Continuous Test 4: Principles and Practice of Banking

Instruction: No study material, laptop and mobile phone allowed as per end term
examination norm.
Full Marks 10
Time: 30 minutes
There is a series of discussions among academicians and practitioners as to
HDFC Bank’s Tier II Capital Bond. On 8/07/10 it was reported that “HDFC Bank
Ltd has issued on a private placement basis Unsecured, Redeemable, NonConvertible, Subordinated Bonds in the nature of Debentures towards Tier - II
Capital. The Bank has issued Upper Tier II bonds for an amount aggregating Rs.
1105 Crores. The total traded quantity was 34961 compared to 2 week average
of 54400. As per the insider’s information SBI is one the major investor in the
above issue but SBI repented after such investment because interest rate loss
since interest rates rose steadily towards thee end of 2010. The SBI bond issue
in 2011 was a tool to hedge such interest rate risk. So comes the first issue –
where is the place of SBI bond - on balance sheet or off balance sheet as a risk
management or hedging derivative product?
The second issue is that HDFC bank bond is fraught with both of credit risk and
market risk. On 8/7/2011 the HDFC bank stock was trading at Rs.1945.25, up by
Rs.8.65 or 0.45%. The stock hit an intraday high of Rs.1968 and low of
Rs.1942.The HDFC Bank beta (β) may be discerned from the following figure
and enclosed prices of the stock and the sensex. At the same time the
concerned fraternity seems to be split into two camps. The issue goes like this “In
April 2010, for the first time a categorical statement is coming from the DIPP,
which has been trying to resolve this issue in consultation with the Finance
Ministry and the Reserve Bank of India for over a year now (but not successful
yet). Like ICICI Bank, HDFC Bank has more than per cent 65% foreign
shareholding. Both these are higher than the stipulated limit that determines
whether an entity is Indian or foreign”.
Assuming that you are an SBI officer furnishing SBI’s capital adequacy report to
RBI, answer the following questions:
(i) In the first issue context what you think would be the place of SBI bond from
the perspective of risk weights or conversion factors? Why?
Marks 4
(ii) In the second issue context how much risk weight or conversion factor would
you suggest to attach to HDFC Bond? Why?
Marks 6

HDFC BANK
Date

Close

SENSEX

Volume

Adj Close

Close

Volume

Adj Close

3/9/2011

159.32

331900

159.32

18469.95

22600

18469.95

3/8/2011

159.25

260800

159.25

18439.65

13800

18439.65

3/7/2011

155.03

215800

155.03

18222.67

15200

18222.67

3/4/2011

158.73

231100

158.73

18486.45

19800

18486.45

3/3/2011

157.39

310600

157.39

18489.76

28600

18489.76

3/2/2011

152.26

216200

152.26

18446.5

24800

18446.5

3/1/2011

151.5

410000

151.5

17823.4

30000

17823.4

2/28/2011

147.11

122400

147.11

17700.91

21800

17700.91

2/25/2011

145.91

210800

145.91

17632.41

23000

17632.41

2/24/2011

145.66

351600

145.66

18178.33

22200

18178.33

2/23/2011

148.36

449400

148.36

18296.16

19800

18296.16

2/22/2011

147.99

281300

147.99

18438.31

19200

18438.31

2/18/2011

153.31

271900

153.31

18211.52

22000

18211.52

2/17/2011

151.75

177000

151.75

18506.82

16600

18506.82

2/16/2011

149.38

190600

149.38

18300.9

18800

18300.9

2/15/2011

150.37

306900

150.37

18273.8

23600

18273.8

2/14/2011

148.5

265600

148.5

18202.2

21800

18202.2

2/11/2011

148.18

397500

148.18

17728.61

25400

17728.61

2/10/2011

142.45

325300

142.45

17463.04

25200

17463.04

2/9/2011

141

440300

141

17592.77

30200

17592.77

2/8/2011

141.93

295000

141.93

17775.7

14200

17775.7

2/7/2011

143.65

147400

143.65

18037.19

13000

18037.19

2/4/2011

141.33

167000

141.33

18008.15

23000

18008.15

2/3/2011

143.91

102400

143.91

18449.31

21600

18449.31

2/2/2011

142.68

220600

142.68

18090.62

22800

18090.62

2/1/2011

146.26

304400

146.26

18022.22

20200

18022.22

1/31/2011

144.41

525300

144.41

18327.76

19800

18327.76

1/28/2011

140.42

829800

140.42

18395.97

18600

18395.97

1/27/2011

146.45

363000

146.45

18684.43

13800

18684.43

1/26/2011

147.37

296500

147.37

18969.45

13400

18969.45

1/25/2011

148.46

167800

148.46

19151.28

11600

19151.28

1/24/2011

149.56

432900

149.56

19007.53

11000

19007.53

1/21/2011

149.89

394300

149.89

19046.54

12800

19046.54

1/20/2011

150.51

322700

150.51

18978.32

16200

18978.32

1/19/2011

150.36

385500

150.36

19092.05

14400

19092.05

1/18/2011

150

392900

150

18882.25

17800

18882.25

1/14/2011

150.06

530000

150.06

18860.44

15800

18860.44

1/13/2011

154.5

453900

154.5

19182.82

16800

19182.82

1/12/2011

155.15

438700

155.15

19534.1

19400

19534.1

1/11/2011

148.6

752200

148.6

19196.34

20000

19196.34

1/10/2011

147.65

855800

147.65

19224.12

17200

19224.12

1/7/2011

153.22

655500

153.22

19691.81

15800

19691.81

1/6/2011

156.55

672400

156.55

20184.74

16600

20184.74

1/5/2011

163.2

236200

163.2

20301.1

14400

20301.1

1/4/2011

164.57

430900

164.57

20498.72

15200

20498.72

1/3/2011

169.5

270000

169.5

20561.05

12000

20561.05

12/31/2010

167.11

134700

167.11

20509.09

12600

20509.09

12/30/2010

167.6

68100

167.6

20389.07

10600

20389.07

12/29/2010

168.52

152000

168.52

20256.03

10000

20256.03

12/28/2010

166.13

90600

166.13

20025.42

10600

20025.42

12/27/2010

165.09

58200

165.09

20028.93

9800

20028.93

12/23/2010

165.47

99300

165.47

20073.66

16400

20073.66

12/22/2010

166.78

181400

166.78

19982.88

7600

19982.88

12/21/2010

163.8

304700

163.8

20015.8

12000

20015.8

12/20/2010

160.97

218000

160.97

20060.32

14200

20060.32

12/17/2010

164.42

314500

164.42

19888.88

11200

19888.88

12/16/2010

162.06

371800

162.06

19864.85

15400

19864.85

12/15/2010

158.53

585000

158.53

19647.77

14000

19647.77

12/14/2010

164.34

298200

164.34

19799.19

13400

19799.19

12/13/2010

166.23

214800

166.23

19691.78

15400

19691.78

12/10/2010

167.08

777000

167.08

19508.89

16000

19508.89

12/9/2010

160.78

1329400

160.78

19242.36

17200

19242.36

12/8/2010

179.92

226400

179.92

19696.48

12600

19696.48

12/7/2010

179.1

398300

179.1

19934.64

13400

19934.64

12/6/2010

186.74

82300

186.74

19981.31

14000

19981.31

12/3/2010

188.08

60700

188.08

19966.93

13800

19966.93

12/2/2010

188.78

133700

188.78

19992.7

16600

19992.7

12/1/2010

185.68

278800

185.68

19850

15000

19850

11/30/2010

176.35

252600

176.35

19521.25

18800

19521.25

11/29/2010

176.37

142900

176.37

19405.1

12400

19405.1

11/26/2010

178.23

172900

178.23

19136.61

25200

19136.61

11/24/2010

175.79

322200

175.79

19318.16

13800

19318.16

11/23/2010

178.07

158800

178.07

19459.85

12200

19459.85

11/22/2010

182.34

141700

182.34

19691.84

14200

19691.84

11/19/2010

182.11

239000

182.11

19957.59

11000

19957.59

11/18/2010

182.42

244300

182.42

19585.44

16400

19585.44

11/17/2010

180.94

310100

180.94

19930.64

21800

19930.64

11/16/2010

178.28

203900

178.28

19865.14

15200

19865.14

11/15/2010

184.05

135700

184.05

20309.69

14200

20309.69

11/12/2010

180.46

175500

180.46

20156.89

14600

20156.89

11/11/2010

184.67

119000

184.67

20589.09

12600

20589.09

11/10/2010

185.81

124900

185.81

20875.71

15200

20875.71

11/9/2010

184.99

163100

184.99

20932.48

11800

20932.48

11/8/2010

185.4

146300

185.4

20852.38

13800

20852.38

11/5/2010

186.8

137000

186.8

21004.96

5200

21004.96

11/4/2010

185.73

205900

185.73

20893.57

12800

20893.57

11/3/2010

179.21

111000

179.21

20465.74

10000

20465.74

11/2/2010

179.49

184100

179.49

20345.69

13200

20345.69

11/1/2010

178.59

208600

178.59

20355.63

5400

20355.63

10/29/2010

172.96

274800

172.96

20032.34

14400

20032.34

10/28/2010

174.93

323200

174.93

19941.04

11600

19941.04

10/27/2010

167.95

303700

167.95

20005.37

12000

20005.37

10/26/2010

173.02

230900

173.02

20221.39

10200

20221.39

10/25/2010

171.81

368700

171.81

20303.12

12200

20303.12

10/22/2010

176.45

257900

176.45

20165.86

13200

20165.86

10/21/2010

177.81

457500

177.81

20260.58

12800

20260.58

10/20/2010

179.33

223600

179.33

19872.15

10600

19872.15

10/19/2010

179.41

259900

179.41

19983.13

12000

19983.13

10/18/2010

186.63

145400

186.63

20168.89

12600

20168.89

10/15/2010

184.92

174300

184.92

20125.05

9400

20125.05

10/14/2010

187.08

205700

187.08

20497.64

15200

20497.64

10/13/2010

188.47

300100

188.47

20687.88

14400

20687.88

10/12/2010

184.45

236300

184.45

20203.34

13400

20203.34

10/11/2010

185.59

203000

185.59

20339.89

11600

20339.89

10/8/2010

187.23

174900

187.23

20250.26

15400

20250.26

10/7/2010

187.17

114900

187.17

20315.32

19200

20315.32

10/6/2010

187.61

259800

187.61

20543.08

16200

20543.08

10/5/2010

189.83

180800

189.83

20407.71

17800

20407.71

10/4/2010

186.99

206400

186.99

20475.73

15000

20475.73

10/1/2010

187.66

282700

187.66

20445.04

19200

20445.04

9/30/2010

184.37

265100

184.37

20069.12

15800

20069.12

9/29/2010

182.77

174200

182.77

19956.34

18800

19956.34

9/28/2010

180.99

313200

180.99

20104.86

13400

20104.86

9/27/2010

180.53

201500

180.53

20117.38

17400

20117.38

9/24/2010

184.14

311100

184.14

20045.18

17400

20045.18

9/23/2010

179.15

242400

179.15

19861.01

11800

19861.01

9/22/2010

180.94

298500

180.94

19941.72

14400

19941.72

9/21/2010

182.14

276100

182.14

20001.55

15800

20001.55

9/20/2010

185.12

307400

185.12

19906.1

19600

19906.1

9/17/2010

182.11

320300

182.11

19594.75

16600

19594.75

9/16/2010

179.67

328300

179.67

19417.49

16200

19417.49

9/15/2010

178.06

217200

178.06

19502.11

17400

19502.11

9/14/2010

176.28

289400

176.28

19346.96

21000

19346.96

9/13/2010

175.94

291900

175.94

19208.33

15800

19208.33

9/10/2010

168.56

130800

168.56

18799.66

13200

18799.66

9/9/2010

166.95

139400

166.95

18666.71

20200

18666.71

9/8/2010

165.07

275700

165.07

18645.06

14600

18645.06

9/7/2010

163.48

271900

163.48

18560.05

18200

18560.05

9/3/2010

169.58

222400

169.58

18221.43

9400

18221.43

9/2/2010

167.36

215900

167.36

18238.31

13400

18238.31

9/1/2010

166.44

284900

166.44

18205.87

14400

18205.87

8/31/2010

159.8

269300

159.8

17971.12

16400

17971.12

8/30/2010

159.28

281400

159.28

18032.11

11600

18032.11

8/27/2010

162.47

269700

162.47

17998.41

13600

17998.41

8/26/2010

159.66

269600

159.66

18226.35

12800

18226.35

8/25/2010

161.76

233500

161.76

18179.64

15800

18179.64

8/24/2010

161.89

287600

161.89

18311.59

14400

18311.59

8/23/2010

163.37

162400

163.37

18409.35

11400

18409.35

8/20/2010

165.79

190700

165.79

18401.82

14200

18401.82

8/19/2010

168.35

431900

168.35

18454.94

14600

18454.94

8/18/2010

166.45

304300

166.45

18257.12

14800

18257.12

8/17/2010

159.33

184200

159.33

18048.85

12800

18048.85

8/16/2010

158.5

191000

158.5

18050.78

16000

18050.78

8/13/2010

158.56

127300

158.56

18167.03

18600

18167.03

8/12/2010

158.3

142000

158.3

18073.9

19600

18073.9

8/11/2010

157.6

276100

157.6

18070.19

20200

18070.19

8/10/2010

161.76

393500

161.76

18219.99

17800

18219.99

8/9/2010

161.73

172100

161.73

18287.5

11000

18287.5

8/6/2010

161.63

170600

161.63

18143.99

9800

18143.99

8/5/2010

162.37

233900

162.37

18172.83

10200

18172.83

8/4/2010

162.14

246700

162.14

18217.44

11200

18217.44

8/3/2010

161.74

414200

161.74

18114.83

13800

18114.83

8/2/2010

165.4

277600

165.4

18081.21

11000

18081.21