HDFC Bank Ltd.: HDFC Bank sitting upon $6-7 billion of excess liquidity: Aditya Puri – The Economic Times

Clipped from: Bank sitting upon $6-7 billion of excess liquidity: Aditya PuriET NowLast Updated: Oct 21, 2020, 10:15 PM ISTSynopsis

India is one of the best opportunities going forward globally. They are underestimating the change that can come in semi urban and rural India, says Aditya Puri.

Most of our growth has come from increased market share. We have positioned our distribution, our technology and our products and we plan to continue to grow at a disproportionate rate, says the outgoing HDFC Bank MD,Aditya Puri.

Do you remember that day when you walked into HDFC Bank? Did you think that you would be able to create a master franchise like HDFC Bank?
Day one there was no HDFC Bank. I walked into an office which was just starting to be renovated with a few chairs and some broken glass around and then even for the next month or so, we really did not have HDFC Bank and we were sitting there and interviewing people and saying if you want to join the best bank and an international standard bank come and join us.

Fortunately, we found a whole lot of people who wanted the vision that we had and believed in it and came to join us because they knew about their own capabilities and we hired from across a broad spectrum — Bank of America, CitiBank, Merrill Lynch, RBI, etc, but we hired people who believed that we take a risk and create or actually realised the opportunity because what was happening is that foreign banks had the product and the service. The local banks had the brand, distribution and the money. We said if we can bring these two together and then go for scale, we should hit the right thing. Did we imagine it would be so big? Not initially but within five years of starting, we were looking very big.

What is it that you have done so differently that you managed to create HDFC Bank as India’s most valuable bank?
The reason for our existence is to provide better service or better products to the customers and make their lives easier. As long as we meet that need, there is no reason why we would not succeed. Also, during this time, a secular shift has taken place in telecommunication computing, artificial intelligence and social mobility has given the opportunity to change the business models in a way that you can provide the more personalised product to the customers at a lower cost and delivered in a manner that he can find it at his convenience 24×7. We did that.

Amazon, Google or Facebook did not change the tech world. They used what was available and came up with a better product at a cheaper price and revolutionised the whole thing. There are companies who sat back and said we have the brand and the distribution and did not alter the product to meet the new reality. The Barnes & Noble and the Nokias were blown out of the water. So we have kept that philosophy. We believed that we are a living organisation and we change every three-four years and we also did that. We went out and had a look at what they had done and we said we can also do it. We did two things. One, we moved from a banking experience to a financial experience. By that, we said you can not only bank with us, you can get secure payments through us, you can also get better pricing on goods, you can get your loans, you can get your third party products, you can buy and sell shares, you can pay your tax. All of this you can get at a click of a button in a convenient manner and we said we will deliver.

Now what did this do? Our original brand proposal remained. It was trust, transparency and safety but we were able to add salience as top of mind recall because we changed the way people looked at financial services and a bank. We also were able to add trust because now the more digital you get, the customer gets your brand delivery time and time again and we also looked at being a very good citizen because in the changed geo-economics and geopolitical situation, it is very important that you give back to society.

We figured 60% of India lives in semi-urban and rural India and we had to find a way to go there because that would create a middle class equivalent to the middle class we already had. The youngsters were going digital. We decided to access them. There were sections that were not getting credit — the two-wheelers, the small businesses, the light commercial vehicles, parts of gold. We said we will go there and we will also develop products and we still believe that India is an underpenetrated financial market and so the road ahead we are building with all the strength that we have and that is why the whole bank believes that our best is yet to come.

“We figured 60% of India lives in semi-urban and rural India and we had to find a way to go there because that would create a middle class equivalent to the middle class we already had.”

— Aditya Puri
How did you resist yourself from not going for growth at least in the corporate sector?
We must understand two things. Banks also have a fiduciary duty to fulfil, people deposit their money based on trust and they expect to get their money back with interest. So banking is not a complicated business. You define your target market, you see what products they need, you see how you can deliver them in the best possible way and then you come to your risk reward. At the end, your price allows you to meet your cost, it allows you to meet the delinquency and it allows you to give investors risk capital and to give back to the society through CSR.

Now if any business does not meet these criteria, then growing for the sake of growth does not help because you will not then have a healthy balance sheet. We have always balanced our risk reward, we are very clear where we want to go and if we do not get the risk reward which ensures safety of the bank and the depositors money, we do not touch it whether it is going down market and in retail or whether it is infrastructure or whether it is any product that is priced irrationally. We would not do it because it will not give us the end result that we want and we stop it. We have reduced our cost to income from almost 50% to about 36-37% and we think over the next two to three years. we will bring this down by another 3-4%. Then you can have a situation where if you are better than the industry, you can price at the same level as the industry. They may not have enough returns to provide which you can see over the last two quarters but we have and we have followed that strictly.

The second thing is it should be very clear that a hierarchy does not work in the new world. The chief executive is the first among equals, you have to have discussions, the team has to believe in it and you have to deliver the bank at every touch point because people now are not willing to wait, they want delivery now. We have kept all this in mind and that is why we went to semi urban and rural India, we went into digital, in terms of our technology, we moved from basic core system to processing and then API so that we can provide a better service and have partnership and to omni channel delivery.

Banks are always a proxy to economic growth…
Because this is the philosophy. You can see what happened in the last two quarters in our results. All depositors can be very sure when S&P says that even if there is a major issue with Covid, they will not be downgrading HDFC Bank because our rating is constrained by the sovereign rating.

Banks are ultimately a proxy to the economy but HDFC Bank is back to almost pre Covid levels. Why is there such a disconnect?
Let me say this in Hindi: yeh jo mahaul logo ne banaya hua tha mar gaya, mar gaya (all the hue and cry saying we are all dying) was not warranted. How is it that the car companies are doing so well? How is it that the two-wheelers did so well? How is it that the rural economy did well? How come cement is doing well, how come steel is doing well? And then everybody said banks will die out with 70% moratorium, 70% NPA. The fact of the matter is and I am telling you again,we have not taken any unnecessary risk. We believe that India is one of the best opportunities going forward globally.

They are underestimating the change that can come in semi urban and rural India. We are probably the best placed based on the digital initiatives that the government has put in to revamp our businesses and become competitive globally and improve our yields as well as put in better infrastructure. I am not saying that everything is okay. There are portions of the country that are suffering but the negative sentiment was overdone and is even overdone now.

Are you saying that the pessimism was overdone and the economy is simply normalised?
Not my take, as HDFC Bank’s take on the economy. Our results showed and so do the results of the other customers. We also had a situation. How will the government finance the deficit? Now they have announced another Rs 1,30,000 crore of additional borrowing. The MPC has rightly looked through inflation because it is supply side and it is basically consequent to lockdown. It will normalise. They have also kept the liquidity, HDM, they have got OMO, they have got LTRO. Toh itna rona kis baat ka bhai (Why is there such hue and cry?).

HDFC Bank has managed to gain market share and acquire customers because you are in a leadership position. Do you think what applies to you, will apply to the rest of the economy as well?
The main thing is demand and it is there even for those not in leadership positions. We have not cornered the entire demand. But we did a lot of things right and if they have not done it, they should. We went to semi-urban and rural areas where 60% of the country lives. The credit deposit ratio in the country is 130%. In semi-urban and rural India, it is 30%. Lending as a percentage of GDP is hardly 5% or 7%. It should be at least 40%. You will be able to create a completely new middle class, we are banking on it. 50% of our distribution is there jointly with the government distribution company called CSC. Over the next six to nine months, we will set up 25,000 banking correspondents and we have a total of 3,000 branches there and we will deliver digitally.

You also have two areas as growth areas. You have already spoken about semi-urban and rural India. Historically HDFC Bank has shied away from the infra space. Would you be lending there now?
We never shied away from infrastructure, we shied away from infrastructure we did not understand. Actually in the debt capital markets, we are number one in terms of financing. That is a major achievement. The government has also changed the way it is structuring infrastructure projects. In he structure, if you put in the proper risk parameters, the owner will pay on time and all approvals are there.

If you have got a good contractor, then you can do infrastructure and that is what we are doing. We are doing roads, we are doing wherever he can show us that he has covered the performance risk, the promoter risk, the payment risk and the regulatory risk. The more the government does in terms of structuring projects, I do not think there is any shortage of financing available provided the project is structured as a viable entity.

Do you think that a wave of disruption could happen in private banks and 3-5 banks will get lion’s share of the market and old private banks and small PSU banks will struggle?
Without getting specific let me answer this in a little roundabout way. Whoever has not gone to semi-urban and rural India, whoever has not created digital, whoever has not created the product range and whoever does not have liabilities, will suffer at the right price. We went to semi-urban and rural India. How did we get the last two quarter results? During the first quarter, we were sitting on approximately $6 billion of liquidity. Anybody who wanted to sell an asset at the right price could do that. We also funded companies which wanted to shore up liquidity to cater for the transitory period of Covid. We also gave a lot of funding to government employees because that is very safe, we lent to AAA, we did not stop our retail AAA salary, we continued to lend. We introduced new products. We are hoping that digital will account for almost 30% of our business. Most of our growth has come from increased market share. We have positioned our distribution, our technology and our products and we plan to continue to grow at a disproportionate rate.

For the banking sector and specifically for HDFC Bank, can a NIM of 4% going to sustain over a long period of time?
Why will it not sustain? It will not sustain if we do not work very hard. We have more than doubled our customer acquisition rate. A large part of our deposit increase is coming in current and saving account CASA which is low cost and consequently leads us being able to maintain NIM.

Our balance sheet profile changed because our growth in the first two quarters largely came from AAA corporates with that pricing and yet we were able to maintain margin. So between 4 and 4.3% is the range that we have always had and I see no reason to alter that. We are getting low cost money from semi-urban and rural India and even today we are sitting in almost $6-7 billion of excess liquidity which we will be able to use up as the economy recovers over a six-seven-month period.

In the next three years will any of your subsidiaries go public?
You have to ask Jagdishan that question.

But I am sure that must be part of your vision?
No, no. It is between Mr Jagdishan and the board.

How would you defend shareholders’ concerns that HDFC Bank equals Aditya Puri. What will happen to continuity and leadership as you have made the difference?
I hate to disappoint you but HDFC Bank is not Mr Puri. If you think 1,20,000 people are making money because Mr Puri made the decision, let me tell you I do not make decisions. I sit down with the team. We set the vision and we have tremendous arguments on that and we test out what works and we scale it up. In the digital world, if all decisions are left to the CEO, that company will fail. We have processes and procedures and we have expertise in every area.

We had an excellent chief marketing officer and a lot of good MBAs who sat down and said we will reposition because we maintain our basic brand characteristics but we will add salience and trust based on being able to provide them a changed experience and financial services as well as far more convenience. Similarly, the semi urban and rural was not my strategy. It was when Shashi and I went visiting the branch manager in Coorg. We asked can you double? He said if you give me the right functions, I will more than double. All he asked for at one end of the town was a banking correspondent and at the other end, he wanted an ATM.

I hate to disappoint you but we have been running plain bread and butter banking, we are an execution story. India is an underpenetrated market and so we have made the right decisions in going to the right places at the right time. The strategy for the next three years is firmly in place. All the nuts and bolts are in place. Unless it is bought by every man in the organisation, strategy and vision is a lump. You should see in the farewell that they are giving that everybody participates and says Sir, we will take your legacy forward, we understand the strategy. I would strongly recommend you talk to a branch manager. If he does not give you the same story that I am giving you then you can ask me this question again.

There was a team, we sat down and we said we need change and when I came back from Silicon Valley, we decided on the change together. We appointed Shashi as the change agent because 95% of changes fail because the rank and file do not believe in it. It fails because you are going against enlightened self interest, the fact that the team was able to bring this together.

When the news came out official that Mr Aditya Puri has sold his esops, it appeared that you want to cut your umbilical cord with HDFC Bank forever?
If you were a 70-year-old, would you have kept all your eggs in one basket and in equity? Answer me honestly.

I always believe in asset allocation.
Then you shouldn’t ask such a question. A 70-year-old can’t keep all eggs in one basket.

I just wanted to hear your perspective.
No, this was actually part of this advice given by others including Shashi and Abhay that I should diversify a bit. I was actually thinking too much about the bank. An investment banker whose name I would not take said think about it. There are two sides to a coin. I do not want to be peering over Shashi’s back, I do not think that is needed. For the last two-three months, during Covid, 85% of the time he has been functioning on his own and as of today, the team is functioning on its own. My selling or buying shares has got nothing to do with what HDFC Bank does or cutting any umbilical cord.

How soon can we hear about your new venture?
You can hear about it in a month-month and a half.

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