Inside The Mind Of HDFC Bank CEO-Designate Sashidhar Jagdishan

1. How Bad Can The NPAs Get?

Analysts expect the non-performing assets of the banking sector to spike because the lockdown to contain the Covid-19 disrupted economic activity. Even the Reserve Bank of India, in its latest financial stability report, said the gross NPAs could rise to 20-year highs by March 2021.

The banking regulator allowed borrowers to defer their term loan repayments by six months till August-end to tide over the crisis. HDFC Bank earlier disclosed that 10% of its loan book continues to be under the moratorium.

According to Jagdishan and Vaidyanathan, even in the worst-case scenario, NPAs will rise to less than 2.08% from 1.36% as of June 30. HDFC Bank last saw gross bad loans of 2.08% during the global financial crisis of 2008.

“Despite 10% of the loan book under moratorium, they are very confident of containing the NPLs to low levels,” Macquarie Research said in its report, citing the conversation with the two bank executives. “Salary credits are at 98% of pre-covid levels. So, there could be some problems in 2% of customers.”

Jagdishan and Vaidyanathan said the floating provisions the bank has created to combat the Covid-19 impact would be adequate to protect its balance sheet. If needed, the bank is prepared to provide more against NPAs which may arise, they said.

2. Not Lowering Risk Standards

As the impact of the pandemic continues, there will be demand for credit from low-rated customers who will need support to manage their finances. However, HDFC Bank would continue to service only the cream, the two executives said.

According to Jagdishan and Vaidyanathan, the bank will continue its policy to service only the top 20-25% borrowers to manage its risk. There is about 6-7% market share among these borrowers which is still up for grabs and the bank will chase it, they said.

To grow its book and expand its bouquet of financial services, the bank will tap the semi-urban and rural markets, where the growth potential is still high. The two executives said the credit-deposit ratio in the rural market is around 30-35%, allowing the bank to lend more.

3. A Bank Within A Bank

According to Macquarie Research, HDFC Bank has started a digital transformation which will take another two years to conclude. This will turn the private sector lender into a financial sector powerhouse, allowing it to cross-sell and monetise its large digital ecosystem.

This growth strategy is similar to Ping An, a financial sector major in China, which offers a wide range of financial services products in healthcare, auto services, real estate services, apart from the regular banking, insurance and asset management to customers, it said.

“They are partnering with one of the leading health chains in the country, with car dealer platforms, etc. to create an entire ecosystem--e.g. for cars they will have a platform which facilitates customer transactions related to buying/selling cars, servicing, test drive, loans, etc.,” Macquarie Research said.

4. Current Account Norms Not A Problem

Jagishan and Vaidyanathan see the RBI’s latest current account norms as having a neutral impact on the bank’s business. The norms stipulate that borrowers who take up working capital facilities from a bank must hold the funds in a current account with the same bank, to better monitor end use of funds. This would have meant that banks which had grown their cash management business by offering better quality current accounts without lending to customers would suffer.

HDFC Bank is looking to take this up as an opportunity, the executives said. While there might be some short-term compression in the small and medium enterprises business, the potential for growth is large in the retail business, they told the research firm.

5. Latest Controversies

HDFC Bank is facing an investigation by two U.S.-based law firms for allegedly misleading shareholders with their asset quality disclosures. Rosen Law Firm and Schall Law Firm have stated that they are conducting their investigation in preparation for class-action lawsuits against the bank.

“The management is confident that there has been no wrongdoing at all,” Macquarie Research said. “There were some issues in the auto loan division (nothing wrong with product they were offering but more to do with how they were offering it), and they have taken swift action.”

The bank had conducted an internal investigation into some alleged impropriety in its auto loans division and found personal misconduct by some employees. The bank never openly stated what the impropriety in the auto loan division was or the nature of the misconduct by the employees. Puri, however, had informed shareholders that the bank had taken strict action against the employees in question.

Bloomberg reported on Aug. 6 that HDFC Bank had been delaying sharing customer data with the Indian unit of Experian, a credit information company. This had led to the RBI getting involved in the issue, according to the report.

Jagdishan and Vaidyanathan clarified that this was because the bank was seeking more information on how to treat defaulters after the RBI introduced the loan repayment moratorium. The regulator had said that the moratorium would not impact the customer’s credit score. The bank had to also revamp its internal systems to not classify accounts as defaulters if customers opted for the moratorium, which led to a delay in reporting customer data, they said.