HDFC Bank, India’s largest private sector bank, is making headlines with its plan to sell a substantial amount of car loans. Here’s a breakdown of what’s happening:
What’s the Sale About?
HDFC Bank is looking to sell car loans worth Rs 9,062.38 crore (about $11 billion) through a financial tool known as ‘pass through certificates’ (PTCs). These PTCs allow investors to earn a steady income from a bundle of assets, such as loans.
This sale could be the largest of its kind in India. According to India Ratings & Research, the PTCs have been given a provisional rating of Universal Trust AL1. However, this rating is conditional on the completion of certain documents and steps.
Details of the Loan Pools
The loans are grouped into three pools:
- Pool 1: Rs 3,500 crore, maturing in September 2026.
- Pool 2: Rs 1,800 crore, maturing in July 2027.
- Pool 3: Rs 3,762.38 crore, maturing in September 2030.
The loans in these pools have an average original loan-to-value ratio of 84.7%, meaning the loan amounts are about 85% of the car’s value. Each loan in the pool has an average balance of Rs 1,058,882, with a weighted average internal rate of return of 8.92%. Importantly, all the loans are up-to-date as of the cut-off date.
Why Is This Sale Important?
As of June 30, HDFC Bank’s credit-deposit ratio was 105%. This means the bank’s loans exceed its deposits. A high credit-deposit ratio indicates that the bank might struggle with asset growth without facing potential financial mismatches. This issue has been compounded since HDFC Bank’s merger with Housing Development Finance Corporation in July 2023.
The bank’s total loan book was Rs 24.87 lakh crore, with its auto loan portfolio standing at Rs 1.33 lakh crore.
What Do the Ratings Say?
India Ratings has estimated a default rate of 0.9% to 1.2% for these loans, with a recovery rate of 70% to 80% and a recovery period of 9 to 12 months. The ratings also account for a potential monthly prepayment rate of 0.25% to 0.50%.
The pool has been amortized by 20.8% and has a seasoning of 15.2 months, indicating a solid repayment history from borrowers.
Impact of Changes in Assumptions
India Ratings has noted that even if the default rate and recovery rate worsen by 20%, the rating of these PTCs is unlikely to be downgraded. This indicates a strong level of confidence in the stability of the PTCs despite potential financial fluctuations.
Conclusion
HDFC Bank’s sale of car loans through PTCs is a significant move to manage its credit-deposit ratio. With substantial amounts and detailed ratings, this sale aims to provide a new investment avenue while addressing the bank’s current financial dynamics.
