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For fifty-six-year-old cricket buff Sashidhar Jagdishan, the entry into the eighth-floor corner room of HDFC Bank’s Mumbai headquarters amidst the raging Covid-19 pandemic was like walking into the Sabina Park cricket pitch in the 1980s and facing a battery of West Indian fast bowlers. That’s how the new MD & CEO of the country’s second-largest bank often recounts his gruelling first 11 months to friends and acquaintances. The man whom iconic CEO Aditya Puri trained and tutored as his successor, faced a barrage of bouncers—technology glitches, disruption in banking services, a credit card acquisition freeze by the regulator Reserve Bank of India (RBI), an embargo on new digital product launches, compliance failures, a hefty penalty by the regulator, and the most challenging economic environment in the bank’s history. Jagdishan (fondly called Sashi by colleagues and friends), was often seen dousing fires working from home, and also taking care of his old parents.
But there was another story brewing that got lost in the din. Taking fresh guard, Jagdishan, who joined the bank as a finance manager in the mid-1990s, was constantly brainstorming with his senior management team to use the current taxing phase as an opportunity to start with a clean slate—especially the technology platform. Despite being an insider, Jagdishan discovered a frightening gap between what he knew about the bank over the shoulders of his predecessor, and what he encountered sitting in the hot seat himself. Part of the reason was the pandemic, which swiftly changed customer behaviour, forced a remote workforce culture, tested the bank’s business continuity plan, and also raised fears of cybersecurity risks.
The new job at hand was all about future-proofing and rewriting many old rules of running a bank. “My respect for Puri has gone up infinite times [considering] how he had steered the ship seamlessly,” Jagdishan once told a colleague. Under Puri, the start-up bank, founded in 1994, grew its numbers to Rs 90,084 crore in net revenues, Rs 31,116 crore in profits, Rs 13.35 lakh crore in deposits, and Rs 11.32 lakh crore of advances in FY2020-21, when he retired. It was also the stock market’s darling. HDFC Bank’s outperformance in the past decade pushed the bank closer to the country’s toppers by market capitalisation—Reliance Industries and Tata Consultancy Services. For perspective, the stock would have minted Rs 15.8 crore to an investor who put in Rs 1 lakh in its IPO in May 1995. However, post-pandemic, HDFC Bank’s stock returns have barely matched the returns of the 30-share BSE Sensex index or even its arch rival ICICI Bank.
We are creating two factories—the enterprise factory and the digital factory—to be able to build new architecture, new designs on the cloud, which will ensure that we are able to compete with the fintechs and the platform players
MD and CEO, HDFC Bank, at the lender’s AGM in July
His close associates say Jagdishan is quietly determined to come back with a bang. The bank is working on a scaleable platform by benchmarking with platforms such as Amazon and Netflix, with no downtime. “We are creating two factories, two muscles, like the enterprise factory and the digital factory, to be able to build new architecture, new designs on the cloud, which will ensure that we are able to compete with the fintechs and the platform players. This is again a journey you will start to see. You will not see it overnight. It will start to happen in 12 to 15 months’ time and the whole thing will probably be unveiled in about three years’ time,” Jagdishan promised shareholders in a virtual annual general meeting or AGM in July. (Jagdishan didn’t participate in this story.)
The new platform is aimed at transforming the bank with 5,600-plus branches and 120,000 employees into a Neo Bank (or virtual bank) in the next two to three years. There would be a one-click auto loan where the customer could visit a dealer, test drive, and walk away with the car. Hundreds of fintechs would plug into the bank’s systems without worrying about tech compatibility. A tie-up with payments giant Paytm was already sealed in August to jointly storm the small merchants’ space in smaller towns and cities for buy-now-pay-later (BNPL) loans. There is a new rural strategy of riding piggyback on the 350,000 government-owned common service centres (CSCs) platform to capture the emerging middle class in smaller towns. There is also an ecosystem approach across geographies in under-penetrated segments like healthcare, education, the gig economy, and start-ups to capture savings, lending and investment opportunities (see box The Digital Banker). Seven months after taking over, Jagdishan has also reshuffled the portfolios of his senior management team to align with the new business strategy. To extend Jagdishan’s cricket analogy, he seems all padded up to play a long innings.
Call it changed circumstances or personality nuances, Jagdishan is turning out to be very different from Puri. The seamless succession without any senior management exit so far shows confidence in his leadership. “Puri was multidimensional, who led the bank right from the front, whereas the bulk of Sashi’s experience is as chief financial officer (CFO),” says V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services. Parag Rao, Group Head-Payments Business, Consumer Finance, Digital Banking & Information Technology at HDFC Bank, points out that “CFOs have this unique advantage of not just managing finances, but also having an extremely deep, incisive, strategic view”. Jagdishan’s leadership skills were on display when he was quick to apologise to the bank’s over 60 million customers for repeated tech outages. In a conference call hosted by Macquarie Capital in May, Jagdishan said that the deficiencies on the technology front were a blot on the reputation of the bank. “No banker actually would have publicly made such an admission,” says a former HDFC bank executive. Two months later at the virtual AGM, Jagdishan dubbed the disruption from new-age fintech players as valid fear. “One can either sit and sulk or deal with it differently,” he had said.
This leadership style of admitting mistakes or recognising competition publicly is also shaping the bank’s new strategy. “Sashi comes up with a blend of an amazing amount of high skills on micromanagement and detailing,” say insiders. Unlike Puri who built the bank brick by brick, Jagdishan inherited a Godzilla-sized entity with Rs 17.46 lakh crore of assets, which is second only to the Rs 48.80-lakh crore assets of State Bank of India, the country’s largest bank. “It’s a running train that he has boarded,” says Arvind Kapil, Group Head-Retail Assets & Sustainable Livelihood Initiative (SLI) at HDFC Bank. Sitting in the CEO’s chair last October, Jagdishan was clear that he didn’t need to worry about the energy levels of the bank’s workforce. His job instead was to communicate the evolving strategy in changed circumstances. For instance, when the bank received a rap on the knuckles (a phrase Jagdishan himself uses) from the RBI for three IT outages in as many years, this is what he wrote in a communication to employees: “I’m grateful and thankful to the regulator.” Many of his senior management colleagues were befuddled by this communiqué, but Jagdishan was actually looking upon it as an opportunity to overhaul the bank’s technology apparatus rather than taking incremental steps to satisfy the regulator.
The subtle differences that Jagdishan brings to the table were visible when he handed over the technology transformation task to Rao, who was Group Head-Cards, Payments and Marketing. It was Jagdishan’s idea of empowering a business head. Rao breaks down the digital transformation into two steps. The first leg, which started under Puri, was digitalisation or straight-through processing, which involved the digitisation of back-end processes by reducing transaction hops in product processing for a customer. “It is an extremely important step because without that there is no point in creating a fancy app or a fancy customer experience on top without having the processes digitalised,” explains Rao.
The bank’s new architecture—do it yourself—will now have virtually no man in the middle. “The clear vision of the bank is to be seen as a technology company with a banking licence,” explains Rao. Under the plan, the bank has started two initiatives—enterprise factory and digital factory—to manage the entire digital transformation, which cuts across the bank, across all product segments, and across all support functions. The role of the enterprise factory is to run and modernise the existing bank whereas the digital factory focusses on building digital practices, processes and products. The enterprise factory is tasked with switching from the legacy (fixed servers) to building the new IT architecture with designs on the cloud to ensure infrastructure scaleability, on-demand capacity, and a fail-safe backup for faster recovery from outages. For instance, UPI payment numbers are growing exponentially every month. That basically means revamping the infrastructure and increasing capacity more than three times a year, which is not possible in an on-premise architecture.
The bank is building a future-ready and future-proof infrastructure... which will give us infinite scaleability, on-demand capacity, completely fail-safe backup... [It] gives us the flexibility to be able to operate with many more partners, without repeated changes in the system
Group Head-Payments Business, Consumer Finance, Digital Banking & Information Technology at HDFC Bank
The bank claims that it is actually thinking far ahead and building its cloud infrastructure in a slightly different way through a multi-cloud strategy, which gives it the scale and expertise of all three clouds—Amazon’s AWS, Microsoft Azure, and Google Cloud. It gives the bank fail-safe backup capability just in case one of them fails. “We will also be able to use the best practices of cloud computing between the three,” says Rao. In today’s neo banking architecture, the bank needs nimbleness to be able to partner with fintechs and technology companies operating in different clouds. The new architecture will also help in seamless launches of new digital products, which the RBI has currently put on hold for the bank.
The mandate of the new digital factory is to improve consumer experience by digitising the product processes for retail, MSMEs and large corporates. It is about building capabilities to reduce the product cycles from months and years to a few weeks. The bank is now talking a new lingo—DevSecOps—which refers to development, security, and operations, where the entire chain is responsible for building the product in a parallel manner. Currently, the product cycle flows from the new product note, then gets converted into a requirement document, which is then handed over to the solutions architect, who will give it to IT for building it. The ops team will then check it, and thereafter you have audit checks, etc. “DevSecOps is a practice wherein you do all these in parallel. DevSecOps in the digital world is a very important prerequisite to be able to achieve this nimbleness and agility,” says Rao.
The bank is also strengthening its data centre where the third outage took place in November 2020 because of power failure. “We are strengthening and tweaking the architecture so that the potential number of outages itself drops,” says Rao. “It is about building your early warning signals, 24X7 monitoring, failsafe checks, and bouncing back faster.” Post the RBI’s action, the bank claims that it has completed 85 per cent of its activity levels, which it communicated to the RBI last December. The post-Covid-19 acceleration in digital banking has also brought new known and new unknown risks. “The security in mobile-first banking is becoming a big issue. The government and the regulators are also increasing their oversight to protect customers,” says Sean Narayanan, CEO at Apexon, a digital technology services firm.
There are several projects we’ve taken up both for improving the existing offerings and bringing about changes in the existing offerings to corporates. The new offering will bring in far more efficiency at the client level; there are a couple of internal projects that will bring in efficiency in our processes
Executive Director, HDFC Bank
RBI Deputy Governor Rajeshwar Rao recently highlighted the cybersecurity and operational risks in open banking architectures. “As the open API provides uncluttered access to customer banking data such as transactions and balance stored within the infrastructure, it may also pose a severe cybersecurity risk,” said Rao, while adding that losses caused to customers on account of cyber events would require financial institutions to compensate customers. Dipesh Doshi, Managing Director, Financial Services, Protiviti Member Firm for India, says banks have always focussed largely on credit risk, liquidity risk, and market risk. “The big risks are now coming from the technology side,” he says. These risks are cybersecurity, outsourcing, compliance, operational, regulatory and legal. Jagdishan has to be mindful of these risks. The new CEO doesn’t rule out outages as they are executing the technology transformation agenda. “This is the bitter pill we need to swallow,” advises Jagdishan.
Fintech companies are all the rage, and consumers are taking to them in droves mostly because of ease of transactions and convenience. Legacy banks like HDFC Bank must adopt fintech’s disruptive approach to evolve in the high-tech era, and that is exactly what Jagdishan is doing. As part of the strategy, the retail assets vertical, which was earlier distributed amongst a couple of heads, has been carved out as a single unit. “The whole idea is to create digital offerings across products as well as a heightened focus on retail as one complete unit for cross-selling,” explains Kapil, the retail head. In terms of size, Kapil is overseeing a Rs 4-lakh crore loan book, which constitutes 30 per cent of the balance sheet size. Currently, the bank works closely with fintechs on the auto side, especially used cars. There are also marketplace models for unsecured loans where the bank has a partnership for loan origination. In the personal loan segment, which is the highest retail segment with loans worth Rs 1.19 lakh crore, it is building capabilities to offer loans to non-bank customers. In a new system of APIs from Amazon, Flipkart or GST returns, it is now entirely possible to tap new bank customers.
The retail segment has been carved out as a separate pillar with mortgages, personal loans, auto, and loans against shares. The whole idea is to leverage synergies and create digital offerings across products. We are also getting them to cross-sell each other’s products much more seamlessly
Group Head-Retail Assets & Sustainable Livelihood Initiative (SLI) at HDFC Bank
The bank is readying for new federated structures, which makes customer data easily available. Take, for instance, the RBI’s open banking Accounts Aggregator (AA) model, where HDFC Bank is one of eight participating banks that have joined the new network of financial data aggregation. Under AA, the banks’ customers will have the freedom to move from one bank to another where they get the best services and deals. HDFC Bank’s strategy is to leverage such kind of parallel federated structures to actually become even bigger and better. “We are going to participate very clearly in a lot of these federated structures because we believe we can bring a lot of value to that ecosystem,” says Rao. Kapil says that things like AA and open banking will put pressure on larger banks to get sharper in their processes for faster turnarounds. “Today’s industry has to be nimble-footed,” he adds.
Currently, there is also a variation of the bank’s 10-second personal loans on the auto side called Zipdrive. The bank is preparing a one-click auto loan product for new customers. While bank officials declined to share details, people who know vouch that customer convenience will go through the roof—any customer can walk into a showroom, select a car, do a test drive and, once satisfied, log in for video KYC at the showroom itself. The bank will algorithmically approve, authorise, and disburse the money to the dealer, all in a few hours, digitally.
In August, the bank sewed up a partnership with Paytm. “It’s an important part of our growth strategy. There will be quite a few fintech partnerships to come over the next six to nine months,” hints Rao. The new tie-up is about to bring more value to the merchants. Paytm has a very large base of merchants who have QR solutions for UPI transactions. “Both of us have jointly created the capability for the same QR to accept card payments through the mobile by tap-and-pay or scan-and-pay,” says Rao. In addition, when the card payment is enabled onto the QR solution, there are plans to run a BNPL lending programme. The duo has also decided to jointly go to the marketplace with slightly bigger merchants with co-branded POS machines, payments and BNPL products. “We want to democratise that capability of being able to fund the transactions lying on this very vast and very large merchant acceptance footprint,” says Rao.
The bank’s fintech engagement also extends to areas like risk management. “The digitally agile have shifted now to how well you can do risk with digital,” says Kapil. Similarly, using data analytics, AI and ML, the bank is equipping its branch managers and relationship managers with real-time leads based on customers’ recent transactions and the likelihood of him or her requiring other savings or lending products. The bank is also gung-ho after the credit card acquisition ban was lifted by the RBI last month. Over the next 12 months, HDFC Bank, which has market leadership in cards with 27.8 per cent market share in spends, will stitch together alliances and partnerships in sectors such as pharma, travel, FMCG, hospitality, telecom and fintech.
In the past eight months, the credit card ban did impact the growth of retail assets. “Retail growth hasn’t kept pace, while the corporate business, which is a fine-rate [low yielding] business, has shown strong growth,” says Nitin Aggarwal, a research analyst at Motilal Oswal Financial Services. He adds that the changing loan mix has resulted in margin compression: “ICICI Bank’s margins are steadily improving whereas HDFC Bank has seen margins falling from 4.3-4.4 per cent to the last reported 4.1 per cent.”
Investors’ key concern has been slower retail growth… This has resulted in margin compression. At a time when peers like ICICI Bank have shown a rise in margins, HDFC Bank has seen them come down
Research analyst at Motilal Oswal Financial Services
Unlike other private banks, HDFC Bank was cautious in building its wholesale book in the past two decades. Post pandemic, the wholesale banking growth has been compensating the low growth in retail as its share has gone up from 49 per cent to 53 per cent. The wholesale growth is still at double digits—21 per cent in 2020-21—albeit that is slower than the 29.3 per cent growth in the previous fiscal.
Over the years, the working capital loan approach has helped the bank expand its share of the corporate wallet by cross-selling more products, including term loans. Be it PSUs, private corporations, or MNCs, the bank today offers a suite of products from cash management to trade to foreign exchange services. “Our philosophy has been to understand a company’s cash flows and working capital cycle, and monitor their growth and profitability before participating in term loan facilities,” explains Kaizad Bharucha, Executive Director at the bank. The digitisation and partnership theme actually extends to corporate banking, too. “There are several projects that we have taken up both for improving the existing offerings and bringing about changes to the existing offerings. These are not necessarily small tweaks,” says Bharucha, without revealing the new product offerings. According to insiders, the bank will soon be announcing some industry-first products for the corporate sector.
Jagdishan has also carved out commercial banking (MSMEs) and rural banking under ex-Citibank executive Rahul Shukla, who was earlier entrusted with corporate and business banking. Shukla, who has completed three years at the bank, jokes that he didn’t realise he was boarding a bullet train. Currently, commercial and rural banking accounts for 35 per cent of the bank’s advances, its largest vertical. The commercial and rural banking assets are growing at 25 per cent plus in 2021-22. The analyst community is also upbeat on MSME growth. “Had there been challenges, they may not have done too well. They would have curtailed the loan growth but the momentum tells you that the confidence is fully there to own those segments,” says Aggarwal of Motilal Oswal. The bank is also shortening the loan processing time. A few weeks ago, it launched the Dukaandar overdraft programme, where any shopkeeper can furnish six months’ bank account statements, on the basis of which the bank gives him overdrafts of Rs 50,000 to Rs 10 lakh within 48 hours. This is done through village-level entrepreneurs (VLEs), via a digital channel, where the documents are scanned and sent to the bank, the credit decision goes back in 48 hours, and the overdraft is ready and working. “The new-to-bank acquisition for us in the semi-urban and rural areas is dramatic. The pandemic outbreak also created a positive impact as our branches were open. Our bank is also an aspirational bank for rural folk. The bank will be doubling the coverage of the number of villages it serves from 100,000 to 200,000,” says Shukla.
The new-to-bank acquisition in the semi-urban and rural areas has been dramatic. The pandemic also created a positive impact as the bank’s branches were open. The bank will be doubling the coverage of the number of villages it serves from 100,000 to 200,000
Group Head-Commercial (MSME) and Rural Banking at HDFC Bank
The digital piece is also getting well-entrenched in the government and institutional business, which spreads into rural and semi-urban areas. “We are plotting the entire ecosystem of healthcare, education, gig economy, and start-ups to offer the whole gamut of services,” says Smita Bhagat, Group Head, Government and Institutional Business, CSCs, Start-ups & Inclusive Banking Initiatives Group at the bank. The healthcare ecosystem covers lending and savings products for patients, nursing homes, pathology labs, hospitals, pharmacists, stockists, medical equipment suppliers, and pharma companies. “At every stage, the various constituents of a healthcare ecosystem require a bank, from a loan to a POS machine,” says Bhagat. Ditto for education, gig economy and start-ups.
The tie-up with CSCs is probably the biggest third-party distribution partnership. There are more than 350,000 CSCs in India, which cover 95 per cent of panchayats. “We have made 100,000 of them as our banking facilitators and close to 15,000-16,000 are our banking correspondents,” says Bhagat. This tie-up is helping HDFC Bank provide cost-effective services in semi-urban and rural areas. The hub-and-spoke model has every CSC mapped to a branch. It has signed up about 171,000 VLEs, and launched a new straight-through process journey for consumer durables products at the VLE centres. It empowers VLEs via multiple APIs to process and sanction loans based on customers’ eligibility without the bank’s intervention.
The tie-up with the government-owned CSCs is probably the largest third-party distribution. We have integrated multiple APIs and there is no paper involved. Today, people in the rural areas can open a bank account or buy a consumer durable via CSCs
Group Head, Government and Institutional Business, CSCs, Start-ups & Inclusive Banking Initiatives Group at HDFC Bank
The investors’ community is still not convinced as they want to see the bank’s plans translating into hard numbers. They also cite the examples of Infosys and Tata Sons where it took time for the top leadership to stabilise after the exit of iconic CEOs or founders. “A lot of disruption is also taking place in the financial services industry. And no one’s really sure who’s going to be a leader tomorrow,” says Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies LLP.
“Most banks including HDFC Bank have also slowed down their new loan acquisitions in the unsecured segment,” says a banking analyst. The car loan segment, which is one of the biggest for the bank, was impacted by the pandemic and chip shortages. The growth in retail assets has already crashed by half to 7.5 per cent in 2020-21, down from 14.6 per cent in the previous year. The wholesale book is growing robustly but the margins are not as high as in retail. In addition, the bank’s NPAs are also increasing gradually, though it still has the best asset quality with 0.40 per cent net NPAs.
The investors’ concerns reflect in the bank’s price to book, a benchmark for bank valuation, which is currently less than 4.7 times as against the earlier six times. “If you look at mutual fund investments, the largest mutual fund investment in terms of value is in ICICI Bank, not in HDFC Bank,” says Vijayakumar of Geojit Financial.
The market is on wait and watch mode as Aditya Puri had an overarching view of everything... Sashi has been a finance person whereas Puri was multidimensional. Investors want to see how this new person is going to deliver
Chief Investment Strategist at Geojit Financial Services
There is no doubt that digitisation will increase productivity and efficiency. Cost to income, a key parameter signalling operating expenses as a percentage of income, has gone down from 49 per cent to 36-38 per cent in the past six years. It is likely to further go down to the 30s over the next 2-3 years. In addition, Jagdishan’s plan to convert an office desk into a hot desk, which means that people can work from anywhere, will rationalise costs even further. Jagdishan, say insiders, is a bit relieved as all the bad news happened during his first year in office. The post-Covid-19 structural changes in consumer behaviour and digital banking are also offering a perfect tailwind for him.
At Sabina Park, it seems like lunchtime. Clearly, Jagdishan looks well settled to play a long innings.
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