Why HDFC Bank is cracking down on ‘temporary’ deposits

HDFC Bank Ltd has sent multiple emails to employees, the latest one in late March, stating this would not be tolerated. Mint has seen a copy of the March-end email that notes the practice of creating deposits by using the bank’s own loan facilities.

“During (the) bank’s due diligence check, temporary creation of CASA/TD (current account and savings account/term deposits) has been identified by utilizing CCOD (cash credit, overdraft) without observable business logic/requirements,” it said.

As per HDFC Bank’s website, cash credit (CC) is a short-term loan offered to companies, businesses and financial institutions for working capital requirements. On the other hand, an overdraft (OD) facility refers to the credit funding offered by banks to individuals and companies.

The mail said that HDFC Bank does not encourage such activities and supervisors should guide staff not to pursue such transactions. The mail further warned of “necessary staff action” on identifying non-compliance.

Two people aware of the matter said the bank has acted after noting such transactions. While one of them said the bank has taken disciplinary action, the other said the lender has also started sensitizing employees.

Mint spoke to industry experts to piece together the practice.

Business customers are often entitled to certain working capital loans via CCOD. Bank relationship managers would request certain business customers to utilize some of their CCOD limit on the last day of a quarter. Once they agree to utilize the credit line, the bank transfers the amount to the current accounts of these customers, which reflects as a deposit. Quarter-end numbers would, therefore, show higher deposits.

These temporary deposits would be reversed the next day or in two days. While the customer would have to pay a small interest for utilizing the CCOD limit, the branch would try to neutralize the impact.

Also read: Soon, SBI customers may be able to print their own debit cards

Senior bankers, consultants and experts said this was not an uncommon practice in the industry. “These customers depend on their relationship with the bank and cannot say no when asked for some favour,” said a senior consultant who works with top-tier banks.

A spokesperson for HDFC Bank said as a large organization with operations across the country, several guidelines and process-related communications were sent out routinely. “These also include communication reiterating that healthy practices be maintained at all times,” the spokesperson said. 

“The bank remains committed to maintaining the highest standards of ethics and professional integrity in its operations,” the spokesperson added.

Also read: Can Bajaj Finserv still dominate the credit game?

The entire banking industry in India suffered a deposit crunch last year, but the challenge was bigger for HDFC Bank. As a result of taking its erstwhile parent and mortgage lender HDFC Ltd into its fold in July 2023, the bank faced an increased credit-deposit ratio, which had to be brought down by adding more deposits.

“Jacking up deposits at quarter and year-end has long been a common window-dressing practice in the banking industry. Customers often oblige out of relationship considerations, leading to a temporary spike followed by a sharp drop post period-end,” said Prakash Agarwal, a partner at debt market advisory firm Gefion Capital Advisors.

Agarwal said this practice had been coming down in recent years and seasoned analysts now increasingly focused on average balances rather than figures at the end of the quarter or year.

Current accounts or those that are used by businesses and earn no interest, are becoming harder for banks to get. In the past few years, the government—a major source of current account deposits—has changed the manner in which it releases funds for various schemes, moving to a model where funds are sent only when they are required.

HDFC Bank’s current account deposits grew 1.3% year-on-year in March to ₹3.1 trillion. In comparison, rival lender ICICI Bank saw a 20.3% growth in current account deposits to ₹2.3 trillion.