HDFC Bank’s treatment of MSRDC deposit an industry-wide practice, say sources

HDFC Bank parking differential interest paid to Maharashtra State Road Development Corporation (MSRDC) under the marketing head is an industry-wide practice, four people with knowledge of the matter told CNBC-TV18.

“It is an industry-wide practice. When you pay a differential amount to one depositor, you don’t want to set it as a precedent. So, it is classified as a marketing expense. Also, there are distributor commissions paid to people who garner deposits for you. It is mostly done on the basis of the quarterly average balance in that account. They also go into the marketing head,” said a person with direct knowledge of the matter.

The RBI hasn't found HDFC Bank in contravention of any banking regulation on this matter, but this might trigger a certain censure from the central bank, given the magnitude of the differential.

“The differential interest is determined on the basis of interest on Certificates of Deposit and Commercial Papers, among others. But for other banks, this differential doesn’t go beyond 50-75 basis points,” said another person with direct knowledge of the matter.

According to a news report by Indian Express, the bank had offered a 6.01% interest rate to MSRDC at a time when its prevailing interest rate was 3.5%, offering a differential interest rate of 2.51%.

The additional amount, and the commission paid to distributors, was parked under the marketing head by the bank.

Sources told CNBC-TV18 that after the Audit Committee of the Board (ACB), under the chairmanship of former Infosys CFO M D Ranganath, ordered a formal “Internal Vigilance Investigation”, the vigilance department — under Prasoon Singh, Group Head, Vigilance — started the investigation on April 2 and completed it on April 17 this year.

“The report has been sent to the Nomination and Remuneration Committee of the bank. The investigating team has flagged hyper-competitiveness by the bank, which may lead to penal action, but not amounting to terminations like in the case of the AT-1 bond issue,” said a third person with direct knowledge of the matter.

In March, HDFC Bank had penalised 12 executives and fired three executives for alleged mis-selling of Credit Suisse AT-1 bonds.

“The Bank has robust internal oversight, audit and control processes and systems. All issues are dealt with in accordance with the Bank’s established norms, and full process is always followed before final determination post any internal review. We strongly reject any assumptions of wrongdoing or culpability based on selective material,” the bank told CNBC-TV18.

Responses from the RBI are still awaited.