HDFC Bank has made 100% contingent provision on its AIF book, says CFO

The guidelines, RBI said, have been introduced to address concerns about potential evergreening through this route.

The country's largest private sector bank, HDFC Bank, has made a 100 percent contingent provision of its alternative investment funds (AIF), said Srinivasan Vaidyanathan, Chief Financial Officer, HDFC Bank.

"Our AIF book is Rs 1,220 crore and the current applicable Reserve Bank of India (RBI) circular asks us to take a provision on that and by January 18. On a prudent basis, we have done the assessment and taken the provision now. We have made a contingent provision of 100 percent of our AIF book," Vaidyanathan said at the post-results press conference.

Also read: RBI bars lenders from investing in AIFs linked to borrowing companies

The RBI, on December 19, said that regulated entities, such as banks, non-bank lenders, and home financiers, cannot invest AIFs that have directly or indirectly invested in companies that have borrowed money from the lenders.

In a press release, the RBI highlighted regulatory concerns regarding certain transactions involving AIFs by regulated entities that have come to its notice and released guidelines for investments in AIFs by the lenders regulated by it.

“These transactions entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs,” the RBI said.

The guidelines, RBI said, have been introduced to address concerns about potential evergreening through this route.

Regulated entities (REs) shall not make investments in any scheme of AIFs that has downstream investments either directly or indirectly in a debtor company of the RE.

The RBI said lenders need to liquidate their investment in the scheme within 30 days if the AIF scheme, in which lenders are already investors, makes a downstream investment in any such debtor company.

Further, if lenders have already invested into schemes having downstream investment in their debtor companies as on date, the 30-day period for liquidation shall be counted from the date of issuance of this circular, the RBI added.

Also read: HDFC Bank expects to start IPO process of HDB Financial Services in next few months, says CFO

If lenders fail to liquidate their investments within 30 days, they need to make 100 percent provision on such investments, the RBI noted.

The central bank also said that investment by REs in the subordinated units of any AIF scheme with a "priority distribution model" shall be subject to full deduction from RE’s capital funds.

RWA impact

The RBI on November 16 increased the risk weight of consumer credit exposure. It raised the risk weight on consumer loans from banks and NBFCs by 25 percent. Earlier, banks attracted a risk weight of 125 percent and NBFCs 100 percent. After the RBI’s latest move, the same will stand at 150 percent for banks and 125 percent for NBFCs.

The increase in risk weight for commercial banks (outstanding as well as new) includes personal loans. However, other categories such as housing loans, education loans, vehicle loans, and loans secured by gold and gold jewellery have been excluded as the risk perception is less on these loans.

Here, Srinivasan said that the bank had a 97 basis points (bps) impact on the capital adequacy ratio (CAR) due to the increase in the risk weight assets on unsecured and other loans.

Bank's Q3 performance

HDFC Bank on January 16 reported a net profit of Rs 16,372 crore for the October-December quarter of 2023-24, which marks a 33.5 percent jump from Rs 12,259 crore clocked a year ago.

The net profit, at Rs 16,372 crore, is almost in line with the market estimates of Rs 16,427 crore. The net interest income (NII) of Rs 28,470 crore, which increased by 23.9 percent as compared to Rs 22,990 crore reported in the corresponding quarter of the previous fiscal. The NII, at Rs 28,470 crore, is lower as against the market estimates of Rs 29,554 crore.

Also read: HDFC Bank plans to increase branches to 13,000 in next 3-5 years, says CFO

The bank's gross non-performing assets (NPA) stood at 1.26 percent, up from 1.23 percent last year. On the other hand, net NPA for the quarter stood at 0.31 percent compared to 0.33 percent last year.

In the October-December FY24 quarter, total deposits of the bank jumped by 27.7 percent to Rs 28.47 lakh crore versus Rs 22.29 lakh crore in the corresponding quarter last year. Current account and savings account deposits grew by 9.5 percent with savings account deposits at Rs 5.79 lakh crore and current account deposits at Rs 2.58 lakh crore.

The lender's total advances jumped 62.4 percent to Rs 24.69 lakh crore. Domestic retail loans of the bank grew by 111 percent, commercial and rural loans of the bank grew by 31.4 percent and corporate and wholesale loans (excluding non-individual loans of eHDFC Ltd. of approximately Rs 98,900 crore) grew by 11.2 percent.