As Gruh Finance gets ready to walk down aisle with Bandhan Bank, treasury officials at former are bracing for a slightly higher cost of funds.

Housing Development Finance Corp.

(HDFC), Gruh’s parent and India’s mortgage-lending pioneer, would cease to be credit-quality benchmark for financier of affordable homes, making borrowings costlier. “…Merger processes may take time and could impact incremental borrowing costs and profitability of Gruh in interim,” said Karthik Srinivasan, group head - financial sector ratings at ICRA.

"Gruh may see a possible revision of its credit rating, given that its rating also factored in its status as a subsidiary of HDFC Ltd.” Gruh’s profitability was higher than its peers, many of which are larger in size.

But higher profitability owed more to fact that Gruh is a subsidiary of HDFC, a triple A-rated, premium mortgage company.

Bandhan Bank, despite all its recent successes, received “AA” tag from ICRA for its longterm bonds. The immediate impact of merger would be visible on Gruh Finance bonds, which may face a rating downgrade.

While Gruh’s bonds are triple A rated, Bandhan’s debt is ranked lower.

This may cause bond yields to rise at home financier. “The merger is credit negative for Gruh while for Bandhan, it will depend on its ability to integrate and scale up business,” said Srinivasan. Mutual funds have investments worth 5,000 crore in Gruh through debt securities including bonds and commercial papers, show data from Value Research, a Delhi-based analytics company.

More than half a dozen mutual funds, including UTI, ICICI Prudential, and SBI hold such debt securities, show data updated until November 30 last year. Fund managers ET spoke with cited “illiquidity” as a problem for such bonds, although there are no concerns over Gruh’s financials. “Culturally, Gruh and Bandhan are very different organisations – allowing cultures to co-exist will be key to success of merger.

Minority shareholders of Gruh (secured) may not share same level of excitement for Bandhan (that has seen super-fast growth, largely unsecured),” said Digant Haria, VP, research, Antique Stock Broking. Some investors tried to sell Gruh debt papers Tuesday but could not obtain right pricing, said a dealer with direct knowledge of matter.

But those investors did not want any distress sale.