HDFC Bank, India’s largest private lender, is finalizing a significant move to assign its car loan portfolio worth Rs 9,062 crore to mutual funds. This strategic initiative aims to bolster the bank’s financial standing by improving its credit-to-deposit (CD) ratio, which has been under pressure following the merger with its parent company, HDFC.
As of March 31, 2024, HDFC Bank’s CD ratio stood at 105 percent, exceeding the industry average of approximately 80 percent. A CD ratio above 100 percent indicates that the bank’s lending activities surpass its deposit base, a situation that can raise concerns about liquidity. In light of this, the bank has received a provisional AAA (SO) rating from India Ratings, underscoring the robustness of the pass-through certificates (PTCs) it plans to issue to investors.
The car loans in this pool are sourced from over 100,000 borrowers, featuring an interest rate of 8.95 percent. Financial experts anticipate that mutual funds will be the primary investors in these PTCs, offering an estimated average return of around 8 percent.
The issuance of PTCs will be structured in three parts:
Series A1: Valued at Rs 3,500 crore, maturing in 24 months.
Series A2: Worth Rs 1,800 crore, maturing in 34 months.
Series A3: Valued at Rs 3,762 crore, maturing in 60 months.
To enhance investor confidence, HDFC Bank has allocated 5 percent cash collateral to support the PTC investors. The repayment mechanism prioritizes Series A1 investors, who will receive 80 percent of the collections from the loan pool. Once Series A1 investors are paid, the repayment will be distributed between Series A2 and Series A3 investors at an 80:20 ratio, with Series A2 receiving priority.
This initiative reflects HDFC Bank’s commitment to managing its credit exposure effectively while providing investors with attractive returns, ultimately contributing to the bank’s long-term financial health.
