Synopsis: HDFC Bank is exploring the issuance of infrastructure bonds valued between Rs. 10,000-15,000 crore to bolster long-term capital and address reserve requirements stemming from its merger with HDFC. This strategic move capitalizes on stable bond markets post-election, leveraging benefits such as exemption from statutory liquidity ratio (SLR) and cash reserve ratio (CRR) obligations.
"Bond markets have stabilized following election-related volatility, making infrastructure bonds an attractive option for HDFC Bank due to the flexibility they provide in maintaining the statutory liquidity ratio (SLR) and cash reserve ratio (CRR)," said a source familiar with the matter.
HDFC Bank, India's largest lender by market value, is exploring the issuance of infrastructure bonds worth around Rs. 10,000-15,000 crore to secure long-term capital and meet reserve requirements resulting from its merger with HDFC last year.
An email sent to HDFC Bank for comments did not receive a response by the time of publication.
In April, HDFC Bank announced plans to raise up to Rs. 60,000 crore through various bonds in the current financial year.
Funds raised through infrastructure bonds, with a minimum maturity of 7 years, are exempt from SLR and CRR requirements, which are mandatory reserves for banks.
SLR, the portion of deposits banks must invest in liquid securities like government bonds, is currently set at 18%. The CRR, kept with the RBI, stands at 4.5% of net demand and time liabilities.
For HDFC Bank, infrastructure bonds are crucial as the bank balances an increasing portion of deposits set aside as reserves with lower-yielding home loans inherited from HDFC.
The bank's net interest margins have compressed, dropping to 3.44% in FY24 from 4% in FY23.
With no dispensations from the RBI on reserve maintenance post-merger, issuing infrastructure bonds becomes more critical.
In March, ET reported that the RBI declined HDFC Bank's request to classify over Rs. 1 lakh crore of securities issued by HDFC as infrastructure bonds.
HDFC had classified more than Rs. 1.20 lakh crore of bonds as infrastructure finance instruments.
If these bonds were recognized as infrastructure bonds by the bank, they could offset infrastructure and affordable housing loans without maintaining CRR and SLR on them.
HDFC, on its own, had about Rs. 1 lakh crore of affordable housing loans, which would be fully offset against these bonds.
In March 2024, HDFC Bank raised Rs. 2,910 crore through infrastructure bonds at a rate of 7.65%.
According to the latest RBI data, as of May 31, bank credit growth was at 16.1% year-on-year, excluding the impact of the HDFC merger. Deposit growth during the same period was 12.2%.
In conclusion, HDFC Bank is strategically considering the issuance of infrastructure bonds worth Rs. 10,000-15,000 crore to secure long-term capital and efficiently manage reserve requirements following its merger with HDFC.
As bond markets stabilize post-election, these bonds offer significant benefits, including exemptions from SLR and CRR maintenance, aiding the bank in balancing its asset-liability mix.
With recent compressions in net interest margins and no RBI concessions on reserve requirements, the move towards infrastructure bonds becomes even more critical for the bank's financial stability and growth.
