Exclusive Interview| After RBI green light, HDFC Bank will take 2-3 quarters to regain credit card market share, says Parag Rao

File image of HDFC Bank

HDFC Bank, India’s largest private sector lender, is on an aggressive drive to recover lost ground in the credit card business. On March 11, the Reserve Bank of India lifted a ban imposed on the bank in December 2020, allowing the lender to launch digital products.

In an exclusive interview to Moneycontrol on March 16, HDFC Bank’s group head of payments, consumer finance and digital banking, Parag Rao, said the bank has used the interim period to relook at fault areas and revamp strategy.

Rao is optimistic the bank can get back lost market share in cards in 2-3 quarters. Rao also spoke about digital initiative plans in FY23 and on forming a digital-only bank. Edited excerpts:

Q: The RBI had barred HDFC Bank from issuing credit cards and launching fresh digital initiatives in December 2020. What are the lessons learned?

A: We are thankful to the RBI for pointing out some of the areas where we needed to improve. HDFC Bank has consistently grown quarter on quarter. I will not delve into our track record of growth… We have set a legacy of good track record of growth and we continue growing and we have aggressive plans to grow.

They key thing that emerged out of this embargo and the comments made by the RBI was that we have no problem with your ambition to grow and you should grow because that is the whole job of financial services players, to spread out financial services to India, but please make sure that you build your systems and invest adequately in your infrastructure to sustain that growth. That is the crux.

Q: How did the bank use the ban period with respect to the digital banking division?

A: We used this time to re-introspect, relook our strategy and revamp. Even during (former managing director Aditya) Puri’s tenure, we had started on our process of digitisation. There are two phases to our chain – first is digitisation and the second is digital journey. Digitisation is essentially taking existing processes and making them digital. And the digital journey is revamping the entire infrastructure, building digital platforms, digital abilities, competencies and getting new types of digital skillsets in terms of the people.

So that, effectively, is what we call our digital transformation Digital 2.0. It is a three-year journey as we have laid out in our roadmap. It is a combination of short-term, medium term and long-term goals and milestones we have laid out.

Q: Could you elaborate more on the preparations?

A: We used this interim period to relook, refurbish a lot of upgrading of systems, which is still work in progress, and digital transformation is still ongoing. It is complex, it is time-consuming because I cannot afford to have a strategy which says shut down one system, wait for some time and then start the new system. You have to fly the plane and you yourself have to fix the plane. That makes the transformation journey a little more time-consuming.

It also makes it complex because you are talking of three or four moving pieces at the same time. One is you are building new digital properties, while the other is that you are modernising existing infrastructure. Nowadays, you have new sets of people coming in who have digital skillsets and ensuring that they synergise and work together, and the fourth bit is you are enhancing ways and means of working towards digital… We are about one-third of the way through the journey and we will complete it.

Q: Should more money go into strengthening digital banking technology?

A: It is not that we were spending less. Even if you take our previous three years’ expenditure from the balance sheet, it is in line with the percentage of opex with most large organisations. I think the key thing was our growth was outpacing investments. And so, on an incremental basis across existing infrastructure, new platforms, skills, competency and people, we will be spending a significantly higher amount over the next three years to build this whole edifice and make us ready for the next 5-10 years.

It is a little difficult for me to share numbers, but it is substantially higher on an incremental basis... on an aggregate basis, the range of increase would be anywhere between 1.25 times to 1.75 times what we did earlier.

Q: Could you throw some light on the new digital initiatives in the offing?

A: We will be launching a completely digital, available on-the-fly credit card with a completely new scalable stack. We have already soft-launched, but we will go to the market in an aggressive way with our merchant app, which is called smart app Vyapar. This will go in the market and become a large engine of growth targeted at medium and small merchants… we soft-launched a very interactive customer layer working with Adobe… we have soft-launched it for internal customers on some products. We want to make it much larger for all the products of the bank and take it to the marketplace.

We are revamping our SMA platform… We are revamping our customer CRM platforms… we will do all of these over the next two to three quarters.

Q: So, the lifting of the RBI embargo is good news…

A: Fundamentally, I am saying that the lifting of the embargo now gives us the freeway to go to the market with these new products and offerings… At the end of three years, we would like to be seen as a completely tech-led digital bank which continues to be the market leader in the Indian space.

Q: How will you make up for lost growth in the credit card business?

A: We were out of the market for, from a calendar perspective, nine months. Now, that is close to a year… Before the embargo, we were 300,000 cards a month, so you can figure out the kind of void in the marketplace. Obviously, other players have stepped in to fill that space and each one’s market share is recalibrated to that extent.

Having said this… we have already started ramping up our numbers. We exceeded our pre-embargo run-rate already. The cards which we have issued in the last six month will now start contributing to the portfolio going forward… over the next two to three quarters you will see us recovering our market share.

Q: Credit cards are unsecured, what is the strategy to limit defaults?

A: We have not changed our strategy. Even pre-embargo, 75 to 80 percent of the sourcing used to happen on our internal existing customers base. Of that 75 to 80 percent, almost 65 percent were salaried persons and the balance self-employed. The balance 20 to 25 percent were sourced through the open market, via multiple channels. In the open market, again the bias was towards salaried customers versus self-employed customers.

Even now, that mix has not changed. It will continue today. That mix has helped us achieve probably one of the best portfolios in the industry in terms of both engagement and spend and also in terms of delinquency, so that strategy continues.

Q: What is your approach to fresh risk when it comes to loan growth?

A: We are growing currently with the same credit policy. There is no additional risk we are taking. We have just ramped up our numbers so the quality of the portfolio in future will be the same, if not better than what we have already. We are not taking incremental risks. That gives us the confidence to tell you that it is a tried and tested credit policy which we have deployed over the years.

Q: Instances of digital frauds are on the rise. Does this worry you?

A: It is an irony that in this digital world, when nimbleness, agility and speed are important, fraudsters are actually faster than everyone else. But having said this, we are a large, regulated entity. It is incumbent upon us, as part of our own regulatory framework, that we build in a significant amount of safety, security, and fraud-prevention measures and that is audited by the RBI. We have a comprehensive 360-degree view of fraud.

Q: Can you explain this a bit more?

A: For example, in our mobile banking app, we are implementing a security wrapper, which cannot allow a fraudster to spoof or create a fake page on your app – it will be rejected. It will also tell you that you are in an area where you have an unsecured Wi-Fi connection, so please change your connection. We ensure that the network on which transactions flow is encrypted completely. It is a completely end-to-end encrypted network… We have a traditional PRM (Partner relationship management) where suspicious transactions are monitored using AML at the backend (Anti-money laundering)… we built in extremely strong KYC (know your customer) and AML features to ensure identity theft and things like spoofing do not happen. These are all inbuilt into our processes and audited by the RBI.

Approximately 20-25 percent of our expenditure goes into risk and fraud-mitigation measures, so it is a substantial amount. And we are constantly on the ball… In the area of spoofing, DDOS (distributed denial of service), attacks which happen on the internet, etc, we have multiple firewalls being laid. In fact, people complain we have so many checks and measures that it slows down the network. But it is a fine balance between security and convenience.

Q: There are reports that say HDFC Bank is keen on forming a digital-only bank…

A: Will I like to get there? The answer is yes. But we do not know, and we are studying the market to see whether India is ready for a neo-bank which is a completely zero-touch, digital bank. In the interim, what we are doing is experimenting with individual products which will be completely digital.

We have the stack ready to launch a neo-bank, but we want to do it carefully, in the right manner. So whether it be a credit card, or an account or a loan, we will give you a completely zero-touch experience.

Once we see the customer response to these products, I need to also service you digitally without a walk-in branch and all I need is to bring them together in one package and it theoretically becomes a neo-bank. So we have plans, although we want to study the market first.