HDFC Bank to sell Rs 10k cr in loan portfolios via pass-through certificate

HDFC Bank will use a rare debt instrument known as pass-through certificates to sell loan portfolios worth up to Rs 10,000 crore ($1.2 billion)

HDFC Bank, one of India’s largest private lenders, is planning to sell loan portfolios worth up to Rs 10,000 crore ($1.2 billion) using a rarely utilised debt instrument known as pass-through certificates (PTCs). This move is part of the bank’s strategy to reduce its exposure to certain sectors while addressing difficulties in raising deposits, according to a report by Bloomberg.

What are pass-through certificates (PTCs)?

Pass-through certificates are debt instruments that allow the holder to receive the principal and interest payments from a pool of loans. These certificates are backed by the underlying assets, in this case, HDFC Bank’s car loans. The issuance of PTCs by HDFC Bank marks a significant shift, as the bank has not used this method in over a decade.

 

HDFC Bank’s planned transaction

HDFC Bank is reportedly in discussions with several local asset management companies, including ICICI Prudential AMC, Nippon Life India Asset Management Ltd, SBI Funds Management Pvt, and Kotak Mahindra Asset Management Co, to facilitate the issuance of these certificates. The PTCs are expected to be issued in multiple tranches over the coming weeks, offering interest rates between 8.3 per cent and 8.5 per cent to investors.
 

This transaction is part of HDFC Bank’s efforts to manage its credit-deposit (CD) ratio, a critical metric that measures the proportion of a bank’s deposits that have been lent out. The bank’s CD ratio has reached 104 per cent as of March 2024, significantly higher than the 85-88 per cent range observed in previous years, according to a report by ICRA Ltd, a subsidiary of Moody’s Ratings. This indicates that the bank’s loan growth has outpaced its deposit growth, prompting the need for strategic adjustments.

Why is HDFC Bank selling loan portfolios?

HDFC Bank’s decision to sell these loan portfolios comes in response to increasing regulatory pressure on banks to improve their CD ratios. The Reserve Bank of India (RBI) has highlighted the need for banks to reconsider their business strategies due to the widening gap between credit and deposit growth rates. As of August 9, 2024, Indian banks’ deposits grew at an annual rate of 10.9 per cent, while loan growth outpaced this at 13.6 per cent, according to the latest data from the RBI.

The bank’s move also aligns with broader industry trends where financial institutions are urged to find innovative ways to bolster their deposit bases. Both Finance Minister Nirmala Sitharaman and RBI Governor Shaktikanta Das have encouraged banks to leverage their extensive networks to attract more savings, warning of potential liquidity challenges if deposit growth does not keep pace with lending.

In June 2024, HDFC Bank sold Rs 5,000 crore loan portfolio to an undisclosed buyer, marking its first such transaction in over a decade, Chief Financial Officer Srinivasan Vaidyanathan confirmed with Bloomberg.