The outgoing CEO of HDFC Bank and the only one that the bank has had in its 26yr history, Aditya Puri, talks about some of the key issues concerning the bank and the economy in this interview with Nikunj Dalmia in The Economic Times. In line with the digitisation initiatives of the bank in the recent years, Puri talks about how technology is an enabler of competitive advantage, a subject that we touched upon in our most recent newsletter (see here):
“…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.”
About the opportunity in semi-urban and rural India:
“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 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.”
Why the bank hasn’t been so aggressive in corporate loans:
“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.
On why concerns on the economy are overdone:
“…(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.”
About any secret sauce for the bank’s success:
“I hate to disappoint you but we have been running plain bread and butter banking, we are an execution story.”
The interview ends with Puri say we should hear about his new venture in the next couple of months.
“…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.”
About the opportunity in semi-urban and rural India:
“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 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.”
Why the bank hasn’t been so aggressive in corporate loans:
“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.
On why concerns on the economy are overdone:
“…(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.”
About any secret sauce for the bank’s success:
“I hate to disappoint you but we have been running plain bread and butter banking, we are an execution story.”
The interview ends with Puri say we should hear about his new venture in the next couple of months.
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