HDFC Ltd-HDFC Bank merger: Behind Sashi Jagdishan's big plans for HDFC Bank

A new wave of technology transformation and product strategy is sweeping through the corridors of the country’s second-largest bank. Under Managing Director and Chief Executive Officer Sashi Jagdishan, who took up the top job in October 2020, HDFC Bank is determined to evolve into more than just a banking institution. The first big step towards realising that dream was finalised on July 1 when the bank’s parent, HDFC Limited, merged with it to create a financial sector giant.

The bank does not see the merger as just a consolidation; it aspires instead to become a dynamic “technology company” that is into banking. To do this, it is banking on the power of bundling—integrating home loans with its bouquet of banking products. But that’s not all. The private sector bank is setting its sights on creating a brand new HDFC Bank every four years.

In an internal communication to employees after the merger, Jagdishan said the runway for growth would be large for a long time to come. “The bank, with its superior digital platform and digital journeys, will have the propensity to upsell to the home loan customer with a complete bouquet of the group’s products across payments, savings, borrowings, investing, insurance, and trading,” he said.

Providing a glimpse of the possibilities, Jagdishan said the bank could now offer an array of products like a savings account for all banking needs, a personal loan for upfront contribution to the builder, a consumer durables loan, life insurance to protect the family in case of any eventuality, home insurance to safeguard against fire and structural damage, a credit card, a systematic investment plan, and EMI payments to create wealth, which can all be accessed with a single click.

“This is going to be a paradigm shift in how we will be doing our businesses in the future—moving from sales management to relationship management. The velocity of product sales and the reduced touch points to serve the customer will be a game changer with this ‘power of bundling’,” he said.

The immediate impact of the merger is quite significant, too. It has catapulted the bank into the list of top 100 lenders in the world in terms of assets. It has a balance sheet size of Rs 32 lakh crore, next only to the State Bank of India’s Rs 55 lakh crore as of March 31, 2023. ICICI Bank stands third with a balance sheet size of Rs 16 lakh crore.

On the business side, it has reduced the share of unsecured loans from 30 per cent to 22 per cent of total advances thanks to the addition of low-yield mortgages. This now gives the bank room to advance more unsecured loans, especially personal loans and credit cards. There is also a change from short-term loans to 20-year retail loans in the bank’s book. Before the merger, the bank’s portfolio consisted of auto loans, with the highest tenure of four years, followed by personal loans with two years, two-wheeler loans with a year, and credit cards with the shortest tenure of a month. The mortgage business will bring more stability

to the asset mix with growing long-term revenue-generating assets. The key sectors the bank funds are non-banking financial companies (NBFCs), power, oil and gas, and telecom.

The bank also has access to the parent’s 45-plus years of expertise in mortgage origination and loan servicing processes. There is a huge cross-selling opportunity here, because before the merger only a third of the bank’s branches offered home loans. The bank will now offer home loans through a much larger network. In addition, only 2 per cent of its 70 million customers had taken a home loan from the parent company, HDFC Ltd. “The penetration levels of the home loan product in its customer base and the extent to which the distribution has been leveraged are quite low. This is an opportunity,” Jagdishan told employees.

A large balance sheet does throw up challenges in maintaining the bank’s vaunted loan book growth of 20 per cent every year, though. But it also provides the opportunity to take on larger exposure on the wholesale side.

Another challenge is meeting regulatory requirements on the cash reserve ratio (CRR) and statutory liquidity ratio (SLR). V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, says being a mortgage lender, HDFC Ltd didn’t have any CRR, SLR, or priority sector lending requirements. “So the merged entity, HDFC Bank, will have to meet an additional CRR and SLR requirement of around Rs 70,000 crore,” he says.

The bank will have to set aside a higher amount to meet priority sector lending requirements. “This will slightly impact NIMs (net interest margins) and profitability in the short term,” says Vijaykumar.

Clearly there are matters that will need Jagdishan’s immediate attention. But as the bank treads this promising new journey with Jagdishan and a young management team, it is bereft of stalwarts like Deepak Parekh, Keki Mistry and Renu Sud Karnad, though Karnad will continue to serve on the bank’s board in a non-executive capacity and Mistry joins it as a non-executive director.

Jagdishan, meanwhile, is banking on the bank’s large and growing distribution and customer franchise, more than adequate capital, healthy asset quality, and profitability to give it a strong foundation to capture growth. “The pace at which we aim to grow, we could be creating a new HDFC Bank every four years,” said Jagdishan.

Perhaps recognising this need to chart a new route to success, Parekh recently emphasised that the greatest risk organisations face in today’s dynamic landscape is clinging to the status quo. He recognised that embracing change requires courage. It is now Jagdishan’s turn to steer the group to success like his illustrious predecessors did.

@anandadhikari