HDFC Bank plans to sell Rs 10,000 crore of loans via rare debt instrument: Report 

HDFC Bank plans to sell Rs 10,000 crore ($1.2 billion) of loan portfolios using a rare debt instrument as it seeks to cut exposure to certain sectors amid challenges in raising deposits, according to a Bloomberg report. 

The bank is in talks with local asset managers including ICICI Prudential AMC, Nippon Life India Asset Management Ltd. and SBI Funds Management Pvt to issue so-called pass through certificates, a route that has not been used in a decade by the bank, the report added. 

The certificates, to be backed by a pool of the bank’s car loans, will likely be issued in multiple tranches in the next few weeks. The securities are expected to offer interest rate in the range of 8.3-8.5% to investors, it added. 

The Mumbai-based lender reported a 35.33 percent surge in its year-on-year (YoY) standalone net profit during the first quarter of the ongoing financial year 2024-25 (Q1FY25). During the quarter under review, the country's largest private lender's profit came at Rs 16,174.75 crore compared with Rs 11,951.77 crore in the year-ago period. 

However, net profit for the quarter ended on June 30 this year was down 2.04 per cent, sequentially, from Rs 16,511.85 crore in the previous quarter (Q4 FY24). 

The lender’s gross advances stood at Rs 24.87 lakh crore in the Q1FY25. The bank’s Credit-to-Deposit ratio improved its numbers from 112 percent last year but the CD ratio was still high at 105 percent. 

Banks have been facing hurdles in deposit growth as they are not keeping pace with their lending activities.   

During the fortnight ending March 22, 2024, deposits saw a 13.5 percent increase, reaching Rs 204.8 lakh crore compared to previous year. However, lending during the same period surged by 20.2 percent, reaching Rs 164.3 lakh crore, as per a report by CareEdge Rating. 

With deposit growth of banks being slower than their credit growth, the credit-deposit ratio – which tells us how much money banks are lending compared to what they have in deposits – is at its highest in 10 years, hovering around 80 percent, a surge of 38 basis points compared to the preceding fortnight, according to CareEdge Ratings report.  

The Reserve Bank of India (RBI) has expressed concerns over high credit- deposit (CD) ratios of some banks. The CD ratio of some small finance banks has gone above 100 percent, much higher than the industry average of 80 percent.

A high CD ratio may pose liquidity and credit risks for a lender. When the CD ratio is high, it implies that a large portion of the bank’s funds is tied up in loans, leaving fewer liquid assets. If depositors suddenly withdraw funds in large amounts, the bank may face liquidity challenges, making it difficult to meet short-term obligations.