HDFC Bank plans to float NBFC

Move will help private sector bank step up corporate lending.

HDFC Bank proposes to float a non-banking finance company (NBFC). This will enable the new generation private bank to step up its corporate lending at a time when credit offtake of the banking industry has been growing significantly.

Banks today cannot lend more than 15 per cent of their net worth to an individual borrower and 40 per cent to a corporate group under the Reserve Bank of India (RBI) exposure norms.

HDFC Bank will be among the first private sector banks to float an NBFC arm. Most foreign banks have either already set up or are in the process of setting up their NBFC arms. They expand their reach through the NBFCs as they are not able to spread their branch network freely.

"HDFC Bank is exploring the option of setting up an NBFC. It is closely examining the RBI guidelines on this," said banking sources. HDFC Bank executives refused to comment on the development.

HDFC Bank exceeded the 15 per cent exposure limit in case of three of its borrowers in fiscal year 2004-05 and in each of the cases it had obtained RBI approval.

On March 31, 2005 the group borrowing limit exceeded in one case which has been classified as "state sponsored financial institution" in its annual report.

The bank's wholesale advances last year increased 41.3 per cent to Rs 13,870 crore. Income from operations from wholesale banking as in March 2005 stood at Rs 2056.35 crore against Rs 1761.45 crore in the previous year. HDFC Bank's net profit in 2004-05 was Rs 665.56 crore on an asset base of over Rs 50,000 crore.

Under the Banking Regulation Act, a bank can set up a subsidiary, which can be registered as an NBFC. An NBFC needs to maintain a statutory liquidity ratio (SLR) of 15 per cent against a commercial bank's minimum SLR requirement of 25 per cent.

Besides, unlike a commercial bank an NBFC does not need to maintain any cash reserve ratio (CRR).

By setting up the NBFC arm, HDFC Bank will have yet another vehicle of accessing funds through the capital market and retail deposits besides building new assets.

An NBFC can offer higher interest rates on deposits as opposed to banks since its SLR is lower and it does not need to maintain any CRR or priority sector lending.

The RBI, in the recent past, has been urging NBFCs to voluntarily exit from public deposit taking activities.