HDFC Bank probes lending practices at vehicle-financing operation

The bank decided against proceeding with an earlier proposal to extend the employment of Ashok Khanna, an 18-year veteran at the bank, after the investigation was completed.

HDFC Bank has conducted a probe into allegations of improper lending practices and conflicts of interests in its vehicle-financing operation involving the unit’s former head, according to people familiar with the matter.

The bank decided against proceeding with an earlier proposal to extend the employment of Ashok Khanna, an 18-year veteran at the bank, after the investigation was completed, said the people, who asked not to be identified as the information remains confidential. The vehicle financing unit he headed had outstanding loans of more than Rs 1.2 trillion ($16 billion) as of March 31.

HDFC Bank’s management had been discussing a proposal for Khanna to stay on as the unit’s head for six months until October. Khanna retired at the end of March in line with his contract, they added.

The result of the investigation isn’t public, but it followed issues thrown up by an internal audit of the bank’s vehicle-dealer lending, as well as allegations of conflicts of interest in the purchase of global positioning systems for vehicles financed by the bank, the people said, without disclosing what the probe uncovered.

HDFC Bank fell 2.3 per cent on Monday and its parent Housing Development Finance fell 2.1 per cent, among the three worst performers on the Sensex that gained 0.3 per cent.

A spokesman for HDFC Bank confirmed there had been an investigation into the vehicle-financing unit but declined to give details. In an emailed statement, he said Khanna had retired in March in line with the terms of his employment contract.

“The bank has a well-established process of investigating every complaint that it receives and takes actions as appropriate,” the spokesman said in the email.

Market rally loses steam over fears of extended lockdown

The weak opening of the European markets and a sharp deprecation in the rupee against the dollar weighed on stock prices.

The Indian markets posted strong gains in early Wednesday trade, with the benchmark indices adding 4 per cent to previous day’s 9-per cent gain, but the rally lost steam over fears of an extended lockdown amid rising Covid-19 cases in the country.

Also, the weak opening of the European markets and a sharp deprecation in the rupee against the dollar weighed on stock prices.

The Sensex after climbing past 31,200, settled at 29,894 — down 173.25 points, or 0.58 per cent, over the previous day’s close. The Nifty closed at 8,749, down 44 points, or 0.5 per cent, after touching an intra-day high of 9,132.

Index heavyweights, such as Hindustan Unilever, HDFC Bank, and ICICI Bank, came off sharply from their day’s highs. Overseas investors were net-buyers for the second day in a row. On Wednesday, they bought shares worth nearly Rs 1,943 crore, while domestic investors took money off the table, dumping equities worth Rs 1,758 crore. Despite foreign inflows, the rupee ended at a record low of 76.38 against a dollar, down nearly 1 per cent over Tuesday’s close of 75.63.

A day earlier, the Indian markets had logged their biggest daily jump in 11 years on optimism that the spread of the virus was deaccelerating in Europe, which had emerged as the Covid-19 hotspot after Wuhan.

The market breadth was strong for the second day in a row, with nearly two advancing stock for every one declining. The mid- and small-cap indices ended with nearly 2 per cent gain.

“Momentum indicators indicate the possibility of further upside towards 9,300-9,400. Support zone for the index is at seen at 8,500-8,700. The current upmove is broad-based and hence, expect positivity to continue for few more trading sessions,” said Sahaj Agrawal, head of research- derivatives, Kotak Securities.

Eye on equity-linked debentures as volatility spikes in Indian markets

FY20 had seen increasing issuances on higher demand from issuers.

Instruments whose pay-outs depend on equity market levels are likely to be closely watched amid the carnage in global and local markets.

The Indian market saw its steepest fall in five years even as fears of coronavirus spreading continued amid a crash in crude oil prices. A price war roiled global oil markets as Saudi Arabia and Russia sparred over oil production. Saudi Arabia steeply cut oil prices and crude prices fell around 30 per cent. The S&P BSE Sensex was down 1,942 points (5.2 per cent) closing at 35,635.

Higher cost of issuing such debentures amidst such volatility is likely to weigh on issuances.

Ashish Shanker, associate director and head of investments for Motilal Oswal Wealth Management said that equity-linked debentures will become more expensive for issuers now. Higher volatility increases the price of issuing such debentures since they typically hedge their risk using derivatives. The cost of such hedging goes up when volatility increases, making it less attractive for most issuers since they tend to prefer taking derivative positions to manage their risk.

"Most people will hedge," he said.

The India VIX, a volatility index which is also known as the market’s fear gauge, surged by over a fifth on Monday.

Equity-linked debentures involve a payout which depends on market levels. This is usually achieved by investing a portion of the capital in call options. They give the investor the right but not the obligation to buy into securities at a pre-defined price.

The issuer usually writes long-dated options for the investor depending on the maturity of the instruments. The interest on the debt portion covers the invested principal over the period of the instrument. The value of the call option provides an upside boost to returns.