The country's largest private lender, HDFC Bank, is in the final stages of allocating its car loan pool of Rs 9,062 crore to mutual funds. The move is intended to improve its credit-to-deposit (CD) ratio, which has deteriorated since its merger with its mortgage-lending parent, HDFC.

On March 31, 2024, the CD ratio stood at 105%, compared to the industry average of around 80%. India Ratings gave the bank a provisional AAA (SO) grade on Thursday evening, highlighting the contents of the pass-through certificates (PTC).

A value exceeding 100% indicates that credit exposure exceeds the deposit base. More than 100,000 applicants signed contracts for car loans at 8.95%.

According to market sources, mutual funds are the most likely investors in these PTCs, with weighted average returns of approximately 8%. PTCs are issued in three tranches: series A1 (issue size of Rs 3,500 crore, expiring in 24 months), series A2 (issue size of Rs 1,800 crore, maturing in 34 months), and series A3 (issue size of Rs 3762 crore, maturing in 60 months).

HDFC Bank has provided PTC investors with a 5% credit enhancement in the form of cash collateral. "The total available external credit enhancement (CE) consists of an unconditional and irrevocable credit collateral guarantee amounting to 5% of the initial pool principal outstanding (POS), proposed to be issued by HDFC favoring the trustee," IndiaRatings stated.

This suggests that the repayment of PTC through the underlying loans may be in danger of default if the carpool's default rate rises above 5%. On the other hand, the rating agency estimates that the average default rate is between 0.9 and 1.2%.

The A1 series subscriber will receive preference in repaying as per the arrangement. Repayment of the series A1 PTC holders may account for up to 80% of the pool's total collections. Following this, the underpinning pool's collections will be divided in an 80:20 ratio among the holders of A1 PTCs, with series A2 PTC holders receiving priority over series A3 PTC holders in terms of repayment. India Ratings said that the carpool's borrowers had already paid back 20% of their initial loan amount and 15 months' worth of EMIs.