Discover how banks package loans to sell them to investors. Learn about HDFC Bank's strategic move to sell its loan portfolios amidst declining growth rates. Explore the impact of its merger with HDFC Ltd. on the bank's balance sheet. Delve into the bank's efforts to enhance liquidity while navigating financial challenges and managing associated risks.
HDFC Bank's loan growth has dramatically fallen from 20% to 7%, prompting a reevaluation of its lending strategy and balance sheet management.
To enhance liquidity and mitigate borrowing risks, HDFC Bank is securitizing its loan portfolios, allowing access to cash while managing risk effectively.
Deep dives
HDFC Bank's Shift in Loan Growth Strategy
HDFC Bank's loan growth has sharply decreased from a consistent 20% year-on-year to just 7%, raising concerns among stakeholders. However, the bank's successful merger with HDFC Ltd. has transformed its balance sheet, leading to a substantial increase in reliance on borrowed funds. Specifically, its borrowing grew from 8% to over 20% of liabilities post-merger, significantly impacting its cost of funds, which climbed from 4% to 4.9%. This change necessitated a recalibration of the bank's lending strategy, as it needed to address an unfavorable credit-to-deposit ratio that surged from 85% to 110%.
Loan Securitization as a Strategic Solution
To counterbalance the increased borrowing risks and improve liquidity, HDFC Bank is actively selling off portions of its loan portfolios through securitization. This approach allows the bank to bundle various loans, such as car loans, and sell them to investors while still servicing the loans and collecting payments from borrowers. Recent securitizations include over 21,000 crore rupees worth of car loans, which have been rated AAA for quality assurance, providing additional security to investors. This strategy not only frees up cash for the bank to invest in expansion and new opportunities, but it also helps realign its cash-to ratio closer to pre-merger levels, supporting sustainable growth.
In today’s episode for 30th November 2024, we tell you how banks package their loans to sell them to investors, and what’s happening with HDFC Bank on that front.