What Exactly Is Happening With Hdfc Bank Explained
read summary →TITLE: What Exactly is Happening With HDFC Bank? | Explained CHANNEL: Think School URL: https://youtu.be/j7r48iIzwpE?si=YTw0pX3yY-ueTOIP
in congruence with my value and ethics. My value and ethics are very different from that which is important for maximizing here is a part of duty of the independent director which comes out of the values uh and the ethical standards which we uh independent directors are required to uphold and I was an independent director
on 18th of March 2026. Atanu Chakraorti, the part-time chairman of HDFC, wrote a resignation letter that sent shock waves through Dal Street.
HDFC, it is India’s second largest bank and right now it’s in the middle of a storm. A massive storm is brewing at India’s second largest lender. In a move that has sent shock waves through the Dalal street,
ACFC bank on Wednesday announced that its chairman Atanu Chakraarti has resigned. In it he said certain happenings and practices within the bank that I have observed over the last 2 years are not in congruence with my personal values and ethics. He offered no specifics no names and no examples just that. And the next day on 19th of March 2026 HDFC bank stock crashed by 8.7% in a single session dragging the entire Indian stock market down by more than 3% in its worst day since June 2024. This one stock because it carries approximately 12 pushing weight in the nifty50. It pulled the entire market down with it.
HDFC Bank delivered a shocker to the market and the news sent shares of the lender sliding over 5% in Thursday morning trade.
And then Chakraorti told NDTV profit that there was no wrongdoing only ideological differences. the chairman who stepped down from HDFC Bank spoken exclusively with NDTV profit that he’s saying is that in the letter that I’ve written I am not pointing out to any wrongdoings at the bank only differences in terms of where ideologies go and he respects the organization and the board clearly.
Wait, what? You just said values and ethics in a formal letter and now you’re saying it’s nothing. This contradiction is what made everything worse. The market didn’t know what to believe and the stock kept falling. By March 23rd, it hit a 52- week low of 750 rupees and by March 30, it slid down further to 731 rupees.
1 lakh cr rupees wiped out in minutes. That’s what just happened with HDFC Bank today.
70,000 cr of investor money has been wiped out from the HDFC bank market capitalization.
The market is unknown because of which the stock is falling. many of the good stocks are falling because of the uh conditions in the markets.
So the question is what exactly is wrong with HTC bank and why is there a red alert sentiment in the market?
Before understanding the HDC problem, you need to understand what 81 bonds are. Let’s understand this using a very simple example. You see, a normal bond is a standard contract. If you lend an airline $10,000 for 5 years at a 5% interest, the airline must pay you $500 interest as in 5% interest every year for 5 years. And at the end of year five, they are legally obligated to give your $10,000 back. And if the airline goes bankrupt, you are given top priority in the people to be paid. So when the company’s assets like the planes get sold, you will get your share of that money before any shareholders see a dime. So if you see there is an end date or maturity period for this bond. The interest rate is low and the airline is obligated to return the capital in 5 years. But when it comes to 81 bonds, you get high interest rate but with no end date and no obligation to be paid back. So if you buy $10,000 worth of 81 bonds, the airline offers you 9% interest because it is a risky asset. But these bonds have no end date. as in the airline can just keep your $10,000 forever as long as they keep paying the 9% interest. And if the airline had a terrible year and their cash reserves fall below a certain emergency level, your bonds can be written down to zero. So unlike the normal bond holder, if the company fails, you are treated almost like a shareholder, which means you will likely lose everything. If this is clear, let’s understand where it got ugly with HDFC. In May 2021, HDFC Banks Dubai branch began selling Credit Swiss 81 bonds to NRI clients and according to business standard and Deken Chronicle, the bank’s executives marketed these high-risk perpetual bonds as safe high yield investments promising 10 to 13% return. Secondly, they convinced NRIs to transfer their foreign currency non-resident deposits from India to HDFC Banks Bahin branch. Thirdly, they used the transferred funds to purchase Credit Swiss 81 bonds. And lastly, they reportedly did not adequately disclose that these bonds had no maturity date and were told as a safe investment option. And then came March 2023 when Credit Swiss collapsed.
Another bank is on the brink. We’re talking about Global Investment Bank.
Credit Swiss. Credit Swiss.
This week, the government took decisive and forceful actions to stabilize and strengthen public confidence in our financial system.
It’s not about econometrics or macro or microeconomics. It’s about consumer psychology.
Credit Swiss has a lot of links to um the financial sectors of other countries.
For those who don’t know, after credit su collapsed, a Swiss bank called UPS took it over in an emergency rescue and they looked at 81 bonds and said, “Hey guys, we are not obligated to pay back the money from 81 bonds, right? That’s the contract, so let’s write them off.” So the Swiss regulators ordered a complete write off of around $17 billion and every single investor who held these bonds lost everything. Now imagine you are Rajes an NRI living in Dubai and you’ve saved 1 cr in deposits earning a safe 5 to 6%. But then HDFC bank relationship manager calls you and says sir why settle for 5% when you can earn 13%. We have a very safe product bonds from credit Swiss bank. So bonds are safe and with a name like credit Swiss it becomes the most trustworthy offer and that to with 13% interest. So who would say no to that right? So Rajes transfers his 1 cr rupees to invest in these bonds. Two years later, credit Swiss collapses and his 1 crore rupees becomes zero and he finds out that the safe product was actually one of the riskiest instruments in banking. In fact, the terms and conditions allowed Swiss regulators to simply erase it off. This is what happened to potentially several NRI investors. Thankfully, the Swiss court enelled the write off and today these bonds trade at 30% of the face value. But wait, it actually gets uglier because there’s another problem that HDFC is facing due to its iconic merger that happened in 2023. And this is where another big problem emerges. But before understanding the hurdles that HDFC is facing due to the merger, you first need to understand how a bank actually makes money. You see, a bank takes deposits from people and pays them 2 to 7% interest and then it lends that money to borrowers at around 9 to 12% interest. Now there are two types of deposits in a bank and this distinction is very very critical. So listen to this carefully. First there are current account and savings account also called CASA accounts. This money is cheap because HDFC only has to pay around 2 to 3% for savings account and 0% for current accounts. So this is the best form of deposit. And then there are fixed deposits. These are expensive for the bank. Why? Because for FDS HDFC has to pay around 6 to 7% interest. So if this money is lent at 10%, the bank will only have a margin of 4%. But the beauty of FDs is that they’re easier to attract in large volumes and you have a stable supply of cash as a bank because investors actually stay invested for very long. Now, if you look at HDFC Bank’s problem after the merger, when HDFC Bank Limited merged with HDFC Bank, HDFC Bank inherited a massive loan book from HDFC’s Home Loans, but not enough cheap CASA deposits to fund them. Let me explain this using an example. Imagine HDFC before and after the merger with HDFC Limited, which is the housing finance arm. Let’s say the bank has 133 rupees in deposits. It has to keep 33 rupees in cash and government bonds for safety and it can lend the rest 100 rupees. Now in this 100 rupees 50 rupees is coming from cheap casa deposits at 3% interest but the rest 50 rupees is coming from expensive sources like fds where the bank has to pay a 7% interest. So if you look at the average cost of funding it’s 3 + 7% divided by 2 equal to 5%. Now they lend this 100 rupees at 10% interest. So if you look at the profits it’s 10 minus 5% equal to 5%. This 5% is called the net interest margin. Now after the merger HDFC bank inherited HDFC Limited’s massive home loan book of 6 lakh crores. Now as we all know HDFC limited was a lending company and it was not a bank. So it did bring many cheap deposits with it. So to put that in the context of this oversimplified example that we’ve taken, the bank now suddenly has 200 rupees in loans to fund but only has 100 rupees in total deposits. And to cover the other 100 rupees, the bank can’t wait for people to open savings accounts. So it must quickly attract large amounts of cash by offering expensive FDs or by borrowing from the market. Now if you look at the math, if the merged HDFC entity has 50 rupees in cheap CASA deposits at 3%, plus 150 rupees in expensive FDs at 7%, the average cost of funds is 6%. Now since the home loans have lower interest rates of around 8.5%, the average lending rate might drop to 9%. So now the new profit is 3% which is a massive drop from the original 5%. This is how in an oversimplified example, the net interest margin drops when the entity has to use costly deposits to lend money. Now coming back to the real world, the merger of HDFC Bank and HDFC Limited compressed HDFC Bank’s net interest margin from roughly 4.1% to around 3% which is below ICI and Axis. And this massive drop happened due to three reasons. Reason number one is lower average lending rate. Like we all know HDFC Limited’s home loans used to cost around 8.2% and 2%. But HDFC Bank’s personal loan and business loans used to cost around 12 to 18%. Now when a huge bucket of home loans got mixed into the portfolio of personal and business loans, the average lending rate got dragged down. Reason number two is higher deposit cost. HDFC Limited used to borrow from bond markets at competitive rates, but now it must fund itself through bank deposits, but CASA deposits aren’t growing fast enough. So the bank has to use expensive FDS which they have taken at 6 to 7.5% which eventually decreases their margins. This is how the net interest margin drops when the entity has to use costly deposits to lend money. And thirdly there’s a hidden cost called CRR and SLR that HDFC bank has to pay. And this is a part that almost nobody talks about. Now guys these banking terms might sound complex but they’re actually very very easy to understand. Okay let’s understand this using an example. You see the RBI requires every bank to keep approximately 21% of the deposits locked up. So if the bank has 100 cranium deposits, RBI says you have to keep 3% in cash reserves parked with RBI with zero interest and 18% has to be invested in government bonds. This is to ensure that the banks don’t lend recklessly and to prevent the banks from failing. So this three crores is called the cash reserve ratio or CRR and this 18% is called statutory liquidity ratio or SLR. Now the beauty of this rule is that only banks have to follow this rule and not NBFCs. And if you remember SDFC bank was a bank but HDFC limited was an NBFC. So HDFC limited as an NBFC never had to follow these rules and it could lend nearly 100% of the money that it raised. But now the problem is that SDFC limited is inside a bank. So all those home loans are subject to these requirements and it also has the obligation to lend to farmers and small businesses. In fact before the merger HDFC limited 6.25 lakh cr loan book was funded by 6 lakh crores in bond borrowings. So they had zero CR or SLR obligation. But after the merger as the bank replaces those borrowings with deposits every 1 lakh cr of new deposits require 21,000 crores to be set aside which is basically 3% of CR plus 18% of SLR. So if HDFC has lent 6 lakh crores it needed to have 1.3 lakh crores of capital sitting idle earning almost nothing. So do you realize 1.3 lakh crores lent at 9% could have made thousands of crores but now it is sitting idle due to the merger. Now comes the third layer of problems. According to Aquintis analysis the loans in HDFC are growing faster than deposits. Secondly if you look at the loan to deposit ratio pre- merger it was at 87 to 88%. Now RBI recommends a comfort range of 60 to 80%. So it was still good but after the merger it spiked to 110%. So the bank had lent out more than it had in deposits. But now in Q3 of FI26 it has come down to 98.5%. So it’s better but still well above the comfort range. And all of these challenges put together has brought down the net interest margin of HDFC from 4.1% by FI23 to 3.35% in Q3 of FI26. So the three problems are 81 bonds problem, the merger problem and the increasing pace of loans as compared to deposits problem. And when you combine all three layers, the result is a massive trust deficit. And in banking, trust is the most valuable asset. And this trust problem is hitting HDFC at the worst possible time when the market is already weak due to geopolitical tensions. And as we all know, HDFC stock was once considered India’s most dependable banking compounder. And now it has trust problems. And if a bank has a trust problem, it’s not a normal challenge. It’s an existential crisis at play. And as an HDFC fan, I’m just hoping that HDFC rectifies this problem and goes back to what it was, the most trusted banker in the country. 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