How will HDFC’s dedicated tenured bonds cut bank’s future borrowings

HDFC sold about Rs 75,000-80,000 crore of bonds, qualifying for the infrastructure and housing status, to help finance the purchase of affordable homes, a top market source familiar with the matter told ET. Those bonds have maturities of seven years or above. The sum is likely to be exempted for the purposes of calculating statutory liquidity and reserves (SLR+CRR) threshold of the merged entity.

HDFC Bank, to be sure, said it will borrow up to Rs. 50,000 crore. That will go largely toward meeting the reserves mandate.

Proceeds from HDFC’s seven-year bonds have been used to fund low-cost, or affordable, homes, said a person aware of the developments. HDFC gave loans of up to Rs 50 lakh for home values of up to Rs. 65 lakhs in the six metropolitan centres – Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad.

For other smaller centres, the slabs are lower by, said a 2014 central bank order that stipulated such exemption provided banks raise infrastructure bonds with a minimum maturity of seven years.

The Reserve Bank of India (RBI) can periodically review the definition of affordable housing given the inflation figures.

“For those bonds that come to HDFC Bank’s books, it is unlikely there will be a need to create additional SLR or CRR,” said an executive.

Total outstanding bonds/non-convertible debentures of HDFC Ltd and HDFC Bank stand at nearly Rs 2.12 lakh crore, show data from Prime Database, an analytics firm. The largest mortgage lender has sold bonds worth Rs 1,74,356 crore, with the bank raising Rs 37,452 crore via bonds.

Any incremental infrastructure and affordable housing loans acquired from other banks and financial institutions to be reckoned for regulatory incentives will require prior approval of the RBI.

“While a bank gets CRR/SLR & PSL relaxation on infra bonds raised with seven-year maturity at least, it is to be seen if the HDFC Ltd bonds are given the same benefits in the books of the bank. The RBI would have the final say.” said Karthik Srinivasan, head of financial sector rating at ICRA Ratings.

Banks must maintain SLR, or a statutory liquidity ratio, which is the proportion of deposits a lender must hold in government bonds. That threshold is currently at 18% of net demand and time liabilities (NDTL). CRR, or cash reserve ratio, is the percentage of deposits banks have to keep with the Reserve Bank of India (RBI), and that threshold is 4%.

The proposed merger has raised CRR and SLR requirements as the balance sheet size of the merged entity will be much bigger than what the standalone bank now has.

“We have Rs 80,000 crore of excess liquidity cushion,” HDFC Bank’s Managing Director Sashidhar Jagdishan said on Monday, when the merger was announced. “We also plan to ramp up our deposit collection drive, in the run-up to the merger; so, I am not worried about these requirements.”