HDFC is morally and legally in the right

Finally the details of the Macquarie report “The Last Bastion Falls” are available for the case of HDFC alerted in yesterday late afternoon’s news alerts. Macquarie’s protestations of research may well be comparable to current /industry standards of promoter and financial information access but the research report is the result of HDFC having adopted a practice as an Industry leader might, with due recourse to the management’s judgement call. However the information provided in the report could easily have been shared by HDFC in an analyst group instead of being “discovered” by the said analyst.

The issue at hand in financial accounting terms is simple, while provisioning for standard assets, making capital available against future losses is made by due modelling and expensed thru the P&L, when a new provisioning was requested by RBI on teaser loans, the institution exercised its judgment, made its stand public and passed due provisions without expensing them and held it against reserves of the institution.

Similarily, the institution has passed thru reserves Interest “expense” on Zero Coupon Bonds to raise monies for investing in HDFC Bank and the insurance JVs. In both cases the use of reserves is undeniably justified and the management has not had to pass any deviations to policy or contravene accounting standards The said analyst in question perhaps assumed the HDFC profits already discounted these provisions as ell and needs to just review those Earnings based forecasts here he has made the wrong assumptions

In both questions, HDFC’s NIMS will not suffer materially  even if the expenses are passed thru and as such are incomparable to questionable accounting practices adopted by Macquarie and other OECD based Financial institutions in the last decade with two financial crises in 2000 and 2008 a direct result

HDFC has clarified that current recognition of Income from subsidiaries has been compensated by the said policy as they only recognise dividends and not the subsidiary revenues and profits which will be part of its balance sheet under IFRS.  This treatment does advance the benefit of a new accounting standard but as HDFC has been clear and unequivocal in the use of accounting policy it cannot be said to have deviated from conservative accounting standards or other such. However the question against the company would be that the impact on earnings was not clearly specified at the time of announcing the results as RoE and NIM calculations would have been different for us in following the company’s financial performance.

That also goes to a comment on the Indian environment here such clarifications are always issued after the event and being part of a clique in the know still matters more than your ability and depth in the subject.

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