Aditya Puri, Managing Director, HDFC Bank: Clearly, the #1

One of HDFC Bank's most notable features is that it's still one of India's fastest growing banks, even after reaching a balance sheet size of Rs 30,000 crore. And there's little reason why this trend won't be maintained. The growth isn't just reflected on the retail side-which grew by 131 per cent during the quarter-ended September 30, 2003-but is amply visible on the wholesale front as well, which has been growing consistently in the 10-15 per cent range. ''With the expected economic recovery that growth rate should accelerate now,'' points out Aditya Puri, Managing Director, HDFC Bank. As its overall marketshare is still at low levels (around 2 per cent), this optimism seems justified.

If you're still wondering what ''quality growth'' means, it's just that HDFC Bank has been growing rapidly without compromising on asset quality. To be sure it scores high for its low net NPAs (non-performing assets, and these are expressed as a percentage of net advances) and loan loss cover. This is because of the strict risk control mechanisms in place, one amongst them being an internal rating model. ''We have our own rating system based on the S&P 500 rating model and lending is done based on that,'' explains Samir Bhatia, Country Head (Corporate Banking). Though HDFC Bank decided to adapt the new NPA recognition norm (a reduction in the outstanding period from 180 days to 90 days) from the second quarter of the current year as against the regulatory deadline of March 31, 2004, its net NPAs are still low at 0.37 per cent. ''Our general loan loss provisions are also around 0.90 per cent against the regulatory requirement of 0.25 per cent,'' says Paresh Sukthankar, Head (Credit & Market Risk).

Quality Of Earnings

If HDFC Bank has been able to rein in NPAs, it's thanks in no small measure to the quality of its earnings, which are less volatile than many banks. That's because HDFC Bank has well diversified income streams and is not dependent on any one segment for spectacular profits. For example, it has a high and sustainable fee income (as a per cent of total income) and is placed at eighth position (after most foreign banks). And unlike most other banks, HDFC's high profits aren't courtesy treasury income. For example, the security gains are only 7 per cent this year (for the first half) compared to 10 per cent last year. That's conservatism, HDFC style. ''We have taken a deliberately less risky strategy and kept our duration (for SLR investments) at two and a half years,'' points out Sukthankar.

What this essentially means is that HDFC Bank will be less vulnerable if the interest rates start moving up from current levels.

HDFC Bank has also consciously kept its cost of funds low (the bank is ranked No. 3 on this parameter) by focusing more on demand deposits (savings and current accounts) as against time (fixed) deposits. Several initiatives like banking anywhere in India, internet banking, phone banking, and a far-flung ATM network have played their part. ''We have changed the notion that only foreign banks could deliver good services. The focus is to show to the retail depositor that we have a better savings/current account and that's helped us acquire high quality customers,'' says Neeraj Swaroop, Country Head (Retail Banking). That's why HDFC Bank can boast of a customer base of around 35 lakh, of which 25 lakh are demand accounts. ''And we are adding around 1 lakh accounts a month,'' sums up Swaroop.

Another roaring revenue stream for HDFC Bank is a cash management system for stock exchanges and large corporates. In fact, the bank is one of the largest movers of money in the country. Settlements at stock exchanges-where it handles both cash as well as securities-are big business for HDFC Bank. ''Now around 65 per cent of NSE and 50 per cent of BSE settlements are happening through us,'' points out H. Srikrishnan, Country Head (Transactional Banking & Operations).

As HDFC Bank presses hard on the growth throttle, the challenge for Puri is to continuously dig up new revenue streams in a bid to maintain the heady pace of growth.

A year ago, for instance, he flagged off supply chain management for large corporates, a unique technology-backed product that enables HDFC Bank to cater to all customers (from top to bottom) in a supply chain. This product allows for instant money transfer between a company and its clients (vendors or dealers). Thus, by signing up a large manufacturing company, it can expand its clientele to include the multiple vendors of raw materials to the company, as well as the large number of dealers and distributors. ''Companies benefit from this product and they in turn help us get new customers,'' explains Bhatia.

Reach!: A later entrant into the retail space, HDFC Bank is playing catch-up pretty well

Filling The Gap

If there was one glaring gap in the HDFC Bank portfolio, it was housing finance. For obvious reason: It didn't want to compete with its parent HDFC, the pioneer in home mortgages. That hole, however, has finally been filled up, with the bank marketing HDFC's home loan products, thereby allowing HDFC Bank to offer the customer the entire gamut of products and services.

Puri claims it's a win-win proposition. ''We have a good marketing network and HDFC has a good product.'' Here's how it works: Depending on market conditions, HDFC Bank will receive a commission (around 65-70 basis points currently) for originating the transaction. The bank has the right to get back 70 per cent of this housing loan as mortgage-backed securities.

These securities will carry the interest of home loans less 1.50 per cent. But will this arrangement hurt margins, in the light of the prevailing low interest rates for housing loans? "We still have enough margins there. Further, the option to buy or not is also with us," explains Puri.

Another growth area the managing director is chasing is the government business. HDFC Bank was the first private sector bank to get permission to collect direct taxes (income tax) on behalf of government. ''We have improved the collection by reducing the turnaround times from seven to eight days earlier to four days,'' says Puri.

That explains why HDFC Bank is at third position (after SBI and RBI) in this business. Puri adds that with the government allowing HDFC Bank to collect indirect taxes as well, this is one activity with huge growth potential.

What should help HDFC Bank dig its heels further into a nationwide network is the ATM-sharing alliance with SBI that's in the pipeline. Srikrishnan reveals that the interlinking process is under way, and it won't be long before HDFC Bank gets linked to SBI's 2,000-strong ATM network. Without SBI, HDFC Bank currently has 850 ATMs, and it's easy to see what the SBI alliance can do to Puri's reach.

HDFC Bank may have been one of the later entrants into the retail space, but it's playing catch-up pretty well. In credit cards, the bank has clocked 3.40 lakh customers, as against the leader Citibank, which boasts an 18 lakh base. Puri expects the credit card business to break even in the third quarter of 2004-05, but what the HDFC top brass is more enthused about is the credit quality of customers. ''As 70 per cent of our card holders are existing customers, the credit quality here is also very good,'' smiles Sukthankar. That's testimony yet again-if you aren't yet convinced-to the relationship between a tireless quest for quality and HDFC Bank surfacing as India's best bank.