Synopsis: HDFC Bank is set to assign a car loan pool worth Rs. 9,062 crore to mutual funds as part of its efforts to rectify its credit-to-deposit (CD) ratio, which surged post-merger with its parent, HDFC. The bank plans to issue Pass-Through Certificates (PTCs) across three tranches with varying maturities.
India’s largest private lender, HDFC Bank, is finalizing the allocation of a car loan pool worth Rs. 9,062 crore to mutual funds in a move aimed at correcting its elevated credit-to-deposit (CD) ratio.
The bank's CD ratio had risen to 105% as of March 31, 2024, following its merger with HDFC, significantly higher than the industry average of 80%.
This transaction will help the bank align closer to the industry standard.
Breakdown of PTC Issuance:
HDFC Bank plans to issue Pass-Through Certificates (PTCs) in three tranches:
- Series A1: Issue size of Rs. 3,500 crore, maturing in 24 months
- Series A2: Issue size of Rs. 1,800 crore, maturing in 34 months
- Series A3: Issue size of Rs. 3,762 crore, maturing in 60 months
The PTCs have received a provisional AAA (SO) rating from India Ratings, indicating a high level of safety for investors.
The deal has been structured to provide investors with a weighted average return of approximately 8%.
Credit Enhancement and Risk Mitigation:
HDFC Bank has offered a 5% credit enhancement in the form of cash collateral to safeguard the interests of PTC investors.
This enhancement is designed to mitigate risk in case of borrower defaults exceeding 5%.
However, India Ratings has projected a low default rate of between 0.9% and 1.2% on the car loan pool, minimizing the risk for investors.
Prioritization of Repayments:
The structure ensures that holders of Series A1 PTCs will receive repayment priority, with 80% of the collections from the car loan pool allocated to them.
After that, repayments will be made to Series A2 PTC holders, followed by Series A3 holders, ensuring an orderly repayment schedule.
As per India Ratings, the loans in this pool have been contracted at 8.95%, with over 100,000 borrowers already repaying 15 months of EMIs and 20% of their original loan amounts.
This solid repayment track record adds a layer of security to the overall transaction.
Strategic Importance for HDFC Bank:
The transaction is a significant part of HDFC Bank’s strategy to reduce its elevated CD ratio, which exceeded 100% after its merger with HDFC.
A CD ratio above 100% indicates that the bank's credit exposure surpasses its deposit base, making it imperative for the bank to offload certain assets, like this car loan pool, to mutual funds and other investors.
Likely Investors and Market Reception:
Market sources suggest that mutual funds will be the primary buyers of these PTCs, given the promise of stable returns and high ratings.
The weighted average returns of around 8% are expected to attract considerable interest from institutional investors seeking low-risk, fixed-income instruments.
In conclusion, HDFC Bank's move to assign its Rs. 9,062 crore car loan pool to mutual funds represents a crucial strategy to bring its credit-to-deposit ratio closer to the industry average.
By issuing PTCs across three tranches and offering a credit enhancement of 5%, the bank is providing investors with a secure investment opportunity while addressing its own balance sheet concerns.
With the deal receiving a AAA (SO) rating and projected low default rates, this initiative demonstrates HDFC Bank’s proactive approach to maintaining financial stability post-merger.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult a certified financial advisor before making any investment decisions.
