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Building on Growth 2.0

HDFC Bank refused to compromise on profitability and tapped semi-urban and rural markets to emerge far ahead of rivals

Sashi Jagdishan, MD & CEO, HDFC Bank - Photograph by Yasir Iqbal Sashi Jagdishan, MD & CEO, HDFC Bank - Photograph by Yasir Iqbal

Fifty five-year-old Sashi Jagdishan is not the one to go with the usual flow. He had keen interest in medicine, but ended up studying physics to make a career in electronics. And when his fathers close friend, a finance director in a multinational company, advised young Jagdishan about the great opportunity in the field of finance, the latter picked up chartered accountancy. But instead of joining any of the Big Four or making a career in auditing or taxation, he joined Deutsche Bank. Within three years, Jagdishan sacrificed all the perks of the MNC job to join HDFC Bank, then a start-up bank, in a public sector-dominated banking industry. "What, you are joining a government bank?", was his wife's response. The rest, as they say, is history.

It's been a long road for the new MD & CEO of India's second-largest bank, one which has been closely scrutinised since it involved stepping into the shoes of one of the country's iconic CEOs, Aditya Puri. Jagdishan took risks, worked hard and got rewarded. In the last 26 years, he has worked towards creating a niche for the bank. The strategy combining growth and profitability has paid rich dividends, the bank has continued on its growth path even during the peak of the global financial crisis. Launched as a corporate bank, it moved to retail as opportunity came, but post-pandemic, its wholesale business surprised everyone. That, in fact, has been the bank's strategy - when one engine struggles, the other takes over. The consistent performance also reflects in the banks market capitalisation of Rs 8.96 lakh crore, next only to Reliance Industries and Tata Consultancy Services (TCS).

Jagdishan has taken over at a time (October 2020) when the economy is contracting and there are new, consolidated PSBs, Small Finance Banks (SFBs), Fintechs and new-age NBFCs. "New players such as Kotak Mahindra Bank, IndusInd bank, Yes Bank and IDFC First Bank are looking to expand into retail banking," says Jitendra Upadhyay, Senior Equity Research Analyst at research firm Bonanza Portfolio. "The growth in low-cost CASA (Current Account Savings Account) is already stagnant for the bank due to competition. The big task will be to retain the senior management team," he adds.

Successions generally lead to exits or instability among the senior management, but HDFC Bank has been an exception so far.

The bank has emerged as the as winner in the large bank category based on quantitative study. The private sector lender is also the country's fastest-growing bank.

Growth Engines

Puri actually left a well-run platform for his successor. Jagdishan, who was also part of the senior management team for more than a decade, doesn't have to exactly work out a new strategy. As the bank's change agent since 2017/18, he has worked closely with Puri in formulating the digitisation strategy and expansion planning into semi-urban and rural areas. "As a change agent, the bank tested his capabilities in every front. We worked towards a complete transformation of the bank to take care of future competition," says Puri. In fact, the duo travelled a lot in the last few years, especially to far-flung areas, to understand the needs of customers. The visits provided Jagdishan with more and more insights into the thought process of a CEO. Insiders suggest he actually became Puri's eyes and ears.

Experts, however, think Jagdishan will have to work the bank's growth strategy around, especially given the current times. "As any engine needs overhauling and polishing, Jagdishan, too, will have to fine-tune the strategy in a fast-changing banking landscape," says the CEO of a financial services firm.

The bank is currently focussed on building a state-of-the-art customer experience hub. Thanks to its Digital 1.0 strategy, it was already way ahead of competitors in launching products such as the 10-second personal and auto loan and loan against securities, which were also global-firsts. Today, 95 per cent of customer transactions happen via Internet and mobile banking. Digital 2.0 is the next phase of the bank's digitisation journey, which includes re-imagining customer interactions, use of Application Programming Interface (APIs) and Analytics, virtual banking etc. There will be extensive use of new technologies like robotic process automation, Machine Learning (ML), Artificial Intelligence (AI) and Blockchain. At the back-end, the bank is also readying to serve non-bank customers, which requires integrating a lot of information from outside sources. It is creating an omni-channel customer experience, which will ride on AI and ML platforms. Virtual relationship managers (RMs) are going to be a big channel in the future. Machines will handle a considerable amount of queries and transactions, helping the bank create a 360-degree view of customers across channels or multiple touch points.

According to Ajit Mishra, Vice President, Research, Religare Broking, "Over the long-term, with rising competition and threat of disruption, sustaining growth momentum and managing asset quality would be key challenges for Jagdishan." The bank witnessed three IT outages over the last one year, as a result of which the RBI has temporarily banned digital launches and credit card issuance. The bank has, however, clarified that it is not a core technology issue. "It is a more process issue than a technology issue," say insiders. In fact, the bank has already given a roadmap to the regulator. It is currently fortifying its existing architecture and building on Digital 2.0.

Expansion Move

Along with digital banking, branches as services and sales centres are also undergoing shifts. Branches are becoming smaller in size - in some metro locations sizes have reduced from 2,000-3,000 square feet to 1,000 square feet. It has a direct and positive impact on the incremental cost of setting up a branch. Expansions in semi-urban and rural markets would continue as usual.

Over the last decade, the bank has created a large network of branches - more than 80 per cent of new branches every year from 2010 onwards - in semi-urban and rural areas. The story is similar to the mid-90s when the bank tapped metros and urban centres. Currently, the bank is targeting the top 25 per cent of the 60-70 per cent population in non-metros and urban areas. Increased social spending, reduced leakages because of direct benefit transfers, telecom penetration, investments in roads and highways in these areas are driving the bank's move.

Jagdishan plans to keep the branch-expansion momentum going, if not 80 per cent but 50 per cent, say insiders. Most rural branches are on lease, which gives it a good hedge to switch if the digital model spreads faster in smaller geographies.

The RBI, meanwhile, has given approval to a number of Small Finance Banks to set up operations in semi-urban and rural areas. This could make the competition tougher for HDFC Bank, according to experts. "It is a new landscape, which is going to be highly competitive in terms of business and returns," says Upadhyay of Bonanza Portfolio.

"The growth prospects in semi-urban and rural areas are certainly promising, but the competitive intensity is also high. We do believe HDFC Bank is more than capable to dominate these geographies, however, the strategy to tackle competition would be a key factor to watch out for," says Religare Broking's Mishra.

Corporate Banking

Post-Covid, the share of the bank's wholesale business went ahead of retail for the first time. The bank terms it an aberration created by the sudden requirement of liquidity and funds by corporates post pandemic. HDFC Bank was one of the few which had the appetite to lend money due to high liquidity. The growth is the corporate loan book is expected to moderate since most companies that had advanced their funding are now sitting on enhanced working capital and cutting down on expenses. The bank expects retail to contribute to 50-55 per cent of its business, with consumption and liquidity coming back into the system. Many suggest the large balance sheet size of the bank at Rs 16 lakh crore has positioned it well to expand the corporate book.

It remains to be seen how Jagdishan, known to take calculated risks wherever necessary, steers the bank for its next phase of growth.

@anandadhikari