HDFC Bank is Betting on Both Wholesale and Retail to Drive Growth

Try it out, make a mistake, learn, and try it again! That’s the new catchphrase at HDFC Bank. The person backing the initiative is 56-year-old Sashidhar Jagdishan, the MD & CEO. Today, there are fundamental and structural shifts taking place in the banking space. The Mumbai-headquartered bank has set up an ‘Innovation Lab’, where over the next 12 months it plans to run some 100 experiments to try out new products, new geographies and new customer segments. “The hallmark of our strategy is that it has the ability to adapt and evolve without losing the core,” Jagdishan said in a recent message to shareholders.

HDFC Bank has set the agenda in the banking space over its nearly 30-year journey. For most of the past decade and a half, it has been among the top few in terms of quantitative rankings in the BT-KPMG Best Banks Surveys. In 2020-21, it emerges as the Best Large Bank (see box).

These days, it is busy implementing its future-ready strategy. HDFC Bank has created two factories—enterprise factory and digital factory—to build a new banking platform with a cloud strategy. The role of the enterprise factory is to completely reengineer the existing bank, including switching from legacy systems to creating a new IT architecture for scaleability, and connecting with fintech and tech giants. The digital factory is focussing on digitising processes, customer journeys, and launching new digital products for retail, MSMEs and large corporates. “We have to be attuned to market demands... digitise our customers’ journeys quickly... [and] build systems for the long term, which are going to provide the platform for the next 20 years,” says Ramesh Lakshminarayanan, Group Head-IT and the bank’s CIO.

The past strategy of a balanced mix of retail and wholesale is paying rich dividends. The share of wholesale banking has gone up from 49 per cent to 53 per cent in the past two years. The wholesale segment, which includes high-rated corporates, MNCs and PSUs, saw loans rising by more than 20 per cent in FY20 and FY21.

One of the main factors driving the bank’s growth in early 2021 was corporate demand for liquidity—corporate growth in the first pandemic year was primarily on account of clients building liquidity buffers. Last year, there was a reversal of the trend as firms started prepaying loans because of a buoyant stock market and easy bond and debt availability.

The prepayment cycle is over and HDFC Bank is expected to grow its corporate book sequentially. Going forward, the retail, MSME and corporate sectors are expected to grow at over 18-20 per cent per annum. The bank is also tapping into the capex cycle revival in sectors such as steel, cement, pharma, etc. There are also PLI sectors like auto, pharma, steel, etc. It is already the largest debt and loan syndicator in the infrastructure sector, which is expected to be boosted by the capex of Rs 7.5 lakh crore budgeted for FY23.

Under Jagdishan, HDFC Bank has reorganised its business segments of commercial (MSME) and rural banking under one head. In the past two years, the corporate sector has been trying to reduce its two-month working capital cycle. As a result, a large part of the leverage is moving to MSME suppliers. With digital assessment, GST and physical presence in semi-urban and rural segments, the bank is spreading its wings in this vertical—which will drive growth over the next five years. “If we use the right credit models and analytics, and extend help to those who face temporary issues, we believe one can lend prudently and maintain good asset quality,” says Rahul Shukla, Group Head-Commercial and Rural Banking.

Retail continues to be a major focus area. With digital, the bank will strengthen its position in the payments and retail assets markets. The bank is in the process of revamping its entire mobile payments platform.

The bank is also focussing on wealth management and private banking, where it has a 4 per cent market share. “Our endeavour is to win more market share from unorganised wealth managers as clients continue to prefer our phygital approach with better analytics, an open product architecture and an emphasis on managing wealth actively,” says Rakesh Singh, Group Head-Investment Banking, Private Banking, Marketing and Products.

Despite encouraging performance and a future-ready model, HDFC Bank’s share price has underperformed the benchmark indices. But if it is able to crack a few products, market segments or new geographies in the coming decade, investors would surely reward it.

@anandadhikari