HDFC Bank Faces 25% Surge in Priority Sector Loan Shortfall, Macquarie Capital Reveals | RBI Target Impact

India’s biggest private lender, HDFC Bank, has seen a 25% increase in its shortfall of priority sector loans (PSL) over the past year, according to a Macquarie Capital analysis of the bank’s annual report.

Suresh Ganapathy, Head of Financial Services Research at Macquarie Capital, noted that while HDFC Bank’s overall PSL is above the Reserve Bank of India’s target of 40%, exceeding 50%, the bank falls short in areas like loans to small and marginal farmers. This shortfall forces the bank to buy low-yield bonds, such as RIDF bonds.

Ganapathy stated, “Ideally, we would like the PSL shortfall percentage to go back to pre-merger levels of 9% from the current 12%.”

HDFC Bank CEO Sashidhar Jagdishan mentioned in the annual report that the bank’s loan growth will likely remain below deposit growth for some time, aiming to bring the credit-deposit ratio below pre-merger levels.

“During this adjustment period, the bank will grow its advances slower than its deposits,” Jagdishan said. “We will avoid pursuing growth that does not meet our risk-adjusted profitability thresholds.”

Before merging with HDFC Limited, the bank’s loan-to-deposit ratio was about 90%. It is now around 104%.

Ganapathy estimates it will take another three years to return to the pre-merger level, assuming loan growth is 400 basis points below deposit growth.

Reserve Bank of India Governor Shaktikanta Das recently advised banks to be cautious with their lending practices. “The gap between credit and deposit growth rates requires banks to rethink their business strategies and maintain a prudent balance between assets and liabilities,” he said.

The annual report also highlighted that before the merger, about 30-35% of new home loans were given to customers with HDFC Bank savings accounts. This has increased to about 85% of new home loans in the last nine months.

Additionally, the bank has seen a decrease in employee turnover. In FY24, new joiner attrition dropped by 10% from the previous year, and overall attrition decreased by over 7% to 27%. Macquarie sees this as a positive development.