This exercise, if approved, would help HDFC Bank cut interest costs as bank infrastructure bonds have the advantage of exemptions from regulatory reserve requirements like Statutory Liquidity Ratio and Cash Reserve Ratio.
“They (HDFC Bank) are likely to come out with a large infrastructure bond issuance soon. What they are proposing to some investors like insurance companies is that based on their subscription to the new infrastructure bond issuance, the bank would buy back securities that had been issued by HDFC Ltd before the merger was effected,” a source aware of the developments said.
Given that a proposal of this sort would require the approval of the Reserve Bank of India, HDFC Bank is in talks with the regulator on the matter, sources said.
Emails sent to the RBI and HDFC Bank seeking comment on the matter did not receive responses by the time of publication.ET had reported last week that HDFC Bank is likely to soon issue infrastructure bonds worth around ₹10,000-15,000 crore.”There are various ideas being floated around and this could be one of them. Nothing prevents a bank or company from buying back a bond. Having said that, any such proposal needs to be examined for legal and regulatory compliance before a concrete plan is made,” said another person close to the development.From April 2022 – when the merger between HDFC Limited and HDFC Bank was announced – to the implementation of the merger in July 2023, HDFC Limited had issued bonds worth around ₹1.2 lakh crore. HDFC Bank had requested the RBI to allow the lender to classify the bonds issued by the former NBFC as infrastructure bonds after the merger.
For insurance companies, HDFC Bank’s proposal to buy back bonds that had been issued by HDFC Limited would open up investment limits to the Banking Financial Services and Insurance (BFSI) sector.
These limits were progressively filled up after the merger as what earlier counted as infrastructure exposure to HDFC bonds, would now be considered as BFSI exposure to HDFC Bank.
However, with the central bank having declined that request, HDFC Bank faces a tricky situation on the maintenance of reserves as the merged entity has seen a sharp increase in liabilities while inheriting a relatively low-yielding home loan portfolio from HDFC Limited.