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Continuous Test 4: Principles and Practice of Banking

Instruction: No study material, laptop and mobile phone allowed as per end term
examination norm.

Full Marks 10 Time: 30 minutes


There is a series of discussions among academicians and practitioners as to
HDFC Bank’s Tier II Capital Bond. On 8/07/10 it was reported that “HDFC Bank
Ltd has issued on a private placement basis Unsecured, Redeemable, Non-
Convertible, Subordinated Bonds in the nature of Debentures towards Tier - II
Capital. The Bank has issued Upper Tier II bonds for an amount aggregating Rs.
1105 Crores. The total traded quantity was 34961 compared to 2 week average
of 54400. FSB (name changed) was one the major investor in the above issue
but FSB repented after such investment because of interest rate loss since
interest rates rose steadily towards thee end of 2010. The FSB bond issue in
early 2011 was a tool to hedge such interest rate risk. So comes the first issue –
where is the place of FSB bond - on balance sheet or off balance sheet as a risk
management or hedging derivative product?

The second issue is that HDFC bank bond is fraught with both of credit risk and
market risk. On 8/7/2011 the HDFC bank stock was trading at Rs.1945.25, up by
Rs.8.65 or 0.45%. The stock hit an intraday high of Rs.1968 and low of
Rs.1942.The HDFC Bank beta (β ) may be discerned from the following figure
and enclosed prices of the stock and the sensex. At the same time the
concerned fraternity seems to be split into two camps. The issue goes like this “In
April 2010, for the first time a categorical statement is coming from the
Department of Industrial Policy and Promotion, which has been trying to resolve
this issue in consultation with the Finance Ministry and the Reserve Bank of India
for over a year now (but not successful yet). Like ICICI Bank, HDFC Bank has
….. foreign shareholding …...... higher than the stipulated limit that determines
whether an entity is Indian or foreign”.

Assuming that you are an FSB officer furnishing FSB’s capital adequacy report to
the regulator concerned, answer the following questions:

(i) In the first issue context what you think would be the place of FSB bond from
the perspective of risk weights or conversion factors? Why?
Marks 4

(ii) In the second issue context how much risk weight or conversion factor would
you suggest to attach to HDFC Bond? Why? Marks 6
HDFC BANK SENSEX
Date Close Volume Adj Close Close Volume Adj Close
3/9/2011 159.32 331900 159.32 18469.95 22600 18469.95
3/8/2011 159.25 260800 159.25 18439.65 13800 18439.65
3/7/2011 155.03 215800 155.03 18222.67 15200 18222.67
3/4/2011 158.73 231100 158.73 18486.45 19800 18486.45
3/3/2011 157.39 310600 157.39 18489.76 28600 18489.76
3/2/2011 152.26 216200 152.26 18446.5 24800 18446.5
3/1/2011 151.5 410000 151.5 17823.4 30000 17823.4
2/28/2011 147.11 122400 147.11 17700.91 21800 17700.91
2/25/2011 145.91 210800 145.91 17632.41 23000 17632.41
2/24/2011 145.66 351600 145.66 18178.33 22200 18178.33
2/23/2011 148.36 449400 148.36 18296.16 19800 18296.16
2/22/2011 147.99 281300 147.99 18438.31 19200 18438.31
2/18/2011 153.31 271900 153.31 18211.52 22000 18211.52
2/17/2011 151.75 177000 151.75 18506.82 16600 18506.82
2/16/2011 149.38 190600 149.38 18300.9 18800 18300.9
2/15/2011 150.37 306900 150.37 18273.8 23600 18273.8
2/14/2011 148.5 265600 148.5 18202.2 21800 18202.2
2/11/2011 148.18 397500 148.18 17728.61 25400 17728.61
2/10/2011 142.45 325300 142.45 17463.04 25200 17463.04
2/9/2011 141 440300 141 17592.77 30200 17592.77
2/8/2011 141.93 295000 141.93 17775.7 14200 17775.7
2/7/2011 143.65 147400 143.65 18037.19 13000 18037.19
2/4/2011 141.33 167000 141.33 18008.15 23000 18008.15
2/3/2011 143.91 102400 143.91 18449.31 21600 18449.31
2/2/2011 142.68 220600 142.68 18090.62 22800 18090.62
2/1/2011 146.26 304400 146.26 18022.22 20200 18022.22
1/31/2011 144.41 525300 144.41 18327.76 19800 18327.76
1/28/2011 140.42 829800 140.42 18395.97 18600 18395.97
1/27/2011 146.45 363000 146.45 18684.43 13800 18684.43
1/26/2011 147.37 296500 147.37 18969.45 13400 18969.45
1/25/2011 148.46 167800 148.46 19151.28 11600 19151.28
1/24/2011 149.56 432900 149.56 19007.53 11000 19007.53
1/21/2011 149.89 394300 149.89 19046.54 12800 19046.54
1/20/2011 150.51 322700 150.51 18978.32 16200 18978.32
1/19/2011 150.36 385500 150.36 19092.05 14400 19092.05
1/18/2011 150 392900 150 18882.25 17800 18882.25
1/14/2011 150.06 530000 150.06 18860.44 15800 18860.44
1/13/2011 154.5 453900 154.5 19182.82 16800 19182.82
1/12/2011 155.15 438700 155.15 19534.1 19400 19534.1
1/11/2011 148.6 752200 148.6 19196.34 20000 19196.34
1/10/2011 147.65 855800 147.65 19224.12 17200 19224.12
1/7/2011 153.22 655500 153.22 19691.81 15800 19691.81
1/6/2011 156.55 672400 156.55 20184.74 16600 20184.74
1/5/2011 163.2 236200 163.2 20301.1 14400 20301.1
1/4/2011 164.57 430900 164.57 20498.72 15200 20498.72
1/3/2011 169.5 270000 169.5 20561.05 12000 20561.05
12/31/2010 167.11 134700 167.11 20509.09 12600 20509.09
12/30/2010 167.6 68100 167.6 20389.07 10600 20389.07
12/29/2010 168.52 152000 168.52 20256.03 10000 20256.03
12/28/2010 166.13 90600 166.13 20025.42 10600 20025.42
12/27/2010 165.09 58200 165.09 20028.93 9800 20028.93
12/23/2010 165.47 99300 165.47 20073.66 16400 20073.66
12/22/2010 166.78 181400 166.78 19982.88 7600 19982.88
12/21/2010 163.8 304700 163.8 20015.8 12000 20015.8
12/20/2010 160.97 218000 160.97 20060.32 14200 20060.32
12/17/2010 164.42 314500 164.42 19888.88 11200 19888.88
12/16/2010 162.06 371800 162.06 19864.85 15400 19864.85
12/15/2010 158.53 585000 158.53 19647.77 14000 19647.77
12/14/2010 164.34 298200 164.34 19799.19 13400 19799.19
12/13/2010 166.23 214800 166.23 19691.78 15400 19691.78
12/10/2010 167.08 777000 167.08 19508.89 16000 19508.89
12/9/2010 160.78 1329400 160.78 19242.36 17200 19242.36
12/8/2010 179.92 226400 179.92 19696.48 12600 19696.48
12/7/2010 179.1 398300 179.1 19934.64 13400 19934.64
12/6/2010 186.74 82300 186.74 19981.31 14000 19981.31
12/3/2010 188.08 60700 188.08 19966.93 13800 19966.93
12/2/2010 188.78 133700 188.78 19992.7 16600 19992.7
12/1/2010 185.68 278800 185.68 19850 15000 19850
11/30/2010 176.35 252600 176.35 19521.25 18800 19521.25
11/29/2010 176.37 142900 176.37 19405.1 12400 19405.1
11/26/2010 178.23 172900 178.23 19136.61 25200 19136.61
11/24/2010 175.79 322200 175.79 19318.16 13800 19318.16
11/23/2010 178.07 158800 178.07 19459.85 12200 19459.85
11/22/2010 182.34 141700 182.34 19691.84 14200 19691.84
11/19/2010 182.11 239000 182.11 19957.59 11000 19957.59
11/18/2010 182.42 244300 182.42 19585.44 16400 19585.44
11/17/2010 180.94 310100 180.94 19930.64 21800 19930.64
11/16/2010 178.28 203900 178.28 19865.14 15200 19865.14
11/15/2010 184.05 135700 184.05 20309.69 14200 20309.69
11/12/2010 180.46 175500 180.46 20156.89 14600 20156.89
11/11/2010 184.67 119000 184.67 20589.09 12600 20589.09
11/10/2010 185.81 124900 185.81 20875.71 15200 20875.71
11/9/2010 184.99 163100 184.99 20932.48 11800 20932.48
11/8/2010 185.4 146300 185.4 20852.38 13800 20852.38
11/5/2010 186.8 137000 186.8 21004.96 5200 21004.96
11/4/2010 185.73 205900 185.73 20893.57 12800 20893.57
11/3/2010 179.21 111000 179.21 20465.74 10000 20465.74
11/2/2010 179.49 184100 179.49 20345.69 13200 20345.69
11/1/2010 178.59 208600 178.59 20355.63 5400 20355.63
10/29/2010 172.96 274800 172.96 20032.34 14400 20032.34
10/28/2010 174.93 323200 174.93 19941.04 11600 19941.04
10/27/2010 167.95 303700 167.95 20005.37 12000 20005.37
10/26/2010 173.02 230900 173.02 20221.39 10200 20221.39
10/25/2010 171.81 368700 171.81 20303.12 12200 20303.12
10/22/2010 176.45 257900 176.45 20165.86 13200 20165.86
10/21/2010 177.81 457500 177.81 20260.58 12800 20260.58
10/20/2010 179.33 223600 179.33 19872.15 10600 19872.15
10/19/2010 179.41 259900 179.41 19983.13 12000 19983.13
10/18/2010 186.63 145400 186.63 20168.89 12600 20168.89
10/15/2010 184.92 174300 184.92 20125.05 9400 20125.05
10/14/2010 187.08 205700 187.08 20497.64 15200 20497.64
10/13/2010 188.47 300100 188.47 20687.88 14400 20687.88
10/12/2010 184.45 236300 184.45 20203.34 13400 20203.34
10/11/2010 185.59 203000 185.59 20339.89 11600 20339.89
10/8/2010 187.23 174900 187.23 20250.26 15400 20250.26
10/7/2010 187.17 114900 187.17 20315.32 19200 20315.32
10/6/2010 187.61 259800 187.61 20543.08 16200 20543.08
10/5/2010 189.83 180800 189.83 20407.71 17800 20407.71
10/4/2010 186.99 206400 186.99 20475.73 15000 20475.73
10/1/2010 187.66 282700 187.66 20445.04 19200 20445.04
9/30/2010 184.37 265100 184.37 20069.12 15800 20069.12
9/29/2010 182.77 174200 182.77 19956.34 18800 19956.34
9/28/2010 180.99 313200 180.99 20104.86 13400 20104.86
9/27/2010 180.53 201500 180.53 20117.38 17400 20117.38
9/24/2010 184.14 311100 184.14 20045.18 17400 20045.18
9/23/2010 179.15 242400 179.15 19861.01 11800 19861.01
9/22/2010 180.94 298500 180.94 19941.72 14400 19941.72
9/21/2010 182.14 276100 182.14 20001.55 15800 20001.55
9/20/2010 185.12 307400 185.12 19906.1 19600 19906.1
9/17/2010 182.11 320300 182.11 19594.75 16600 19594.75
9/16/2010 179.67 328300 179.67 19417.49 16200 19417.49
9/15/2010 178.06 217200 178.06 19502.11 17400 19502.11
9/14/2010 176.28 289400 176.28 19346.96 21000 19346.96
9/13/2010 175.94 291900 175.94 19208.33 15800 19208.33
9/10/2010 168.56 130800 168.56 18799.66 13200 18799.66
9/9/2010 166.95 139400 166.95 18666.71 20200 18666.71
9/8/2010 165.07 275700 165.07 18645.06 14600 18645.06
9/7/2010 163.48 271900 163.48 18560.05 18200 18560.05
9/3/2010 169.58 222400 169.58 18221.43 9400 18221.43
9/2/2010 167.36 215900 167.36 18238.31 13400 18238.31
9/1/2010 166.44 284900 166.44 18205.87 14400 18205.87
8/31/2010 159.8 269300 159.8 17971.12 16400 17971.12
8/30/2010 159.28 281400 159.28 18032.11 11600 18032.11
8/27/2010 162.47 269700 162.47 17998.41 13600 17998.41
8/26/2010 159.66 269600 159.66 18226.35 12800 18226.35
8/25/2010 161.76 233500 161.76 18179.64 15800 18179.64
8/24/2010 161.89 287600 161.89 18311.59 14400 18311.59
8/23/2010 163.37 162400 163.37 18409.35 11400 18409.35
8/20/2010 165.79 190700 165.79 18401.82 14200 18401.82
8/19/2010 168.35 431900 168.35 18454.94 14600 18454.94
8/18/2010 166.45 304300 166.45 18257.12 14800 18257.12
8/17/2010 159.33 184200 159.33 18048.85 12800 18048.85
8/16/2010 158.5 191000 158.5 18050.78 16000 18050.78
8/13/2010 158.56 127300 158.56 18167.03 18600 18167.03
8/12/2010 158.3 142000 158.3 18073.9 19600 18073.9
8/11/2010 157.6 276100 157.6 18070.19 20200 18070.19
8/10/2010 161.76 393500 161.76 18219.99 17800 18219.99
8/9/2010 161.73 172100 161.73 18287.5 11000 18287.5
8/6/2010 161.63 170600 161.63 18143.99 9800 18143.99
8/5/2010 162.37 233900 162.37 18172.83 10200 18172.83
8/4/2010 162.14 246700 162.14 18217.44 11200 18217.44
8/3/2010 161.74 414200 161.74 18114.83 13800 18114.83
8/2/2010 165.4 277600 165.4 18081.21 11000 18081.21

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