Leading private Indian bank HDFC Bank is planning to offload as much as ₹10, 000 Crore ($ 1.2 billion) of loans through PTCs. It is a strategic one that is supposed to help the bank decrease the sector-focused risk while addressing issues of deposit mobilization, as stated by Bloomberg.
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What Is the Concept of Pass-Through Certificates (PTCs) and How Did They Operate?
A pass-through certificate (PTC) is a form of security that gives the holder a proportionate return on the principal and interest on a pool of loans. They are secured by the underlying assets, in this case, car loans from HDFC Bank which are mentioned in the above table. Notably, this is quite a drag for HDFC Bank which has not used PTCs in the last ten years.
This paper presents HDFC Bank’s plan for using PTCs
Currently, the HDFC Bank is in an active conversation with other local Asset Management Companies to enable them to float these PTCs. Some of the players are ICICI Prudential Asset Management Company Ltd., Nippon Life India Asset Management Ltd., SBI Mutual Fund, and Kotak Mahindra Mutual Fund Company Ltd. It may issue the PTCs in various tranches in the next couple of weeks and offer better interest rate between 8% to 8. 3% to 8. 5%.
The question that arises in one’s mind why is HDFC Bank selling loan portfolios now.
The sale of these loan portfolios by HDFC Bank has been made due to regulatory pressure which seeks to have an enhanced CD ratio. A risk assessment has also been made concerning the CD ratio which has been defined as the percentage of the total deposit that has been funded; the CD ratio is 104% as of March 2024. This has risen from the previous estimate of between 85 – 88% as estimated by ICRA Ltd which is a Moody’s Ratings company.
This increase in the CD ratio shows that HDFC Bank’s loan growth has been faster than the deposit growth hence the need for strategic shifts. RBI has pointed out that credit continues to grow at a faster pace than deposits and the banks need to reset their business models accordingly. By Aug 9, 2024, the data of RBI shows that the deposits of the Indian banks were growing at a rate of 10 % annually. 9%; and loan growth, at 13 percent, was higher than this figure as well. 6%.
That Being the Case, the Broader Implications of the Social Banking Movement that is Currently Emerging in the Banking Industry
HDFC Bank’s action is in tune with emerging industry practices, as global organizations press for banks to lift their game regarding enhancing their deposit base. While emphasizing large-scale branching networks of banks to mobilize more savings, Sitharaman has also advised banks to avert future liquidity crunch if deposit expansion doesn’t match credit expansion, similar advice has been given by Das as well.
The Bank had earlier in June this year sold a ₹5,000 crore loan portfolio to another buyer for the first time in more than 14 years as revealed by Srinivasan Vaidyanathan, the CFO of HDFC Bank through an interview with Bloomberg.
In light of this information, what does it mean for the investors?
From investors’ perspective, the ability of HDFC Bank to issue PTCs allows investors to obtain access to attractively priced debt instruments that are linked to the quality of its loan portfolio. However, it also indicates a change in banks’ orientation toward the optimization of the result of their financial performance in light of new regulations and the dynamics of the market.
HDFC Bank’s strategy is to use PTCs effectively to achieve a good CD ratio while also keeping loan growth going despite difficult conditions for deposit mobilization in the current economy.
