HDFC Bank’s track record of consistent earnings growth has given it a reputation of being predictable to the point of boring. But its top bosses and shareholders are not complaining. Having emerged unscathed from the bad loan mess roiling the banking sector, HDFC Bank is now looking to expand its corporate loan book.
This, at a time, when the loan books of its rivals are shrinking and credit growth in the system itself is at multi-year lows.
HDFC Bank’s corporate loan book (which accounts for a large part of the wholesale book) doubled to Rs 100,000 crore in FY16 in less than three years. In the December quarter, the bank reported a credit growth of 17.5 percent, well ahead of the single-digit growth across the industry. The growth was driven by higher corporate and retail loan disbursals in equal measure. Also, HDFC Bank is now getting into term loans as well—something it has shied away from for a long time.
“We provided working capital loans when we started, but we don’t just want to do that,” Kaizad Bharucha, Executive Director, HDFC Bank told Chillicious in a freewheeling chat. “We wanted to be a full service bank and bring in a fair level of customization to suit needs of corporates,” he said.
Competitors—mainly public sector banks—gripe that HDFC Bank has managed to boost its earnings by not lending to the infrastructure sector.
Bharucha says it was a well-thought strategy.
During the early 00s, when peers were busy growing both the retail and corporate loan books rather aggressively, HDFC Bank chose to stay away from funding large corporate projects. Instead, it focused on chasing profitable growth and concentrated on growing its retail franchise by deepening relationships and using technology to solve problems.
“Everyone wanted to move into power and country was starved of power,” said Bharucha.
“Conceptually it was fine. We didn’t fund them because the common sense was you can create industrial temples, but the linkage to coal and ability to move coal was not there. We did not see the ability to dump ash and have linkage to see offtake of power,” he said.
So for years HDFC Bank only gave working capital loans even as it looked at ways to solve problems. And even in this period, few know that HDFC Bank stepped in to help Tata Motors when it was in the midst of concluding the acquisition of Jaguar Land Rover and the world’s financial system froze in the aftermath of the Lehman crisis.
In a matter of minutes, Rs 800 crore was released through its Bahrain branch of HDFC Bank. It was during this time that the bank was developing a platform for Tata Motors, which would enable it to do bill discounting digitally eliminating the need for paper. Today, senior officials in Tata Motors claim that the relationship is a fairly deep one with HDFC Bank.
In order to differentiate itself, yet help solve a problem, HDFC Bank has used technology to offer working capital loans to corporates and helped with vendor financing and dealer financing. So on the trade side, the bank introduced a technology platform that helped eliminate the use of paper completely. This helped improve efficiency for the entire supply chain and not merely for the corporate client. The treasury head at a large automobile company said the bank helped eliminate the paper trail by taking bill discounting on to the electronic platform.
Having taken their time to develop cutting-edge products for their clients, HDFC Bank wants its corporate banking vertical to become a one-stop shop for large and mid-sized corporates. Adds Bharucha, “We have an end-to-end product vendor and dealer financing. We are among the largest movers of cash in the country today. We have had the volumes because of product diversity, ability to customize and provide superior MIS.”
Rather than just lend to the corporates, HDFC Bank first created stickiness by offering simple solutions. For instance, the bank’s cash management solutions facilitate payments of all kinds from a centralized system. So be it payment of utilities for all facilities across the country or salaries, HDFC Bank facilitates this through a centralized system using the payments platform. The cash management solutions help corporates eliminate numerous departments across the country and duplication. It is basic business that the lesser the number of touchpoints, the lower is the cost.
Having understood the cash-flows of clients, the bank is now aggressively helping companies deal with balance sheet stress. While it continues to engage with customers through product customization, it is also looking at deepening the relationship across the value chain. HDFC Bank is among the few banks willing to even fund infrastructure projects now, especially in the roads segment.
Since fresh credit demand isn’t picking up pace, HDFC Bank is looking at balance sheets and understanding the pain points so that it can offer a structure that solves problem for the corporate client. Explains K Balasubramanian, Group Head Corporate Banking, “We have looked at a lot of refinance opportunities over the last year and a half. These are largely associated with projects completed and operational. This is one more avenue to reach out to new clients and it has aided growth.”
The market believes that while HDFC Bank will be able to grow its loan book ahead of peers, it may not be as high as the previous few quarters as the demand for working capital loans has decelerated. But with interest differential between credit substitutes and bank loans narrowing, a revival in loan demand could boost the corporate loan book. The bank currently has a 4.5 percent market share in system loans. Analysts believe that as competitive intensity picks up in the retail segment, margins could come down. This explains HDFC Bank’s focus on the corporate loan book.