HDFC Bank, one of India’s largest banks, has recently sold a significant portion of its loan portfolio, worth about ₹60 billion (approximately $717 million), to ease its credit burden. This decision comes amid rising regulatory pressures on the banking industry to manage credit and deposits more effectively.
What Happened?
HDFC Bank sold a large portion of its housing loans to about half a dozen state-owned banks. These transactions were conducted privately, meaning they weren’t publicly announced or auctioned. The bank took this step to lighten its credit load as part of broader efforts to balance its lending and deposit activities.
Additionally, the bank sold another group of car loans worth ₹90.6 billion. Instead of selling these loans directly, HDFC Bank securitized them into pass-through certificates (PTCs), which are a type of financial product used to bundle loans. These PTCs were then sold to various asset management companies (AMCs), including major names like ICICI Prudential AMC, Nippon Life India AMC, SBI Funds Management, and Kotak Mahindra AMC. These buyers would receive a return on their investment from the payments made by the borrowers of those car loans.
The pass-through certificates offered investors a return ranging between 8.02% and 8.20% per month, divided into three tranches (segments of the loan pool).
Why Did HDFC Bank Do This?
The main reason for selling off parts of its loan portfolio is the pressure from regulators to improve the credit-deposit ratio (CDR) of banks. The credit-deposit ratio shows how much of a bank’s deposits are lent out as loans. A high ratio can indicate that the bank is lending aggressively, potentially leading to risks if deposits don’t keep up with the pace of loans.
HDFC Bank’s CDR had been rising over the past few years. In fact, by the end of March 2024, its credit-deposit ratio had reached 104%, compared to a more comfortable range of 85% to 88% in the previous three years. This means the bank was lending out more money than it had in deposits, a situation that regulators often see as risky.
By selling off these loan portfolios, HDFC Bank can reduce the amount of loans it holds on its books, effectively improving its credit-deposit ratio. This is especially important after HDFC Bank merged with Housing Development Finance Corp (HDFC), which increased the bank’s overall loan exposure.
The Broader Impact on the Banking Industry
The sale of these loan portfolios highlights a larger issue facing the Indian banking industry: slower deposit growth compared to the increase in loans. The Reserve Bank of India (RBI) has expressed concern about this imbalance, warning that it could lead to liquidity problems for banks in the future.
In a statement, the central bank mentioned that if banks continue to lend out more than they are receiving in deposits, they might face difficulties in maintaining adequate cash flow. This could put the entire banking system under stress, especially if the situation continues without corrective measures.
Future Outlook
HDFC Bank is expected to report solid deposit growth of 13% in its next earnings report for the quarter ending in September 2024. However, loan growth is expected to be lower at 8%, which indicates the bank is likely working to rein in its credit expansion in line with regulatory expectations.
In conclusion, by selling off parts of its loan portfolio, HDFC Bank is actively managing its financial health, ensuring it remains in good standing with regulators while continuing to grow deposits. This move is also a signal to other banks that may face similar challenges with their credit-deposit ratios, potentially leading to more portfolio sales in the future.
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