Hit Refresh

The day is etched in Ashok Khanna’s memory. On March 28, 2012, Khanna, country head of secured loans (vehicles) at HDFC Bank, along with managing director Aditya Puri and the-then Reserve Bank of India (RBI) deputy governor KC Chakrabarty, were visiting Gudivada, the second-largest municipality in the coastal district of Krishna in Andhra Pradesh. The occasion was the 300^th Grameen Loan Mahotsava, a retail loan fest that the bank had kicked off in 2010. Since that day also marked the bank crossing its 1 millionth rural loan, chief guest Chakrabarty was to hand over vehicle keys to successful applicants. There was palpable excitement among the crowd as they hadn’t witnessed loans being disbursed in such a fashion. Chakrabarty, known for his plain-speak and also the former CMD of Punjab National Bank, couldn’t contain his curiosity and asked one of the villagers: “Why did you take a loan from this bank?” The customer promptly replied, “No other bank was willing to offer a loan.” 

Chakrabarty found that a bit strange considering that the coastal district was also home to well-entrenched state-owned banks, especially Andhra Bank. On being asked from whom he was taking loans earlier, the villager replied the usual practice was to borrow from moneylenders at 18-24% against the 11% rate that HDFC Bank was offering. “No other bank gave you a loan?” Chakrabarty queried again. “No” came the response. “How did they approach you?” asked Chakrabarty. “They came to our house offering loans,” replied the villager much to the surprise of Chakrabarty. Later, Khanna told the crowd in Telugu that if they wanted the bank to keep coming back to them, they also needed to ensure that payments are made in time. In fact, some officials of other banks who dropped by at the event even cautioned Khanna against the approach. “They told me, ‘You will regret this loan fest as they are not creditworthy.’ I replied, ‘It’s my money and I will worry about that,’” recalls the 61-year-old, who is back at work just a day after travelling 900 km to and fro for a similar fest at Sangli in Maharashtra where Rs.160 million in loans were disbursed. 

Khanna, an old-hand who put in 16 years at the bank, heads the biggest vehicle loan book in the banking sector at Rs.1,300 billion, comprising loans for tractors, cars, two-wheelers, and commercial vehicles. Since 2010, the bank has held several such melas in rural areas, home to 21% of the bank’s 4,787 branches. This has fuelled its retail loan book, which has grown at a CAGR of 25% over the past decade to Rs.3,761 billion. This impressive growth is backed by prudent lending standards given that the delinquency ratio is just 0.5% of the vehicle loan book. “We are going where no other bank has gone before. Given that the branch is not a natural point of sale, a lot of legwork is involved. Sometimes the bank staff has to travel 100 km couple of times just to finance a tractor,” adds Khanna. This ear-to-the-ground approach with more than a majority (53%) of branches located in semi-urban and rural markets has also helped HDFC Bank emerge as the country’s largest private sector lender in terms of standalone assets, pipping rival ICICI Bank. 

Unlike most other big public and private banks that have been grappling with stressed corporate loans, HDFC Bank has managed to avoid the stress in its wholesale loan book of Rs.2,880 billion, with term loans accounting for just 30%. However, independent market observers such as Hemindra Hazari believe that the bank has not played the infra story like the others and, instead, has been very selective. Sitting in his boardroom on the sixth floor of HDFC Bank House in central Mumbai, Puri, head honcho since the bank’s inception in 1994 and due to step down in 2020, believes the bank has always been doing what is right. “We don’t lend money to lose money,” quips Puri, adding, “I have let go only that borrower who I thought would not be able to repay my loan. 30% of our wholesale loan book is term loans. What we have left out is what doesn’t repay back and that’s a business I don’t intend to get into.”

With 43 million customers and 88,253 employees, economies of scale are visibly evident at the bank with business per employee and profit per employee both at an all-time high of Rs.150 million and Rs.2 million, even as business has been doubling every three-and-a-half years. From just 20 cities in the early 90s, the bank now covers 2,691 cities. Early this year, it became the first bank in the country to cross Rs.5 trillion in market cap even as its stock continues to delight investors generating an annual return of 28% since 1995. But with technology emerging as a big disruptor and differentiator in the financial services space, Puri was quick to sense that if the bank had to maintain its legacy it had to embrace a digital future. While the bank had already migrated to netbanking in 1999 and mobile banking in 2012, it was a trip to Silicon Valley that turned Puri into a digital evangelist.

Digital push

During a two-day trip to the Bay Area in November 2014, Puri got a first-hand account of the disruptive technologies in store. Once he got home, Puri got cracking. Nitin Chugh, country head — digital banking, recalls the meeting: “Puri felt what we were doing was not enough even though 55% of transactions were digital. He stressed on innovation rather than influencing customer behaviour.”

Beginning 2015, the bank went on a digital blitzkrieg. In association with MobME, a Kochi-based technology firm, the bank in March launched Chillr, a mobile app that allows bank customers to instantly transfer money to any contact in their phonebook. “It works on the immediate payment service (IMPS) network but the ease of tech was the biggest differentiator,” mentions Chugh. Chillr has since been acquired by Truecaller.

Two months later, the bank unveiled a mobile payment solution, PayZapp, to counter prepaid wallets by offering one-click payment instead of two-factor authentication. To woo customers, the app features a deal and discount marketplace, SmartBuy, through which the bank offers deals sourced from its merchant partners. The distribution fee that the bank earns from the merchants is passed on as discounts to the customer. 

In March 2017, the bank upped the ante by rolling out Eva (electronic virtual assistant), the country’s first AI-driven banking chatbot that can answer millions of customer queries across multiple channels almost instantaneously. Shridhar Marri, CEO and co-founder, Senseforth.ai, says, “From 2013 till 2015, we were experimenting with our product, and it was HDFC Bank that gave us our first break.” Eva currently handles over 50,000 semantic variations for thousands of everyday customer issues. “By doing so, it gains a deeper understanding of behaviour patterns,” adds Marri. The bank claims to have answered more than 5 million user queries with more than 85% accuracy. The bank has also deployed a robot (IRA) that will address basic customer queries and in the next phase, will help carry out transactions. “We are still in the learning phase and are trying to assess what we can offer to customers,” adds Chugh. 

Not surprising, the impact of the bank’s digital strategy is clearly visible. Digital accounts for 85% of the bank’s overall transactions. Branch transactions are down to 8% with ATM transactions at 6%. Of the 85%, mobile accounts for more than 45% and traditional internet 40% (see: New face of banking).

Core strength

The bank could swiftly move up the digital curve on account of its flexible IT architecture. Though the bank does not reveal its total spend on technology and digital, analysts believe that in recent years higher spend on technology is fuelling the growth in capex (see: Tech guzzler). Bhavesh Zaveri, country head, operations and cash management products, says, “We never kept our systems static beyond five to seven years as it limits a bank’s ability to add any new features to a legacy product.” Over the past 23 years, there have been several migrations that the bank has made in its IT architecture. But post the Silicon Valley trip, Puri wanted to know whether the bank’s IT backbone was good enough for the digital push. That’s when the IT team, headed by Munish Mittal, chose the API banking middleware that would give customers the flexibility to access the bank from any device. Currently, the bank’s core banking system, on average, clocks 5,000 transactions per second (tps) and the plan is to increase it to 10,000 tps. Puri, though, rules out any significant jump in IT spend. “Spend on technology also comes down because now technology is less expensive. You can share technology. So when you look at the cloud, it is nothing but sharing of excess capacity in technology. More spending now will be on cyber security.”

Though a lot has been spoken about the growing importance of blockchain, Mittal is skeptical and does not see it as a path-breaking technology. “Blockchain is not new. It existed 35-40 years ago when we wrote compilers. It’s an old concept and it is just now being made applicable to commercial use cases,” he says. While blockchain is still at an exploratory stage at the bank, the three years of digital push has not only made processes paperless and frictionless for customers, but also created new products, especially on the lending side.

Leveraging digital

Nearly a third of outstanding retail loans in the banking system are unsecured as of June 2018, according to data released by the RBI. Outstanding loans to individuals stood at Rs.19,181 billion, of which loans worth Rs.5,029 billion were unsecured. In fact, personal loans accounted for 42% of incremental credit growth both in FY16 and FY17. At HDFC Bank, Arvind Kapil, manages a retail loan book of Rs.1,700 billion, which largely comprises unsecured, home mortgages and small working loans. Over 40% (Rs.700 billion) of the book is unsecured personal loans, with the bank disbursing Rs.50 billion of personal loans every month. “We believe personal loan is the new working capital for the salaried, thanks to the rise and proliferation of credit bureaus. It’s probably the only lending business that doesn’t have property as collateral,” says Kapil. In 2015, the bank launched an instant loan product disbursed within 10 seconds. Existing customers have a pre-approved loan amount available, and to avail the same have to log into their bank account via netbanking or mobile banking and with a few clicks the amount is transferred to the account. “Today, we are disbursing close to Rs.10 billion a month of 10-second loans,” reveals Kapil, adding that 70% of the demand comes from salaried customers. In fact, 50% are existing customers. “With a turnaround time as low as 10 seconds and cross-selling to existing liability customers, the bank continues to see lower delinquencies,” mentions R Sreesankar, head, institutional equities, who tracks banking at Prabhudas Lilladher. The other instant retail loan product that the bank is offering is loan against shares and mutual funds. After discussions with NSDL, system integration was done between the two entities. “It used to take seven days to approve the loan, now it takes three minutes,” adds Kapil. Similarly, the bank has tied up with close to 10 AMCs to offer instant loan against mutual funds. “It’s an old loan product. Even if you today sell the MFs, funds will be available only after T+2, here we are offering it instantly,” mentions Kapil. The bank is now looking to extend the ease of digital for working capital loans to small traders and SMEs. Usually, if the documentation is in order it takes close to a week to avail the loan, the bank is looking at bringing that down to less than a day. “The penetration within my own customer database is up 3x since the introduction of 10-second loan, and I have done that without advertising,” adds Kapil.

With about 11 million credit cards and 25 million debits cards, HDFC Bank is the largest acquirer and issuer in the payments business. Of the close to Rs.750 billion credit card outstanding loan book, the bank has over 52% market share. To cater to quick e-commerce transactions, the bank in 2017 launched insta-credit and issued 300,000 cards last year. According to a report by Motilal Oswal Securities, credit card customers currently comprise around 25% of the bank’s 42 million customers. The management aims to increase this penetration to around 50% over the next three years, even as it is witnessing steady growth in customer accounts every year. Parag Rao, country head, payment products, points out that while 80% of transactions done by its credit card customers was in the top 10 towns three years ago, it has now declined to 65%.

Similarly, on the merchant acquisition side, with close to 0.5 million acceptance points for its point-of-sale terminals (both physical and digital), the bank is now eyeing 3 million acceptance points across the country. To cast the net wide to acquire merchants, the bank is looking to entice small shopkeepers with its digital POS. “He may not take my POS machine because he has to pay a rental and 2% commission on every swipe. So we onboard them through a merchant app,” reveals Rao. The bank has currently deployed close to 0.5 million PoS terminals, of which 0.2 million are DigiPoS. For merchants, the discount rate is low which brings down the total cost of ownership.

In the case of auto loans — 67,000 cars a month and 1.4 million two-wheelers — Khanna is not just relying on digital to sell auto loans but also keep costs down. For the past three to four years, Khanna has kept his team largely constant at 570 employees. To keep the momentum going, the bank launched ZipDrive, which allows existing customers to generate a 30-day validity approval, walk into a dealership and drive out with the car of their choice. For those who do not have a netbanking account, the bank is running a pilot which offers loans via phone. “The customer has to confirm his credentials and after punching in the details, the loan is disbursed,” says Khanna. It saves time as the customer has already identified the model and the money is transferred straight to the dealer’s bank account. In semi-urban and rural markets, it is using biometric with 2,000 dealers armed with devices. “The moment we get the Aadhaar and bank details of a customer, it is very easy to give them loans within 10 minutes,” adds Khanna. The bank is now sourcing nearly 30% of its two-wheeler customers digitally, up from a mere 4% two years ago.

Given its target of raising the revenue share of semi-urban and rural branches from 15% to 35% over the next five years, the bank faces the challenge of higher customer acquisition costs as it goes down the pyramid. The bank’s sustainable livelihood initiative (SLI), which is quasi-microfinance, is present in 400 districts across 25 states. With 8,000 employees, it’s the most labour-intensive division of the bank. With a loan book of over Rs.52 billion, the bank has thus far managed to raise only Rs.5 billion in deposits. “Only adequate transactions can justify deploying banking correspondents. Hence, viable liability transactions is still a challenge,” says Manohara Raj, head of SLI. To reduce the turnaround time and increase the ROI of its salespeople, the bank has moved the entire SLI business unit to the Vymo platform, automating customer acquisition, KYC, assessment, approval and distribution processes. The ease-of-use of the mobile app and the ready availability of data at the point of sale (customer acquisition) allow for swift collection of relevant documents and their fast upload to the bank. “This ensures that we can, at that very moment, decide and inform the borrower if he is creditworthy or not,” adds Raj. Despite credit to agriculture and allied activities increasing 45% in FY18 to about Rs.1,132 billion, Paresh Sukthankar, deputy managing director, believes the challenge of SLI cannot be extrapolated to the entire rural portfolio. “It’s incorrect to extrapolate the challenges of SLI to the rural portfolio as you have to differentiate between financial access and financial inclusion. SLI focuses on the bottom of the pyramid.”

Even as the retail business is leveraging digital, wholesale banking is not far behind. At Rs.2,880 billion, it makes up for the next big business. Kaizad Bharucha, a veteran banker, who joined in 1995 from SBI, has been heading the business as ED for the past five years. Under his tenure, the book has more than doubled from Rs.1,360 billion in December 2013. Unlike retail banking that has seen a host of launches, the bank, since the launch of ENet in 2000, equivalent of netbanking on retail side, rolled out trade finance transactions through a mobile app, only three years ago. “If you are a CFO and need to approve payments, the app helps the transaction get approval on the go,” says Bharucha. While AI and machine learning are being more effectively used in the customer facing retail business, Bharucha mentions that AI and analytics will be used to improve processes from a risk management perspective at the back-end. While digital is making it easier for customers to avail lending products at the click of a button, the bank’s backroom boys are ensuring that nothing goes awry.

Risk-busters

At a time when most of its peers are grappling with bad loans, HDFC Bank has managed to steer clear as is reflected in its March 2018 net NPA of 0.40%. Unlike the traditional method of verifying, researching and reviewing a borrower’s credit history, the bank’s risk management system continuously scans the cash flow pattern of the borrower and matches it with his credit score. At any given point of time, the bank has 200 analytical models built across the bank’s customer lifecycle right from origination to recovery to written-off clients, including fraud. “The fact that 10 second loans are instantaneous is because the existing customer’s risk has already been assessed. Based on the product being offered, a few million customers are already pre-approved,” reveals Rajesh Kumar, group head and co-head, retail risk. 

Over the years, the bank has built a comprehensive scorecard of its customers. Jimmy Tata, chief risk officer, points out, “If you want a lower probability of default in the digital portfolio you have to truncate portfolio selection to that level. If you wish to take a slightly higher risk then you will look at which segments need to be added.” Not surprising that the delinquency trend in the unsecured portfolio is under control, as around 60% of credit card loans and 50% of personal loans are disbursed to existing customers with a strong credit history.

Unlike in retail, where data gathering and sampling play a very important role, the wholesale side has fared well on account of good origination. While the starting point is largely top-down, the key aspect, besides other parameters, taken into consideration is whether the entity can sustain itself through times of stress. “We look at past data to see how the corporate fared when the industry went through a turmoil and if something changes dramatically in the industry to what extent can the company bear the hit compared to its peers,” adds Benjamin Frank, head, wholesale credit risk. 

What next?

The bank is sitting pretty having raised Rs.240 billion from the market, giving it enough capital to sustain its good run. Over the past decade, the bank has managed to grow its loans and deposits market share to 7.8% and 6.4% respectively, driven by 7x jump in branch network from 684 in FY07 to 4,787 in FY18. More importantly, increased adoption of technology has resulted in improving the cost-to-income ratio. “Our average balance in savings account is the highest at Rs.65,000 and growing, which indicates the quality and strength of the liability portfolio,” adds Chugh. 

The next phase of digital for the bank is hyper-personalisation. “We will deliver the best experience by being real-time, intuitive, contextual, and relevant. Besides, it will keep getting smarter as it keeps reading consumer behaviour,” says Chugh. For example, if a customer logs into his account to prematurely break a FD, the new interface will instantly offer the option of an overdraft or a personal loan. Similarly, Eva would be able to handle real banking transactions, which would enable the bank to offer true conversational banking through Amazon Alexa and Google Home. “If you look at Apple, Netflix, Google, and Amazon… what have they done? They used technology to deliver a more focused product to the customer. We have done the same,” says Puri. In a nutshell, the bank wants to offer its customers an experience as simple as Google, as rich as Netflix, as comprehensive as Amazon and as intuitive as Apple. On the emerging threat from fintech companies, Puri plays down the impact and believes the future lies in partnerships. “We could be partnering with Google for its search engine and origination. Google could partner with us for our credit capability. We could co-brand our credit cards. We could introduce different types of joint accounts. The possibilities are endless. Let’s see how it goes,” sums up Puri.