credila

  • The decision to sell HDFC Credila was a result of the complicated regulation system that would arise from merging HDFC Ltd and HDFC Bank. 
  • But former chairman Deepak Parekh said it was a time-consuming and costly process as the extensive approval requirements had to be dealt with in terms of approvals from the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Competition Commission of India (CCI) among others. 
  • HDFC Bank, instead of going through this long process, wanted to give out education loans directly, without an intermediary structure like Credila.
  • HDFC Ltd was a housing finance company and wasn’t under the same regulatory constraints put by the RBI. 
  • But when the merger happened, HDFC Ltd became part of the HDFC Bank fold and therefore came under the regulatory purview of the banking sector, and hence HDFC Bank had to sell its stake in Credila.
  • The merger hopes to merge resources together, expand customer offerings, and strengthen the financial standing of the newly merged entity so that the newly merged entity can operate more effectively in a competitive market.

Benefits and Challenges of the Stake Reduction

Benefits of Stake Reduction

  1. Regulatory Compliance and simplification in bank’s structure:
    • This reduction is to make sure HDFC Bank follows the RBI rules that require it to limit HDFC Credila's holding to 10%. 
    • The selling of non-core NBFC assets by HDFC Bank streamlines the structuring of the bank to conform to the banking regulatory framework.
  2. Potential for Strategic Collaboration:

    • Credila will have an independent board of directors and HDFC Bank will get a non-executive director on the board of directors of Credila, which will help it maintain a say in Credila's decisions, especially those related to its customer base or long-term interests.

    • Although Credila has minimized its relationship with HDFC bank, it can still maintain a close tie, because HDFC bank can still 'cross-sell' education loans or any other service to its customers.

Challenges of Stake Reduction

  1. Reduced Revenue from Education Financing
    • Loss of a Growing Segment: As a pioneer and a specialist in education loans, HDFC Credila was well positioned in a high-demand segment and funded over 178,000 students in 4,600 institutions around the world. That divestment could also mean lost revenue from a sector that keeps expanding as education costs rise and the need for student financing grows.
  2. Impact on Brand Positioning and Market Perception
    • Potential Brand Dilution: As India’s first dedicated education loan provider HDFC Credila has been building a reputation associated with the HDFC brand. With less stake involved, the tie-up with HDFC Bank may become weaker 

Impact of Stake Reduction on Credila’s Operations

1. Introduction of New Loan Products and Features

  • Customized Loan Products: One of the things private equity investors often look to do is product innovation to draw a larger customer base. Credila could come out with more specialized loan products such as those for fields of study, short-term certification courses, or courses with a big earning potential. Students who wish to choose a niche or a soon-to-emerge field will profit from it.
  • Flexible Loan Repayment Options: Credila can appeal to a more diverse group of borrowers by offering options for repayment that would better fit students' post-graduation earning schedules, such as income-based repayment plans, or even grace periods for job-seeking graduates.
  • Pre-Admission Loan Approval Expansion: With Credila’s pre-admission loan feature the new owners can expand this offering to attract applicants earlier in the education planning phase, especially those who are planning overseas studies. It could even include conditional approvals that allow students to get funding before getting their final university offers.

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2. Fee Structure and Interest Rate changes

  • Competitive Interest Rates: The new owners will also have to adjust interest rates to meet the market demand because now that they are trying to be competitive Credila. The increase and decrease could be either an increase or a decrease, depending on the focus: It is tailored to specific student demographics or study programs.
  • Variable vs. Fixed Interest Options: With some flexibility, Credila can start offering fixed and variable rate options. This approach would give students the option of the security of a loan at a fixed rate or the chance of a lower rate if their loan were in the market.
  • Revised Fee Structures: Sometimes new investors come in, streamline the pricing, so you can see changes in processing fees, late payment penalties, and prepayment penalties. However, these adjustments might raise some costs, but also make some costs more transparent and easier to understand.

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3. Changes in Collateral Requirements and Loan Amounts

  • Flexible Collateral Policies: Private equity investors may look for ways to attract more customers by providing more flexibility with collateral. As an example, Credila could adjust collateral to the institution, the field of study, or future earnings expectation to make loans available to those who don’t have the traditional collateral.
  • Increased Loan Limits for Premier Institutions: Credila may also increase its upper limit on loan amounts to cater to students who attend high-cost international programs. It could also draw students looking to study at prestigious universities overseas as education becomes more and more expensive.

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4. Impact of a Profit-Focused Ownership Model

  • Focus on High-Yield Programs: The new investors may focus more on the students in programs that produce high post-graduation salaries, for instance, STEM or business fields. Those in the lower-earning fields may find that they have a harder time getting advantageous loan terms than students in these programs.
  • Risk-Based Pricing: For instance, Credila might adopt risk-based pricing such that the interest rates or the loan conditions could vary with the perception of risk by Credila of each borrower’s educational and financial background. The loan terms thus could vary according to the profile of the borrower.

Impact on Current Credila Borrowers and Future Education Loan Applicants

  1. For existing borrowers, loan terms are expected to remain stable, there will be no change in interest rates, EMIs, and tenures of repayment. 
  2. But customer experience may soon change as Credila adapts to the operational style of its new investors
  3. Private equity owners are likely to change pricing strategies and credit evaluation for new loan applicants as they move to better returns. 
  4. HDFC Bank's future applicants may experience a more digitalized and standardized service approach, but may also find less ability to access the HDFC Bank integrated payment services or automatic EMI payment through HDFC Bank and discounted banking offers received from being an existing HDFC customer.
  5. This means that Credila may have to adapt to new investor directives and RBI guidelines, and in turn, so may both current and future borrowers.
  6. The change in ownership here could also change Credila’s brand perception, we could have some customers who may want to see reassurance that Credila is still committed to providing education finance with the new brand identity.

Will Student Loan Options with Credila Change?

So to summarize:

  • New loan products and features are expected to suit a wider range of students. 
  • Loans may be customized to specific fields or high-earning potential programs, and repayment options may be flexible, such as income-based and grace periods that make more sense with post-graduation schedules.
  • It could also unlock funding earlier, for example to students studying abroad, by expanding pre-admission loan approval. 
  • We expect changes in the interest rates and fee structures, shifts to keep pace and to remain competitive, including both fixed and variable rate options, and a modified fee structure for transparency. 
  • Greater collateral flexibility and higher loan limits for top-tier institutions may mean that more students have access to loans.