Mumbai: HDFC, India's most valuable bank, continues to be in a bit of a pickle in the Middle East ever since it ran into a controversy two years ago over alleged misselling of high-risk bonds floated by the disgraced Swiss lender Credit Suisse (CS). In the wake of the glare that HDFC faced amid complaints from bond investors, one of UAE authorities is believed to be examining if the bank had breached regulatory or licensing conditions while marketing the third-party products.
According to senior bankers in UAE, the bank had engaged relationship managers (RMs) of its UAE office, while offering advisory through officials attached to its operations in a separate entity at the Dubai International Financial Centre (DIFC) and booking the accounts with its branch in Bahrain. Investors opened accounts with the Bahrain office and funded the account to buy the bonds which is a common practice.
DIFC, a financial free zone, functions as a separate jurisdiction under an independent legal system which is different from the general UAE laws. Financial services conducted in and from DIFC are regulated by Dubai Financial Services Authority (DFSA), an independent regulator.
"There was nothing wrong per se with opening accounts in Bahrain. However, if officials advising clients belong to the bank's DIFC office, and the RMs are employees of the Dubai rep office, which is under the UAE Central Bank, but the clients are not on-boarded by the DIFC office, it can raise eyebrows among regulators. So when some aggrieved investors of CS bonds approached DFSA, alleging that they were misled, it was found that they were not on-boarded in the DIFC branch of HDFC. The practice came to light as the regulators looked into the matter following investor complaints," a senior UAE banker told ET.
The know-your-customer rules, anti-money laundering regulations, and the risk assessment under the suitability rules used to evaluate a customer's risk tolerance level differ in DIFC. "Besides, DIFC banks focus on 'professional clients' who are typically categorised as those having a minimum liquid net worth of $1 million. We don't know whether some clients who did not meet the criteria were boarded by the Dubai rep office but advised by the DIFC outfit," said another person. In most banks, advisors come to the picture for high-valued clients as RMs often lack the skill.
The private sector bank had also extended leverage to some of the clients-offering loans to well-heeled non-resident Indians (NRIs) to invest in the financial products. HNIs, who had borrowed to invest were left fuming after a troubled Credit Suisse chose to write down the AT1 bonds in 2023. "Even as their investments were wiped out, they faced margin calls from the lender as the bond prices dropped as CS troubles intensified in the run-up to the write-down decision," said another banker in the region.
Unlike regular bonds, AT1, or additional tier-one bonds, carry a higher risk and are issued by banks to shore up capital. "Both the UAE authorities as well as DFSA had sought explanation from the bank," said a source.
About 20 employees have quit HDFC in recent months with the bank restricting bonuses and incentives, and going slow on the wealth management business in the UAE. A large number of them have joined a wealth advisory firm which has high net-worth persons and family offices as clients.
A HDFC Bank spokesperson did not respond to any of the queries that were mailed by ET on Monday. Also, the bank officials did not comment when asked specifically whether HDFC had given loans against FCNR (foreign currency accounts by NRIs) deposits of other banks. Such loans, bankers say, are discouraged by the Reserve Bank as it can raise risk in the system.
"I think HDFC UAE took things rather casually. What we understand is that for the time being, it is focusing on basic businesses like raising foreign currency and rupee deposits from NRIs. People also left because without fee earnings and leverage linked to active sale of third-party products, future bonuses could come down," said one of the bankers quoted above.
According to senior bankers in UAE, the bank had engaged relationship managers (RMs) of its UAE office, while offering advisory through officials attached to its operations in a separate entity at the Dubai International Financial Centre (DIFC) and booking the accounts with its branch in Bahrain. Investors opened accounts with the Bahrain office and funded the account to buy the bonds which is a common practice.
DIFC, a financial free zone, functions as a separate jurisdiction under an independent legal system which is different from the general UAE laws. Financial services conducted in and from DIFC are regulated by Dubai Financial Services Authority (DFSA), an independent regulator.
"There was nothing wrong per se with opening accounts in Bahrain. However, if officials advising clients belong to the bank's DIFC office, and the RMs are employees of the Dubai rep office, which is under the UAE Central Bank, but the clients are not on-boarded by the DIFC office, it can raise eyebrows among regulators. So when some aggrieved investors of CS bonds approached DFSA, alleging that they were misled, it was found that they were not on-boarded in the DIFC branch of HDFC. The practice came to light as the regulators looked into the matter following investor complaints," a senior UAE banker told ET.
The know-your-customer rules, anti-money laundering regulations, and the risk assessment under the suitability rules used to evaluate a customer's risk tolerance level differ in DIFC. "Besides, DIFC banks focus on 'professional clients' who are typically categorised as those having a minimum liquid net worth of $1 million. We don't know whether some clients who did not meet the criteria were boarded by the Dubai rep office but advised by the DIFC outfit," said another person. In most banks, advisors come to the picture for high-valued clients as RMs often lack the skill.
The private sector bank had also extended leverage to some of the clients-offering loans to well-heeled non-resident Indians (NRIs) to invest in the financial products. HNIs, who had borrowed to invest were left fuming after a troubled Credit Suisse chose to write down the AT1 bonds in 2023. "Even as their investments were wiped out, they faced margin calls from the lender as the bond prices dropped as CS troubles intensified in the run-up to the write-down decision," said another banker in the region.
Unlike regular bonds, AT1, or additional tier-one bonds, carry a higher risk and are issued by banks to shore up capital. "Both the UAE authorities as well as DFSA had sought explanation from the bank," said a source.
About 20 employees have quit HDFC in recent months with the bank restricting bonuses and incentives, and going slow on the wealth management business in the UAE. A large number of them have joined a wealth advisory firm which has high net-worth persons and family offices as clients.
A HDFC Bank spokesperson did not respond to any of the queries that were mailed by ET on Monday. Also, the bank officials did not comment when asked specifically whether HDFC had given loans against FCNR (foreign currency accounts by NRIs) deposits of other banks. Such loans, bankers say, are discouraged by the Reserve Bank as it can raise risk in the system.
"I think HDFC UAE took things rather casually. What we understand is that for the time being, it is focusing on basic businesses like raising foreign currency and rupee deposits from NRIs. People also left because without fee earnings and leverage linked to active sale of third-party products, future bonuses could come down," said one of the bankers quoted above.
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