HDFC Bank Merger

119-0085-1
School of Management,
National Institute of Technology, Rourkela,769008
LENDING RATE CUT TO CUSTOMERS:

RETAIL GIANT HDFC BANK
Authorised for educator review use only by D Bag, National Institute of Technology Rourkela. Expiry date 21-Oct-2020
Usage permitted only within these parameters otherwise contact info@thecasecentre.org
Educational material supplied by The Case Centre
Copyright encoded A76HM-JUJ9K-PJMN9I
© 2019 This case was prepared by Instructor D.Bag. It was written as a basis for class discussion rather than to
illustrate effective or ineffective handling of managerial decision making post facto. No part of this publication may
be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—
electronic, mechanical, photocopying, recording, or otherwise. It uses facts and information available in the public
domain.
Distributed by The Case Centre North America Rest of the world

www.thecasecentre.org t +1 781 239 5884 t +44 (0)1234 750903
case centre All rights reserved f +1 781 239 5885
e info.usa@thecasecentre.org
f +44 (0)1234 751125
e info@thecasecentre.org
119-0085-1
LENDING RATE CUT TO CUSTOMERS: RETAIL GIANT HDFC BANK
Mr. Ramesh a customer of HDFC Bank read in the newspaper The Times of India on 2nd August 2017
about the repo rate was reduced by the Reserve bank of India, from 625 Basis Points (BP) to 600 basis
Points (BP). The newspaper on 2nd August 2017 also mentioned that all banks were expected to follow
soon. Mr. Ramesh met the Chief Branch Manager of HDFC bank, a retail giant, to enquire about changes
to his own loan account. The chief branch manager was a senior manager of the HDFC bank did not have
a definite reply to the customer. He was not sure about when the bank was expected to take a decision.
Mr. Ramesh, the customer was advised by the Chief Branch Manager, that the Bank would communicate
and update his account terms later. Mr. Ramesh, the customer, was not satisfied with the reply. He asked
around his friends and colleagues who happened to be customers of other Banks. He found that few
Banks had already passed on rate cuts to their customers, whereas few others had not. Mr. Ramesh is in

doldrums. Why do Banks do not pass on rate cuts? What action was needed on the part of CBM to
appease customers like Mr. Ramesh?
This case investigates the situation of a leading private sector Bank to understand what would have made
them falter in passing the rate cuts to their old customers? HDFC Bank is top private sector bank in India
that commenced its operations as a Scheduled Commercial Bank in January 1995. The mission of HDFC
Bank is to become a World Class Indian Bank. After initial struggle with its competitors for few years,
HDFC Bank attained formidable space in the Banking market in India. The banks’ distribution network
stands at 4,014 branches in 2,464 cities. HDFC Bank is a healthy Bank with adequate capital reserves
(CRR) compared to its peers, and has demonstrated lower levels of NPAs (Non Performing Assets),
achieved periodic growth and has thrived to meet shareholder’s expectations. This bank is the first choice
for a customer among few other banks.
There are few questions in the minds of Mr. Ramesh, the customer. Could HDFC Bank meet the
expectations of Mr. Ramesh? Could the Bank’s action be linked to business reasons or external factors
outside the control of the bank?
Chief Branch Manager (CBM)
The Chief Branch Manager needed time to revert to the customer. To investigate the nature of the
problem, the Bank performs the role of an intermediary. A bank sustains in the business of lending by
relying on sources of funds from retail deposits or borrowings from other sources. Banks are regulated
under the Basel norms to meet capital requirement which curtails the volume of lending. Unlike Govt.
banks, private banks do not receive periodic capital infusion from the Government and has to recourse to
their own shareholders to recapitalise. For example, Basel III desires all banks to maintain overall CRAR
(capital ratio) of at least 11.5% with Tier I pure equity ratio of at least 5.5%. Further, private banks like
HDFC Bank, do not use the refinance window of the central bank (RBI) to avoid regulatory conditions.
A deep dive into lending rates offered by the Bank requires a proper analysis of facts. HDFC bank could
have faced business challenges ahead. Was the Bank into an ambitious expansion mode? Was it preparing
2
119-0085-1
itself for higher provisions? Has the banks’ strength of leadership in Time Liabilities got over? Are there
any other market or macroeconomic forces which were holding it from rendering spontaneous response to
Mr. Ramesh, the customer? It did not look like Mr. Ramesh had a simple quick and easy answer to his
satisfaction.
Further, customers demand for the entire spell of 50 basis points (BP) rate cuts, announced by the RBI
cannot be passed on to customers. This is apt and rational. Similar rate cuts could not be evenly translated
to all loan portfolios with the Bank. This is because HDFC Bank could not use the RBI repo rate as an
anchor to fix lending rates. Further, it is impractical for a Banker to dissociate product lending rates from
the expected margin to be realised from each of its loan products. The expected margin could vary with
characteristics of the product such as cost of borrowing, product maturity profile, non-performing loan
(NPA) rates, acquisition costs, fulfilment or servicing costs, etc.

CBM’s revert to the customer is obviously based on historical facts on lending rates of HDFC and the
analysis of how it has responded to repo rates in past 3 years preceding the date of this case which was on
August 3rd, 2017. We collected historical financials for HDFC Bank from their website to figure out the
manner in which they have responded in the past. To describe the external environment, we collected
three key rates namely, repo rate and bond yield, and the 3 year lending rate of HDFC Bank shown in
Figure 1.
One can find the disconnect between repo rates and bond yield and so also the repo rate and the 3 year
lending rate. The 3 year time deposit rates offered by HDFC Bank had fallen from 6.75% in June 2017 to
6.0% in July 2017. The Reserve Bank of India (RBI) had revised repo rates many times in past few years.
We observe that the 10 year bond yield has risen sharply beyond July 2017 from 6.5% to 7.7% which
portrays that funds had turned costlier then. Private Banks rarely avail the refinance windows of RBI. The
time deposit rates offered by HDFC Bank for deposits below Rs. 10 Million for maturity above (>) 3
years has fallen from 6.0% in August 2017 to 7.1% in September 2018. This could be due to rising
competition in opportunities of investments, such as ULIP (unit linked insurance), MFs (mutual funds),
and savings products such as NPS (national pension scheme) and PPF( Public provident fund), etc.
Net Interest Margin (%)
The Bank has announced the performance outlook for next quarter to maintain NIM at 9%. Net interest
margin (NIM) is the difference between Interest Income from Advances and the Interest Expended on its
funds. The rates of margin such as net interest margin, provisioning from the quarterly audited results of
the Bank are also plotted for each quarter from April 2016 to October 2018 in Figure 3. We find although
repo rate has fallen from 6.25% to 6.00 % in Figure 2. The impact on NIM is lower than actual because
the gain in NIM was outweighed by increased provisioning (%). As shown in Table 2, a big Jump in
provisions from Rs. 7157.8 Million in December 2016 to Rs. 12,610 Million in March 2017 and to Rs.
3
119-0085-1
15,580 Million in June 2017. It seems the bank had an overall 15% increase in provisions quarter over
quarter. Correspondingly, we observe that Interest margin received (interest income over Interest
expended) to Gross advances has fallen during the same period from 72BP (Basis Points) in March 2017
to 56BP (Basis Points) in June 2017. This means the bank could not do better than stop passing on rate
cut on customer advances. Average interest income on Gross advances has reduced from 218BP (Basis
Points) in March 2017 to 161BP (Basis Points) in June 2017. The ratio of Provisions to the interest
income earned (%) was increased from 30BP in Mar 2017 to 33BP in June 17 and has risen further.
Since the inflow due to advances has fallen. The Bank could not pass any rate cuts then. Could there be
any pressure from shareholders to meet performance targets?
WHAT LIES NEXT

There is no easy answer to satisfy customers like Mr. Ramesh. The revert made by CBM to the customer,
Mr. Ramesh was practical and justified, based on objective assessment of facts given in this situation. It
appears from the above that lending rates set by banks have not fallen as much as policy rates. The policy
rate is a short-term rate where RBI invites banks participate in money market auction to fix the repo rates.
Banks do not manage to obtain funds at repo rates, which are much lower than interbank rates. Banks face
unique challenges when it comes to their portfolio of advances. HDFC Bank was under no legal
obligation to pass on the rate cuts to its customers.
Mr. Ramesh did get recourse from the bank in time. The HDFC Bank had valid reason to decide to pass
on the announced rate cuts disproportionatly, for pure business reasons explained in the analysis. The
bank could revise its base rate only when in future quarters (e.g., 2017) when oan provisions had been
lower than previous quarters. This could cause a lower provision to cause improvement in NIM (%) in
future quarters.
Summary
Decision making is a process and it involves analyzing the causes and their impact. The Bank needed time
to respond to the changed business scenario. Customer expectations never remain constant and are ever
changing due to circumstances. The trade-off is between the goals and shareholder’s goals. An action is
specific and mandated in an objective manner with facts and analysis. We demonstrate how key ratios
audited statements could possibly show the root causes and figure out which is the rate that moves closest
to policy rates. We also explained how companies could execute change to take advantage of the
opportunities and challenges that emerge due to evolving business.
Reading References
4
119-0085-1
1. James M. Wahlen, Stephen P. Baginski, Mark Bradshaw, FINANCIAL REPORTING AND

STATEMENT ANALYSIS: A STRATEGIC PERSPECTIVE, 8th edition, (Boston, Cengage Learning,
2014), 189.
2. Mitchell Berlin and Lorretta J. Mester, “Deposits and Relationship Lending”, The Review of Financial
Studies, Volume 12, Issue 3, 1 July 1999, Pages 579–607, https://doi.org/10.1093/revfin/12.3.0579,
accessed on September 1, 2018
3.Erskine, J.A. and Leenders, M.R., (1997) Learning with Cases, Richard Ivey School of Business.
4. R R Sharma, Deepak Tandon, “Canara Bank Turnaround”, Ivey Publishing product no. 9B15M115,
(London, ON: Ivey Publishing, 01/11/2016).
5
FIGURE 1: KEY RATES ( 7TH JAN 2017- 7TH SEP 2018)

119-0085-1
6
119-0085-1
TABLE 1: KEY RATES
3 year HDFC RBI
Banks' lending 10 Year Bond Yield

Date rate (%) Repo rate (%) (%)
07th Sep 18 8.90 6.50 8.024
01st Aug 18 8.70 6.50 7.951
07th Jul 18 8.70 6.25 7.772
06th Jun 18 8.70 6.25 7.903

07th May 18 8.60 6.00 7.826
05th Apr 18 8.60 6.00 7.767
07th Mar 18 8.60 6.00 7.398
07th Feb 18 8.50 6.00 7.726
07th Jan 18 8.40 6.00 7.43
06th Dec 17 8.40 6.00 7.318
07th Nov 17 8.40 6.00 7.062
04th Oct 17 8.45 6.00 6.862
07th Sep 17 8.45 6.00 6.667
02nd Aug
17 8.45 6.00 6.526
07th Jul 17 8.45 6.25 6.466
08th Jun 17 8.45 6.25 6.511
08th May 17 8.45 6.25 6.664
06th Apr 17 8.30 6.25 6.964
7
119-0085-1
07th Mar 17 8.30 6.25 6.694

08th Feb 17 8.30 6.25 6.871
07th Jan 17 8.30 6.25 6.409
TABLE 2: HDFC BANK KEY RATIOS
Quarter Sep '18 Jun '18 Mar '18 Dec '17 Sep '17 Jun '17 Mar '17 Dec '16 Sep '16 Jun '16
Gross
13,42,9 12,68,6 11,18,9 10,62,3 9,70,55 8,98,12 6,17,99 5,49,38 5,17,04 5,11,77
Advances (Rs.
98 36 06 00 8 3 4 8 2 3
10 Million)
Interest

Income on 18,827. 17,390. 16,663. 16,156. 15,355. 14,486. 13,507. 13,175. 12,901. 12,470.
Advances (Rs 68 73 37 61 75 06 45 64 36 81
10 Million)
Interest
12,436. 11,735. 10,663. 10,266. 9,918.2 9,297.9 9,059.3 9,296.5 9,076.3 8,734.5
Expended (Rs
15 41 37 93 1 8 0 1 5 8
10 Million)
Loan
1,819.9 1,629.3 1,541.1 1,351.4 1,476.1 1,558.7 1,261.8
Provisions (Rs 715.78 748.99 866.73
6 7 0 4 9 6 0
10 Million)
Interest
Margin
Received on
Gross
Advances
(Basis Points)
(Interest 47.59 44.58 53.62 55.44 56.02 57.77 71.98 70.61 73.98 73.01
Income from
Advances–
Interest
Expended) /
Gross
Advances
Average
Interest
income on
Gross
Advances 140.19 137.08 148.93 152.09 158.22 161.29 218.57 239.82 249.52 243.68
(Basis points)
Interest
Income from
Advances /
Gross
8
119-0085-1
Advances
Loan
Provision/Gro
52.64 52.27 53.68 51.41 52.61 52.50 65.40 66.76 69.24 66.97
ss Advances
(Basis Points)
Loan
Provision/Inte 38% 38% 36% 34% 33% 33% 30% 28% 28% 27%
rest Income
% of Gross
1.33 1.33 1.3 1.29 1.26 1.24 1.05 1.05 1.02 1.04
NPA
Data Source: HDFC Bank, “Quarterly Results” , HDFC bank, “Interest rates”, www.hdfcbank.com, accessed on 7th October 2018.


HDFC Bank Merger

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

HDFC Bank Merger

Uploaded by

Copyright:

Available Formats

119-0085-1

LENDING RATE CUT TO CUSTOMERS:

Distributed by The Case Centre North America Rest of the world

LENDING RATE CUT TO CUSTOMERS: RETAIL GIANT HDFC BANK

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

Net Interest Margin (%)

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

1. James M. Wahlen, Stephen P. Baginski, Mark Bradshaw, FINANCIAL REPORTING AND

FIGURE 1: KEY RATES ( 7TH JAN 2017- 7TH SEP 2018)

TABLE 1: KEY RATES

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

06th Jun 18 8.70 6.25 7.903

07th Mar 17 8.30 6.25 6.694

TABLE 2: HDFC BANK KEY RATIOS

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

Usage permitted only within these parameters otherwise contact info@thecasecentre.org

You might also like